<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996.
FILE NO. 333-9741
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------
TELLURIAN, INC.
(Name of small business issuer in its charter)
------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3570 22-3451918
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------
Stuart French
Tellurian, Inc.
15 Industrial Avenue
Upper Saddle River, NJ 07458
(201) 818-6767
(Address and telephone number of principal executive offices)
------
Stuart French
Tellurian, Inc.
15 Industrial Avenue
Upper Saddle River, NJ 07458
(201) 818-6767
(Address and (Name, address and telephone number of agent for service)
------
Copies of all communications should be sent to:
Steven Morse, Esq. Henry C. Malon, Esq.
Lester Morse P.C. One Battery Park Plaza, Third Floor
111 Great Neck Road New York, New York 10004
Great Neck, NY 11021 (212) 483-9600
(516) 487-1446
------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective. /X/
If any of the securities being registered on this form are to be offered
on a delayed basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering.
If the delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. /X/
Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number of
securities issuable upon exercise of the Representative's Warramts and
Representative's Warrants to purchase Warrants are subject to the anti-
dilution provisions of the Warrant.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), may determine.
=============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
=============================================================================
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount to Offering Aggregate
Title of Each Class of Securities be Price Per Offering Amount of
to be Registered Registered Unit (1) Price (1) Registration Fee
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par value
$.01 per share ("Common Stock") (2) 2,085,000 $ 5.00 $10,425,000 $ 3,594.83
Redeemable Common Stock Purchase
Warrants ("Warrants") (3) ......... 2,127,500 $ .25 $ 531,875 -- (11)
Shares of Common Stock underlying
the Warrants (4) .................. 2,127,500 $ 6.00 $12,765,000 $ 4,401.72
Representative's Warrant to purchase
Common Stock (5) .................. 140,000 $ .001 $ 140 -- (11)
Representative's Warrant to Purchase
Warrants (6) ...................... 185,000 $ .001 $ 185 -- (11)
Warrants underlying Representative's
Warrants (7) ...................... 185,000 $ .30 $ 55,500 $ 19.14
Shares of Common Stock underlying 140,000 $ 6.00 $ 840,000 $ 289.66
Representative's Warrants (8) ..... 185,000 $ 6.00 $ 1,110,000 $ 382.76
Other Warrants (9) ................. 3,000,000 $ .25 $ 750,000 -- (11)
Shares of Common Stock underlying
Other Warrants (10) ............... 3,000,000 $ 6.00 $18,000,000 $ 6,206.90
Totals ....................................................... $44,477,700 $ 14,895.01 (12)
</TABLE>
=============================================================================
(1) Total estimated solely for the purpose of determining the registration
fee.
(2) Includes (i) 210,000 shares of Common Stock subject to sale upon
exercise of an over-allotment option granted by the Registrant to the
Underwriters, (ii) 450,000 to be sold by Selling Stockholders and (iii)
25,000 shares to be sold by Additional Selling Stockholders outside of
the Firm Commitment Offering.
(3) Includes 277,500 Warrants subject to sale upon exercise of an
over-allotment option granted by the Registrant to the Underwriters.
(4) Reserved for issuance upon exercise of the Warrants.
(5) Represents Warrants to purchase Common Stock to be issued to the
Representative.
(6) Represents Warrants to purchase Warrants to be issued to the
Representative.
(7) Number of Warrants to be issued upon exercise of Representative's
Warrant to purchase Warrants.
(8) Reserved for issuance upon exercise of Representative's Warrants to
purchase Common Stock and upon exercise of the Warrants underlying the
Representative's Warrants to purchase Warrants.
(9) Other Warrants to be offered on behalf of certain Warrant Holders
described in the Prospectus.
(10) Reserved for issuance upon exercise of Other Warrants by Warrant
Holders.
(11) No fee due under Rule 457(g) since the Warrants are registered
contemporaneously with the Common Stock underlying the Warrants.
(12) $14,895.01 previously paid.
<PAGE>
TELLURIAN, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Location of Caption in Prospectus
- ------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Outside Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors Prospectus Summary; Investment Considerations
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders, Additional Selling
Stockholders and Warrant Holders
8. Plan of Distribution Outside Cover Page; Underwriting
9. Legal Proceedings Business -- Litigation
10. Directors, Executive Officers, Promoters and Management; Principal and Selling Stockholders
Control Persons
11. Security Ownership of Certain Beneficial Owners Principal and Selling Stockholders; Certain Transactions
and Management
12. Description of the Securities Description of Securities; Underwriting
13. Interests of named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Management
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Management; Principal and Selling Stockholders; Certain
Transactions
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of Managements discussion and analysis of financial condition
Operation and results of operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Cover Page; Risk Factors
Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on *
Accounting and Financial Disclosure
</TABLE>
- ------
* Omitted because item is inapplicable or answer is in the negative.
<PAGE>
"Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there by any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State."
SUBJECT TO COMPLETION OCTOBER 30, 1996
TELLURIAN, INC.
1,850,000 SHARES OF COMMON STOCK AND
1,850,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Of the 1,850,000 shares of Common Stock and 1,850,000 Redeemable Common
Stock Purchase Warrants (the "Warrants," which together with the Common Stock
are collectively referred to as the "Securities") offered hereby, 1,400,000
shares and 1,850,000 Warrants are being sold by Tellurian, Inc. (the
"Company" or "Tellurian") and 450,000 shares are being sold by certain
selling stockholders (the "Selling Stockholders"). The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders."
The offering of Common Stock and Warrants made pursuant to this Prospectus
is referred to herein as the "Offering." Each Warrant entitles the owner
thereof to purchase one share of the Company's Common Stock at an exercise
price of $6.00 per share (the "Warrant Exercise Price"), subject to
adjustment under certain circumstances, at any time during the five year
period that commences from the date hereof. The Common Stock and the Warrants
are being offered separately and will be separately tradeable and
transferable upon issuance. Beginning one year from the date hereof the
Warrants may be redeemed by the Company, at $.30 per Warrant if certain
conditions are met. See "Description of Securities -- Warrants."
Prior to the Company Offering, there has been no public market for the
Common Stock or the Warrants and there can be no assurance that such a market
for the Common Stock or Warrants will develop after the closing of the
Offering or that, if developed, it will be sustained. The offering price of
the Common Stock and the Warrants and the initial exercise price of and other
terms of the Warrants were established by negotiation between the Company and
J.W. Barclay & Co., Inc., the representative (the "Representative") of the
underwriters of the Offering (collectively, including the Representative, the
"Underwriters"), and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. For information regarding the factors considered in
determining the initial offering prices of the Securities and the terms of
the Warrants, see "Risk Factors" and "Underwriting." The Common Stock and
Warrants are expected to trade on the Nasdaq SmallCap Market ("NASDAQ
SmallCap") under the symbols "TLRN" and "TLRNW", respectively.
------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AS
DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND
"DILUTION" BEGINNING ON PAGE 14.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
===============================================================================
Underwriting Proceeds Proceeds to
Price to Discounts and to the Selling
Public Commissions (1) Company (2) Stockholders
- ------------------------------------------------------------------------------
Per Share ..... $5.00 $ .45 $ 4.55 $4.55
- ------------------------------------------------------------------------------
Per Warrant .. .25 .0225 .2275 --
- ------------------------------------------------------------------------------
Total (3) .... $9,712,500 $874,125 $6,790,825 $2,047,500
==============================================================================
(footnotes appear on next page)
The Securities included in the underwritten offering are being offered by
the Underwriters on a "firm commitment" basis subject to prior sale, when, as
and if delivered to and accepted and subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates evidencing the Securities will be made at the offices of the
Representative, New York, NY, against payment therefor on or about
__________, 1996.
J.W. BARCLAY & CO., INC.
The date of the Prospectus is __________,1996
<PAGE>
(continued from cover page)
(1) Does not include additional compensation to the Underwriters in the form
of (a) a non-accountable expense allowance of three (3%) percent of the
gross proceeds of this Offering and (b) Warrants purchasable at a nominal
price, giving the holders the right to acquire 140,000 shares of Common
Stock at an initial exercise price of $8.25 per share (the "Underwriters'
Stock Warrants") and 185,000 Warrants at an initial exercise price of
$.4125 per Warrant (the "Underwriters' Warrants"). The Underwriters'
Stock Warrants and the Underwriters' Warrants are collectively referred
to as the "Underwriters' Securities". In addition, the Company has agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act"), to
retain the Representative as a financial consultant for a two year period
following the closing of this Offering for an aggregate fee of $149,250
to be paid at the closing of the Offering and, commencing one year from
the date hereof, to pay the Representative a commission of 10% of the
exercise price of the Warrants, payable upon exercise. See
"Underwriting."
(2) Before deducting estimated expenses (including the non-accountable
expense allowance payable to the Representative) of $748,500 payable by
the Company and $67,500 payable by the Selling Stockholders. See
"Principal and Selling Stockholders."
(3) Solely for the purpose of covering over-allotments, if any, the Company
has granted to the Underwriters options, exercisable within 45 days of
the date hereof, to purchase an additional 210,000 shares of Common Stock
and 277,500 Warrants upon the same terms and conditions as the Securities
offered hereby. If such over-allotment options are exercised in full, the
Total Price to Public will be $10,831,875 the Total Underwriting Discount
will be $974,868.75, and the Total Proceeds to the Company will be
$7,809,506.25. See "Underwriting."
------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
The Company has registered for sale on behalf of certain security holders
(the "Warrant Holders") 3,000,000 additional warrants to purchase Common
Stock. Such warrants are identical to the Warrants and are issuable
automatically upon the completion of the Offering in exchange for certain
outstanding warrants of Tellurian. The Company has also registered the shares
of Common Stock issuable upon the exercise of such warrants. Such warrants
are not being underwritten in the Offering, and the Company will not receive
any proceeds from the sale of such warrants. The Warrant Holders may not sell
the Warrants and the shares of Common Stock issuable upon exercise of same
for a period of one year from the closing of this offering. See "Warrant
Holders." The Company has also registered for sale on behalf of certain
security holders (the "Additional Selling Stockholders"), the resale of
25,000 shares (the "Additional Registered Shares") that are issuable
automatically upon the completion of the Offering in exchange for certain
outstanding notes. Such shares are not being underwritten in the Offering and
the Company will not receive any proceeds from the sale of such shares. The
Additional Registered Shares may not be sold by the Additional Selling
Stockholders for a period of six months after the date of this Prospectus.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined and reported upon by an
independent certified public accounting firm and to make available copies of
quarterly reports containing unaudited financial statements. The Company's
fiscal year end is December 31. The Company has filed a Registration
Statement on Form 8-A with the Securities and Exchange Commission (the
"Commission") to register under, and be subject to the reporting requirements
of, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
will file proxy statements and other information with the Commission.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and the Company's financial
statements (including the notes thereto) appearing elsewhere in the
Prospectus. Unless otherwise indicated, all information included in this
Prospectus assumes that the Underwriters over-allotment options will not be
exercised. All share and per share amounts in the Prospectus give retroactive
effect to a 98.52216749-for-1 forward stock split effective March 15, 1995.
Also, all references to "Tellurian" or the "Company" include Tellurian, Inc.,
a South Carolina corporation, which was formed on August 10, 1988 and
reincorporated in Delaware via merger into its wholly-owned subsidiary
effective July 2, 1996. An investment in the Securities offered hereby
involves a high degree of risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
THE COMPANY
Tellurian, Inc. ("Tellurian" or the "Company"), a Delaware corporation, is
engaged in the design, development and marketing of virtual reality products
which include image generators, related software, helmets and motion systems.
The term virtual reality refers to artificial environments of sight, sound
and motion created with the use of specialized computers and visual and audio
equipment. The Company also provides consulting services via developing
customized software and databases for customers who purchase its image
generators and need such services for specific application requirements.
Since 1988, the Company has been designing, building and selling a line of
specialized computers and ancillary software which are used to generate
visual images in realtime for use in flight trainers and other simulation
equipment. Since 1992, the Company's principal product has been its AT-200
image generator which is sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. Since June 1994, the Company has
been adapting its AT-200 Image Generator and has been selling this product
and ancillary software for use in virtual reality entertainment devices to
companies such as Fightertown Entertainment Centers, Ride & Show Engineering
Corp., and MaxFlight Corp.
Beginning in 1994, the Company has been designing and engineering a new
image generation product known as the "EAGLE", a specialized computer, which
is specifically designed for the virtual reality entertainment market. In
July 1996, Tellurian delivered its first production units of the EAGLE
pursuant to purchase orders. The Company intends to utilize a portion of the
net proceeds of the Offering to purchase production tooling necessary to
produce the Eagle products in higher volume. The Eagle which is available in
multiple resolution formats, is faster and less expensive to produce than the
Company's previous products, the AT-100 and AT-200. It is also different from
such previous products in that it is being tailored for entertainment use.
Each unit is composed of proprietary hardware and software which when
combined with motion and sound simulate a full-immersion experience. The
"EAGLE" is intended for use at amusement/theme parks, video arcades, family
fun centers, and other Location Based Entertainment Centers ("LBE").
Utilizing the "EAGLE" technology, Tellurian is currently designing helmets
and motion products to complement the Eagle for the entertainment market.
These new products are expected to be marketed and sold on two levels. The
first level will be components for other virtual reality game manufacturers.
The second level of marketing will be for Tellurian to build its own complete
game units and using these units to establish one or more joint ventures, or
revenue share agreements with owners and operators of LBE's. See "Business."
In January 1996, Tellurian signed a Technology Transfer Agreement with
Voyager Graphics, Inc. ("Voyager") pursuant to which Tellurian granted
Voyager an irrevocable, exclusive, assignable, fully paid license (the
"License") to be the exclusive supplier of the EAGLE Image Generator in
various Asian and middle east countries. In consideration of the License and
technology transfer, Voyager agreed to pay Tellurian $1,500,000. Of such
amount, Tellurian has agreed that Voyager will pay $650,000 to two parties
3
<PAGE>
unrelated to Tellurian for their services in connection with such contract,
resulting in a net amount of $850,000 payable to Tellurian. As of July 31,
1996, Tellurian received payments totalling $416,000 of such $850,000. Under
the contract, Tellurian will be entitled to receive royalties of 2% of
Voyager's net sales of the products and derivative products sold pursuant to
the License. See "Business - Licensing of Tellurian Technology."
Tellurian, Inc. is located at 15 Industrial Avenue, Upper Saddle River, NJ
07458. It's telephone number is (201) 818-6767.
THE OFFERING
Securities Offered............. 1,850,000 shares of Common Stock and
1,850,000 Warrants. Of these Securities,
1,400,000 shares and 1,850,000 Warrants are
being offered by Tellurian and 450,000
shares are being offered by the Selling
Stockholders. Each Warrant entitles the
registered holder thereof to purchase one
share of Common Stock at the Warrant
Exercise Price at any time during the
five-year period commencing after the date
of this Prospectus. The Warrants will be
redeemable under certain circumstances. The
Common Stock and the Warrants are separately
tradeable and transferable immediately upon
issuance. See "Description of Securities."
Common Stock outstanding before
offering..................... 1,600,000 shares (1)
Common Stock outstanding after
offering..................... 3,025,000 shares (1)
Use of Proceeds................ The net proceeds from this Offering will be
utilized by the Company towards the
repayment of promissory notes and certain
current liabilities, establishment of
Location Based Entertainment Centers, sales
and marketing, research and product
development, purchase of equipment, general
and administrative expenses and working
capital. See "Use of Proceeds."
Risk Factors................... The Securities offered hereby involve a high
degree of risk and substantial immediate
dilution to investors. Prospective
investors, before purchasing any securities
offered, should review carefully and
consider the information contained in the
Prospectus and particularly the items set
forth under "Risk Factors" and "Dilution."
NASDAQ SmallCap Symbols (2).... Common Stock "TLRN"
Warrants "TLRNW"
Additional Offering ........... The Company has registered for sale on
behalf of the Warrant Holders 3,000,000
additional warrants to purchase Common
Stock, the exercise of such warrants and the
resale of 25,000 shares by the Additional
Selling Stockholders. See "Warrant Holders"
and "Additional Selling Stockholder."
- ------
(1) Does not include the following: (i) up to 1,850,000 shares of Common
Stock issuable upon exercise of the Warrants sold to the public; (ii) up
to 3,000,000 shares of Common Stock issuable upon exercise of the
Warrants which will be issued to the Warrant Holders; (iii) up to 140,000
shares of Common Stock issuable upon exercise of the Underwriters' Stock
Warrants, (iv) up to 185,000 shares of Common Stock issuable upon
exercise of the Warrants underlying the Underwriters' Warrants; and (v)
up to 400,000 shares of Common Stock issuable under Tellurian's Stock
Option Plan.
4
<PAGE>
(2) There is no assurance that a trading market will develop for the
Company's Common Stock and Warrants or that, if developed, it will be
sustained. If the Company fails to meet certain maintenance standards
imposed by the NASD, delisting of its securities from NASDAQ SmallCap is
possible. See "Risk Factors - Requirements for Listing Securities on
NASDAQ SmallCap."
SUMMARY FINANCIAL INFORMATION
The following selected information has been derived from the historical
financial statements of Tellurian included elsewhere in this Prospectus and
should be read in conjunction therewith, including the notes thereto. The pro
forma as adjusted balance sheet as of June 30, 1996 gives effect to (i) the
sale of 1,400,000 shares of Common Stock and 1,850,000 Warrants offered
hereby, after deducting underwriting discount and commissions and other
Offering expenses and the anticipated application of the net proceeds of the
Offering to retire long-term indebtedness, and (ii) the issuance of 25,000
shares to the Additional Selling Stockholders upon the conversion of certain
long-term indebtedness. See "Use of Proceeds."
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
-------------------------- --------------------------
June 30, June 30, Dec. 31, Dec. 31,
1996 1995 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ............................... $542,284 311,161 $ 477,311 $ 461,832
Gross Profit ........................... 460,225 140,323 138,091 155,608
Net Loss (1) ........................... (95,010) (293,464) (699,665) (576,902)
Net Loss per Common Share .............. (.06) (.23) (.48) (.58)
Weighted Average
Number of Common Shares Outstanding (2) 1,600,000 1,300,000 1,450,000 1,000,000
</TABLE>
BALANCE SHEET DATA:
June 30,
June 30, 1996
1996 (Proforma)(3)(4)
-------------- ------------
Working Capital (Deficiency) ..... $(1,379,604) $3,792,396
Total Assets ..................... 932,932 5,204,617
Long-Term Debt ................... 895,000 -0-
Total Liabilities ................ 2,973,051 1,378,051
Stockholders' Equity (Deficiency) (2,040,119) 3,826,566
- ------
(1) Although the Company's S corporation status for tax purposes terminated
effective July 2, 1996, the Company is an S corporation for all periods
presented. Pro forma net loss assuming the Company files its income tax
return as a C corporation would be the same as if an S corporation.
(2) See Notes 1 and 13 of Notes to Financial Statements for an explanation of
the calculation of shares used in computing net loss per share.
(3) Gives effect to the sale 1,400,000 shares of common stock and 1,850,000
Warrants offered hereby and the anticipated application of the estimated
net proceeds of $6,042,000 therefrom. See "Use of Proceeds".
(4) Gives effect to the repayment of certain indebtedness from the proceeds
of the Offering and the elimination of deferred offering expenses of
$200,315.
5
<PAGE>
RISK FACTORS
An investment in the Securities involve a high degree of risk and
immediate substantial dilution. Prospective investors should consider
carefully the following risk factors, in addition to other information
contained in this Prospectus, in evaluating an investment in the Securities
offered hereby.
Qualified Auditor's Report of Accountants. As a result of the Company's
current financial condition, the Company's independent auditors have
qualified their report on the financial statements at December 31, 1995 and
for the years ended December 31, 1995 and 1994. The Company's ability to
continue in the normal course of business is dependent upon successful
completion of its planned public offering of securities to raise capital and
the success of future operations. These uncertainties raise substantial doubt
about its ability to continue as a going concern if the subject offering is
not completed. There can be no assurance that the Company will not incur net
losses in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Business," "Use of Proceeds," and
"Financial Statements and Notes."
Arrears in Payroll Taxes to IRS and New Jersey. As of June 30, 1996, the
Company owes approximately $114,000 in payroll taxes, interest and penalties
to the Internal Revenue Service ("IRS") and the State of New Jersey. Periodic
payments are being made to the IRS, which has filed a tax lien in the
approximate amount of $92,000. Failure to make payments to the IRS and the
State of New Jersey could result in additional liens and levying on the
Company's assets which would materially adversely effect the Company and its
operations. The Company intends to pay off these payroll obligations
utilizing a portion of the net proceeds of the offering. See "Use of
Proceeds" and "Notes to Financial Statements."
Financial Condition; Losses; Deficit Net Worth. The Company sustained net
losses of $95,010 and $293,964 for the six months ended June 30, 1996 and
1995, respectively, and $699,665 and $576,902 for the years ended December
31, 1995 and 1994, respectively, and continues to incur losses from
operations. As of June 30, 1996, the Company has a working capital deficit of
$1,379,604, an accumulated deficit of $2,191,384 and a Stockholders'
deficiency of $2,040,119. In the past two fiscal years and the six months
ended June 30, 1996, the Company has spent an aggregate of $996,664 for
research and product development purposes. For the six months ended June 30,
1996 and June 30, 1995 and for the years ended December 31, 1995 and 1994,
the Company had sales of $542,284, $311,161, $477,311 and $461,832,
respectively. There can be no assurance that the Company will be able to
operate profitably in the future. See "Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Substantial Proceeds to be Used Toward Repayment of Liabilities/Proceeds
to be Partially Used for Insiders' Benefit. As described in the "Use of
Proceeds" Section of this Prospectus, the Company has allocated $1,570,000 to
be used toward repayment of promissory notes ($880,000), payments to the
Internal Revenue Service to eliminate certain tax liens and State of New
Jersey for payroll tax arrears ($114,000) and to reduce the Company's
accounts payable, accrued expenses, unpaid salaries of employees and officers
of the Company and unpaid consulting fees of consultants ($576,000). To the
extent that any monies from the proceeds of this Offering are paid to
officers and directors of the Company, then such insiders will benefit from
the Offering. See "Use of Proceeds."
Uncertain Market Acceptance; Lack of Marketing Organization; and
Distribution Network. The Company's future success depends upon the
acceptance of its new virtual reality entertainment products, parts of which
are currently in the development stage. With any new technology, there is a
substantial risk that the market may not appreciate the benefits or recognize
the potential of the technology. Market acceptance of the Company's virtual
reality entertainment products will depend in large part, upon the ability of
the Company to demonstrate the technological advantages of the Company's
products over other types of virtual reality entertainment products or other
more passive entertainment systems. The inability of the Company to
successfully introduce its new products, establish these products as a
standard in the industry and cause name recognition will have a material
adverse effect on the Company's financial condition and results of operation.
Successful penetration of the Company's proposed markets will be
substantially dependent on the Company's ability to develop a marketing and
sales organization and/or distribution network and establish one or more
LBE's. There can be no assurances that the Company can develop such an
organization or, if developed, that such an organization will be able to
successfully penetrate the Company's proposed markets. See "Business--Sales
and Marketing."
