<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21645
Tellurian, Inc.
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(Exact name of Regristrant as specified in its charter)
Delaware 22-3451918
- ---------------------------------------- ----------
(State or other jurisdiction (IRS Employer of
incorporation or organization) Identification No.)
300K Route 17 South
Mahwah, New Jersey 07430
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (201) 529-0939
---------------
None
------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No .
--- ---
The number of shares issued of the Registrant's Common Stock, as of September
30, 1997 was 3,025,000 shares of Common Stock.
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 3
September 30, 1997 (Unaudited) and
December 31, 1996
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . 4
Nine and Three Months ended September 30, 1997
and September 30, 1996 (Unaudited)
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . 5
Nine Months ended September 30, 1997
and September 30, 1996 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT 27 . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
----------------- -----------------
(Unaudited) (a)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 394,515 $ 1,761,186
Marketable Securities 0 968,722
Accounts Receivable, net of allowance for
doubtful accounts of $10,000 and $115,000, respectively 61,436 19,362
Inventories 433,696 287,851
Prepaid Consulting Fees 74,625 74,625
Prepaid Expenses and Other Current Assets 118,041 13,856
----------- -----------
Total Current Assets 1,082,313 3,125,602
----------- -----------
PROPERTY AND EQUIPMENT- at cost
less accumulated depreciation 3,063,306 206,176
----------- -----------
OTHER ASSETS:
Security Deposits 127,591 47,750
Prepaid Consulting Fees 6,219 62,187
Deferred Costs 16,934 50,000
Marketable Securities 0 1,006,664
----------- -----------
Total Other Assets 150,744 1,166,601
----------- -----------
$ 4,296,363 $ 4,498,379
=========== ===========
CURRENT LIABILITIES:
Accounts Payable $ 1,387,879 $ 49,754
Accrued Expenses 110,033 60,020
Payroll Payable 2,952 98,399
Payroll Taxes Payable 0 34,494
Consulting Fees Payable 0 46,594
Notes Payable 363,765 0
Notes Payable--Related Parties 496,736 496,736
Interest Payable--Related Parties 337,464 315,306
Deferred Revenue 96,115 80,448
----------- -----------
Total Current Liabilities 2,794,944 1,181,751
=========== ===========
STOCKHOLDERS' EQUITY:
Common Stock--$.01 par value
Authorized - 10,000,000 shares
Issued and Outstanding - 3,025,000 shares 30,025 30,025
Additional Paid-in Capital 6,345,387 6,345,387
Accumulated Deficit (4,873,993) (3,058,784)
----------- -----------
Total Stockholders' Equity 1,501,419 3,316,628
----------- -----------
$ 4,296,363 $ 4,498,379
=========== ===========
</TABLE>
(a) The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that time.
The accompanying notes are an integral part of the financial statements.
Page 3
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 370,701 $ 812,572 $ 71,085 $ 270,288
COST OF GOODS SOLD 445,304 106,349 233,224 24,290
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (74,603) 706,223 (162,139) 245,998
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and Development 583,367 567,740 185,524 292,710
Selling 271,573 66,432 110,416 13,301
General and Administrative 894,083 311,576 107,873 131,679
----------- ----------- ----------- -----------
1,749,023 945,748 403,813 437,690
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,823,626) (239,525) (565,952) (191,692)
----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSES:
Other Income 50,917 13,397 0 4,686
Interest Expense (7,853) (44,389) (4,159) (18,047)
Interest Expense--Related Parties (34,647) (43,424) (10,049) (13,878)
----------- ----------- ----------- -----------
8,417 (74,416) (14,208) (27,239)
----------- ----------- ----------- -----------
NET LOSS $(1,815,209) $ (313,941) $ (580,160) $ (218,931)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.60) $ (0.20) $ (0.14) $ (0.15)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,025,000 1,600,000 3,025,000 1,450,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 4
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,815,209) $ (313,941)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 117,894 14,002
Amortization of Deferred Debt -- 64,109