6
<PAGE>
Dependence Upon Material Contract. The Company has a material contract
with Voyager pursuant to which the Company is entitled to receive up to
$850,000 net upon the occurrence of certain milestones as specified in the
contract. The contract requires Tellurian to train Voyager personnel in the
design and fabrication techniques of the Company's new Eagle image generator
so that Voyager can manufacture the unit in Taiwan for sale on an exclusive
basis in the Licensed Territory as defined herein and elsewhere worldwide on
a non-exclusive basis. No assurances can be given that Voyager and Tellurian
will each fulfill its contractual obligations. Further, since Voyager has
worldwide non-exclusive rights to sell the Eagle image generator, any sales
by Voyager outside of the Licensed Territory may be in direct competition
with Tellurian and could adversely impact Tellurian notwithstanding
Tellurian's entitlement to be paid by Voyager a two percent royalty on all
sales of Eagle and derivative products. See "Business."
Dependence Upon Material Contract with a Republic of China
Corporation. The Company's material contract described in the preceding risk
factor is with Voyager, a foreign corporation formed and operating in the
Republic of China (Taiwan). The Company is receiving certain licensing fees
and anticipates receiving certain royalties based upon Voyager's sale of the
EAGLE. A number of risks are inherent in international transactions such as
limited or disrupted payment cycles, problems in collecting receivables
(including the use of foreign courts) and the imposition of government
controls, export license requirements, political uncertainties, possible
trade restrictions and changes in tariffs, all of which could materially
adversely affect the Company's results of operations.
Dependence on Joint Venture Agreements for LBE's. Tellurian intends to
utilize the Eagle technology to build its own complete game units and use
these units to establish one or more LBE's to be owned solely by Tellurian or
jointly with others. Depending upon the cash requirements of the LBE's,
Tellurian may finance the LBE's utilizing a portion of the proceeds of the
Offering or Tellurian may enter into joint venture or revenue sharing
agreements with third parties such as existing owners and operators of LBE's.
In some cases, the Company may provide the equipment for the facility and
assist in the designing, developing and construction of the LBE's. The
Company has no experience in owning, financing and operating LBE's and is
likely to be dependent in such areas upon third parties to assist it, or
participate with it, in establishing LBE's. The Company has no binding
agreements with respect to any of these opportunities and there can be no
assurances that Tellurian will be successful in establishing or entering into
revenue sharing agreements for one or more LBE's and deriving operating
profits from such operations. The Company has allocated $1,650,000 of the
proceeds of the Offering which may be used to establish or enter into revenue
sharing agreements for one or more LBE's. See "Use of Proceeds."
Rapid Changes in Technology. The technology underlying Tellurian's
products is subject to rapid change. The Company maintains an ongoing
research and development program and its success will depend in part upon its
continuing ability to respond quickly and successfully to technological
advances by developing and introducing new and improved products. There can
be no assurance that the Company will be able to foresee and respond to such
advances or that competitors, including those with greater financial and
other resources, will not succeed in developing technologies and products
that are more effective than the Company's. See "Business -- Research and
Development."
Competition. Competition in the virtual reality entertainment market comes
primarily from defense related manufacturers, many of which have much greater
financial, technical, manufacturing and sales and marketing resources than
the Company. In addition, as the virtual reality market develops and
continues to grow, many larger companies will also enter this market
increasing the competition. Although the Company believes that its developing
virtual reality system and other virtual reality devices will be highly
competitive due to performance and cost factors, there can be no assurance
that the marketplace will consider the Company's products to be superior to
competing products or that the Company can effectively compete with these
larger companies in the future. See "Business -- Competition."
Dependence Upon Proprietary Technology; Intellectual Property
Rights. Tellurian regards its products as proprietary and relies primarily on
a combination of technological complexity trade secret protection, employee
and third party non-disclosure agreements, and other intellectual proprietary
protection methods to protect its proprietary rights. Although the Company
believes that its products are uncopyable, it may be possible in the future,
for unauthorized third parties to copy or reverse engineer certain portions
of the Company's products or
7
<PAGE>
obtain or use information that the Company regards as proprietary. The
Company currently has no patents. Although the Company's competitive position
may be adversely affected by unauthorized use of its proprietary information,
the Company believes that the ability to fully protect its intellectual
property is less significant to its success than are other factors, such as
the knowledge, ability and experience of its employees and its ongoing
product development and customer support activities. There can be no
assurance that third parties will not assert infringement or other claims
against the Company with respect to any existing or future products, or that
licenses would be available if any Tellurian technology were successfully
challenged by a third party, or if it became desirable to use any third party
technology to enhance Tellurian's products. Litigation to protect the
Company's proprietary information or to determine the validity of any third
party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel, whether or
not such litigation is determined in favor of the Company. See "Business --
Lack of Patent Protection."
Dependence on Key Employees. The Company is particularly dependent on the
services of its key employees, Dr. Ronald Swallow and Mr. Stuart French, the
loss of one or more of whom could have a material adverse effect on the
Company's operations. Upon the completion of the Offering, the Company
intends to enter into employment agreements with each of Dr. Swallow and Mr.
French and apply for key man life insurance in the amount of $1,000,000 on
the lives of Dr. Swallow and Mr. French. No assurances can be given that such
insurance will adequately compensate Tellurian in the event of the loss of
such key personnel. The Company believes that its success will depend in
large part upon its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel. The business of the Company is
highly technical in nature. The Company's future growth is dependent upon its
ability to attract and retain qualified technical personnel. There can be no
assurance that the Company will be successful in attracting and retaining the
personnel it requires to market its products. Competition for such personnel
in the computer technology industry is intense. Failure to attract and retain
such personnel could have an adverse effect on the Company's business,
operating results and financial condition.
Control by Principal Shareholders. Following the completion of the
Offering, without giving effect to the potential exercise of the Warrants,
the current principal shareholders and Management of the Company will
beneficially own 886,699 shares of Common Stock, or approximately 29.3% of
the then outstanding shares of Common Stock of the Company. Accordingly, the
current principal shareholders and Management will be in a position to
influence the election of the Board of Directors of the Company. See
"Principal and Selling Stockholders."
Management's Broad Discretion in Use of Proceeds. While the Company
presently intends to use the net proceeds of the Offering, as described in
the "Use of Proceeds" Section of this Prospectus, Management of the Company
has broad discretion to adjust the application and allocation of the net
proceeds of the Offering as well as any proceeds received upon exercise of
the Warrants in order to address changed circumstances and opportunities. As
a result of the foregoing, the success of the Company will be substantially
dependent upon the discretion and judgment of the Management of the Company
with respect to the application and allocation of the net proceeds hereof.
Pending use of such proceeds, the net proceeds of this Offering will be
invested by the Company in short-term, low risk marketable securities. See
"Use of Proceeds."
No Dividends and None Anticipated. The payment by Tellurian of cash
dividends on its Common Stock, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things,
upon the Company's earnings, its capital requirements and its financial
condition as well as other relevant factors. Tellurian has not paid or
declared any cash dividends upon its Common Stock since its inception and, by
reason of its present financial status and its contemplated future financial
requirements, does not contemplate or anticipate making any cash
distributions upon its Common Stock in the foreseeable future. See "Dividends
Policy."
Determination of Offering Price. The initial public offering price of the
Shares and Warrants has been determined by negotiations between the Company
and the Representative and are not necessarily related to the Company's asset
value, net worth, or other established criteria of value. See "Underwriting."
Immediate and Substantial Dilution. The purchasers of the Shares offered
hereby will incur an immediate and substantial dilution in the value of their
Common Stock in that the net tangible book value of the Common Stock
immediately after this Offering will be $(1.27) per share as compared to the
initial public offering
8
<PAGE>
price of $5.00 per share, representing a dilution to new investors of $3.73
per share, or approximately 75%. Additional dilution to public investors may
result to the extent that outstanding warrants and the Underwriters'
Securities are exercised at a time when the net tangible book value per share
of the Common Stock exceeds the exercise price of such warrants or when the
Company could receive a higher price for the sale of its Common Stock. See
"Dilution" and "Description of Securities."
Shares Eligible for Future Sale. Sales of substantial amounts of Securities
or the perception that such sales could occur could adversely effect the market
price for the Securities. Upon consummation of the Offering, the Company will
have 3,025,000 shares of Common Stock outstanding (3,235,000 shares if the
Underwriters' over-allotment options are exercised in full) and 1,850,000
Warrants outstanding (2,127,500 if the Underwriter's over-allotment options are
exercised in full). In addition, the Company will have 3,000,000 warrants
outstanding held by the Warrant Holders, 140,000 Underwriters' Stock Warrants
and 185,000 Underwriters' Warrants outstanding held by the Underwriters. Of
these shares of Common Stock and warrants, 1,875,000 shares of Common Stock
(2,085,000 if the Underwriters' over-allotment options are exercised in full),
1,850,000 Warrants (2,127,500 Warrants if the Underwriter's over-allotment
options are exercised in full), 3,000,000 warrants held by the Warrant Holders,
140,000 Underwriters' Stock Warrants and 185,000 Underwriters' Warrants will be
freely tradeable in the public market without restriction under the Securities
Act, except for Securities purchased by an "affiliate" of the Company (as that
term is defined under the rules and regulations of the Securities Act), which
will be subject to the resale limitations of Rule 144 under the Securities Act
("Rule 144"), and except that (i) 25,000 shares owned and offered by the
Additional Selling Stockholders may not be sold for a period of six months (ii)
3,000,000 Warrants (and shares of Common Stock issuable upon exercise of same)
owned and offered by the Warrant Holders may not be sold for a period of one
year from the consummation of this offering, and (iii) the Underwriters'
Securities may not generally be transferred by the holders thereof for a period
of one year after the date of this Prospectus. All of the remaining shares of
Common Stock to be outstanding after the Offering, 1,150,000 shares of Common
Stock, will be "restricted securities" as that term is defined in the Securities
Act and will not have been registered under the Securities Act. The holders of
1,000,000 of such shares of Common Stock have agreed with the Representative not
to sell or otherwise transfer any of their shares of Common Stock for a period
of 24 months after the date of this Prospectus, without the prior written
consent of the Representative. At the end of the aforesaid 24 month period (or
earlier in with the consent of the Representative) these 1,000,000 shares will
be eligible for sale, subject to the restrictions imposed by Rule 144. Some of
these stockholders may elect to sell some or all of these shares as soon as they
are permitted to do so. Ordinarily, under Rule 144, a person holding restricted
securities for a period of two years may, every three months thereafter, sell in
ordinary brokerage transactions or in transactions directly with a market maker,
an amount of shares equal to the greater of one percent of the Company's
then-outstanding Common Stock or the average weekly trading volume in the same
securities during the four calendar weeks prior to such sale. In addition, the
holders of an additional 150,000 shares of Common Stock have agreed not to sell
or otherwise transfer any of their shares of Common Stock for a period of 90
days after the date of this Prospectus. See "Shares Eligible For Future Sale"
and "Underwriting."
Requirements for Listing and Maintaining Listing of Securities on NASDAQ
Smallcap. The Company has applied to have the Securities approved for
quotation on NASDAQ SmallCap. The rules of NASDAQ SmallCap establish criteria
for initial and continued quotation of securities on The NASDAQ SmallCap.
While the Company expects to meet the initial criteria, there can he no
assurance that it will be able to maintain the standards for continued
quotation. These standards will require the Company to maintain total assets
of $2,000,000, capital and surplus of $1,000,000 and, in certain
circumstances, a minimum bid price for its Common Stock of $1.00 per share.
If the Company fails to meet the criteria for initial quotation or the
standards for continued quotation, the market for the Securities may be
affected adversely and holders may be unable to sell their shares of Common
Stock or Warrants. Trading, if any, in the listed securities would thereafter
be conducted in the over-the-counter market in what are commonly referred
to as the "pink sheets" or on the NASD electronic bulletin board. If this
result were to occur, an investor may find it more difficult to dispose of,
or in the case of the "pink sheets," to obtain accurate quotations as to the
price of, the Securities.
"Penny Stock" Regulations. The Commission has adopted regulations under
the Exchange Act which generally define a "penny stock" to be any equity
security that has a market price (as defined in the Exchange Act) of less
than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. If the securities offered hereby are not
approved for quotation on or are removed from NASDAQ SmallCap, the
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<PAGE>
Securities may be deemed to be "penny stocks" and become subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to the transaction, of a disclosure
schedule prepared by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. In addition,
the broker-dealer must obtain a written acknowledgement from the customer
that such disclosure information was provided and must retain such
acknowledgement for at least three years. Further, monthly statements must be
sent disclosing current price information for the penny stock held in the
account. Transactions in a non-NASDAQ security would be exempt from all but
the sole market maker provision for (i) issuers who have $2,000,000 in
tangible assets if such issuer has been in continuous operation for three
years, or $5,000,000 in tangible assets if such issuer has been in continuous
operation for less than three years, (ii) transactions in which the customer
is an institutional accredited investor and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a NASDAQ
security directly with a NASDAQ market maker for such securities would be
subject only to the sole market marker disclosure, and the disclosure with
respect to commissions to be paid to the broker-dealer and the registered
representative.
The above-described rules may materially adversely affect the liquidity
for the market of the securities should they cease to be quoted on NASDAQ
SmallCap. Such rules may also affect the ability of broker-dealers to sell
the Securities and may impede the ability of Warrant Holders or subsequent
holders of the shares of Common Stock or the Warrants (including,
specifically, the purchasers in the Offering) to sell such securities in the
secondary market.
Current Prospectus and State "Blue Sky" Registration Required to Exercise
the Warrants. The Warrants provide that the Company shall not be obligated to
issue shares of Common Stock upon exercise of the Warrants unless there is a
current prospectus relating to the Common Stock issuable upon the exercise of
the Warrants under an effective registration statement filed with the
Commission and unless such Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. In accordance with the
Securities Act, a prospectus ceases to be current nine months after the date
of such prospectus if the information therein (including financial
statements) is more than sixteen months old or sooner if there have been
other fundamental changes in the matters discussed in the prospectus. The
Company intends to utilize its best efforts to maintain a current prospectus
relating to the Common Stock issuable upon exercise of the Warrants under an
effective Registration Statement filed with the Commission. Although the
Company has agreed to use its best efforts to meet such regulatory
requirements, there can be no assurance that the Company can continue to meet
these requirements. The Securities are not expected to be qualified for sale
or exempt under the securities laws of all states. Although the Securities
will not knowingly be sold to purchasers in jurisdictions in which the
Securities are not qualified for sale or exempt, purchasers may buy Warrants
in the secondary market or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Warrants are not so qualified or
exempt. In this event, the Company would be unable lawfully to issue shares
of Common Stock to those persons upon exercise of the Warrants unless and
until the Common Stock issuable upon exercise of the Warrants is qualified
for sale or exempt from qualification in jurisdictions in which such persons
reside. There is no assurance that the Company will be able to effect any
required registration or qualification. The value of the Warrants could be
adversely affected if a then current prospectus covering the Common Stock
issuable upon exercise of the Warrants is not available pursuant to an
effective registration statement or if such Common Stock is not qualified for
sale or exempt from qualification in the jurisdictions in which the holders
of the Warrants reside. Further, under the terms of the agreement under which
the Warrants will be issued, the Company is not permitted to redeem such
Warrants unless a current prospectus is available at the time of notice of
redemption and at all subsequent times to and including the date of
redemption. See "Description of Securities -- Warrants."
Potential Adverse Effect of Redemption of Warrants; Possible Expiration
Without Value; Effect of Warrants, Warrants held by Warrant Holders and
Representative's Warrant Securities on Value of Common Stock. The Warrants
are redeemable by the Company, in whole or in part, upon 30 days' prior
written notice at $.30 per Warrant, beginning 12 months after the date hereof
and provided certain specified market conditions are met.
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<PAGE>
Redemption of the Warrants could force the holders to exercise the Warrants
and pay the Warrant Exercise Price at a time when it may be disadvantageous
for the holders to do so, to sell the Warrants at the then current market
price when they might otherwise wish to hold the Warrants for possible
additional appreciation or to accept the redemption price, which is likely to
be substantially less than the market value of the Warrants at the time of
redemption. In addition, if the market price of the Common Stock does not
exceed the Warrant Exercise Price at the expiration of the exercise period,
the Warrants may expire without value. See "Description of Securities --
Warrants." The exercise of the Warrants, the warrants held by the Warrant
Holders and the Underwriters' Securities and the sale of the underlying
shares of Common Stock (or even the potential of such exercise or sale) may
have a depressive effect on the market price of the Company's securities. The
exercise of such warrants also may have a dilutive effect on the interest of
investors in the Offering. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected because
the holders of such outstanding warrants can be expected to exercise them, to
the extent that they are able to, at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in such warrants. See "Description of
Securities" and "Underwriting." As a result of the Warrants, the warrants
held by the Warrant Holders and the Underwriters' Securities being
outstanding, the Company may be deprived of favorable opportunities to obtain
additional equity capital, if it should then be needed, for its business. It
is also possible that, as long as the Warrants held by the Warrant Holders
and the Underwriters' Securities remain outstanding, their existence might
limit increases in the price of the Common Stock. See "Risk Factors --
Representative's Potential Influence on the Market" and "-- Current
Prospectus and State "Blue Sky" Registration Required to Exercise the
Warrants," "Description of Securities -- Warrants" and "Underwriting."
No Prior Market; Possible Volatility of Share Price. Prior to this
Offering, there has been no public trading market for the Securities.
Although the Company intends to apply to have its Common Stock and Warrants
included on NASDAQ SmallCap and the Representative has indicated that it
intends to make a market in the Securities following this Offering, the
Representative is not required to make such a market and there can be no
assurance that an active public trading market for the Securities will be
developed or, if developed, that it will be sustained. Accordingly,
purchasers of the Common Stock and Warrants may experience substantial
difficulty selling such Securities.
Limitation on Director Liability. As permitted by Delaware corporation
law, the Company's Certificate of Incorporation limits the liability of
Directors to the Company or its stockholders to monetary damages for breach
of a Director's fiduciary duty except for liability in certain instances. As
a result of the Company's charter provision and Delaware law, stockholders
may have a more limited right to recover against Directors for breach of
their fiduciary duty other than as existed prior to the enactment of the law.
See "Management -- Limitation of Directors' Liability; Indemnification."
Absence of Independent Directors. The Company has three directors, each of
whom is an officer and two of whom are principal stockholders of the Company.
The absence of outside or disinterested directors may result in less
objectivity and an increased risk for conflicts of interest with respect to
decisions made by the Board of Directors. See "Principal and Selling
Stockholders" and "Management."
Potential Adverse Effect of Warrants on Market for Common Stock. Upon the
completion of the Offering, there will be outstanding 4,850,000 warrants to
purchase Common Stock which will be able to be sold by the holders thereof,
except that the holders of 3,000,000 Warrants may not sell or otherwise
transfer such Warrants for a period of one year from the consummation of this
offering. Such outstanding warrants may have an adverse effect on the market
for the Company's Common Stock. See "Description of Securities -- Warrants."
Company Will Not Receive Proceeds from Sales by Selling Stockholders,
Additional Selling Stockholders and Warrant Holders. This Prospectus includes
securities to be offered on behalf of the Company and certain Selling
Stockholders, Additional Selling Stockholders and Warrant Holders as
described herein. The Company will not receive any proceeds from the sale of
securities by Selling Stockholders, Additional Selling Stockholders and
Warrant Holders. See "Principal and Selling Stockholders", "Additional
Selling Stockholders" and "Warrant Holders."
Representative's Influence on the Market. A significant amount of the
securities offered hereby may be sold to customers of the Representative.
Such customers subsequently may engage in transactions for the sale or
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<PAGE>
purchase of such Securities through or with the Representative. Although it
has no obligation to do so, the Representative intends to make a market in
the Securities and may otherwise effect transactions in such Securities. If
it participates in the market, the Representative may exert a dominating
influence on the market, if one develops, for the Securities. Such market
making activity may be discontinued at any time. The price and liquidity of
the Securities may be significantly affected by the degree, if any, of the
Representative's participation in such market. Additionally, if the
Representative should exercise its registration rights to effect the
distribution of the Underwriters' Securities, or the shares of Common Stock
underlying the Underwriters' Securities, the Representative, immediately
prior to and during such distribution, will be unable to make a market in the
Securities. If the Representative ceases making a market, the market and
market prices for the Securities may be adversely affected and holders
thereof may be unable to sell such Securities.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,400,000 shares of
Common Stock and 1,850,000 Warrants offered hereby, after deducting
underwriting discounts and commissions and other expenses of the Offering
payable by the Company, will be approximately $6,042,000 (approximately
$7,016,000 if the Underwriters' over-allotment option is exercised in full).
The Company anticipates that the net proceeds of this Offering will be used
approximately as follows:
<TABLE>
<CAPTION>
Amount Percentage
------------ ------------
<S> <C> <C>
Locations Based Entertainment Centers (1) .......... $1,650,000 27%
Repayment of Promissory Notes and Payment of Certain
Current Liabilities (2) ........................... 1,570,000 26
Research and Product Development (3) ............... 900,000 15
Purchase of Equipment (4) .......................... 250,000 4
Sales and Marketing (5) ............................ 820,000 14
General and Administrative ......................... 350,000 6
Working Capital (6) ................................ 502,000 8
------------ ------------
Total ............................................ $6,042,000 100%
============ ============
</TABLE>
- ------
(1) See "Business-Location Based Entertainment Centers."
(2) Tellurian intends to utilize $1,570,000 toward repayment of promissory
notes and certain current liabilities approximately as follows: (i)
$880,000 for repayment of Subordinated promissory notes in the principal
amount of $870,000 plus interest at the rate of 8% per annum. These long
term notes provide for prepayment of the notes upon the completion of the
Offering. These funds were spent for the following purposes: payroll
taxes, reduction of stockholder loans to Charles Powers, expenses of the
Company's private placement, general working capital and advances toward
the expenses of the Offering; (ii) $114,000 to the Internal Revenue
Service and State of New Jersey for payroll tax arrears; and (iii)
$576,000 to reduce Tellurian's then accounts payable, accrued expenses,
unpaid salaries of employees and officers of the Company, and unpaid
consulting fees of consultants. See "Certain Transactions."
(3) The Company has allocated $550,000 for the completion of product
development of the Company's virtual reality entertainment system. The
Company has also allocated $350,000 for future research and development.
See "Business -- Products" and "Business -- Research and Development."
(4) Approximately $60,000 will be used to purchase production tooling
necessary to produce the EAGLE products in higher volume. The balance
will be utilized to purchase computers, a trailer and equipment for the
Company's facilities.
(5) See "Business -- Sales and Marketing."
(6) If the Underwriters' over-allotment options are exercised in full, the
working capital amount will be increased to approximately $1,487,000. The
funds allocated for working capital will be available for all general
corporate purposes and may be utilized at the Board's discretion, for
among other purposes, to make payments of approximately $160,000 to TTY
Graphics, Inc. and Gregory Gustin. See "Business -- Background."
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<PAGE>
The foregoing represents the Company's best estimate of its expected use
of the net proceeds of the Offering. The amounts actually expended for
certain purposes described above may vary significantly depending on numerous
factors, including but not limited to, the market demand for the Company's
virtual reality products, and the technological and development progress of
new products including helmets and motion systems. The Company may in the
future find it necessary or desirable to change the allocation of net
proceeds due to certain exigencies of the business and, therefore, there
could be significant variations in the above use of proceeds. In the event
one or more of such exigencies occurs, the Company will reallocate the net
proceeds of this Offering in response thereto.
The Company has estimated the net proceeds from this Offering together
with revenues from operations will be sufficient to meet the Company's cash
requirements for a period of between 12 and 15 months following the date of
this Prospectus. However, there can be no assurance that unexpected future
developments may result in the Company requiring additional financing and
that if required, additional financing will be available to the Company.
Pending application of the net proceeds of this Offering, the Company may
make temporary investments in interest-bearing savings accounts, certificates
of deposit, United States government obligations, money market accounts,
interest-bearing securities or other insured short-term, interest-bearing
investments. Any additional proceeds received upon exercise of the
Underwriters' over-allotment options or the Underwriters' Warrants
Securities, as well as income from such investments, will be used for working
capital.
DIVIDEND POLICY
Tellurian has not paid any cash dividends and does not anticipate paying
any dividends in the foreseeable future. Tellurian intends to retain any
future earnings to finance the growth and development of its business. Any
future determination as to the payment of dividends will be at the discretion
of the Board of Directors of Tellurian and will depend on the Company's
operating results, financial condition, capital requirements and such other
factors as the Board of Directors of Tellurian may deem relevant. See "Risk
Factors -- No Dividends and None Anticipated" and "Description of
Securities."
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CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
June 30, 1996 and (b) pro forma as of June 30, 1996, as adjusted, to reflect
(i) the sale by the Company of 1,400,000 shares of Common Stock at $5.00 per
share, and 1,850,000 Warrants, at a price of $.25 per warrant, offered hereby
(after deducting the underwriting discounts and commissions and expenses of
the Offering); (ii) the application of a portion of the estimated net
proceeds of the Offering as described under "Use of Proceeds," and (iii) the
issuance of 25,000 shares to the Additional Selling Stockholders upon the
conversion of certain indebtedness. This table should be read in conjunction
with the Company's financial statements and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
----------------------------
Actual Pro Forma
------------- -----------
<S> <C> <C>
Long-term debt ................................................. $ 895,000 -0-
Stockholders' equity (deficiency)(1):
Common stock-$.01 par value: authorized 10,000,000 shares,
issued 1,600,000 shares and issued 3,025,000 pro forma .... 16,000 30,250
Additional paid-in capital ..................................... 135,265 3,796,316
Accumulated deficit(2) ......................................... (2,191,384) -0-
------------- -----------
Stockholders' equity (deficiency) .............................. (2,040,119) 3,826,566
------------- -----------
Total capitalization ........................................... (1,145,119) 3,826,566
------------- -----------
</TABLE>
- ------
(1) Does not include the following: (i) up to 1,850,000 shares of Common
Stock issuable upon exercise of the Warrant; (ii) up to 3,000,000 shares
of Common Stock issuable upon exercise of certain other warrants which
will be issued to the Warrant Holders upon the closing of the Offering;
(iii) up to 140,000 shares of Common Stock issuable upon exercise of the
Underwriters' Stock Warrants; (iv) up to 185,000 shares of Common Stock
issuable upon exercise of the Warrants underlying the Underwriters'
Warrants; and (v) 400,000 shares of Common Stock issuable upon exercise
of stock options granted under Tellurian's Stock Option Plan.
(2) The pro forma balance sheet reflects the netting of an accumulated
deficit of $2,191,384 against additional paid in capital in light of the
Company's conversion to a "C" status for income tax purposes and the
elimination of deferred offering costs of $200,315.
DILUTION
Net tangible book value (deficit) per share represents the amount of total
tangible assets less total liabilities of the Company, divided by the number
of shares of Common Stock outstanding, which will be 1,600,000 shares prior
to and 3,025,000 shares immediately after the completion of the Offering. At
June 30, 1996, the Company had a net tangible book value (deficit) of
approximately $(2,240,000) or $(1.40) per share of Common Stock.
After giving effect to the conversion of $25,000 of long-term indebtedness
into 25,000 shares of the Company's Common upon the completion of the
Offering and sale by the Company of the 1,400,000 shares of Common Stock and
1,850,000 Warrants offered hereby (and after deducting the underwriting
discounts and commissions and Offering expenses) and the application of the
estimated net proceeds therefrom of approximately $6,042,000, the pro forma
net tangible book value of the Company at June 30, 1996 would have been
approximately $3,827,000 or 1.27 per share. This represents an immediate
increase in net tangible book value of $2.67 per share to the existing
stockholders and an immediate dilution in net tangible book value of $3.73
per share (74.6%) to purchasers of Common Stock in this Offering. The
following table illustrates the dilution in net tangible book value per share
to new investors:
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Price to public (1) ............................................... $5.00
Net tangible book value before Offering ......................... $(1.40)
Increase per share attributable to sale of Securities ........... 2.67
---------
Pro forma net tangible book value per share of Common Stock,
after the Offering ........................................... 1.27
-------
Net tangible book value dilution per share of Common Stock to
public investors (2) ............................................ $3.73
=======
</TABLE>
- ------
(1) Does not include the following: (i) up to 1,850,000 shares of Common
Stock issuable upon exercise of the Warrant; (ii) up to 3,000,000 shares
of Common Stock issuable upon exercise of certain other warrants which
will be issued to the Warrant Holders upon the closing of the Offering;
(iii) up to 140,000 shares of Common Stock issuable upon exercise of the
Representative's Stock Warrants; (iv) up to 185,000 shares of Common
Stock issuable upon exercise of the Warrants underlying the
Representative's Warrants; and (v) 400,000 shares of Common Stock
issuable upon exercise of stock options granted under Tellurian's Stock
Option Plan.
(2) If the Underwriter's over-allotment options are exercised in full, the
pro forma net tangible book value would be approximately $4,800,000 or
$1.48 per share and the dilution to public investors in the Offering
would be $3.52 per share (70.4%).
The following table sets forth the percentage of equity to be purchased by
public investors in the Offering from the Company compared to the percentage
of equity to be owned by the present stockholders, and the comparative
amounts of cash paid for the shares by the public investors as compared to
the total cash consideration paid by the present stockholders of the Company.
See "Certain Transactions" and "Financial Statements".
<TABLE>
<CAPTION>
Approximate Approximate Average
Percent age of Percentage Price
Shares Total Total Cash of Total Per
Purchased Shares Consideration Consideration Share
----------- -------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Public Stockholders ..... 1,400,000 46.2% $7,000,000 98.1% $5.00
Present Stockholders (1) 1,625,000 53.8 135,000 1.9 0.08
----------- -------------- --------------- ---------------
Total ................... 3,025,000 100.0% $7,135,000 100.0%
=========== ============== =============== ===============
</TABLE>
- ------
(1) Upon the completion of the Offering, promissory notes in the principal
amount of an aggregate of $25,000 will automatically convert into 25,000
shares of the Company's Common Stock. These shares are included as owned
by present stockholders.
Does not give effect to the following: (i) up to 1,850,000 shares of
Common Stock issuable upon exercise of the Warrant; (ii) up to 3,000,000
shares of Common Stock issuable upon exercise of certain other warrants which
will be issued to the Warrant Holders upon the closing of the Offering; (iii)
up to 140,000 shares of Common Stock issuable upon exercise of the
Representative's Stock Warrants; (iv) up to 185,000 shares of Common Stock
issuable upon exercise of the Warrants underlying the Representative's
Warrants; (v) 400,000 shares of Common Stock issuable upon exercise of stock
options granted under Tellurian's Stock Option Plan; (vi) the value of
services rendered in the amount of $15,000 for stock purchased by existing
stockholders; (vii) 450,000 shares purchased by investors in the Offering
from existing stockholders; and (viii) $462,500 in gross proceeds received
from the sale of 1,850,000 Warrants in the Offering.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected information has been derived from the historical
financial statements of Tellurian included elsewhere in this Prospectus and
should be read in conjunction therewith, including the notes thereto. The pro
forma as adjusted balance sheet as of June 30, 1996 gives effect to (i) the
sale of 1,400,000 shares of Common Stock and 1,850,000 Warrants offered
hereby, after deducting underwriting discount and commissions and other
Offering expenses and the anticipated application of the net proceeds of the
Offering to retire long-term indebtedness and (ii) the issuance of 25,000
shares to the Additional Selling Stockholders upon the conversion of certain
long-term indebtedness. See "Use of Proceeds."
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
-------------------------- ------------ ------------
June 30, June 30, Dec. 31, Dec. 31
1996 1995 1995 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues ........................ $ 542,284 $ 311,161 $ 477,311 $ 461,832
Gross Profit .................... 460,225 140,323 138,091 155,608
Net Loss (1) .................... (95,010) (293,464) (699,605) (576,902)
Net Loss per Common Share ....... (.06) (.23) (.48) (.58)
Weighted Average Number of Common
Shares Outstanding (2) ......... 1,600,000 1,300,000 1,450,000 1,000,000
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
June 30, 1996
(Pro
June 30, 1996 forma)(3)(4) Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Working Capital (Deficiency) ..... $(1,379,604) $3,792,396 $(1,865,510)
Total Assets ..................... 932,932 5,204,617 223,560
Long-Term Debt ................... 895,000 -0- 192,000
Total Liabilities ................ 2,973,051 1,378,051 2,196,669
Stockholders' Equity (Deficiency) (2,040,119) 3,826,566 (1,973,109)
</TABLE>
- ------
(1) Although the Company's S corporation status for tax purposes terminated
effective July 2, 1996, the Company is an S corporation for all periods
presented. Pro forma net loss assuming the Company files its income tax
return as a C corporation would be the same as if an S corporation.
(2) See Notes 1 and 13 of Notes to Financial Statements for an explanation of
the calculation of shares used in computing net loss per share.
(3) Gives effect to the sale 1,400,000 shares of common stock and 1,850,000
Warrants offered hereby and the anticipated application of the estimated
net proceeds of $6,042,000 therefrom. See "Use of Proceeds".
(4) Gives effect to the repayment of certain indebtedness from the proceeds
of the Offering and the elimination of deferred offering expenses of
$200,315.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES
INTRODUCTION
The Company was founded in 1988 as a South Carolina corporation by Drs.
Ronald and Richard Swallow, and Mr. Charles Powers to design, manufacture,
and sell computer image generators for use in flight and other simulation
training. Since 1992, the Company's principal product has been its second
generation unit, the AT-200, a specialized computer, which is largely used in
simulators for training aircraft and ship pilots.
Since 1994, the Company has been designing and engineering its latest
image generation product known as the "EAGLE", a specialized computer which
is specifically designed for the virtual reality entertainment market. In
July 1996, Tellurian delivered its first production units of the EAGLE
pursuant to purchase orders. The Company intends to utilize a portion of the
net proceeds of the Offering to purchase production tooling necessary to
produce the Eagle products in higher volume. The Eagle which is available in
multiple resolution formats, is faster and less expensive to produce than the
AT-200. It is also different from the AT-200 in that it is being tailored for
entertainment use. Each unit is composed of proprietary hardware and software
which when combined with motion and sound simulate a full-immersion
experience. The "EAGLE" is intended for use at amusement/theme parks, video
arcades, family fun centers, and other LBE's.
The Company expects that substantially all of its immediate future
revenues will be dependent upon the sales of the EAGLE image generator and
the development and introduction of its complementary products. The Company
has invested significant resources in product research, development, and
engineering activities, and has incurred significant losses while completing
the EAGLE. The Company has a backlog of orders of approximately $404,000 to
purchase 73 Units of the EAGLE as of September 15, 1996.
In January 1996, Tellurian signed a Technology Transfer Agreement with
Voyager pursuant to which Tellurian granted Voyager an irrevocable,
exclusive, assignable, fully paid license (the "License") to be the exclusive
supplier of the EAGLE Image Generator in various Asian and middle east
countries. In consideration of the License and technology transfer, Voyager
agreed to pay Tellurian $1,500,000. Of such amount, Tellurian has agreed that
Voyager will pay $650,000 to two parties unrelated to Tellurian for their
services in connection with such contract, resulting in a net amount of
$850,000 payable to Tellurian. As of July 31, 1996, Tellurian received
payments totalling $416,000 of such $850,000. Under the contract, Tellurian
will be entitled to receive royalties of 2% of Voyager's net sales of the
products and derivative products sold pursuant to the License. See "Business
- -- Licensing of Tellurian Technology."
PLAN OF OPERATION
For the twelve months following the completion of the Offering, the
Company plans to focus its efforts on the following three areas: (i)
increasing revenues through marketing efforts of its new EAGLE product; (ii)
developing its virtual reality helmet and motion system and establishing a
virtual reality showplace for demonstrations of Tellurian's products; and
(iii) entering into joint ventures or revenue sharing agreements with third
parties for the purpose of owning, operating and/or having an interest in one
or more LBE's for the sale and/or use of its virtual reality game units.
Marketing of the new EAGLE image generator will be accomplished by
directing efforts towards three different customer groups: (i) the training
and simulation market where Tellurian sold in July and August 1996 twenty
units of the EAGLE for $200,000; (ii) pursuing the VR game developer market
through trade show exhibits, advertisements and newsletters; and (iii)
pursuing the inter-active thrill-ride market for which the Company has
received deposits of approximately $130,000 as of September 15, 1996. The
Company intends to expand its current customer list as several manufacturers
move into this new type of themed adventure. Trade shows, marketing
brochures, and personal contacts will be used to gain customers.
To effectively market Tellurian's products, it is planning to have a
complete virtual reality showplace ready for demonstrations approximately
seven months after the closing of the Offering. The Company's range of VR
devices which includes modern fighter cockpits, dune buggies, spacecraft and
full immersion helmet experiences will be displayed at the game room; but the
centerpiece of the facility will be the six cockpit "Battle of the
17
<PAGE>
Bulge" simulation. The Showplace will consist of approximately 3,000 square
feet in a retail zoned area of Orlando, Florida. The units will act as a
marketing tool for sales, and also as a very controlled environment for the
introduction of new experiences. Although this facility is expected to be
geared to testing and market response, it is anticipated to have a revenue
stream.
The Company is engaged and intends to continue to engage in ongoing
research and development efforts to expand and enhance the technical
capabilities, design features and range of uses of its products. The Company
currently employs nine persons, seven of which are engineers. Due to the
increasing competition and rapid technological change in the VR marketplace,
the Company believes that it must continue to improve and refine its
products. The Company intends to hire additional full time personnel
subsequent to the completion of the Offering, including two additional
engineering technicians and two sales/marketing employees.
Tellurian intends to utilize the Eagle technology to build its own
complete game units and use these units to establish one or more LBE's to be
owned solely by Tellurian or jointly with others. Depending upon the cash
requirements of the LBE's, Tellurian may finance the LBE's utilizing a
portion of the proceeds of the Offering or Tellurian may enter into joint
venture or revenue sharing agreements with third parties such as existing
owners and operators of LBE's. In some cases, the Company may provide the
equipment for the facility and assist in the designing, developing and
construction of the LBE's. The Company has no experience in owning, financing
and operating LBE's and is likely to be dependent in such areas upon third
parties to assist it or participate with it in establishing LBE's. The
Company has no binding agreements with respect to any of these opportunities
and there can be no assurances that Tellurian will be successful in
establishing or entering into revenue sharing agreements for one or more
LBE's and deriving operating profits from such operations. The Company has
allocated $1,650,000 of the proceeds of the Offering which may be used to
establish or enter into revenue sharing agreements for one or more LBE's.
The Company has estimated the net proceeds from this Offering together
with revenues from operations will be sufficient to meet the Company's cash
requirements for a period of between 12 and 15 months following the date of
this Prospectus. However, there can be no assurance that unexpected future
developments may result in the Company requiring additional financing and
that if required, additional financing will be available to the Company.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 VS. JUNE 30, 1995
Tellurian's net sales for the six months ended June 30, 1996 were
$542,284, an increase of $231,123 or approximately 74% over the comparable
period of the prior year. For the six months ended June 30, 1996, $395,000 or
approximately 73% of revenues were derived from the license agreement with
Voyager as compared to no revenues for the comparable period of the prior
year. For the six months ended June 30, 1996, the Company's gross profit was
$460,225 as compared to $140,323 for the comparable period of the prior year.
Such increase in gross profit is primarily due to revenues received from
Voyager. Revenues derived from sale of image generators and ancillary
software decreased to $32,610 for the six months ended June 30, 1996 from
$225,578 for the comparable period of the prior year. Such decrease was due
to the delay in completing the production of the Company's EAGLE. As a result
of this delay, Tellurian filled purchase orders for EAGLE with delivery of
the AT-200 at prices which are substantially lower than the normally quoted
sales prices for the Company's AT-200.
For the six months ended June 30, 1996, the Company sold nine AT-200's at
a price of $7,500 per unit. No EAGLES were sold during this time period.
While the normal quoted price was $10,000 per AT-200 unit, the Company agreed
to deliver AT-200's at $7,500 per unit since the EAGLES were not available to
be delivered at the time requested. The Company has agreed to deliver EAGLES
in replacement of these AT-200's at no extra cost if the customers want to
replace them. The Company has notified these customers that the EAGLES will
be available in the fourth quarter of 1996 and is awaiting the customers'
response as to whether they will elect to replace the AT-200's with EAGLES.
During the six months ended June 30, 1995, the Company sold 14 AT-200's at an
average price of $9,929.
Tellurian's research and development activities for the six months ended
June 30, 1996 was $275,030, an increase of $38,903 or approximately 16% over
the comparable period of the prior year. The increase in research
18
<PAGE>
and development activities related to Tellurian's development of the "EAGLE,"
Tellurian's new image generator product specifically designed for the virtual
reality entertainment market. Research and development activities include
costs of the Company's product design, quality insurance, engineering support
activities and microcode consulting. The Company intends to commit
significant resources to future research and development activities and has
allocated expenses of approximately $900,000 of the proceeds of the Offering
towards research and development.
Selling, general and administrative expenses for the six months ended June
30, 1996 were $233,028, an increase of $67,068 or approximately 40% from the
comparable period of the prior year. The increase in selling, general and
administrative expenses was substantially due to professional fees and
participation in a trade show. Selling, general and administrative expenses
expressed as a percentage of sales was approximately 43% for the six months
ended June 30, 1996, a decrease of approximately 10% from the comparable
period of the prior year. This percentage decrease was due to the sharp
increase in revenues derived from Voyager. The Company expects that it will
incur substantial increases in selling, general and administrative expenses
over the next 12 months as a result of planned marketing efforts for the
EAGLE and its complimentary products.
For the six months ended June 30, 1996, interest expense was $55,888 as
compared to $32,700 for the comparable period of the prior year. The increase
of $23,188 was due to Tellurian's long-term indebtedness of $895,000,
$192,000 of which was issued on December 27, 1995, $528,000 was issued on
January 22, 1996 and $175,000 issued on June 27, 1996.
Tellurian's net loss for the six months ended June 30, 1996 was $95,010 as
compared to $293,964 for the comparable period of the prior year. The
decrease in the net loss was primarily due to increases in revenues derived
from Voyager.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Tellurian's net revenues for the year ended December 31, 1995 were
$477,311, an increase of $15,479 or approximately 3% over the comparable
period of the prior year. Net revenues consisted of sales of the Company's
AT-200 image generator, repairs and maintenance to existing AT-200 image
generators and sales of ancillary software products. During 1994,
approximately 4% of sales were derived from royalties on manufacturing
licenses. Tellurian has occasionally licensed the right to manufacture and
sell its AT-200 Image Generator to non-affiliated third parties in return for
a royalty fee.
For the years ended December 31, 1995 and 1994, the Company sold 23 and 30
AT-200's, respectively, at an average price of approximately $9,950 each. Not
included in the above figures were one AT-200 sold in 1995 at $7,500 and
eight AT-200's sold in 1994 at $5,000 each which were delivered in place of
EAGLES with the promise to deliver EAGLES at no extra cost to the customer in
replacement of AT-200's should customers desire to replace them. The Company
has notified these customers that the EAGLES will be available in the fourth
quarter of 1996 to replace the AT-200's with EAGLES.
Tellurian's gross profit for the year ended December 31, 1995 was
$138,091, a decrease of $17,517 or approximately 11% over the comparable
period of the prior year. Tellurian's gross profit percentage for 1995 was
approximately 29%, a decrease of approximately 4% from the comparable period
of the prior year. The decrease in gross profit percentage was due to sales
of the Company's AT-200 image generator at lower prices to encourage
customers to purchase this product pending the completion of the production
of the Eagle.
Tellurian's research and development activities for the year ended
December 31, 1995 was $423,770, an increase of $125,906 or approximately 42%
over the comparable period of the prior year. The large increase in research
and development activities related to Tellurian's development of the "EAGLE,"
Tellurian's new image generator product specifically designed for the virtual
reality entertainment market. Research and development activities include
costs of the Company's product design, quality insurance, engineering support
activities and microcode consulting.
Selling, general and administrative expenses for the year ended December
31, 1995 were $349,630, a decrease of $22,629 or approximately 6% from the
comparable period of the prior year. The decrease in selling, general and
administrative expenses was due to lower rent payment and the shifting of one
employee from
19
<PAGE>
administrative responsibilities to research and development. Selling, general
and administrative expenses expressed as a percentage of sales was
approximately 73% for 1995, a decrease of approximately 10% from the
comparable period of the prior year. This decrease was a result of increased
sales combined with a decline in selling, general and administrative
expenses.
For the year ended December 31, 1995, interest expense paid to a related
party was $64,356 as compared to $62,387 for the comparable period of the
prior year.
Tellurian's net loss for the year ended December 31, 1995 was $699,665 as
compared to $576,902 for the comparable period of the prior year. The
increase in the net loss was primarily due to an increase of approximately
$126,000 in research and development activities related to Tellurian's
development of the EAGLE.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March, 1995, cash flow from financing activities
principally came from Charles Powers, a founder of the Company, who was then
a principal stockholder of the Company prior to his transfer of his
stockholdings in October 1995 to a family member, and to a lesser extent,
from monies borrowed from officers, directors and their family members. In
March 1995, the Company sold 600,000 shares of Common Stock at a purchase
price of $100,000. Between December 1995 and January 1996 the Company raised
$750,000 in gross proceeds from the sale of promissory notes in the principal
amount of $720,000 and 3,000,000 warrants which are automatically convertible
into 3,000,000 warrants identical to those sold herein upon the completion of
the Offering. In June 1996 the Company received gross proceeds of $175,000
from the sale of its promissory notes in the principal amount of $175,000,
$25,000 of which automatically converts into 25,000 shares of the Company's
Common Stock upon the completion of the Offering. See "Certain Transactions."
The Company requires significant financing for it to meet its liquidity
needs. The Company has capital commitments for the balance of 1996 of
approximately $250,000 to purchase the tooling equipment necessary to produce
the EAGLE in higher volume and for computers, a trailer and office equipment.
As of June 30, 1996, the Company had a working capital deficit of $1,379,604.
The Company intends to satisfy its cash resources and liquidity needs for
capital commitments and other operational requirements for a period of
between twelve and fifteen months from the proceeds of the Offering and cash
flow from operations. See "Use of Proceeds."
During the six months ended June 30, 1996, net cash of $216,534 was used
in operating activities as compared to net cash used in operating activities
of $88,709 for the six months ended June 30, 1995. During the six months
ended June 30, 1996 and 1995, net cash was used in investing activities to
purchase property and equipment of $7,209 and $1,033, respectively. During
the six months ended June 30, 1996 and 1995, net cash was provided by
financing activities totaling $467,985 and $104,125, respectively. During the
six months ended June 30, 1996, the Company received $703,000 in proceeds
from long-term debt and retired $100,000 of notes payable to related parties.
During the six months ended June 30, 1995, the Company received proceeds from
the sale of its Common Stock of $90,266.
For the year ended December 31, 1995, net cash of $233,791 was used in
operating activities due to the Company's net loss reduced by substantial
increases in the Company's payables and decreases in the Company's
inventories. For the year ended December 31, 1994, net cash of $9,080 was
provided by operating activities as a result of substantial increases in the
Company's payables and decreases in its inventories over and above the
Company's net loss.