Changes in Assets and Liabilities
Restricted Cash -- (9,199)
Accounts Receivable (42,074) (129,362)
Inventories (155,845) (81,352)
Prepaid Expenses and Other Current Assets (94,185) 4,311
Deferred Costs 50,000 --
Security Deposits (79,841) (2,637)
Prepaid Consulting Fees 55,968 --
Accounts Payable 1,338,125 98,848
Accrued Expenses 50,013 136,820
Payroll Payable (95,447) 100,884
Payroll Taxes Payable (34,494) (176,610)
Consulting Fees Payable (46,594) (47,661)
Interest Payable--Related Parties 22,158 43,255
Deferred Revenue 15,667 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (713,864) (298,533)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (2,987,024) (24,132)
Sale of Marketable Securities 1,975,386 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,011,638) (24,132)
----------- -----------
NET CASH FROM FINANCING ACTIVITIES:
Proceeds from notes payable 375,765 0
Proceeds from issuance of warrants in connection
with private placement 0 28,000
Proceeds from notes payable--related parties 0 45,494
Repayments of notes payable--related parties 0 (160,000)
Repayments of notes payable--other 0 (500)
Proceeds from long-term debt 0 703,000
Payments of deferred offering costs (16,934) (326,183)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 358,831 289,811
----------- -----------
NET CHANGE IN CASH (1,366,671) (32,854)
CASH-- Beginning 1,761,186 39,130
----------- -----------
CASH-- Ending $ 394,515 $ 6,276
=========== ===========
</TABLE>
Page 5
<PAGE>
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 16,842 $ 9,000
Cash Paid for Income Taxes $ -- $ --
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of property and equipment through issuance
of note payable $ 72,464 $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1--Presentation Basis
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1996 which were included in its Form 10-K filing dated April 15,
1997. Such statements should be read in conjunction with the data herein.
NOTE 2--Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at September 30, 1997
and the consolidated statements of operations and cash flows for the three and
nine months ended September 30, 1997 and 1996 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.
NOTE 3--Minority Interest in Subsidiary
In March 1997 the Company formed a subsidiary, Cyberport Niagara,
Inc., in the Province of Ontario, Canada, in which the Company holds an 87.5
percent interest. No minority interest in this corporation is reflected at
June 30, 1997 since the loss applicable to the minority interest exceeds the
minority interest in the equity capital of the corporation. In the fourth
quarter of 1997, the Company acquired the balance of the interest in
Cyberport.
On March 24,1997 the Company formed a subsidiary, Cyberport
International, Inc. ("CII") in the state of Delaware in which the Company held
a 96 percent interest. No minority interest in this corporation is reflected
at September 30, 1997 since the loss applicable to the minority interest
exceeds the minority interest in the equity capital of the corporation. In the
fourth quarter of 1997, the Company acquired the balance of the interest in
CII.
7
<PAGE>
NOTE 4---Stock Options
In June of 1997 the Company authorized stock options to two
individuals, Michael Hurd and David Turner, President and General Manager of
Cyberport Niagara, Inc, respectively. These options allow Mr. Turner to
purchase 500 shares of Cyberport stock for approximately 70 cents per share
($1.00 Canadian) and allow Mr. Hurd to purchase 2,000 shares of Cyberport
stock at approximately 70 cents per cents per share ($1.00 Canadian). Mr.
Turners options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options. The
remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares on
July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors or
in the employ of Tellurian on those dates. The options expire on June 30,
2007.
No options have been exercised as at September 30, 1997.
NOTE 5--Translation of Foreign Currency
The foreign currency financial statements of subsidiaries operating outside
the United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities at current
exchange rates; and stockholders equity at historical rates. Translation
adjustments were accumulated but have not been included as a separate
component of equity at September 30, 1997 because they have been deemed to be
immaterial.