20
<PAGE>
BUSINESS
GENERAL
The Company is engaged in the design, development and marketing of virtual
reality products which include image generators, related software, helmets
and motion systems. The Company also provides consulting services by
developing customized software and databases for customers who purchase its
image generators and need such services for specific application
requirements. Since 1988, the Company has been designing, building and
selling a line of specialized computers and ancillary software which are used
to generate visual images in realtime for use in flight trainers and other
simulation equipment. Since 1992, the Company's principal product has been
its AT-200 image generator, a specialized computer, which is sold to
customers who manufacture training and simulation equipment. Beginning June
1994, the Company has been adapting its AT-200 Image Generator and has been
selling this product and ancillary software for use in virtual reality
entertainment devices.
Since 1994, the Company has been designing and engineering a new image
generation product known as the "EAGLE", a specialized computer, which is
specifically designed for the virtual reality entertainment market. In July
1996, Tellurian delivered its first production units of the EAGLE pursuant to
purchase orders.
BACKGROUND
The Company's AT-100 and AT-200 image generators were, in part, based upon
developments by Ronald Swallow in computer graphics hereinafter referred to
as the "Quantum flat-shaded technology" while he was a principal in Quantum
Graphics Corporation ("Quantum"), a corporation which he had founded in 1987
and which became 80% owned by him, Richard Swallow and Charles Powers. The
development activities of Quantum became adversely affected because of its
inability to obtain adequate funding and disagreements among its
shareholders, and it filed for protection under the Bankruptcy Act in 1988.
During the course of bankruptcy proceedings, an adversarial proceeding was
commenced by the trustee in bankruptcy concerning the ownership of the
Quantum flat-shaded technology. As a result of such adversarial proceeding,
an agreement was entered into on November 5, 1991 between the trustee of
Quantum, TTY Graphics, Inc. ("TTY") and Greg Gustin ("Gustin"), hereinafter
referred to as the "Purchase Agreement", the latter two having been investors
or principals in a predecessor of Quantum prior to its formation. The
agreement acknowledged that Quantum, TTY and Gustin each owned an undivided
one-third interest in the Quantum flat-shaded technology and provided for the
sale of the interests owned by Quantum and Gustin to TTY for a cash
consideration of $150,000 and royalties to be paid by TTY or Tellurian equal
to two-thirds of four percent of revenues derived from the licensing of, or
sales of products incorporating, the Quantum flat-shaded technology and one
percent of revenues derived from the licensing of, or sales of products
incorporating, computer graphics technology other than the Quantum flat-
shaded technology. Payment of the royalties is secured by a security
agreement granting the bankruptcy trustee of Quantum and Gustin a lien on the
Quantum flat-shaded technology and all revenues, products, accounts
receivable and contract rights arising from or related to the technology, and
providing that TTY cannot, except for non-exclusive licenses sell, contract
to sell, encumber or otherwise dispose of the Quantum flat-shaded technology
without the prior written consent of the trustee of Quantum. Except for the
above mentioned payment of royalties of one percent, the foregoing provisions
are not applicable to the EAGLE, which is not based upon the technology of
the AT-100 and AT-200.
TTY assigned the Purchase Agreement to Tellurian in exchange for the
forgiveness of certain financing provided by Tellurian to TTY and a royalty
of one-third of four percent of all sales of Quantum flat shaded technology
up to a maximum of $500,000. In August 1996, TTY agreed to cancel its right
to receive future royalties in exchange for Tellurian agreeing to pay accrued
and unpaid royalties to it of $10,529.50 and an additional $70,000. Such
$80,529.50 is payable $45,529.50 on the earlier of March 31, 1997 or the
completion of the Offering and the balance one year thereafter. Similarly, in
August 1996, Gustin agreed to cancel his rights to receive future royalties
under the Purchase Agreement in exchange for Tellurian agreeing to pay him
accrued and unpaid royalties fixed at $5,000 and an additional $75,000. Such
$80,000 is payable $42,500 on the earlier of March 31, 1997 or the completion
of the Offering and the balance one year thereafter.
VIRTUAL REALITY
Virtual Reality is an artificial environment of sight, sound and motion
created with the use of computers. The earliest example of a rudimentary
virtual reality device is the Link Trainer, which was used in training pilots
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for instrument flying. With the availability of modern computers, simulators
have undergone rapid development, particularly in the presentation of visual
scenes and sound effects. Present day simulators not only provide motion, but
also visual pictures and sound effects, which are altered as the controls are
manipulated. Simulators are presently extensively used in training ship
pilots and air traffic controllers, as well as aircraft pilots.
The hallmark of virtual reality entertainment is its ability to immerse
the user in a fantasy experience. The four dimensions to present day VR are
sight, sound, motion, and interactivity with other players. Tellurian's "ICE
Falcon" is a prime example of virtual reality entertainment. The unit
consists of a fiberglass cockpit similar to that of an F-16 fighter aircraft,
and it is outfitted with a control stick, throttle, and all the gauges one
would expect to find in the actual jet. Once seated, the player views what
appears to be the outside world via three 27" video monitors. Game play
begins when the player taxis down the runway and takes off. Using only the
visual display, the player is able to see a view of the world which the
computer is constantly creating and changing in response to the manipulation
of the controls by the player. This continual interaction between player and
computer maintains the virtual reality of the F-16's pitch and direction and
allows the player to choose his own adventure. If the player heads off in the
direction of the enemy's airport, for example, the computer will create and
control a visual image of an attacking aircraft for the player to destroy. If
the player moves in a direction away from an enemy airport, the player is
free to practice his flying skills without being confronted by an enemy
aircraft.
PRODUCTS
Tellurian has been designing, building and selling low cost, high speed
image generators since 1988. The first generator, known as the AT-100 was
used exclusively for flight training applications. Since 1992, the Company
has been selling the AT-200 image generator which is a second generation unit
and is largely used in simulators for training aircraft pilots and ship
captains. The AT-200 is currently installed on Link Flight Trainer Devices
("FTD") simulators, ships handling training devices, and air traffic control
simulators. The AT-200 provides realtime image generation with high
resolution, multi-channel operation and full color using proprietary hardware
and software. As of June 30, 1996, the Company has built and sold over 250
AT-200 systems.
The Company currently sells its AT-200 unit and ancillary software
(including performing repairs and maintenance and providing related
consulting services) to two types of customers: those engaged in the
production of training devices, and those who specialize in entertainment
devices. The first category of customers includes such companies as
Hughes/Link Corporation, Ship Analytics Corp., and Grumman Aerospace
Corporation (currently known as Northrop/Grumman Aerospace Corporation).
During the six months ended June 30, 1996 and the year ended December 31,
1995, revenues from this category amounted to 100% and 31%, respectively, of
the Company's total revenues for each applicable period. The latter group
includes MaxFlight Corp., Ride & Show Engineering, and the Fightertown
Entertainment Centers. During the six months ended June 30, 1996 and the year
ended December 31, 1995, revenues from this group amounted to 0% and 69%,
respectively, of the Company's total revenues for each applicable period.
Tellurian's most recently developed image generation product is the
"EAGLE," a system specifically designed for the VR entertainment market. The
EAGLE, which is available in multiple resolution formats, is faster and less
expensive to produce than the AT-200. Each unit is composed of proprietary
hardware and software which combined with motor and sound simulate a full-
immersion experience. The EAGLE is intended for use at amusement/theme parks,
video arcades, family fun centers and other location based entertainment
facilities. In July 1996, the Company completed and delivered the first
production units pursuant to purchase orders. The Company intends to utilize
a portion of the net proceeds of the Offering to purchase production tooling
necessary to produce the EAGLE products in higher volume.
Using the EAGLE, the Company is currently developing a class of games in
which a significant portion of the entertainment center is themed to a
particular time and place. For example, the Company's "Battle of the Bulge"
adventure will be based on the legendary P-51 Mustang fighter plane of WW II.
The following describes this specific experience; however, the Company has
already been contacted to design other adventures themed around NASCAR
racing, ancient civilizations and under sea exploration.
The Battle of the Bulge VR experience will be a theme area within a LBE.
Although the size of the area will be flexible, a minimum of 60' x 40' is
recommended. Within the entertainment area will be a Flight Shop
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where the guests register for the P-51 experience and can purchase items such
as T-shirts, hats, jackets, models, dog tags, and coffee mugs bearing the
P-51 logo. This area is intended to resemble a WW-II Officers Club with
rustic wood tables and counters, and planked wood floors. The ceiling will
have corrugated metal which has been curved to meet the area of Flight Shop
and Briefing Room. Walls will be adorned with maps, squadron insignias, and
pin-up girls with period music (such as Glen Miller) playing.
Behind the Flight Shop will be a small "Briefing Area," consisting of
wooden benches, a video tape machine, and chalk board. The purpose of this
area will be to get guests ready for their experience. In addition to
receiving instructions on how to best use the P-51, each guest will be
interviewed by the "Flight Leader" (a uniformed employee) to establish the
level of difficulty each guest wishes to experience. Basic introduction to
the experience will be handled via video tape. The Flight Leader will be
there to answer questions. The floor of the Briefing Area will contain
planked wood and the walls will have military aeronautical maps, detailed
maps of certain target areas, and silhouettes of various aircraft (both
friendly and foe). A rough wooden door will be the exit into the "Hanger
Area." Around the door are sand bags, various warning signs, and a small
chalk board with weather conditions over the target area. Sound in this room
will be of muffled "mic chatter," engines starting, and the occasional signal
siren. Since each experience will last approximately eight minutes, the
amount of time a guest spends in the "Briefing Area" will be limited. The
size of the "Briefing Area" will be determined by the number of VR units in
the "Hanger Area." When the "Hanger Area" is ready for the guests, a bare red
light bulb will flash above the exit door.
The "Squadron Leader" (a uniformed employee -- in flight gear) will meet
the guests as they enter the "Hanger Area," and escort them to their P-51
aircraft. Each P-51 will be a 70% scale model of the actual Mustang aircraft.
The aircraft will be made of fiberglass and painted with authentic markings.
Each aircraft will have two seats, the pilot's cockpit, and a "back seat
observer." The interior of the P-51 will be equipped with instruments,
control stick and throttle, radios, rudder peddles. The canopy opens and
closes. Each cockpit will be mounted on a two axis platform which provides
both guests with motion cues. The experience will differ for each crew, based
on the interview data given to the Flight Leader in the Briefing Room. The
experience will be generally the same; however, the guests are to meet up
with, and escort B-17 bombers on a raid over enemy territory.
OTHER PRODUCTS AND SERVICES
There are various manufacturers which produce helmets and motion systems
for the virtual reality experience. Tellurian believes that it would be
advantageous to utilize the technologies of the "Eagle" in developing its own
proprietary products of this type.
HELMET
After the completion of the Offering, approximately two months will be
required to complete development of the Company's own VR helmet. This device
will be tailored to maximize the performance of the EAGLE and to replace the
cumbersome 27" monitors now being used on Tellurian's game units. When
combined with the EAGLE, the helmet's special optics and ear phones will give
the player stereo viewing and sound.
MOTION SYSTEM
Once the helmet is completed and tested, the Company will focus its
efforts on the design and manufacturing of a low cost, high performance
motion system which will be adaptable to a variety of game platforms
including cars, planes, and space ships. This project is expected to take
four to six months. Once completed, individual vehicle models (in software)
will be written to give the motion system full realism.
VIRTUAL REALITY SHOWPLACE
To effectively market Tellurian's products, it is planning to have a
complete virtual reality showplace ready for demonstrations approximately
seven months after the closing of the Offering. The Company's range of VR
devices which includes modern fighter cockpits, dune buggies, spacecraft and
full immersion helmet experiences will be displayed at the game room; but the
centerpiece of the facility will be the six cockpit "Battle of the
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Bulge" simulation. The Showplace will consist of approximately 3,000 square
feet in a retail zoned area of Orlando, Florida. The units will act as a
marketing tool for sales, and also as a very controlled environment for the
introduction of new experiences. Although this facility is expected to be
geared to testing and market response, it is anticipated to have a revenue
stream.
CONSULTING SERVICES
When a customer purchases the Company's image generator, the Company
provides the customer with a standard variety of databases and software.
However, from time to time a customer's application may demand a unique
database and software for specific application requirements. Upon a
customer's request, the Company will build a customized database and software
under a separate consulting agreement.
SALES AND MARKETING
Tellurian's core product line includes the AT-200 and the EAGLE computer
image generators. They are special purpose computers designed and built by
the Company to render images in a variety of display devices, such as,
helmets, projection screens and TV monitors. The AT-200 is being sold in the
training, simulation and entertainment markets. Location based entertainment
operations, which currently utilize devices employing the AT-200 image
generators are Six Flags (Great Adventure -- Jackson, NJ, Magic Mountain --
Los Angeles, CA and Fightertown -- Lake Forest, CA). Entering the
entertainment market is believed to be a natural progression of the
technology and products which the Company has been developing.
The Company's marketing efforts to date have been concentrated on selling
image generating systems to manufacturers of trainers and simulators. The
sales and marketing are presently conducted by officers of the Company. For
1994, three customers, namely, CAE/Link Corp., Ship Analytics Corp., and
Fightertown, Inc. represented approximately 24%, 19% and 18%, respectively,
of the Company's revenues. During 1995, three customers, namely, Ride & Show
Engineering Corp. (a vendor to Six Flags), Virtual Reality Entertainment
Center and Voyager accounted for 32%, 21% and 11%, respectively, of the
Company's revenues. During the six months ended June 30, 1996, two principal
customers, namely, Voyager and Ship Analytics Corp. accounted for 73% and 9%,
respectively, of the Company's revenues.
It is anticipated that several sales persons will be hired at the
Company's New Jersey facility as the Company expands its marketing activities
into the entertainment market. Traditional trade magazine advertising will be
done on a regional scale, while trade show participation will be done on a
national level.
The goal of the Company is to use its products in arcades, family fun
centers, LBE's and theme parks. The second market for the Company's products
consists of company's which develop virtual reality games.
LOCATION BASED ENTERTAINMENT CENTERS
Tellurian intends to utilize the Eagle technology to build its own
complete game units and use these units to establish one or more LBE's to be
owned solely by Tellurian or jointly with others. Depending upon the cash
requirements of the LBE's, Tellurian may finance the LBE's utilizing a
portion of the proceeds of the Offering or Tellurian may enter into joint
venture or revenue sharing agreements with third parties such as existing
owners and operators of LBE's. In some cases, the Company may provide the
equipment for the facility and assist in the designing, developing and
construction of the LBE's. The Company has no experience in owning, financing
and operating LBE's and is likely to be dependent in such areas upon third
parties to assist it or participate with it in establishing LBE's. The
Company has no binding agreements with respect to any of these opportunities
and there can be no assurances that Tellurian will be successful in
establishing or entering into revenue sharing agreements for one or more
LBE's and deriving operating profits from such operations. The Company has
allocated $1,650,000 of the proceeds of the Offering which may be used to
establish or enter into revenue sharing agreements for one or more LBE's.
In March 1996, Tellurian entered into an agreement to enter into a joint
venture agreement with Eye Wonder Studios of Fenwick, Canada ("Eye Wonder"),
for the purpose of establishing a LBE at the Canadian side of Niagra Falls.
Under the contract, Tellurian is to provide at cost its skill and expertise
in image generators and virtual reality equipment and Eye Wonder is to
provide all funding. Tellurian has agreed to assist Eye Wonder in securing
such funds. All other terms and conditions of the joint venture agreement
have not been determined.
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The location of the anticipated attraction is expected to be on the Canadian
side of Niagara Falls, and is anticipated to be part of redevelopment of the
area making it a destination resort. The Canadian government has granted
licenses for casino gambling in the city, and the new entertainment center is
intended to be right in the middle of this renovation. In addition to
providing a portion of the equipment in the facility, Tellurian intends to
assist in the design, development and construction of this 32,000 sq. ft.
facility. No assurances can be given that the Company will enter into a
definitive agreement with Eye Wonder Studios on terms satisfactory to the
Company, if at all.
LICENSING OF TELLURIAN TECHNOLOGY
Pursuant to an agreement dated as of January 1, 1996 by and between
Tellurian and Voyager Graphics, Inc., a Republic of China corporation,
("Voyager") Tellurian granted Voyager an irrevocable, exclusive, assignable
fully paid license (the "License") to be the exclusive supplier of the EAGLE
image generator (the "Product") within a restricted group of countries (the
"Licensed Territory") and to sell the Products worldwide. The Licensed
Territory consists of Afghanistan, Australia, Bahrain, Bangladesh, Bhutan,
Burma, China (including Taiwan, Hong Kong and Mainland China), Cyprus, India,
Indonesia, Iran, Iraq, Japan, Jordan, Kampuchea (Cambodia), Korea (North),
Korea (South), Kuwait, Laos, Lebanon, Malaysia, Maldives, Marshall, Mongolia,
Nepal, New Zealand, Oman, Pakistan, Philippines, Qatar, Saudi Arabia,
Singapore, Sri Lanka (Ceylon), Syria, Thailand, Turkey, United Arab Emirates,
Vietnam, Yemen (Aden and Sana). The License includes all the know- how,
patent rights and copyright matter, if any (hereinafter the know how,
copyrights and patent rights are collectively referred to as the
"Intellectual Property"), and the right to grant sub-licenses to third
parties without the consent of Tellurian. Tellurian retains the right to
grant licenses of the Intellectual Property to third parties outside of the
Licensed Territory and to sell the Products and/or any derivative products
(i.e. computer image generators that are manufactured based on and by
utilizing partly the Intellectual Property of Tellurian, hereinafter referred
to as the "Derivative Products") outside the Licensed Territory. As part of
the License Agreement, Tellurian is responsible to provide a classroom
training and production training program of a total of twelve weeks for up to
twelve engineers at Tellurian's facilities in Upper Saddle River, New Jersey,
to provide each Voyager engineer with a sound working knowledge of every
aspect of the computer image generator known as EAGLE and to build ten
working units during the program.
In consideration of the License and technology transfer, Voyager has
agreed to pay Tellurian $1,500,000 as follows: 4% upon signing of the License
Agreement, 16% upon the completion of the first prototype of the EAGLE, 10%
upon delivery of design data package, 40% upon the completion of training
program, 20% in 90 days after the completion of the training program, and 10%
in 180 days after the completion of the training program. Of the $1,500,000,
Tellurian has agreed, pursuant to separate agreements, that Voyager will pay
$500,000 to its parent corporation, Voyager Simulation Company Ltd., in
consideration of Voyager Simulation's services and expenses in negotiating
the transaction and establishing Voyager and $150,000 to TTY Graphics, Inc.
("TTY") in consideration of TTY's contribution to the development of the
EAGLE's software, resulting in a net amount of $850,000 payable to Tellurian.
The License Agreement provides that in addition to the foregoing payment,
Voyager shall pay Tellurian for a period of five years until January 1, 2001,
a royalty equal to 2% of the net sales value of the Products sold and in the
case of Derivative Products, a royalty equal to 2% of the Derivative Products
multiplied by the ratio of the material cost of components common to the
Products to the total cost of the Derivative Products. The License Agreement
contains provisions to protect Voyager's licensing and sales rights that
require Tellurian to pay Voyager a sum equivalent to 100 times the net sales
value of each Product or Derivative Product sold by Tellurian in the Licensed
Territory and in the event that Tellurian is in breach of the grant of
License by allowing third parties to use Intellectual Property in the
Licensed Territory, Tellurian shall compensate Voyager in an amount
equivalent to five times the price payable under the License Agreement. As of
July 31, 1996, Tellurian has received payments from Voyager totalling
$416,000 of such $850,000.
MANUFACTURING
The Company designs and manufactures its products according to its
proprietary designs and engineering. The Company uses vendors to produce the
circuit boards used in its products. The Company also purchases integrated
circuits (IC) from a variety of sources and is not dependent upon any one
supplier with the exception of its central processing unit (CPU) for the
EAGLE. The Company purchases its CPU from analog devices corp.
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and does not anticipate any supply problems in either the short or long term.
Once all the components are assembled at the Company, the products are
forwarded to another vendor for soldering. After soldering, the completed
boards are returned to the Company for final integration into units ready for
shipment.
BACKLOG
As of September 15, 1996, the Company had a backlog of orders of $404,000
for 73 EAGLE units, $50,000 of which are anticipated to be delivered by
December 31, 1996, $198,000 to be delivered in the first quarter of 1997 and
$156,000 to be delivered in the second quarter of fiscal 1997. As of
September 15, 1995 the Company had a backlog of orders of $216,000 for five
EAGLE units, all of which are included in the Company's backlog as of
September 15, 1996. Since the Company did not finish the development of the
EAGLE until July 1996, the Company was unable to deliver in 1995 any EAGLES
which were ordered.
AGREEMENT WITH FIGHTERTOWN
In March 1994, Tellurian received a purchase order from Fightertown for 40
EAGLES at a price of $4,888 each. As of the date of this Prospectus, Tellurian
has delivered eight EAGLES to Fightertown and has a backlog of 32 EAGLES.
Tellurian has agreed with respect to future orders of EAGLE from Fightertown to
deliver EAGLES at a maximum price of $7,500 per EAGLE ($10,000 per EAGLE where
certain improvements to the EAGLE are made) and that Fightertown will receive
the best pricing offered to any Tellurian customers regardless of volume.
Further Tellurian has agreed to give Fightertown a right of first refusal to
participate with Tellurian in any LBE site or product in which Tellurian wishes
to utilize conventional fighter jet simulation and to not copy Fighertown's
method of operating LBE's.
RESEARCH AND DEVELOPMENT
The Company is engaged and intends to continue to engage in ongoing
research and product development efforts to expand and enhance the technical
capabilities, design features and range of uses of its products. The Company
currently employs seven engineers who are involved in research and product
development. Due to the increasing competition and rapid technological change
in the VR marketplace, the Company believes that it must continue to improve
and refine its products.
COMPETITION
The market for the Company's products is highly competitive and rapidly
changing, and the Company expects competition to continue to be intense in the
foreseeable future. There are two major categories of competitors for the
Company's products. The first are the "high end" (costly) real time image
generators from companies such as Silicon Graphics, Inc., Evans & Sutherland,
Inc. and Lockheed Martin Corp. These real-time image generators are generally
used for military training and simulation applications; as engineering and
graphics work stations; and as animation design tools. These costly systems
provide photo realistic images by creating objects from polygons and laminating
each surface with a texture pattern whereas the Company's products produce a
non-textured polygon image. Although these competitive systems provide more
realistic images, the Company's products are substantially cheaper than those of
such competitors. The second type of competitors are the manufacturers of "low
end" (less costly) video arcade devices. These electronic devices have no
computers and are limited as to the quality and complexity of the images they
produce. Management believes that both categories of competitors will continue
to improve their products in either price or performance as developments permit.
The Company believes that its products provide a balanced approach containing
the proper mix of image quality with price. Many of the Company's current and
prospective competitors have (or will likely have) significantly greater
financial, technical, manufacturing and marketing resources and experience, and
a larger installed base, than the Company.
The Company believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new
product development by the Company and its competitors, product performance
and price, distribution and customer support. Although the Company believes
that it offers products with price and performance characteristics
competitive with other manufacturers' products, there is no assurance that
products can be developed, produced or marketed successfully in the future.
In order to be successful in the future, the Company must continue to respond
promptly and effectively to the challenges of technological
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change and its competitors' innovations. Performance in these areas will, in
turn, depend on the Company's ability to attract and retain highly qualified
technical personnel in a competitive market for experienced and talented
computer hardware developers and managers. There is no assurance that the
Company will be able to compete successfully in its chosen markets.