NOTE 6--Inventories
Inventories consist of the following:
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Raw materials $249,339 $217,663
Work-in-process 115,000 43,942
Finished Goods 69,357 26,246
-------- --------
$433,696 $287,851
======== ========
NOTE 7--Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY AND ITS SUBSIDIARY
RECENT DEVELOPMENTS
Cyberport
During the third quarter of 1997, the Company conducted limited operations in
its subsidiary, Cyberport Niagara (Cyberport). Although the limited opening in
late June, 1997 was not able to have any significant impact on the revenue for
the third quarter due to the lead time required to book groups and to enter
the Niagara regional marketing system, Management believes that it was
essential to open the facility in close to final form before the tourist
months of July and August arrived. While Management does not believe that the
traffic flow from the casual tourists in Niagara Falls will provide enough
revenue to ensure the viability of Cyberport , Management believes that the
exposure to the summer tourists was critical to its plans to develop the group
tour business for the fall and subsequent seasons. The exit interviews of
those people attending Cyberport have been extremely encouraging as has the
early interest shown by tour groups controlling important segments of the
Niagara Falls market.
The Company promoted the facility in general and the Tellurian experience
extensively during the third quarter of 1997. Numerous "free-of-charge" events
were run in order to hasten the awareness of the facility to the tourism
industry in the Niagara region. Efforts concentrated on ensuring strong
relationships with group tour operators and guaranteeing prime exhibit spots
in the many tourist information booths in and around the Niagara area for the
1998 season. As a result, revenues for the third quarter were not strong, but
Management remains confident that the marketing programs and overall direction
of Cyberport remains on target. Management is particularly encouraged by the
number of sales leads it has received for Tellurian products as a result of
the promotional efforts done by Cyberport staff.
The Company believes that its ability to operate this facility successfully
depends on elements both within and outside of its control, including the
success of its own products incorporated into this venture as well as the
competition which it faces from existing and new entrants into the tourism
market in Niagara Falls. Some of the competitors have more experience than the
Company in opening and managing tourist facilities and many have more
financial resources than the Company. There can be no assurance that the
project will perform successfully.
The Company expects that a significant portion of its future revenues are
dependent upon the successful operation of the Cyberport facility and the
sales leads for EAGLE image generators that this venture may create.
9
<PAGE>
Acquisition of Minority Interest in Cyberport Niagara and Cyberport
International, Inc.
In March 1997 the Company formed a subsidiary, Cyberport Niagara, Inc., in the
Province of Ontario, Canada, in which the Company held an 87.5 percent
interest. In the fourth quarter of 1997, the Company acquired the remaining
interest in Cyberport at a nominal price due to the minority interest's
inability to meet its' capital obligations to Cyberport.
On March 24,1997 the Company formed a subsidiary, Cyberport International,
Inc. ("CII") in the state of Delaware in which the Company held a 96 percent
interest. In the fourth quarter of 1997, the Company acquired the balance of
the interest in CII from the minority interest as part of a package that
allowed the Company to acquire the interest in Cyberport Niagara as well for
the nominal price of $5,000.
In June of 1997 the Company authorized stock options to two individuals,
Michael Hurd and David Turner, President and General Manager of Cyberport
Niagara, Inc, respectively. These options allow Mr. Turner to purchase 500
shares of Cyberport stock for approximately 70 cents per share ($1.00
Canadian) per share and allow Mr. Hurd to purchase 2,000 shares of Cyberport
stock at approximately 70 cents per share ($1.00 Canadian) per share. Mr.
Turner's options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options.
The remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares
on July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors
or in the employ of Tellurian on those dates. The options expire on June 30,
2007.
No options have been exercised as at September 30, 1997.
The Virtual Reality Helmet
Management continues to be encouraged by the progress it is making in
completing the virtual reality helmet to be used in conjunction with its
proprietary image generators. The helmet is now ready for introduction to the
market. Working prototypes now exist which will be unveiled for the first time
at the IAAPA trade show in Orlando during November of 1997. The Company will
be offering the helmet based experience for delivery late in the first quarter
of 1998. However, the Company cannot be certain that the design principles it
has decided upon will be successful in the marketplace. While the initial
reports indicate that the product can be manufactured at a cost low enough to
allow the Company to market the helmet at favorable sales margins, the Company
cannot be sure that the marketplace will accept the product and the pricing
which the Company intends to utilize. Management recognizes that many
competitors are actively engaged in the design and manufacture of products
intended for this use. Many of these competitors have more experience in
helmet design and manufacturing that the Company does, and many of these
competitors have more financial resources to draw upon than the Company has.
There can be no assurance that the Company's design will be successful, nor
that the Company will find a ready market for the helmet.