LACK OF PATENT PROTECTION
The Company does not currently hold any patents and the technology
embodied in the Company's current product line cannot be patented. The
Company relies on confidentiality agreements with its key employees to the
extent it deems such to be necessary. Although the Company intends to file a
patent application for its new products to the extent any technology included
in such products is patentable, if any, there can be no assurance that any
patents in fact, will be issued or that such patents will be effective to
protect the Company's products from duplication by other manufacturers. In
addition, there can be no assurance that the Company will be able to afford
the expense of any litigation which may be necessary to enforce its rights
under any patent.
EMPLOYEES
Currently, the Company has nine full-time employees, including one
executive employee, one production person and seven engineers. The Company
intends to hire additional full time personnel subsequent to the completion
of this offering, including two additional engineering technicians and two
sales/marketing employees. The Company believes that its relations with its
employees is good. None of the Company's employees is represented by a union.
FACILITIES
In May 1996, the Company entered into a two year lease expiring May
31,1998 for approximately 7,500 square feet of space at 15 Industrial Avenue,
Upper Saddle River, New Jersey 07458. Pursuant to the lease, the Company pays
a monthly rent of $5,125. The Company has the option to renew the lease for
two one year periods at fair market value. Upon the completion of the
Offering, the Company intends to lease additional facilities for its
operations in the New Jersey area. The Company believes that suitable
additional facilities can be found on terms satisfactory to the Company.
LITIGATION
There are currently no legal proceedings pending or threatened against the
Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names of the executive officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------- ----- -----------------------------
<S> <C> <C>
Dr. Ronald Swallow* . 60 Chairman of the Board of directors
and Chief Executive Officer
Stuart French ....... 50 President, Chief Financial and
Accounting Officer and a director
of the Company
Dr. Richard Swallow* 58 Secretary and a director of the
Company
</TABLE>
- ------
* May be deemed a founder of the Company. Dr. Ronald Swallow and Dr. Richard
Swallow are brothers.
All directors of the Company hold office until the next annual meeting of
shareholders of the Company or until their successors are elected and
qualified. Executive officers hold offices until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
Set forth below is a biographical description of each director and
executive officer of the Company based upon information supplied by them:
Dr. Ronald Swallow has been the Chief Executive Officer, Chairman of the
Board and Vice President-Engineering of Tellurian and its predecessor under
the same name since 1988. Dr. Swallow has a Bachelor of Science degree in
Engineering Physics, a Masters degree in Electrical Engineering and a Ph.D in
Biophysics, all from the University of Illinois.
Stuart French has been Chief Financial and Accounting Officer since
January, 1996, has served as a member of the Board of Directors since March
1995, the President of the Company since October 1993, and prior thereto was
the Vice President of Operations and Marketing from August 1991. Mr. French
joined the Company after the sale of Flightmatic Corp. which he owned and
operated from 1987 through 1991. Flightmatic was a flight simulation company
manufacturing and selling low cost general aviation training equipment.
Previously, he spent ten years at Grumman Aerospace as a Business Development
Manager for US Air Force contracts. After receiving a BS degree in Marketing
from New England College, Mr. French was a pilot in the US Navy.
Dr. Richard Swallow has been a director of Tellurian and its predecessor
under the same name since its inception in 1988. From 1988 to October 1993
Dr. Swallow also held the position of President. Since 1973, Dr. Swallow has
been a member of the faculty and staff of Coker College in Hartsville, South
Carolina, where he is currently the Director of Information Services. Dr.
Swallow received his Ph.D. degree in Zoology from the University of Missouri
in 1968, his Masters of Science degree from the University of Missouri in
June 1966 and Bachelor of Science degree from the University of Illinois in
June 1963.
BANKRUPTCY OF QUANTUM GRAPHICS CORPORATION
On March 16, 1987, Dr. Ronald Swallow founded and served as Chairman of
the Board and principal stockholder of Quantum Graphic Corporation, an image
generator research and development private company which owned certain rights
to a prototype of the AT-100. Dr. Richard Swallow was also a founder and a
director of Quantum. On April 12, 1988, Quantum, as a result of its inability
to raise sufficient funding and due to disagreements among Quantum
stockholders, filed for bankruptcy protection in the Western District of
Texas, Austin Division under Chapter 11, which was converted into a Chapter 7
filing on May 12, 1988. On May 27, 1988, the Chapter 7 filing was dismissed
and on May 31, 1988, a new Chapter 7 filing was made with the Court and the
case was closed by the Bankruptcy Court on April 19, 1995. In November, 1991,
the Bankruptcy Court confirmed the sale of the technology relating to the
AT-100 prototype to TTY Graphics, Inc. ("TTY"). See "Business -- Background."
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EMPLOYMENT AGREEMENTS
During 1996, Dr. Ronald Swallow and Stuart French have been receiving
salaries at the annual rate of $108,000 and $84,000, respectively and Mr.
French has been receiving a sales commission of five percent. Upon the
completion of the Offering, the Company intends to enter into employment
agreements with Dr. Ronald Swallow and Stuart French. The agreements will
provide for a term of four years and a continuation of their current
compensation arrangements with salary increases based upon profitability of
the Company's operations to be determined at the discretion of disinterested
board members. Commencing in 1997 and each year thereafter, the Company will
after the completion of its year end audit, establish a bonus pool for
executive officers and will make annual cash contributions to such pool of an
amount equal to 10% of pre-tax profits for the prior year. The board of
directors will have the sole discretion to allocate bonuses among such
officers. The employment agreements will provide for covenants not to compete
during the term of the agreements and for a period of one year thereafter
(including continuation of half salary during the post-employment one year
period covered by the covenant not to compete) and indemnification against
liabilities as an officer and director of the Company to the fullest extent
permitted by applicable law. Prior to the Offering, the Board of Directors
granted Dr. Ronald Swallow and Stuart French options to purchase 73,000
shares and 150,000 shares, respectively, of the Company's Common Stock. See
"Stock Option Plan."
DIRECTOR COMPENSATION
Directors of the Company do not currently receive cash compensation for
their services as directors, although each director has been granted stock
options under the Company's Stock Option Plan. See "Executive Compensation --
Stock Option Plan." The Board of Directors has the right to compensate its
directors in the future.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
Pursuant to Tellurian's By-Laws, Tellurian must, to the fullest extent
permitted by the General Corporation Law of the State of Delaware (the
"GCL"), as amended from time to time, indemnify all persons (e.g., directors
and officers) whom it may indemnify pursuant thereto and to advance expenses
incurred in defending any proceeding for which such right to indemnification
is applicable, provided that, if the GCL so requires, the indemnitee must
provide Tellurian with an undertaking to repay all amounts advanced if so
determined by a final judicial decision. Tellurian's Certificate of
Incorporation contains a provision eliminating, to the full extent permitted
by Delaware law, the personal liability of Tellurian's directors for monetary
damages for breach of a fiduciary duty. By virtue of this provision, under
current Delaware law, a director of Tellurian will not be personally liable
for monetary damages for breach of his fiduciary duty as a director, except
for liability for (i) any breach of his duty of loyalty to Tellurian or to
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) dividends or
stock purchases or redemptions that are unlawful under Delaware law and (iv)
any transaction from which he derives an improper personal benefit. This
provision of Tellurian's Certificate of Incorporation pertains only to
breaches of duty by directors as directors and not in any other corporate
capacity such as officers, and limits liability only for breaches of
fiduciary duties under Delaware corporate law and not for violations of other
laws such as the federal securities laws. As a result of the inclusion of
such provision, stockholders may be unable to recover monetary damages
against directors for actions taken by them that constitute negligence or
gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with
respect to such actions. The inclusion of this provision in Tellurian's
Certificate of Incorporation may have the effect of reducing the likelihood
of derivative litigation against directors, and may discourage or deter
stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action if successful, might
otherwise have benefitted Tellurian and its stockholders.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the amount of all compensation paid by
Tellurian for services rendered during the years ended December 31, 1995,
1994 and 1993 to Tellurian's Chief Executive Officer, Dr. Ronald Swallow and
Stuart French, President.
29
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ------------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Number Other
and Compen- Stock of LTIP Compen-
Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) (1) ($) ($)(2)
--------------------------- ------ --------- ------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ronald Swallow, 1995 108,000 -0- -0- -0- -0- -0- 4,200
Chief Executive Officer (3) 1994 108,000 -0- -0- -0- -0- -0- 4,200
1993 90,000 -0- -0- -0- -0- -0- -0-
Stuart French 1995 84,000 -0- 13,814 -0- -0- -0- 4,200
President (4) 1994 84,000 -0- 13,420 -0- -0- -0- 4,200
1993 80,000 -0- 25,343 -0- -0- -0- -0-
</TABLE>
- ------
(1) Does not include options to purchase 73,000 shares and 150,000 shares of
the Company's Common Stock granted in June 1996 to Dr. Ronald Swallow and
Stuart French, respectively, and exercisable at $5.00 per share
commencing on July 1, 1997. See "Stock Options."
(2) Includes the value of car leases paid by the Company at a rate of
approximately $350 per month.
(3) During 1993, 1994 and 1995, the Company accrued salaries for Dr. Swallow
of $19,205, $22,000 and $43,143, respectively. As of July 31, 1996, Dr.
Swallow is owed accrued salary and expense reimbursement totaling
$113,323.
(4) Stuart French earns other annual compensation in the form of a sales
commission of 5%, which is reflected in column (e). During 1993, 1994 and
1995, the Company accrued salaries and commissions of $39,138, $1,420 and
$9,614, respectively. During 1994, Mr. French also received payment of
$2,000 toward prior years accrued salaries. As of July 31, 1996, Mr.
French is owed accrued salary and expense reimbursement totaling $96,834.
Since inception, the Company has not granted stock appreciation rights and
does not have a defined benefit or actuarial plan.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan covering 400,000 shares of
Common Stock (subject to adjustment to cover stock splits, stock dividends,
recapitalizations and other capital adjustments) for employees, including
officers and directors and consultants of the Company. The Plan provides that
options to be granted under the Plan will be designated as incentive stock
options or non-incentive stock options by the Board of Directors or a
committee thereof, which also will have discretion as to the persons to be
granted options, the number of shares subject to the options and the terms of
the options. Options designated as incentive stock options are intended to
receive incentive stock option tax treatment pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
The Plan provides that all options granted thereunder shall be exercisable
during a period of no more than 10 years from the date of grant (five years
for incentive Stock options granted to holders of 10% or more of the
outstanding shares of common stock), depending upon the specific stock option
agreement and that the option exercise price for incentive stock options
shall be at least equal to 100% of the fair market value of Common Stock on
the date of grant (110% for incentive Stock options granted to holders of 10%
or more of the outstanding shares of Common Stock), but in no event less than
the initial public offering price of the Company's proposed public offering.
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of grant) of the shares of the Common Stock for which
incentive stock options are first exercisable under the terms of the Plan by
an option holder during any one calendar year cannot exceed $100,000.
Currently, the Plan provides that if the employment of an optionee is
terminated other than by reason of death, disability or retirement at age 65,
any incentive Stock options granted to the optionee will immediately
30
<PAGE>
terminate. If employment is terminated by reason of disability or retirement
at age 65, the optionee may, within one year from the date of termination, in
the event of termination by reason of disability, or three months from the
date of termination, in the event of termination by reason of retirement at
age 65, exercise the incentive Stock option (but not after the normal
termination date of the option). If employment is terminated by death, the
person or persons to whom the optionee's rights under the incentive Stock
option are transferred by will or the laws of descent and distribution have
similar rights of exercise within three months after such death (but not
after the normal termination date of the option). Any termination provisions
of non-statutory Stock options will be fixed by the board of directors or a
Committee thereof.
Options are not transferable otherwise than by will or the laws of descent
and distribution and during the optionee's lifetime are exercisable only by
the optionee. Shares subject to options which expire or terminate may be the
subject of future options, The Plan will terminate in 2006. In 1996, the
Company granted non-qualified stock options to purchase 300,000 shares of its
Common Stock at an exercise price of $5.00 per share over a term of ten
years. Dr. Ronald Swallow, Stuart French, Dr. Richard Swallow, Steven Morse
and Lester Morse received options to purchase 73,000 shares, 150,000 shares,
27,000 shares, 25,000 shares and 25,000 shares, respectively. See "Legal
Matters." These options are not exercisable until July 1, 1997. The Company
has agreed with the Representative that it will not grant the remaining
available options to purchase 100,000 shares to 5% or greater shareholders
for a period of three years without the consent of the Representative.
CERTAIN TRANSACTIONS
Effective July 2, 1996, Tellurian, Inc., a South Carolina corporation
reincorporated in Delaware under the same name by merging itself into a
wholly owned subsidiary formed for that purpose on January 25, 1996. All
references in the Prospectus to the "Company" or "Tellurian" includes
Tellurian, Inc., a South Carolina corporation unless the context indicates
otherwise. The following discussion regarding the issuances of shares gives
retroactive effect to such merger.
In March 1995, Tellurian completed a private placement of 600,000 shares
of its common stock for a purchase price of $100,000. Investors in the
private placement were Dennis Giunta (200,000 shares), Joseph Defalco
(125,000 shares), Matthew Langdon (125,000 shares), John Bruno (45,000
shares), John Cioffoletti (45,000 shares), Michael Wills (45,000 shares) and
Douglas Spinosa (15,000 shares). Messrs., Defalco, Giunta and Langdon are
Selling Stockholders. See "Principal and Selling Stockholders." Messrs.
Bruno, Cioffoletti and Wills are principals, and Mr. Spenosa is an employee,
of the Representative. See "Underwriting."
In March 1995, Dr. Ronald Swallow and Dr. Richard Swallow transferred from
their holdings, without payment therefore, an aggregate of 152,710 shares of
Tellurian to nine non-affiliated persons including 49,261 shares to Stuart
French, and subsequently, they transferred 100,000 shares to Charles Power, a
founder of the Company.
Since the inception of Tellurian, Charles Powers has advanced monies to
Tellurian for working capital purposes and the acquisition of certain
technological licensing rights from TTY relating to Tellurian's image
generator. As of May 31, 1996, Mr. Powers was owed approximately $752,000,
inclusive of interest at a rate of 10% per annum. Such $752,000 includes
$470,505 of principal and $281,693, of accrued and unpaid interest (including
$127,460 of interest accumulated between January 1, 1994 and May 31, 1996).
From January 1, 1994 until May 31, 1996, the Company has repaid Powers a
total of $100,000, which payment was made in January 1996. In June 1996,
Tellurian entered into agreements with Mr. Powers which agreements as amended
provide that upon his receipt from Tellurian of $121,200 in reduction of
outstanding indebtedness, Tellurian's remaining indebtedness owing to him
will not be payable until November 1, 1997. To help secure repayment of such
$121,200, Tellurian has granted to Mr. Powers a security interest in its
contract with Voyager (such security interest being limited to the right to
receive all payments under the contract up to $121,100) and has assigned to
him Tellurian's right to receive $121,200 of payments required to be made
under Tellurian's agreement with Voyager. As of July 31, 1996, Tellurian has
paid Mr. Powers $60,000 of the $121,200.
Since inception, Ronald Swallow, Richard Swallow, their family members and
Stuart French have made various cash loans to Tellurian that are repayable
upon demand together with interest at the rate of 10% per annum. As of July
31, 1996, Tellurian owes (inclusive of interest) $60,330 to Dr. Richard
Swallow, $97,812 to family members of Doctors Ronald and Richard Swallow and
$8,180 to Stuart French. The foregoing amounts do not include accrued and
unpaid compensation and expense reimbursement as of July 31, 1996 of $113,323
owed to Dr. Ronald Swallow and $96,834 owed to Stuart French, which monies
will be paid to such officers from the proceeds of the Offering.
31
<PAGE>
Tellurian completed a Private Placement of securities for an aggregate sum
of $750,000 between December 1995 and January 1996, consisting of (i)
$192,000 in principal amount of unsecured and subordinated 8% Promissory
Notes due December 27, 1997 and $528,000 in principal amount of unsecured and
subordinated 8% Promissory Notes due January 22, 1998, with such Notes
providing for accelerated payment upon the completion of the Offering, and
(ii) 3,000,000 Common Stock Purchase warrants sold at a price of $.01 per
warrant. Each warrant entitles the holder thereof to purchase one share of
Common Stock at a price of $6.00 per share, subject to adjustment, at any
time for a period of five years from the date of issuance. In the event that
the Company completes the Offering, the warrants shall be automatically
exchanged for Warrants identical to those sold to the public. As compensation
for its services as placement agent of such private placement. J. W. Barclay
& Co., Inc. was paid a commission of $75,000 and an expense allowance of
$22,500 and was issued 300,000 Common Stock Purchase Warrants for a cash
consideration of $6,000. On June 27, 1996, J. W. Barclay & Co., Inc. returned
the 300,000 Warrants to the Company and the Company agreed to pay $6,000 to
J. W. Barclay & Co., Inc. upon the completion of the Offering. See
"Description of Securities" and "Warrant Holders."
On June 27, 1996, the Company issued its promissory notes in the principal
amount of $175,000 to three non-affiliated persons and received net proceeds
of approximately $148,000 after deduction of certain cash compensation to the
Placement Agent of such offering, J.W. Barclay & Co., Inc., of $26,250. Of
the $175,000 of Notes, (i) $150,000 are represented by 8% Subordinated
Non-Convertible Notes due June 27, 1998 or upon the completion of the
Offering or series of private placements wherein the Company receives gross
proceeds of at least $5,000,000, and (ii) $25,000 is an 8% Subordinated
Convertible Note due June 27, 1998 (the "Convertible Note"), provided that
the principal amount of the Convertible Note will convert into 25,000 shares
automatically upon the completion of the Offering. See "Additional Selling
Stockholders."
Management believes that all transactions with officers, directors and
shareholders of the Company (and affiliated companies) were made on terms no
less favorable to the Company than those available from unaffiliated parties.
It is intended that any future transactions with officers, directors and
affiliates of the Company will be made on terms no less favorable to the
Company than those available from unaffiliated parties.
32
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus, and as adjusted to reflect the completion of the Offering
regarding the beneficial ownership of the Company's Common Stock by: (i) all
persons known by the Company to own beneficially more than 5% of the
Company's Common Stock; (ii) each director and officer of the Company; (iii)
all directors and officers of the Company as a group; and (iv) the Selling
Stockholders. All information with respect to ownership by the Selling
Stockholders has been furnished by the Selling Stockholders. Although Jericho
Limited and Imafina S.A. are not Selling Stockholders, each corporation is a
principal stockholder whose stock ownership is entirely represented by
Warrants that have been registered in this Prospectus. See "Warrant Holders."
<TABLE>
<CAPTION>
Percent of
Outstanding
Stock Owned
Amount and Shares ------------------------
Nature of Shares Owned Before After
Name and Address of Beneficial Being After Offering Offering
Beneficial Owner (1) Ownership Offered Offering (2) (2)
------------------------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dr. Ronald Swallow
15 Industrial Avenue
Upper Saddle River, NJ
07458 (3) ................... 297,908 -- 297,908 18.6 9.8
Dr. Richard Swallow
15 Industrial Avenue
Upper Saddle River, NJ
07458 (4) ................... 109,481 -- 109,481 6.8 3.6
Stuart French
15 Industrial Avenue
Upper Saddle River, NJ
07458 (5) ................... 49,261 -- 49,261 3.1 1.6
Mary Elizabeth Huggins Trust
2419 West Sumter
Florence, SC 29572 (6) ...... 430,049 -- 430,049 26.9 14.2
Joseph DeFalco
2335 Promenade
Westfield, NJ 07090 ......... 125,000 125,000 -- 7.8 --
Matthew Langdon
70 Cantiagle Rock Road
Hicksville, New York 11801 .. 125,000 125,000 -- 7.8 --
Dennis Giunta
183 Taylors Mills Road
Manalapan, NJ 07726 ......... 200,000 200,000 -- 12.5 --
All officers and
directors as a group
(3 persons) (7) ............. 456,650 -- 456,650 28.5 15.1
Jericho Limited
c/o InterTrust Management
S.A. P.O. Box 3292 16 rue
de la Pelisserie 1211
Geneva 3 Switzerland(8) ..... 2,200,000 2,200,000 0 57.9 --
Imafina S. A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
(Switzerland)(9) ............ 800,000 800,000 0 33.3 _
</TABLE>
- ------
(1) Unless otherwise indicated below, all shares are owned beneficially and
of record.
33
<PAGE>
(2) Based upon 1,600,000 shares outstanding before the Offering and 3,025,000
shares outstanding after the Offering without giving effect to the
issuance of shares under the Company's Warrants, Stock Option Plan,
Underwriters' Stock Warrants, Underwriters' Warrants, and other
outstanding warrants.
(3) Does not include options to purchase 73,000 shares, which options become
exercisable at $5.00 per share commencing July 1, 1997.
(4) Does not include options to purchase 27,000 shares, which options become
exercisable at $5.00 per share commencing July 1, 1997.
(5) Does not include options to purchase 150,000 shares, which options become
exercisable at $5.00 per share commencing July 1, 1997.
(6) Trust set up by Charles H. Powers, a founder and former shareholder,
officer and director of the Company, for the benefit of his
granddaughter, with Jane Powers Huggins as Trustee.
(7) Does not include options to purchase 250,000 shares, which options become
exercisable at $5.00 per share commencing July 1, 1997.
(8) Represents shares of common stock issuable upon exercise of Warrants.
See Note 4 under "Warrant Holders."
(9) Represents shares of common stock issuable upon exercise of Warrants.
See Note 5 under "Warrant Holders."
None of the Selling Security Holders have had any position, office or
other material relationship with the Company or any of its predecessors or
affiliates during the past three years except for their stock ownership in
the Company.
DESCRIPTION OF SECURITIES
Tellurian's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of 10,000,000 shares of Common Stock,
$.01 par value. The following are brief descriptions of Tellurian's
securities. The rights of the stockholders of Tellurian are established by
Tellurian's Certificate of Incorporation, the Bylaws, and law of the State of
Delaware. The descriptions set forth below are intended as summaries only and
are qualified in their entirety by reference to the Certificate of
Incorporation, the Bylaws, and the relevant Delaware law.
COMMON STOCK
As of the date hereof, 1,600,000 shares of Common Stock were outstanding,
held by 20 stockholders of record. Immediately following the closing of this
Offering (assuming the Underwriter's over-allotment options are not
exercised), 3,025,000 shares of Common Stock will be issued and outstanding
(excluding shares of Common Stock underlying outstanding, but unexercised
warrants).
The holders of the shares of Common Stock have no preemptive or
subscription rights in later offerings of Common Stock and are entitled to
share ratably (i) in such dividends as may be declared by the Board of
Directors of Tellurian out of funds legally available for such purpose, and
(ii) upon liquidation, in all assets of Tellurian remaining after payment in
full of all debts and obligations of Tellurian and any preferences granted in
the future to any preferred stock. To date, Tellurian has not paid any
dividends on the Common Stock. The Company intends to follow a policy of
retaining all of its earnings, if any, to finance the development and
continued expansion of its business. There can be no assurance that dividends
will ever be paid by the Company.
The holders of shares of Common Stock are entitled to one vote for each
share of Common Stock held of record on all matters submitted to a vote of
the stockholders and have no cumulative voting rights. Accordingly, the
holders of more than 50% of the issued and outstanding shares of Common Stock
entitled to vote for election of directors are able to elect all of
Tellurian's directors. All shares of Common Stock now outstanding are fully
paid and nonassessable, and all shares of Common Stock, which are the subject
of this Offering, when issued, will be fully paid and nonassessable. The
Board of Directors of Tellurian is authorized to issue additional shares of
Common Stock within the limits authorized by the Certificate of Incorporation
without stockholder action.
34
<PAGE>
WARRANTS
The Warrants offered hereby will be issued pursuant to a Warrant Agreement
(the "Warrant Agreement") between Tellurian, the Representative, and
Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agent") and will be in registered form. The following summary of the
provisions of the Warrants is qualified in its entirety by reference to the
Warrant Agreement, a copy of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part.
Each Warrant will be separately transferable and will entitle the
registered holder thereof to purchase one share of Common Stock at $6.00 per
share (subject to adjustment as described below) at any time during the
period commencing on the date hereof and expiring on the fifth anniversary
hereof. Unless exercised or extended by the board of directors, the Warrants
will expire on ________________________ [fifth anniversary of date of
Prospectus]. A Warrant Holder may exercise his Warrants by surrendering the
certificate evidencing such Warrants to the Warrant Agent, together with the
form of election to purchase on the reverse side of such certificate attached
thereto, properly completed and executed, and the payment of the exercise
price and any transfer tax. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Under certain circumstances, the Representative
will receive a warrant solicitation fee equal to 10% of the exercise price of
all Warrants solicited by an NASD member. See "Underwriting."
35
<PAGE>
For a Warrant Holder to exercise his Warrants, there must be a current
registration statement on file with the Commission and the relevant state
securities commissions. The Company will be required to file post- effective
amendment to the registration statement when events require such amendments,
and to take appropriate action under state securities laws. While it is the
Company's intention to file post-effective amendments when necessary and to
take appropriate action under applicable state securities laws, there is no
assurance that a registration statement will be kept effective or that
appropriate action under applicable state securities laws will be effected.
If a registration statement is not kept current for any reason, or if the
Common Stock is not registered or qualified for sale in the state in which a
Warrant Holder resides, the exercise of the Warrants and the resale or other
disposition of Common Stock issued upon such exercise could be unlawful and
the Warrants will not be exercisable, and holders thereof may be deprived of
value.
Tellurian has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable.
Warrant Holders will not have any voting or other rights as stockholders of
Tellurian unless and until their Warrants are exercised and shares of Common
Stock are issued pursuant thereto. The exercise price and the number of
shares of Common Stock issuable upon the exercise of each Warrant are subject
to adjustment in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or certain other events.
At any time after one year from the date of this Prospectus, any or all of
the Warrants may be redeemed by Tellurian at a price of $.30 per Warrant,
upon the giving of 30 days prior written notice to the Warrant Holders, and
provided that the trading price of the Common Stock for 20 consecutive
trading days ending within 10 days prior to such notice of redemption
delivered by Tellurian to the Warrant Holders has equalled or exceeded $9.25.
The right to purchase the Common Stock issuable upon exercise of the Warrants
noticed for redemption will be forfeited unless such Warrants are exercised
prior to the date specified in the notice of redemption. While Tellurian may
legally be permitted to give notice to redeem the Warrants at a time when a
current Prospectus is not available, thereby leaving the Warrant Holders no
opportunity to exercise their Warrants prior to redemption, Tellurian does
not intend to redeem the Warrants unless a current Prospectus is available
both at the time of mailing of notice of redemption and at the time of
redemption.
ANTI-TAKEOVER STATUTE
Section 203 of the Delaware General Corporation Law provides that if a
person acquires 15% or more of the stock of a Delaware corporation, he
becomes an "interested stockholder" and may not engage in a "business
combination" with that corporation for a period of three years. The term
"business combination" includes a merger, a sale of assets, or a transfer of
stock. The three year moratorium may be terminated if any of the following
conditions are met: (1) the Board of Directors approved the acquisition of
stock or the business combination before the person became an interested
stockholder, (2) the interested stockholder acquired 85% of the outstanding
voting stock in such transaction, excluding in the determination of
outstanding stock is any stock owned by individuals who are officers and
directors of the corporation and any stock owned by certain employee stock
plans, or (3) the business combination is approved after the person became an
interested stockholder by 2/3 of the voting stock which is not owned by the
interested stockholder.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Securities or the perception that such
sales could occur could adversely effect the market price for the Securities.
Upon consummation of the Offering, the Company will have 3,025,000 shares of
Common Stock outstanding (3,235,000 shares if the Underwriters'
over-allotment options are exercised in full) and 1,850,000 Warrants
outstanding (2,127,500 Warrants if the Underwriter's over-allotment options
are exercised in full). In addition, the Company will have 3,000,000 warrants
outstanding held by the Warrant Holders, 140,000 Underwriters' Stock Warrants
and 185,000 Underwriters' Warrants outstanding held by the Underwriters. Of
these shares of Common Stock and warrants, 1,875,000 shares of Common Stock
(2,085,000 if the Underwriters' over-allotment options are exercised in
full), 1,850,000 Warrants (2,127,500 if the Underwriter's over-allotment
options are exercised in full), 3,000,000 warrants held by the Warrant
Holders, 140,000 Underwriters' Stock Warrants and 185,000 Underwriters'
Warrants will be freely tradeable in the public market without restriction
under the Securities Act, except for Securities purchased by an "affiliate"
of the Company (as that
36
<PAGE>
term is defined under the rules and regulations of the Securities Act), which
will be subject to the resale limitations of Rule 144 under the Securities Act
("Rule 144"), and except that (i) 25,000 shares owned and offered by the
Additional Selling Stockholders may not be sold for a period of six months, (ii)
3,000,000 Warrants (and the shares issuable upon exercise of same) owned and
offered by the Warrant Holders may not be sold for a period of one year from the
consummation of this offering, and (iii) the Underwriters' Securities may not
generally be transferred by the holders thereof for a period of one year after
the date of this Prospectus. All of the remaining shares of Common Stock to be
outstanding after the Offering, 1,150,000 shares of Common Stock, will be
"restricted securities" as that term is defined in the Securities Act and will
not have been registered under the Securities Act. The holders of 1,000,000 of
such shares of Common Stock have agreed with the Representative not to sell or
otherwise transfer any of their shares of Common Stock for a period of 24 months
after the date of this Prospectus, without the prior written consent of the
Representative. At the end of the aforesaid 24 month period (or earlier with the
consent of the Representative) these 1,000,000 shares will be eligible for sale,
subject to the restrictions imposed by Rule 144. Some of these stockholders may
elect to sell some or all of these shares as soon as they are permitted to do
so. Ordinarily, under Rule 144, a person holding restricted securities for a
period of two years may, every three months thereafter, sell in ordinary
brokerage transactions or in transactions directly with a market maker, an
amount of shares equal to the greater of one percent of the Company's
then-outstanding Common Stock or the average weekly trading volume in the same
securities during the four calendar weeks prior to such sale. In addition, the
holders of an additional 150,000 shares of Common Stock have agreed not to sell
or otherwise transfer any of these shares of Common Stock for a period of 90
days after the date of this Prospectus. See "Underwriting."
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement between
Tellurian and the Underwriters named below, including the Representative (the
"Underwriting Agreement"; a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part), Tellurian and
the Selling Stockholders have agreed to sell to each of the Underwriters
named below, and each of such Underwriters has severally agreed to purchase,
the number of shares of Common Stock and number of Warrants set forth
opposite each name.
Number of Number of
Underwriter Shares Warrants
------------------------- ----------- -----------
J.W. Barclay & Co., Inc.
----------- -----------
TOTAL .............. 1,850,000 1,850,000
=========== ===========
The Underwriters are committed, subject to certain conditions precedent,
to purchase all of the Securities offered hereby if any such Securities are
purchased.
The Representative has advised the Company that the Underwriters propose
to offer the Common Stock and the Warrants to the public at the offering
prices set forth on the cover page of this Prospectus and that the
Underwriters may allow certain dealers who are members in good standing of
the National Association of Securities Dealers, Inc. ("NASD") concessions of
$------ per share of Common Stock and $------ per Warrant. After the initial
public offering, the public offering price and concessions may be changed by
the Representative.
The Company has granted the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 210,000 shares of
Common Stock and 277,500 Warrants at the public offering prices less the
underwriting discounts set forth on the cover page of this Prospectus. The
Underwriters may exercise this option solely to cover over-allotments in the
sale of the shares of Common Stock and Warrants.
The Company and the Selling Stockholders have agreed to pay the
Representative a non-accountable expense allowance of 3% of the gross
proceeds of the shares of Common Stock and Warrants sold in the offering
(including the over-allotment option), of which $50,000 has been paid.
The Company has agreed to enter into an agreement with the Representative
retaining the Representative as financial consultant for a period of two
years from the date hereof, pursuant to which the Representative will receive
a fee of $74,625 per year payable in full at the closing of the Offering. The
Company has agreed with
37
<PAGE>
the Representative to pay a finder's fee, ranging from 7% of the first
$1,000,000 down to 2 1/2 % of the excess over $9,000,000 of the consideration
involved in any transaction (including mergers and acquisitions) consummated
by the Company in which the Representative introduced the other party to the
Company during the five year period commencing on the closing date.
The Company will pay the Representative, commencing one year from the date
hereof, a commission equal to ten percent of the exercise price of the
Warrants exercised, provided that (i) at the time of exercise the market
price of the Common Stock is greater than the exercise price of the Warrants,
and (ii) the exercise of the Warrants was solicited by a member of the NASD
and the NASD member is designated in writing by the Warrant Holder, (iii) the
Warrants exercised are not held in discretionary accounts, (iv) disclosure of
the compensation arrangements has been made both at the time of exercise, and
(v) the solicitation of the exercise of the Warrants is not in violation of
Rule 10b-6 under the Securities Exchange Act of 1934. A portion of such
commission may be reallocated to any dealer who solicited such exercise.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933.
The Company has agreed to sell to the Underwriters or their designees, at
a price of $.001 per warrant, a total of 140,000 warrants (the "Underwriters'
Stock Warrants") to purchase a like number of shares of Common Stock of the
Company and 185,000 warrants (the "Underwriters' Warrants") to purchase a
like number of Common Stock Purchase Warrants. The Underwriters' Stock
Warrants will be exercisable at a price of $8.25 per share and the
Underwriters' Warrants will be exercisable at a price of $.4125 per Common
Stock Purchase Warrant for a period of four years commencing one year after
the date hereof, and they will not be transferable for one year after the
date hereof except to Underwriters and selected dealers and officers and
partners thereof. Any profit realized upon any resale of the Underwriters'
Stock Warrants or the Underwriters' Warrants underlying same may be deemed to
be additional underwriter's compensation. The Company has agreed to register
(or file a post-effective amendment with respect to any registration
statement registering) the Underwriters' Stock Warrants and the Underwriters'
Warrants and their underlying securities under the Securities Act at its
expense on one occasion, and at the expense of the holders thereof on another
occasion, upon the request of a majority of the holders thereof. The Company
has also agreed to certain "piggy-back" registration rights for the holders
of the Underwriters' Stock Warrants and the Underwriters' Warrants and their
underlying securities.
The Underwriters have informed the Company that they do not expect sales
of shares of Common Stock to be made to discretionary accounts to exceed 2%
of the shares of Common Stock offered hereby.
All current Common Stock holders of the Company, excluding the Warrant
holders and the Additional Selling Stockholders, have agreed that they will
not, directly or indirectly, offer to sell, contract to sell, sell, transfer,
assign, encumber, grant an option to purchase, pledge or otherwise dispose of
any beneficial interest in such securities, for a period of twenty-four
months following the date hereof, without the prior written consent of the
Representative. The Additional Selling Stockholders have agreed not to sell
the 25,000 shares that the Additional Selling Stockholders will receive upon
the completion of the Offering for a period of six months. The Warrant
Holders have agreed not to sell or otherwise transfer their 3,000,000
Warrants (and the shares issuable upon exercise of same) for a period of one
year after the consummation of this offering.
The Underwriting Agreement provides that the Representative has the right,
for a period of five years from the date of the closing of the Offering, to
designate one person to attend Board of Directors meetings. Such person shall
be entitled to attend all such meetings and to receive all notices and other
correspondence and communications sent by the Company to members of its Board
of Directors. The Company shall reimburse the designee of the Representative
for his out-of-pocket expenses incurred in connection with his attendance at
such meetings. As of the date of this Prospectus, the Representative has not
designated any director.
The Company has agreed that for a period of six months from the date
hereof, it will not issue any securities not contemplated by this Prospectus
and for a period of three years, it will not issue any Preferred Stock
without the prior written consent of the Representative.
See "Certain Transactions" regarding the following transactions involving
the Company, the Representative, Selling Stockholders and Additional Selling
Stockholders: (i) the Company's March 1995 sale of 600,000 shares of its
Common Stock which included 450,000 shares to the Selling Stockholders and
150,000 shares to certain
38
<PAGE>
principals and an employee of the Representative; (ii) the Company's December
1995/January 1996 private placement wherein the Representative acted as
Placement Agent and received cash compensation equal to 13% of the gross
proceeds or $97,500 (not including 300,000 warrants which have been returned
to the Company and have been cancelled); and (iii) the private placement
completed on June 27, 1996 wherein the Representative acted as Placement
Agent and received cash compensation equal to 15% of the gross proceeds or
$26,250.
PRICING OF THE OFFERING
Prior to this offering, there has been no public trading market for any of
the Company's securities. Consequently, the initial public offering of the
shares of Common Stock and Warrants have been determined by negotiations
between the Company and the Representative. Among the factors considered in
determining the offering prices were the Company's financial condition and
prospects, the industry in which the Company is engaged, certain financial
and operating information of companies engaged in activities similar to those
of the Company and the general market condition of the securities markets.
Such prices do not necessarily bear any relationship to any established
standard or criteria of value based upon assets, earnings, book value or
other objective measures.
WARRANT HOLDERS
Upon the consummation of the Offering, certain outstanding warrants of
Tellurian automatically convert into warrants identical to the Warrants. This
Prospectus relates to the registration of 3,000,000 of such warrants as well
as shares of Common Stock issuable upon exercise of such Warrants. The
3,000,000 warrants will not be issued and delivered to Warrant Holders until
on or after the closing date of the Offering. Such Warrant Holders will
receive their warrants upon the consummation of the Offering via automatic
conversion of outstanding warrants received by them in connection with the
Company's private placement completed between December 1995 and January 1996.
See "Certain Transactions." The Warrant Holders have agreed not to sell or
otherwise transfer their 3,000,000 Warrants (and the shares of Common Stock
issuable upon exercise of same) for a period of one year after the
consummation of this offering.
Each of the Warrant Holders may be deemed to be an "underwriter" of the
Common Stock offered hereby, as that term is defined under the Securities
Act. Each of the Warrant Holders may sell its warrants from time to time on
or after the date of the closing of the Offering for its own account in the
open market at the prices prevailing therein, or in individually negotiated
transactions at such prices as may be agreed upon. The net proceeds from any
sale of such warrants by the Warrant Holders will inure entirely to their
benefit and not to that of the Company except for the purchase price received
by the Company from the exercise of any such warrants.
None of the Warrant Holders have any position, office or other material
relationship with the Company or any of its predecessors or affiliates during
the past three years, except as Warrant and Note holders.
The Warrant Holders are required to deliver a current prospectus in
connection with the offer or sale of such warrants. The Warrant Holders have
been advised that Rules 10b-6 and 10b-7 of the General Rules and Regulations
promulgated under the Exchange Act will be applicable to their sales of
warrants. These rules contain various prohibitions against trading by persons
interested in a distribution and against so-called "stabilization"
activities.
Any sale of warrants by Warrant Holders through broker-dealers may cause
the broker-dealers to be considered as participating in a distribution and
subject to Rule 10b-6 promulgated under the Exchange Act. If any such
transaction were a "distribution" for purposes of Rule 10b-6, then such
broker-dealers might be required to cease making a market in the Company's
equity securities for either two or nine trading days prior to a sale in such
transaction.
39
<PAGE>
The following table provides a list of the names, addresses and amount of
warrants to purchase shares of Common Stock beneficially owned by Warrant
Holders.
<TABLE>
<CAPTION>
Approximate
% of Class Approximate
Number of Number of Number of Owned Prior to % of Class
Name and Address of Warrants Warrants Warrants Offering Owned After the
Security Holders Held Offered Retained (1)(3) Offering (2)(3)
-------------------------- ----------- ----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Jericho Limited .......... 2,200,000 2,000,000 -0- 73.3 45.4
c/o Intertrust Management
S.A. P.O. Box 3292 16 rue
de la Pelisserie 1211
Geneva 3 SWITZERLAND (4)
Imafina S.A. ............. 800,000 800,000 -0- 27.7 16.5
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
(Switzerland) (5)
</TABLE>
- ------
(1) Does not give effect to the completion of the Offering by the Company.
(2) Gives effect to the completion of the Offering by the Company.
(3) Based upon 3,000,000 warrants outstanding prior to the Offering and
4,850,000 warrants outstanding after the Offering without giving effect
to the possible issuance of any Warrants pursuant to the exercise of the
Underwriter's over-allotment option or the Representative's Warrants. See
"Underwriting."
(4) The beneficial owner of Jericho Limited is Louis Carlos SantaMaria. The
officers and directors of Jericho Limited are Louis Carlos SantaMaria and
Jane Borgognon and the sole officer is Jane Borgognon.
(5) The beneficial owner and sole officer and director of Imafina S.A. is Hubert
Hendrickx.
ADDITIONAL SELLING STOCKHOLDERS
The Company has registered for sale on behalf of certain security holders
named in the table below (the "Additional Selling Stockholders"), the resale
of 25,000 shares (the "Additional Registered Shares") that are issuable
automatically upon the completion of the Offering in exchange for the
Convertible Note described under "Certain Transactions." Such shares are not
being underwritten in the Offering and the Company will not receive any
proceeds from the sale of such shares. The Additional Registered Shares may
not be sold by the Additional Selling Stockholders for a period of six months
after the date of this Prospectus.
The Additional Selling Stockholders have advised the Company that the
Additional Registered Shares may be offered for sale from time to time by
them in regular brokerage transactions in the over-the-counter market, or,
either directly or through brokers or to dealers, or in private sales or
negotiated transactions, or otherwise, at prices related to the then
prevailing market prices. Such Additional Selling Stockholders have also been
advised that Rules 10(b)6 and 10(b)7 of the General Rules and Regulations
promulgated under the Securities Exchange Act of 1934 the ("Act") will be
applicable to sales of the Additional Registered Shares. Such rules contain
various prohibitions against trading by persons interested in a distribution
and against so-called "stabilization" activities.
The Additional Selling Stockholders may be deemed to be underwriters of
the Common Stock offered hereby, as that term is defined under the Securities
Act. Prior to making loans totaling $175,000 to the Company in June 1996, as
more fully described under "Certain Transactions," the Additional Selling
Stockholders had no position or office, or any material relationship with the
Company or any of its predecessors or affiliates.
40
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares
to be Approximate Approximate
Number of Number of Retained on % of Class % of Class
Name and Address of Shares Shares Completion Owned Prior Owned After
Security Holders Held Offered of Offering to Offering Offering
-------------------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Andrew F. Nicoletta ...... 10,000 10,000 -0- * -0-
111 Broadway 3rd Floor New
York, NY 10006
Karen Bulavinetz ......... 10,000 10,000 -0- * -0-
240-31 Alameda Ave.
Douglaston, NY 11362
Alec McDonald ............ 5,000 5,000 -0- * -0-
41 Plein St. Pietewsburg,
Republic of South Africa
0700
</TABLE>
- ------
* Represents less than 1% of Tellurian's issued and outstanding shares.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Lester Morse P.C. Certain
legal matters will be passed upon on behalf of the Underwriters by Henry C.
Malon, Esq. Members of the family of Lester Morse own options to purchase
50,000 shares of the Company's Common Stock.
EXPERTS
The Company's financial statements, included in this Prospectus, have been
audited by Miller Ellin & Co., Inc., independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, which are included in reliance upon the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form SB-2, File No. 333-9741 (of which this
Prospectus is a part) under the Securities Act with respect to the Securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information about the Company and the Securities offered hereby, reference is
made to the Registration Statement and to the exhibits filed as a part
thereof. The statements contained in this Prospectus are not necessarily
complete and, in each instance, reference is made to a copy of the relevant
contract or document filed as an exhibit to the Registration Statement, each
statement being qualified in any and all respects by such reference. The
Registration Statement, including exhibits, may be inspected without charge
at the Public Reference facilities of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 10549, and at the
offices of the Commission located at the Northeast Regional Office, 7 World
Trade Center, 13th Floor, New York, NY 10048 and the Midwest Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL
60661, and copies of such material can be obtained upon request and payment
of the appropriate fee from the Public Reference Section of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549.
41
<PAGE>
TELLURIAN, INC.
REPORT ON FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .... F-2
BALANCE SHEETS ........................................ F-3 - F-4
STATEMENTS OF OPERATIONS .............................. F-5
STATEMENTS OF STOCKHOLDERS' DEFICIENCY ................ F-6
STATEMENTS OF CASH FLOWS .............................. F-7
NOTES TO FINANCIAL STATEMENTS ......................... F-8 - F-16
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Tellurian, Inc.
We have audited the accompanying balance sheet of Tellurian, Inc. as at
December 31, 1995, and the related statements of operations, stockholders'
deficiency and cash flows for the years ended December 31, 1995 and 1994.
These financial statements are the responsibility of the management of
Tellurian, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tellurian, Inc. as at
December 31, 1995 and the results of its operations and cash flows for the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Tellurian, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company's significant operating losses,
accumulated deficit and working capital deficiencies raise substantial doubt
about its ability to continue as a going concern. Management's plans
regarding those matters are described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 29, 1996, except
for Note 1, which is
dated July 2, 1996,
Note 10, which is dated
August 2, 1996 and
Note 5, which is
dated October 3, 1996
F-2
<PAGE>
TELLURIAN, INC.
BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
----------- --------------
(Unaudited)
CURRENT ASSETS:
Cash ................................ $283,372 $ 39,130
Restricted cash (Note 2) ............ 112,023 --
Accounts receivable ................. 168,602 5,000
Inventories (Note 3) ................ 134,450 87,218
Prepaid expenses and other current
assets ............................ -- 7,811
----------- --------------
Total current assets ...... 698,447 139,159
----------- --------------
PROPERTY AND EQUIPMENT -- at cost
less accumulated depreciation (Note 4) . 34,170 32,711
----------- --------------
OTHER ASSETS:
Deferred offering costs ............. 200,315 50,765
Security deposits ................... -- 925
----------- --------------
200,315 51,690
----------- --------------
$932,932 $223,560
=========== ==============
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
TELLURIAN, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
JUNE 30, DECEMBER 31,
1996 1995
------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable ...................... $ 94,115 $ 29,321
Accrued expenses (Note 7) ............. 124,399 144,131
Payroll payable ....................... 283,197 212,302
Payroll taxes payable (Note 6) ........ 114,071 241,749
Consulting fees payable ............... 279,468 255,693
Notes payable -- related parties
(Note 5) ............................ 596,415 670,921
Interest payable -- related parties
(Note 5) ............................ 322,982 293,604
Note payable -- other ................. 351 500
Deferred revenue (Note 8) ............. 263,053 156,448
------------- --------------
Total current liabilities ... 2,078,051 2,004,669
------------- --------------
LONG-TERM DEBT (Note 9) .................... 895,000 192,000
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIENCY:
Common stock -- $.01 par value
(Note 13)
Authorized -- 10,000,000 shares
Issued and outstanding -- 1,600,000
shares .............................. 16,000 16,000
Additional paid-in capital ............ 135,265 107,265
Accumulated deficit ................... (2,191,384) (2,096,374)
------------- --------------
Total stockholders'
deficiency ................ (2,040,119) (1,973,109)
------------- --------------
$ 932,932 $ 223,560
============= ==============
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
TELLURIAN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX
MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- ------------------------------
1996 1995 1995 1994
------------ ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 12) ......................... $ 542,284 $ 311,161 $ 477,311 $ 461,832
COST OF GOODS SOLD ......................... 82,059 170,838 339,220 306,224
------------ ------------- ------------- -------------
GROSS PROFIT ............................... 460,225 140,323 138,091 155,608
------------ ------------- ------------- -------------
OPERATING EXPENSES:
Research and development .............. 275,030 236,127 423,770 297,864
Selling ............................... 53,131 68,890 92,505 73,758
General and administrative ............ 179,897 97,070 257,125 298,501
------------ ------------- ------------- -------------
508,058 402,087 773,400 670,123
------------ ------------- ------------- -------------
LOSS FROM OPERATIONS ....................... (47,833) (261,764) (635,309) (514,515)
------------ ------------- ------------- -------------
OTHER INCOME AND EXPENSES:
Other income .......................... 8,711 500 -- --
Interest expense ...................... (26,342) -- -- --
Interest expense -- related parties
(Note 4) ............................ (29,546) (32,700) (64,356) (62,387)
------------ ------------- ------------- -------------
(47,177) (32,200) (64,356) (62,387)
------------ ------------- ------------- -------------
NET LOSS ................................... $ (95,010) $ (293,964) $ (699,665) $ (576,902)
============ ============= ============= =============
NET LOSS PER COMMON SHARE .................. $ (.06) $ (.23) $ (.48) $ (.58)
============ ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................ 1,600,000 1,300,000 1,450,000 1,000,000
============ ============= ============= =============
PRO FORMA INFORMATION (Note 18):
Net loss as presented ................. $ (95,010) $ (293,464) $ (699,665) $ (576,902)
Provision for income tax benefits
reflecting
C corporation status ................ -- -- -- --
------------ ------------- ------------- -------------
Pro forma net loss .................... $ (95,010) $ (293,464) $ (699,665) $ (576,902)
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
TELLURIAN, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
----------- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT January 1, 1994 --
as previously reported (Note 13) .... 1,000,000 $10,000 $ 20,000 $ (824,807) $ (794,807)
Prior period adjustment (Note 17) .... -- -- (5,000) 5,000 --
----------- ---------- ------------ --------------- ---------------
BALANCE AT January 1, 1994 --
as restated ......................... 1,000,000 10,000 15,000 (819,807) (794,807)
Net loss for the year ended
December 31, 1994 ................... -- -- -- (576,902) (576,902)
----------- ---------- ------------ --------------- ---------------
BALANCE AT December 31, 1994 ......... 1,000,000 10,000 15,000 (1,396,709) (1,371,709)
Issuance of common stock for cash
(Note 13) ........................... 600,000 6,000 94,000 -- 100,000
Costs relating to issuance of common
stock for cash ...................... -- -- (9,735) -- (9,735)
Issuance of warrants in connection
with private placement
(Notes 13 and 14) ................... -- -- 8,000 -- 8,000
Net loss for the year ended
December 31, 1995 ................... -- -- -- (699,665) (699,665)
----------- ---------- ------------ --------------- ---------------
BALANCE AT December 31, 1995 ......... 1,600,000 16,000 107,265 (2,096,374) (1,973,109)
Issuance of warrants in connection
with private placement
(Notes 13 and 14) ................... -- -- 28,000 -- 28,000
Net loss for the six months ended June
30, 1996 (Unaudited) ................ -- -- -- (95,010) (95,010)
----------- ---------- ------------ --------------- ---------------
BALANCE AT June 30, 1996
(Unaudited) ......................... 1,600,000 $16,000 $135,265 $ (2,191,384) $ (2,040,119)
=========== ========== ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
TELLURIAN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX
MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- -----------------------------
1996 1995 1995 1994
------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (95,010) $ (293,964) $(699,665) $ (576,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ........... 44,560 36,387 41,611 70,245
Changes in assets and liabilities:
Restricted cash ...................... (112,023) -- -- --
Accounts receivable .................. (163,602) (7,078) (5,000) 8,500
Inventories .......................... (47,232) 14,621 75,981 108,889
Prepaid expenses and other current
assets ............................. 7,811 -- (7,811) --
Security deposits .................... 925 (925) (925) --
Accounts payable ..................... 64,794 (41,431) (55,801) (22,476)
Accrued expenses ..................... (19,732) 53,227 99,898 30,472
Payroll payable ...................... 70,895 40,220 79,864 34,025
Payroll taxes payable ................ (127,678) 39,281 89,520 103,581
Consulting fees payable .............. 23,775 33,303 79,231 27,922
Interest payable -- related parties .. 29,378 31,650 63,306 74,376
Deferred revenue ..................... 106,605 6,000 6,000 150,448
------------ ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ......................... (216,534) (88,709) (233,791) 9,080
------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......... (7,209) (1,033) (11,214) (7,791)
------------ ------------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES .......... (7,209) (1,033) (11,214) (7,791)
------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....... -- 100,000 90,266 --
Proceeds from issuance of warrants in
connection with private placement ......... 28,000 -- 8,000 --
Proceeds from notes payable -- related parties 25,494 23,159 53,190 8,790
Repayments of notes payable -- related parties (100,000) (9,300) (8,635) (10,000)
Proceeds from notes payable -- other ......... -- -- 7,000 --
Repayments of notes payable -- other ......... (149) -- (7,000) --
Proceeds from long-term debt ................. 703,000 -- 192,000 --
Payments of deferred offering costs .......... (188,360) (9,734) (50,765) --
------------ ------------- ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ......................... 467,985 104,125 284,056 (1,210)
------------ ------------- ------------ -------------
NET CHANGE IN CASH ............................. 244,242 14,383 39,051 79
CASH -- beginning .............................. 39,130 79 79 --
------------ ------------- ------------ -------------
CASH -- ending ................................. $ 283,372 $ 14,462 $ 39,130 $ 79
============ ============= ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest ....................... $ 9,000 $ -- $ -- $ 2,000
Cash paid for income taxes ................... -- -- -- --
</TABLE>
The accompanying notes are an integral part of the financial statements
F-7
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
Tellurian, Inc. (the "Company"), a South Carolina corporation, was
incorporated on August 10, 1988 for the purpose of designing and
manufacturing real time image generation equipment for training and
simulation. The Company also provides consulting and parts/repair services
related to computer image generator technology. These operations constitute a
single business segment. The Company sells its image generators to two types
of entities, those which are interested in training and simulation and those
which specialize in entertainment devices and games.
In January 1996, the Company formed a wholly-owned subsidiary in the State
of Delaware and merged the Company into such corporation on July 2, 1996.
Pursuant to the merger, the holders of all of the shares of common stock of
the Company exchanged their 1,600,000 shares outstanding for 1,600,000 shares
of the new corporation on a pro rata basis.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet of the Company at June 30, 1996 and the
consolidated statements of operations, stockholders' deficiency and cash
flows for the six months ended June 30, 1996 and 1995 are unaudited but
include all adjustments which, in the opinion of management, are necessary
for the fair presentation of the Company's financial position and results of
operations for the periods then ended. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods are not
necessarily indicative of the results of operations for a full fiscal year.
GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. However, the Company has sustained
substantial losses since inception including net losses of approximately
$700,000 and $577,000 for the years ended December 31, 1995 and 1994,
respectively. Further, at December 31, 1995, total liabilities exceeded total
assets by approximately $1,973,000. During 1995, the Company borrowed
approximately $53,000 from related parties and $192,000 through a private
placement to meet its current operating needs.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheets is dependent upon the continued operations of
the Company, which in turn is dependent upon the Company's ability to achieve
profitable operations and to meet its financing requirements. The Company is
planning a $7,000,000 public offering (see Note 16) and if successful, will
use the net proceeds of such offering to reduce its debt and provide working
capital.
DEFERRED REVENUE
Deferred revenue consists of customer advances which are reflected in
current liabilities and is expected to be recognized as revenue when the
finished product is shipped.
REVENUE RECOGNITION
Sales are recognized when the finished product is shipped.
F-8
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
CONCENTRATIONS OF CREDIT RISK
Accounts Receivable
The Company sells primarily to aviation training and entertainment
entities throughout the United States. It is the Company's policy to require
a substantial deposit prior to commencement of production for specific orders
with the balance due upon completion.
Cash
The Company maintains cash balances in its banks which, at times, may
exceed the limits of the Federal Deposit Insurance Corp.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows:
Machinery and equipment - 5 years
Furniture and fixtures - 7 years
Expenditures for repairs and maintenance are charged to expense as
incurred.
TECHNOLOGY RIGHTS
Technology rights are valued at cost and are amortized over a four year
period, which approximates its useful life.
Amortization expense amounted to $-0-, $31,163, $31,163 and $62,326 for
the six months ended June 30, 1996 and 1995 (unaudited) and for the years
ended December 31, 1995 and 1994, respectively.
DEFERRED OFFERING COSTS
Deferred offering costs incurred in connection with the Company's private
placement agreement are being amortized over the respective terms of the
promissory notes issued (see Note 9).
Amortization expense amounted to $38,810 and $-0- for the six months ended
June 30, 1996 and the year ended December 31, 1995, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense in the period
incurred. For the six months ended June 30, 1996 and 1995 (unaudited) and for
the years ended December 31, 1995 and 1994, research and development costs
amounted to $274,730, $236,127, $423,770 and $297,864, respectively.
F-9
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
INCOME TAXES
The Company has elected to be treated as an "S" corporation for federal
and South Carolina purposes whereby net income or loss is recorded by the
stockholders on their individual income tax returns. There are no corporate
income taxes or deferred income taxes.
NEW ACCOUNTING STANDARDS
The adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets," is not expected to materially affect the Company's financial
position or results of operations. The Company is not adopting SFAS No. 123,
"Accounting for Stock Based Compensation." However, the Company will make all
necessary disclosures required in fiscal 1996.
LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of
common shares outstanding during the period. The weighted average number of
shares outstanding has been adjusted to reflect the recapitalization in
connection with the private placement as if it had occurred as of the
beginning of the period for which loss per share is presented.
RECLASSIFICATIONS
Certain amounts in the 1994 financial statements have been reclassified to
conform to the 1995 presentation.
NOTE 2 -- RESTRICTED CASH
Restricted cash represents funds held by the Company's attorney from the
proceeds of the note issued on June 27, 1996 (see Note 9) net of payments for
deferred offering costs.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
June 30, December 31,
1996 1995
----------- --------------
(Unaudited)
Raw materials.............. $ 77,314 $58,762
Work-in-process............ 42,556 28,456
Finished goods............. 14,580 --
----------- --------------
$134,450 $87,218
=========== ==============
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of:
June 30, December 31,
1996 1995
----------- -------------
(Unaudited)
Equipment ...................................... $70,850 $68,452
Computer software .............................. 18,431 13,621
Office furniture ............................... 2,374 2,373
----------- -------------
91,655 84,446
Less: Accumulated depreciation and amortization . 57,485 51,735
----------- -------------
$34,170 $32,711
=========== =============
F-10
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 4 -- PROPERTY AND EQUIPMENT - (Continued)
Depreciation expense amounted to $5,750, $5,224, $10,448 and $7,919 for
the six months ended June 30, 1996 and 1995 (unaudited) and for the years
ended December 31, 1995 and 1994, respectively.
NOTE 5 -- NOTES PAYABLE - RELATED PARTIES
The Company has borrowed funds from officers and stockholders to finance
its operations. The notes are due on demand (except as described below) and
bear interest at the rate of 10% per annum.
In October 1995, the Company agreed to repay a portion of its debt owed to
a stockholder as follows:
1. $100,000 upon the completion of its private placement (see Note 9).
2. $121,200 from corporate receipts other than the private offering.
As of June 30, 1996 (unaudited), the stockholder has been paid $100,000.
In addition, the Company has assigned its proceeds from the Technology
Agreement (see Note 11) and granted a security interest until the stockholder
has received a total of $221,200. Once the total amount has been paid, the
stockholder has agreed to cancel the assignment and the security interest. In
addition, the stockholder agreed not to demand payment of any sums due him
through November 1, 1997.
As at December 31, 1995, notes payable amounted to $670,921 and accrued
interest payable amounted to $293,604. At June 30, 1996 (unaudited), notes
payable amounted to $596,415 and accrued interest payable amounted to
$322,982.
Interest expense charged to operations amounted to $29,546, $32,700,
$64,356 and $62,387 for the six months ended June 30, 1996 and 1995
(unaudited) and for the years ended December 31, 1995 and 1994, respectively.
NOTE 6 -- PAYROLL TAXES PAYABLE
The Company owes federal and New Jersey payroll taxes from the fourth
quarter of 1993 through the fourth quarter of 1995. Interest and penalties
have been accrued (see Note 7). In January 1996, the Company paid
approximately $150,000 including interest and penalties to the Internal
Revenue Service. The Company has reached oral agreements with the Internal
Revenue Service and the State of New Jersey to repay the balances owed from
the proceeds of the proposed public offering (see Note 16).
In January and March 1996, the Internal Revenue Service filed tax liens
totalling $92,007 for unpaid payroll taxes for the quarters ended September
1994 through June 1995.
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- --------------
(Unaudited)
<S> <C> <C>
Accrued interest on long-term debt (Note 9) ........... $ 26,510 $ --
Royalties (Note 11) ................................... 30,183 29,854
Interest and penalties on unpaid payroll taxes (Note 6) 45,000 60,000
Others ................................................ 22,706 54,277
----------- --------------
$124,399 $144,131
=========== ==============
</TABLE>
F-11
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 8 -- DEFERRED REVENUE
Deferred revenue consists of two customer deposits which are expected to
be recognized as revenue in 1996.
NOTE 9 -- LONG-TERM DEBT
Long-term debt consists of subordinated promissory notes issued in
connection with the Company's private placement of securities. The notes bear
interest at 8% per annum and are due 24 months from the date of issuance,
provided however, that if the Company completes a public offering of its
securities prior to the expiration of such period, the principal amount of
the promissory notes together with any unpaid interest shall be payable upon
the closing of the public offering (see Note 16).
June 30, December 31,
1996 1995
----------- --------------
(Unaudited)
Note, payable on December 27, 1997..... $192,000 $192,000
Note, payable on January 22, 1998...... 528,000 --
Note, payable on June 27, 1998 (*)..... 175,000 --
----------- --------------
895,000 192,000
Less: Current portion ................ -- --
----------- --------------
$895,000 $192,000
=========== ==============
- ------
(*) Terms of the note are as described above except as follows:
1. The notes are due if and when the gross proceeds from a series of private
placements amount to at least $5,000,000.
2. One $25,000 note is convertible into 25,000 shares of common stock
automatically upon the completion of the proposed public offering (see
Note 16).
The promissory notes are subordinated to all senior indebtedness, defined
as principal and interest on all indebtedness of the Company, whether
outstanding on the date of the issuance of the promissory notes or
subsequently created for money borrowed by the Company or other monetary
obligations of the Company, including debentures, other notes, letters of
credit, loan agreements or guarantees to banks, trust companies, leasing
companies, insurance companies or other institutional lenders and any
renewal, extension refunding, amendment or modifications of any such senior
indebtedness, including without limitation of the foregoing, purchase money
mortgages and mortgages made, given or guaranteed by the Company.
Maturities of long-term debt are as follows:
1996 $ --
1997 192,000
1998 703,000
-----------
$895,000
===========
Interest amounted to $26,342 for the six months ended June 30, 1996
(unaudited).
F-12
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 10 -- FINANCIAL INSTRUMENTS
The amounts at which cash, accounts receivable, accounts payable and other
current liabilities are presented in the balance sheets approximate their
fair value due to their short maturities. The following table presents the
carrying amount and fair value for long-term debt:
June 30, 1996 (Unaudited) December 31, 1995
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ----------- -----------
Long-term debt.... $895,000 $764,800 $192,000 $160,800
========== =========== =========== ===========
The fair value of long-term debt has been determined based on discounted
cash flow using a market rate of interest at the balance sheet date as
applicable to comparable debt.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
LEASE
All of the Company's operations take place in leased facilities.
Commencing December 1993, the Company began leasing its office and
manufacturing facility from an unrelated entity on a month-to-month basis. In
April 1995, the Company entered into a five year lease for the facility. In
May 1996, the Company terminated the lease and moved to a new facility
entering into a two year lease expiring in May 1998. The Company is also
responsible for its share of operating expenses (as defined).
Future minimum lease payments are as follows:
Year Ending
December 31,
--------------
1996 $ 63,400
1997 61,500
1998 25,600
----------
$150,500
==========
Rent expense amounted to $48,742, $31,777, $70,018 and $59,048 for the six
months ended June 30, 1996 and 1995 (unaudited) and for the years ended
December 31, 1995 and 1994, respectively.
TECHNOLOGY AGREEMENT
In January 1996, the Company entered into an agreement with a Republic of
China corporation ("ROC") which replaces an earlier agreement entered into in
1995 with a different Republic of China corporation. There have been no
modifications to the old agreement other than the customer name. The purpose
of this agreement is to provide training, advice and consultation in relation
to computer image generator technology. The agreement provides for a fee of
$1,500,000 payable as follows:
4% upon signing the agreement
16% upon the completion of the first prototype of the computer image
generator
10% upon delivery of the design data package
40% upon completion of the training program
20% 90 days after completion of the training program
10% 180 days after completion of the training program
F-13
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 11 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
TECHNOLOGY AGREEMENT (CONTINUED)
Of the agreed $1,500,000, the Company, pursuant to separate agreements,
has agreed that ROC will pay $650,000 to two unrelated parties as follows:
1. $500,000 to ROC's parent company in consideration of the parent's
services and expenses incurred in negotiating the agreement and
establishing ROC.
2. $150,000 to an unrelated corporation in consideration of such
corporation's contribution to the development of software for the
computer image generator technology.
As compensation for the license granted, the Company will receive royalty
payments at the rate of 2% of the sales value of the products or derivative
products sold by such corporation using the technology, payable annually for
a period of five years from the date of the agreement. In return, the Company
agrees not to market such products within a restricted group of countries as
defined in the agreement.
In October 1995, the Company assigned proceeds received under the
agreement and granted a security interest to a stockholder (see Note 5).
In May 1995, the Company entered into an agreement to pay 15% of the
monies received from the technology agreement to an unrelated corporation.
Such fee amounted to $10,650 for the year ended December 31, 1995.
Consulting fee income amounted to $71,000 for the year ended December 31,
1995 under the old agreement.
ROYALTIES
In connection with the acquisition of technology rights, the Company is
obligated to pay royalties based upon revenues at a rate of 4% of image
generator sales and 1% of other revenue, as defined. Such agreement
stipulates that the royalties paid shall not exceed $1,500,000. Royalty
expense amounted to $5,329, $21,530, $8,573 and $15,889 for the six months
ended June 30, 1996 and 1995 (unaudited) and for the years ended December 31,
1995 and 1994, respectively.
In July and August 1996, the Company has entered into agreements to
terminate two-thirds of all future royalty payments as of the respective
dates of the agreements. These agreements call for total payments of $150,000
as well as a payment of $10,529 for unpaid royalties as follows:
1. $88,029 within ten business days from the closing of the Company's
proposed public offering (see Note 16) but no later than March 31,
1997.
2. $72,500 will be due and payable one year after the initial payments.
NOTE 12 -- REVENUES
Revenues consist of:
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
-------------------------- --------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Real time image generators . $ 32,610 $225,578 $267,428 $415,254
Consulting fees ........... 458,000 51,000 169,558 40,740
Parts and repairs ......... 51,674 34,583 40,325 5,838
----------- ----------- ----------- -----------
$542,284 $311,161 $477,311 $461,832
=========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 12 -- REVENUES - (Continued)
The Company operates principally in three geographic areas: the United
States, Canada and the Republic of China. The following is a summary of
information by area:
Six Months Ended Years Ended
June 30, December 31,
-------------------------- --------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Revenues
United States .... $139,686 $260,161 $379,311 $405,718
Canada ........... 5,000 -- 27,000 35,000
Republic of China . 395,598 51,000 71,000 21,114
--------- ----------- ----------- -----------
$540,284 $311,161 $477,311 $461,832
========= =========== =========== ===========
Revenues from major customers are as follows:
Customer A ....... 72.9% 39.5% 31.8% 24.3%
Customer B ....... 8.9% 16.4% 20.5% 18.8%
Customer C ....... 5.6% 8.9% 10.7% 18.1%
NOTE 13 -- COMMON STOCK
On March 24, 1995, in connection with its private placement, the Company
increased its authorized common stock from 10,150 shares to 10,000,000 shares
and changed the par value from $1.00 per share to $.01 per share. In
addition, the Company issued 1,000,000 shares of $.01 par value common stock
to replace the 10,150 shares of $1.00 par value common stock that were
previously outstanding. All share data and per share amounts have been
adjusted to reflect this transaction. In March 1995, the Company completed a
private placement of 600,000 shares of its $.01 par value common stock for
$100,000, including 150,000 shares sold to principals and an employee of the
underwriter.
NOTE 14 -- WARRANTS
On December 27, 1995, the Company issued 800,000 warrants to purchase
800,000 shares of $.01 par value common stock at an exercise price of $6.00
per share. The warrants were issued in connection with the subordinated
promissory note and were valued at $.01 per warrant amounting to $8,000 (see
Note 9). Such amount was credited to additional paid-in capital. The warrants
are exercisable from December 31, 1995 through December 31, 2000.
On January 22, 1996, the Company issued 2,500,000 warrants to purchase
2,500,000 shares of $.01 par value common stock at an exercise price of $6.00
per share. The warrants, 2,200,000 issued in connection with the subordinated
promissory note and 300,000 issued for cash, were valued at $.01 per warrant
amounting to $28,000 (see Note 9). Such amounts were credited to additional
paid-in capital. The warrants are exercisable from January 22, 1996 through
January 22, 2001.
On June 27, 1996, an agreement was signed cancelling 300,000 of these
warrants. In addition, upon completion of the proposed public offering (see
Note 16), the balance of the warrants (3,000,000) will automatically convert
to warrants identical to those sold to the public.
NOTE 15 -- STOCK OPTION PLAN
On June 1, 1996, the Company adopted a Stock Option Plan (the "Plan")
covering 400,000 shares of common stock (subject to adjustment to cover stock
splits, stock dividends, recapitalizations and other capital adjustments) for
employees, including officers and directors and consultants of the Company.
The Plan provides that options to be granted under the Plan will be
designated as incentive stock options or non-incentive stock options by the
board of directors or a committee thereof, which also will have discretion as
to the persons to be granted options, the number of shares subject to the
options and the terms of the options. Options designated as
F-15
<PAGE>
TELLURIAN, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 15 -- STOCK OPTION PLAN - (Continued)
incentive stock options are intended to receive incentive stock option tax
treatment pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended.
The Plan provides that all options granted thereunder shall be exercisable
during a period of no more than 10 years from the date of grant (five years
for Incentive Stock options granted to holders of 10% or more of the
outstanding shares of common stock), depending upon the specific stock option
agreement and that the option exercise price for incentive stock options
shall be at least equal to 100% of the fair market value of common stock on
the date of grant (110% for Incentive Stock options granted to holders of 10%
or more of the outstanding shares of common stock), but in no event less than
the initial public offering price of the Company's proposed public offering.