10
<PAGE>
The Company expects that, if the helmet design is successful, this medium will
replace the larger and more expensive means of delivering the video and audio
images to its customers. Management believes that, if successful, the helmet
will represent a significant portion of its future revenue.
PLAN OF OPERATION
The Company continues to focus its efforts in the following three areas:
1. Finding and 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 Tourist Entertainment Centers (TEC) or Location
Based Entertainment Centers (LBE) for the sale and/or use of its virtual
reality game units while pursuing the sale of part of its investment in
Cyberport Niagara, Inc.;
2. Increasing revenues through marketing of its new EAGLE product now on
display at its Cyberport facility;
3. Marketing its virtual reality helmet with head tracking and products
utilizing the helmet technology.
Marketing of the new EAGLE image generator will be accomplished by directing
efforts towards three different customer groups:
1. the training and simulation market where Tellurian has been selling its
AT-200 unit;
2. the virtual reality game developer market through trade show exhibits,
advertisements and newsletters;
3. pursuing the interactive thrill ride market.
The Company intends to expand its customer base through trade show involvement
in the fourth quarter of 1997 at which it can demonstrate its EAGLE product
and its helmet technology. Also, the Company is actively pursuing sales leads
generated from the market recognition gained from the Cyberport operations.
The Company intends to continue its ongoing research and development efforts
and to expand and enhance the technical capability, design features and range
of its products.
Tellurian has designed and installed complete games units in its Cyberport
facility and intends to pursue this concept in developing future TEC or LBE
locations. Tellurian has financed the Cyberport facility utilizing a portion
of the proceeds of its recently completed public offering and is now actively
seeking investors and/or lenders to a) meet the remaining capital needs of the
venture and b) release some of Tellurians capital to allow it to pursue
subsequent opportunities. The Company has limited experience in owning,
financing and operating such centers, and is dependent in such areas upon
third parties to assist it or participate with it in completing such centers.
There can be no assurances that the Company will be successful in establishing
or entering into revenue sharing agreements or financing agreements for
Cyberport or any other such center or that it will be able to derive profits
from such operations.
11
<PAGE>
Results of Operations
Nine and Three Months Ended September 30, 1997 vs. September 30, 1996
Tellurian and its' subsidiary had net sales for the three months ended
September 30, 1997 of $71,085, a decrease of $199,203, or 73.7% from the
comparable period of the prior year. For the three months ended September 30,
1997, the Company's gross profit was a ($162,139), a decrease of $408,137 from
the prior year. The principal cause of this reduction was the completion of
the Voyager consulting contract at the end of 1996 and the opening of the
Cyberport subsidiary which resulted in the recognition of significant costs
accompanied by very low revenues. During the second quarter of 1997, the
Company did recognize approximately $200,000 of revenue with regard to the
Voyager activity in 1996 which could not be recognized in 1996 due to the
significant question regarding the likelihood of collection which existed at
that time.
Tellurian and its' subsidiary had net sales for the nine months ended
September 30, 1997 of $370,701, a decrease of $441,871, or 54.4% from the
comparable period of the prior year. For the nine months ended September 30,
1997, the Company's gross profit was a ($74,603), a decrease of $750,826 from
the prior year. The principal cause of this reduction was the completion of
the Voyager consulting contract at the end of 1996 and the opening of the
Cyberport facility.
Research and development activities for the three months ended September 30,
1997 was $185,524, representing a decrease of $107,186 over the respective
period of the prior year. The decrease in research and development activities
was partially due to the reduction in staff made late in the second quarter
and partially due to reduced purchasing of materials as the helmet product
became stabilized in design.
Research and development activities for the nine months ended September 30,
1997 was $583,367, representing an increase of $15,627 over the respective
period of the prior year. The increase in research and development activities
relates to the work on the virtual reality helmet earlier in the year.
Selling, general and administrative expenses for the three months ended
September 30, 1997 were $218,289, an increase of $73,299 or 50.6% from the
comparable period of the prior year. The increases in selling, general and
administrative expenses were partially due to the costs incurred in promotion
of the Cyberport facility, increased costs of professional services related to
the requirements imposed by virtue of the Company's recently concluded Initial
Public Offering, and rent on the new Company facility in Mahwah, New Jersey.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 were $1,165,656, an increase of $787,648 or 208.4% from the
comparable period of the prior year. The reasons for this increase in selling,
general and administrative expenses were noted in the paragraph above.