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of grant) of the shares of the common stock for which
incentive stock options are first exercisable under the terms of the Plan by
an option holder during any one calendar year cannot exceed $100,000.
Currently, the Plan provides that if the employment of an optionee is
terminated other than by reason of death, disability or retirement at age 65,
any Incentive Stock options granted to the optionee will immediately
terminate. If employment is terminated by reason of disability or retirement
at age 65, the optionee may, within one year from the date of termination, in
the event of termination by reason of disability, or three months from the
date of termination, in the event of termination by reason of retirement at
age 65, exercise the Incentive Stock option (but not after the normal
termination date of the option). If employment is terminated by death, the
person or persons to whom the optionee's rights under the Incentive Stock
option are transferred by will or the laws of descent and distribution have
similar rights of exercise within three months after such death (but not
after the normal termination date of the option). Any termination provisions
of non-statutory stock options will be fixed by the board of directors or a
Committee thereof.
Options are not transferable otherwise than by will or the laws of descent
and distribution and during the optionee's lifetime are exercisable only by
the optionee. Shares subject to options which expire or terminate may be the
subject of future options. The Plan will terminate in 2006. On June 1, 1996,
the Company granted non-qualified stock options to purchase 300,000 shares
of its common stock at an exercise price of $5.00 per share at any time on or
after July 1, 1997 until June 1, 2006, the expiration date of such options.
NOTE 16 -- PROPOSED PUBLIC OFFERING
The Company is filing a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, for the purpose of registering its
securities for sale to the public.
Pursuant to the registration statement, the Company will offer 1,400,000
shares of $.01 par value common stock for $7,000,000 and 1,850,000 five-year
warrants (to purchase 1,850,000 shares of $.01 par value common stock at
$6.00 per share) for $462,500. In addition, 450,000 shares are being sold by
certain existing stockholders for $2,250,000. The Company will not receive
any proceeds from the sale of these shares.
The Company has agreed to enter into a financial consulting agreement with
the underwriter for a period of two years from the date of the closing of the
proposed public offering.
NOTE 17 -- PRIOR PERIOD ADJUSTMENT
Accumulated deficit at January 1, 1994 has been adjusted to correct an
error made in 1988. The Company erroneously capitalized as additional paid-in
capital certain services rendered by existing stockholders. The error had no
effect on the net loss for 1994.
NOTE 18 -- PRO FORMA INFORMATION
Pro forma net loss has been presented to show results of operations
assuming the Company filed its income tax returns as a C corporation. If the
Company was a C corporation, there would be no current income taxes and
deferred income taxes would consist solely of an asset for net operating loss
carryforwards offset by a 100% valuation allowance.
F-16
<PAGE>
==============================================================================
No underwriter, dealer, salesman or other person has been authorized to
give any information or to make any representation, other than those
contained in this Prospectus, in connection with the Offering, and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company. The delivery of this Prospectus at any time
does not imply that there has not been any change in the information set
forth herein or in the affairs of the Company since the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any security other than the securities offered hereby, or an offer to
sell or solicitation of an offer to buy such securities in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person
to whom such offer or solicitation would be unlawful.
TABLE OF CONTENTS
Page
--------
Prospectus Summary ........................................... 3
Summary Financial Data ....................................... 5
Risk Factors ................................................. 6
Use of Proceeds .............................................. 12
Dividend Policy .............................................. 13
Capitalization ............................................... 14
Dilution ..................................................... 14
Selected Financial Data ...................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operation ................................................... 17
Business ..................................................... 21
Management ................................................... 28
Certain Transactions ......................................... 31
Principal and Selling Stockholders ........................... 33
Description of Securities .................................... 34
Shares Eligible for Future Sale .............................. 36
Underwriting ................................................. 37
Warrant Holders .............................................. 39
Additional Selling Stockholders .............................. 40
Legal Matters ................................................ 41
Experts ...................................................... 41
Additional Information ....................................... 41
Index to Financial Statements ................................ F-1
Until , 1996, (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus with
respect to their solicitations to purchase the securities offered hereby.
==============================================================================
<PAGE>
==============================================================================
TELLURIAN, INC.
1,850,000 SHARES OF
COMMON STOCK
AND 1,850,000 WARRANTS
------
PROSPECTUS
------
J.W. BARCLAY & CO., INC.
________, 1996
==============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Tellurian's Certificate of Incorporation contains a provision which, in
substance, eliminates the personal liability of the directors of Tellurian
and its stockholders for monetary damages for breaches of their fiduciary
duties as directors to the fullest extent permitted by Delaware law. By
virtue of this provision, under current Delaware law a director of Tellurian
will not be personally liable for monetary damages for breach of his
fiduciary duty, except for liability for (a) breach of his duty of loyalty to
Tellurian or to its stockholders, (b) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (c)
dividends or stock repurchases or redemptions that are unlawful under
Delaware laws and (d) any transaction from which he receives an improper
personal benefit. This provision pertains only to breaches of duty by
directors as directors and not in any other corporate capacity, such as
officers, and limits liability only for breaches of fiduciary duties under
Delaware corporate law and not for violations of other laws such as the
federal securities laws. As a result of the inclusion of such provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions. The
inclusion of this provision in Tellurian's Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or Management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefitted
Tellurian and its stockholders.
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, or investigative
in nature to procure a judgment in its favor, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees) and, in a
proceeding not by or in the right of the corporation, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by him in
connection with such suit or proceeding, if he acted in good faith and in a
manner believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Delaware law further provides
that a corporation will not indemnify any person against expenses incurred in
connection with an action by or in the right of the corporation if such
person shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for the
expenses which such court shall deem proper.
The indemnification and advancement of expenses provided by, or granted
pursuant to Delaware Corporation Law is not be deemed exclusive of any other
rights to which those seeking indemnification or advance of expenses may be
entitled under any bylaw, agreement, vote of stockholders of disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Article IX of Tellurian's By-Laws provides that the officers and directors
of Tellurian shall be entitled to indemnification to the maximum extent
permitted by Delaware law.
The form of Underwriting Agreement included as Exhibit 1 provides for
indemnification of Tellurian and certain controlling persons under certain
circumstances, including liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment of
the registrant of expenses incurred or paid
II-1
<PAGE>
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission Registration fee $ 14,605.35
NASD Registration Fee .............................. 4,947.77
NASDAQ filing fees ................................. 15,000.00*
Blue Sky qualification fees and expenses ........... 50,000.00*
Printing of Prospectus and Certificates ............ 100,000.00*
Legal fees and expenses ............................ 100,000.00*
Accountants' fees and expenses ..................... 50,000.00*
Fees and expenses of Transfer Agent ................ 5,000.00*
Miscellaneous ...................................... 185,071.88*
-------------
Total ............................................ $524,625.00*
=============
- ------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
(i) On March 17, 1995, Tellurian, Inc. (a South Carolina corporation) sold
600,000 shares of its Common Stock at a purchase price of $100,000 or $.167
per share. Of such shares, Dennis Giunta, Joseph DeFalco, Matthew Langdon,
John A. Bruno, John C. Cioffoletti, Michael J. Wills, and Douglas Spinosa
purchased 200,000 shares, 125,000 shares, 125,000 shares, 45,000 shares,
45,000 shares, 45,000 shares, and 15,000 shares, respectively.
(ii) On December 27, 1995, the Issuer received $200,000 from the sale of
promissory notes in the principal amount of $192,000 and 800,000 warrants
from Imafina S.A. On January 22, 1996, the Issuer received $550,000 from the
sale of promissory notes in the principal amount of $528,000 and 2,200,000
warrants from Jericho Limited.
(iii) On June 27, 1996, the Issuer received $175,000 from the sale of
promissory notes in the principal amount of $175,000. $150,000 of the notes
are not convertible and $25,000 of the notes are convertible at $1.00 per
share into 25,000 shares of the Issuer's Common Stock automatically upon the
completion of the Issuer's initial public offering. Of such notes, Andrew F.
Nicoletta, Karen Bulavimetz and Alec McDonald paid $70,000, $70,000 and
$35,000, respectively. The Company issued to each of Andrew F. Nicoletta and
Karen Bulavimetz non-convertible notes in the principal amount of $60,000 and
convertible notes in the principal amount of $10,000. The Company also issued
to Alec McDonald a non-convertible note in the principal amount of $30,000
and a convertible note in the principal amount of $5,000.
Each of the transactions described in subparagraphs (i), (ii) and (iii)
are exempt under Section 4(2), Section 4(6), Regulation 505 and/or Regulation
506 of the Securities Act of 1933, as amended (the "Act").
The transactions described in sub-paragraphs (iv) and (v) below are not
considered sales within the meaning of Rule 145 of the Securities Act of
1933, as amended.
(iv) On March 15, 1995, Tellurian, Inc. (a South Carolina corporation)
declared a 98.52216749-for-1 stock split.
(v) On July 2, 1996, Tellurian, Inc. (a South Carolina corporation)
reincorporated in the State of Delaware through a merger into and with
Tellurian, Inc. (a Delaware corporation) with the Delaware corporation as the
surviving corporation. As a result of the merger, the Company issued 430,049
shares to Charles Powers, 297,908 shares to Ronald Swallow, 109,481 shares to
Richard Swallow, 9,852 shares to Sergei Doroshov, 16,748 shares to Donald
Wnageran, 49,261 shares to Stuart French, 49,261 shares to Ching-yuan Tung,
9,852 shares to Hitesh Amin, 9,852 shares to Lawson Nichols, 4,926 shares to
Jerry Plotczyk, 4,926 shares to Karyssa Plotczyk, 4,926
II-2
<PAGE>
shares to Richard Mathiesen, 2,958 shares to Mat Adams, 45,000 shares to John
Bruno, 15,000 shares to Douglas Spinosa, 200,000 shares to Dennis Giunta,
45,000 shares to Michael Wills, 125,000 shares to Joseph DeFalco, 45,000
shares to John Cioffoletti and 125,000 shares to Matthew Langdon.
ITEM 27. EXHIBITS
(a) Exhibits. The following exhibits have been previously filed unless
otherwise noted.
<TABLE>
<CAPTION>
Exhibit
No. Description
----------- ----------
<S> <C>
1 Amended Form of Agreement Among Underwriters, Underwriting Agreement and Selected Dealer Agreement.
2 Agreement and Plan of Merger; Certificate of Ownership and Merger (Delaware); Articles of Merger
(South Carolina)
3(a) Articles of Incorporation of Registrant
3(b) By-Laws of Registrant
4(a) Specimen of Common Stock
4(b) Form of Warrant Agreement including Form of Warrant
4(c) Form of Underwriter's Warrants
5 Opinion re: legality
10(a) Indemnification Agreement dated October 10, 1995 between Charles Powers and the Registrant and
an amendment thereto dated June 17, 1996
10(b) Assignment of Contract Rights dated October 9, 1995 between Charles Powers and the Registrant and
an amendment thereto dated June 17, 1996
10(c) Form of Employment Agreement to be entered into between Dr. Ronald Swallow and the Registrant
10(d) Form of Employment Agreement to be entered into between Stuart French and the Registrant
10(e) Lease for Facilities in Upper Saddle River, New Jersey
10(f) Transfer Technology Agreement dated January 1, 1996 between Voyager Graphics, Inc. and the Registrant
10(g) Agreement dated November 14, 1994 between TTY Graphics, Inc., Voyager Simulation Ltd. and the Registrant.
10(h) Letter Agreement dated May 26, 1995 between the Registrant and TTY Graphics, Inc. and amendment
thereto dated July 17, 1996.
10(i) Agreement dated November 5, 1991 by and among Greg Gustin, Pat Lowe as Trustee for the Estate of
Quantum Graphics, Inc. and TTY Graphics, Inc.
10(j) Assignment Agreement dated as of November 5, 1991 between TTY Graphics, Inc. and the Registrant
10(k) Letter Agreement dated August 1, 1996 and August 2, 1995 between Greg Gustin and the Registrant
10(l) Agreement dated July 23, 1996 between TTY Graphics, Inc. and the Registrant
10(m) 1996 Incentive and Non-Statutory Stock Option Plan
10(n) Promissory Note dated December 27, 1995, issued to Imafina S.A.
10(o) Promissory Note dated January 22, 1996 issued to Jericho Limited
10(p) Form of Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta, Karen Bulavinetz
and Alec McDonald
10(q) Form of Non-Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta, Karen Bulavinetz
and Alec McDonald
10(r) Common Stock Purchase Warrants dated December 27, 1995 issued to Imafina S.A.
10(s) Common Stock Purchase Warrants dated January 22, 1996 issued to Jericho Limited.
10(t) Letter dated March 19, 1996 between Eye Wonder Studios and the Registrant.
10(u) Consulting Agreement with J.W. Barclay & Co., Inc.
10(v) Merger and Acquisition Agreement with J.W. Barclay & Co., Inc.
10(w) Letter Agreement between the Registrant and Charles Powers*
10(x) Letter Agreement between the Registrant and Fightertown*
10(y) Letter agreement between the registrant, Voyager Graphics Inc, Voyager Simulation Company, Ltd. and
TTY Graphics, Inc.*
11 Earnings per share - See notes to financial statements
21 Subsidiaries of Registrant - None
23 Consent of Miller, Ellin & Co.*
27 Selected Financial Data
</TABLE>
- ------
* Filed herewith.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby further undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment of the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Company will provide to the Representative of the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Representative
to permit prompt delivery to each purchaser.
For determining any liability under the Securities Act, the Registrant
will treat the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this Registration Statement
as of the time the Commission declared it effective.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Upper Saddle River, State of New Jersey on the 29 day of October,
1996.
TELLURIAN, INC.
By: /s/ Stuart French
-----------------------------------
Stuart French, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signatures Titles Date
-------------------------- ------------------------------------- -------------------
<S> <C> <C>
/s/ Dr. Ronald Swallow Chairman of the Board, Chief October 29, 1996
------------------------- Executive Officer
Dr. Ronald Swallow
/s/ Stuart French President, Chief Financial and October 29, 1996
------------------------- Accounting Officer and a Director
Stuart French of the Company
/s/ Richard Swallow Secretary and a Director of the October 29, 1996
------------------------- Company
/s/ Richard Swallow
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. Description No.
----------- -----------
<S> <C> <C>
1 Amended Form of Agreement Among Underwriters, Underwriting Agreement and Selected Dealer
Agreement.
2 Agreement and Plan of Merger; Certificate of Ownership and Merger (Delaware); Articles of
Merger (South Carolina)
3(a) Articles of Incorporation of Registrant
3(b) By-Laws of Registrant
4(a) Specimen of Common Stock
4(b) Form of Warrant Agreement including Form of Warrant
4(c) Form of Underwriter's Warrants
5 Opinion re: legality
10(a) Indemnification Agreement dated October 10, 1995 between Charles Powers and the Registrant
and an amendment thereto dated June 17, 1996
10(b) Assignment of Contract Rights dated October 9, 1995 between Charles Powers and the Registrant
and an amendment thereto dated June 17, 1996
10(c) Form of Employment Agreement to be entered into between Dr. Ronald Swallow and the Registrant
10(d) Form of Employment Agreement to be entered into between Stuart French and the Registrant
10(e) Lease for Facilities in Upper Saddle River, New Jersey
10(f) Transfer Technology Agreement dated January 1, 1996 between Voyager Graphics, Inc. and the
Registrant
10(g) Agreement dated November 14, 1994 between TTY Graphics, Inc., Voyager Simulation Ltd. and
the Registrant.
10(h) Letter Agreement dated May 26, 1995 between the Registrant and TTY Graphics, Inc. and amendment
thereto dated July 17, 1996.
10(i) Agreement dated November 5, 1991 by and among Greg Gustin, Pat Lowe as Trustee for the Estate
of Quantum Graphics, Inc. and TTY Graphics, Inc.
10(j) Assignment Agreement dated as of November 5, 1991 between TTY Graphics, Inc. and the Registrant
10(k) Letter Agreement dated August 1, 1996 and August 2, 1995 between Greg Gustin and the Registrant
10(l) Agreement dated July 23, 1996 between TTY Graphics, Inc. and the Registrant
10(m) 1996 Incentive and Non-Statutory Stock Option Plan
10(n) Promissory Note dated December 27, 1995, issued to Imafina S.A.
10(o) Promissory Note dated January 22, 1996 issued to Jericho Limited
10(p) Form of Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta, Karen
Bulavinetz and Alec McDonald
10(q) Form of Non-Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta,
Karen Bulavinetz and Alec McDonald
10(r) Common Stock Purchase Warrants dated December 27, 1995 issued to Imafina S.A.
10(s) Common Stock Purchase Warrants dated January 22, 1996 issued to Jericho Limited.
10(t) Letter dated March 19, 1996 between Eye Wonder Studios and the Registrant.
10(u) Consulting Agreement with J.W. Barclay & Co., Inc.
10(v) Merger and Acquisition Agreement with J.W. Barclay & Co., Inc.
10(w) Letter Agreement between the Registrant and Charles Powers*
10(x) Letter Agreement between the Registrant and Fightertown*
10(y) Letter agreement between the registrant, Voyager Graphics Inc, Voyager Simulation Company, Ltd. and
TTY Graphics, Inc.*
11 Earnings per share - See notes to financial statements
21 Subsidiaries of Registrant - None
23 Consent of Miller, Ellin & Co.*
27 Selected Financial Data
</TABLE>
- ------
* Filed herewith.
<PAGE>
Charles Powers
2419 W. Sumter Ave.
Florence, SC 29502
October 3, 1996
Tellurian, Inc.
15 Industrial Avenue
Upper Saddle River, NJ 07458
Gentlemen:
This is to confirm that the Amendment to the Indemnification Agreement and the
Amendment to the Assignment of Contract Rights both effective on June 17, 1996
are hereby amended so that all references to August 1, 1997 now read November
1, 1997. Accordingly, upon receipt of an additional $61,200 from Tellurian, I
will not demand payment of the principal and interest owed to me until November
1, 1997.
/s/ Charles Powers
------------------------------------
Charles Powers
<PAGE>
[LETTERHEAD OF TELLURIAN]
The purpose of this document is to set forth in writing an agreement reached
between Tullurian and Fightertown.
1. Fightertown and Tellurian agree to maintain the 1994 purchase order for EAGLE
image generators as is.
2. Tellurian agrees to exchange the ten AT-200 image generators at the Lake
Forest facility with EAGLES, at no cost to Fightertown, within six weeks of the
date of this document.
3. After the purchase order, a cap of $7,500 per EAGLE will be placed on any
future Fightertown order. If it is determined that the Super EAGLE is to be
purchased, a cap of $10,000 is placed on that product. In either case,
Fightertown will receive the best pricing offered to any Tellurian customer,
regardless of volume.
4. Tellurian agrees to assist Fightertown personnel with the installation of the
EAGLES and the building of more efficient databases. Mat Adams will spend a
minimum of 5 days completing these tasks, at Tellurian's expense. Tellurian
represents that it has the ability to network a minimum of eight of its EAGLE
image generators without the use of the Fighternet card.
5. Tellurian will upgrade the BOP database within three months of the date
hereof to take full advantage of the EAGLE, at no cost to Fightertown. The
database will be the property of Fightertown Entertainment, Inc., and Tellurian
will be allowed to use the database for demonstration purposes only.
6. If Tellurian is engaged to do any engineering services for Fightertown,
there will be confidentiality agreements between both parties.
7. Tellurian will return the Silicon Graphics workstation to Fightertown.
8. Tellurian agrees not to engage in any LBE locations that mirror the
"Fightertown method" of operating LBEs, including instruction by personnel in
flightsuits, the issuance of flight suits and helmets, the use of "FAM" flights,
the organization of training squadrons for additional tactics, and head to head
combat flying.
<PAGE>
9. Tellurian agrees to give Fightertown the "right of first refusal" to
participate with Tellurian in any LBE site or product in which Tellurian wishes
to utilize conventional fighter jet simulation. Fightertown's participation
could include any or all of the following: operations, manufacturing of
equipment, use of software, and use of the Fightertown name.
10. If Tellurian receives a purchase order from Eye Wonder Studios, Tellurian
agrees to enter into a contract with Fightertown to develop cockpits for the
location, if terms and conditions are reasonably acceptable to both parties.
11. This agreement will settle all issues with respect to the 1994 EAGLE
purchase order.
12. By virtue of this agreement, Fightertown hereby retracts the Wilson letter
dated 8/19/96.
/s/ Andrew Messing /s/ Stu French
- ----------------------------- -------------------------------
Fightertown Tellurian
Andrew Messing Stu French
Date: 10/22/96 Date: 10/22/96
<PAGE>
Tellurian, Inc.
15 Industrial Avenue
Upper Saddle River, NJ 07458
Voyager Graphics October 28, 1996
#2 Tze Chiang 3rd Road
Chungli Industrial Park
Chungli, Taoyuan, Taiwan
Republic of China
Att: Dr. K. Yang, President
Gentlemen:
Pursuant to Section 2.5 of the Technology Transfer Agreement
dated January 1, 1996 between Voyager Graphics Inc. and Tellurian, Inc.,
Tellurian is entitled to receive a project fee of $1,500,000 pursuant to a
payment schedule as provided therein. As you are aware, Tellurian has entered
into separate agreements to pay $500,000 to Voyager Simulation Company, Ltd. and
$150,000 to TTY Graphics Inc. This letter shall serve to confirm our agreement
for you to make payments on our behalf directly to Voyager Simulation Company
Ltd. and TTY Graphics Inc. up to the maximum amounts stated above so that the
net project fee to be ultimately paid to Tellurian will be $850,000.
Very truly yours,
TELLURIAN INC.
By /s/ Ronald J. Swallow
----------------------------
Ronald J. Swallow
Chief Executive Officer
Agreed to and Accepted:
VOYAGER GRAPHICS INC.
By /s/ Dr. K. Yang
-------------------------
Dr. K. Yang, President
By signing below, Voyager Simulation Company, Ltd. agrees to
look solely to Voyager Graphics Inc. to make payment of the $500,000 required to
be paid to it pursuant to Tellurian's agreement with Voyager Simulation Company,
Ltd. dated November 14, 1994 and agrees to release Tellurian from any
responsibility to make such payments.
AGREED TO AND ACCEPTED BY:
VOYAGER SIMULATION COMPANY, LTD.
By /s/ Yen Chen Lee
-------------------------
(Authorized Officer)
By signing below TTY Graphics, Inc. agrees to look solely to
Voyager Graphics Inc. to make payment of the $150,000 required to be paid to it
pursuant to Tellurian's agreement with TTY Graphics, Inc. dated May 26, 1995 as
amended July 17, 1996, and agrees to release Tellurian from any responsibility
to make such payments.
AGREED TO AND ACCEPTED BY:
TTY GRAPHICS, INC.
By /s/ Ching-Yuan Tung
- -----------------------------
Ching-Yuan Tung, President
<PAGE>
EXHIBIT 23.1
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INTERNATIONAL PLAZA
750 LEXINGTON AVENUE, NEW YORK, N.Y. 10022-1200
------
(212) 750-9100
------
FAX: (212) 750-2727
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus constituting part of
this Registration Statement on Amendment No. 1 to Form SB-2 of Tellurian,
Inc. of our report dated March 29, 1996, except Note 1 which is July 2, 1996,
Note 10 which is dated August 2, 1996 and Note 5 which is dated October 3,
1996, relating to the financial statements of the Company for the years ended
December 31, 1995 and 1994.
We also consent to the reference to us under the heading "Experts".
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
October 30, 1996