12
<PAGE>
Selling, general and administrative expenses expressed as a percentage of
sales was approximately 307.1% for the three months ended September 30, 1997,
an increase of approximately 253.5% from the comparable period of the prior
year. Selling, general and administrative expenses were approximately 314.4%
for the nine months ended September 30, 1997, an increase of 267.9% from the
comparable period of the prior year. The increased levels of administrative
effort required as noted above coupled with the reduced revenue due to the
completion of the Voyager contract caused this result.
For the three months ended September 30, 1997, interest expense was $14,208 as
compared to $31,925 for the comparable period of the prior year. For the nine
months ended September 30, 1997, interest expense was $42,500 compared to
$87,813 for the comparable period of the prior year. This decrease was due to
the repayments of debt made following the completion of the Company's Initial
Public Offering.
The Company's net loss for the three months ended September 30, 1997 was
$580,160 as compared to a loss of $218,931 for the comparable period of the
prior year. The Company's net loss for the nine months ended September 30,
1997 was $1,815,209 as compared to a loss of $313,941 for the comparable
period of the prior year. The increase in the net loss was primarily due to
increases in levels of activity in the development of Cyberport Niagara,
increased cost of research and development activities, and the loss of
revenues from the Voyager contract.
Liquidity and Capital Resources
During the nine months ended September 30, 1997 and 1996 net cash of $713,864
and $298,533, respectively, was used in operating activities. The net loss
from operations for the period ended September 30, 1997, $1,815,209, was
partially offset by increases in accounts payable of $1,338,125. The primary
uses of cash were the increase in inventory and the increase in security
deposits principally related to the Cyberport facility.
During the nine months ended September 30, 1997 and 1996 net cash of
$1,011,638 and $24,132, respectively was used in investing activities. The
1997 activity relates primarily to the construction of the Cyberport facility
and the acquisition of various display assets for that facility, net of the
sale of marketable securities.
During the nine months ended September 30, 1997 and 1996, net cash was
provided by financing activities totaling $358,831 and $289,811, respectively.
The 1997 activity reflects financing notes obtained for the Cyberport
subsidiary as well as proceeds of notes used to finance the acquisition of
various property and equipment.
13
<PAGE>
The Company has experienced some delays in completing the virtual reality
helmet and has suffered from its inability to attract a major investor to the
Cyberport project as planned. These two events, coupled with the limited
revenues from sales of the Company's existing products and less than expected
receipts from Cyberport, have caused a continued drain of the Company's
limited capital . As a result, Management has been forced to devote
significant efforts to raising capital in support of the plan of operations.
While many potential investors have been approached about purchasing an interest
in Cyberport, the financial difficulties that the subsidiary is experiencing due
to lower than expected revenues and to the failure of a third party to honor
certain financing obligations, has made it difficult to complete the sale of any
of the Company's Cyberport interest.
Further, management believes that the introductory marketing costs of the
virtual reality helmet and the working capital required to be able to meet
expected delivery needs will require the Company to employ as much as $500,000
of additional capital. If the Company is not successful in obtaining those
funds, the introduction of the helmet will be negatively impacted and the
Company's operating results will be adversely impacted.
At September 30, 1997, Tellurian has a deficit working capital of $1,712,631.
The Company is currently meeting its cash requirements from limited cash
generated from operations and limited cash resources that are left from the
proceeds of Tellurian's initial public offering. The Company is dependent upon
immediate and substantial additional revenues from operations, the sale of up
to a majority interest in its Cyberport facility, private financing or the
success of a proposed exchange offering to be made to existing warrant holders
to meet its obligations as a going concern.
With respect to a possible sale of up to majority interest in Cyberport, the
Company has active negotiations with various firms interested in acquiring the
Company's Cyberport interest as well as the right to open other Cyberport
licensed facilities.
Regarding the proposed exchange offering to existing warrant holders, the
Company has filed a Registration Statement with the Securities and Exchange
Commission (file no. 333-36871) which describes the terms of the proposed
offering. After the Registration Statement has been amended satisfactorily in
response to comments received by the Company from the Staff of the Securities
and Exchange Commission, the Company expects to have the Registration
Statement declared effective. Immediately afterwards, warrant holders would
receive a Prospectus and a letter of transmittal detailing the definitive
terms of the offer pursuant to which warrant holders would be given the option
to exchange each warrant and cash (presently not expected to exceed $5.00 per
warrant tendered) for a Unit certificate, each Unit consisting of one share of
Common Stock and one Warrant identical to the warrants tendered. The Unit
certificate is not anticipated to be detachable for six months from the
completion of the exchange offer without the consent of the Company. No
assurances can be given that the Registration Statement covering the proposed
exchange offer will be declared effective by the Commission or, if declared
effective, that the proposed exchange offer will result in substantial net
proceeds to the Company.
14
<PAGE>
The foregoing represents the Company's plan to meet its cash requirements for
the next 12-15 months. In light of the Company's working capital deficit and
continued negative operating cash flows, the Company is dependent upon the
success of this plan in order to continue as a going concern. The unaudited
financial statements contained herein have been prepared by management on a
going concern basis.
In the event that cash generated from the above plan are insufficient to meet
the existing obligations and ongoing expenses of the Company (including
Cyberport Niagara), the Company may need to seek reorganization protection under
applicable bankruptcy laws.
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 September 30, 1997 Tellurian has
delivered 18 EAGLES to Fightertown and has a backlog of 22 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. In March 1994,
Tellurian has also 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 Fightertown's
method of operating LBE's.
In November 1997, the Company entered into a settlement agreement with
Fightertown Entertainment, Inc. Tellurian has had an order and cash deposit
from Fightertown for several years which was, at the time it was received, a
vote of confidence in the Tellurian vision as seen at that time. Due to the
Company's financial difficulties prior to the Initial Public Offering completed
in November 1996, Tellurian was unable to complete the EAGLE and deliver units
to Fightertown until late in the second quarter of 1997. This extensive delay
caused significant strain between the two companies which recently resulted in
Fightertown initiating a lawsuit in The United States District Court, Central
District of California against Tellurian alleging various breaches of good faith
and demanding, among other things, return of their deposit plus interest on
those funds.
During the third quarter of 1997 and extending into November 1997,
the Company has worked diligently to complete installation of the first group
of EAGLES that were shipped to Fightertown and restore the confidence and
working relationship that had previously existed between the two companies. In
November 1997, the Company signed a mutual release and settlement agreement
(the "Agreement") with Fightertown Entertainment, Inc. ("Fightertown") to
release all claims the parties have against each other except for obligations
created by the Agreement. The terms of the Agreement include the following:
(1) The Company must deliver to Fightertown twenty-five (25) EAGLE units
between November 13, 1997 and January 31, 1998 and relinquish all ownership
interest in eight AT-200 units currently in Fightertown's possession. The
Company accepts all payments (i.e. the remaining deposit of $80,448) made to
date in full payment of the 25 EAGLES; (2) Fightertown will have the right to
purchase up to thirty (30) additional EAGLE units at any time on or before
June 30, 1999 at a price of $6,000 per unit and delivery terms as specified in
the Agreement; (3) The Company agrees to pay Fightertown $20,000 no later than
January 31, 1998 for future consulting services regarding the performance of
Tellurian's EAGLES; (4) The Company agrees to pay Fightertown $67,500 in three
installments of $22,500 on August 15, 1998, August 15, 1999 and August 15,
2000. The payments are for the prominent use and display of the Fightertown
name at the Cyberport facility, Fightertown's expertise in the theming and
running of air battle games and the Company's acknowledgement that the
Tellurian fight experience at Niagara Falls was modeled after Fightertown's
flight simulation experience; (5) The Company agrees not to build a jet
fighter based experience in which the image generators are housed in the
fuselage resembling any type of airplane or in any way intended to be used in
an experience similar to that which Fightertown employs. The Company may offer
jet fighters in free standing game units designed for arcades; (6) The Company
agrees to offer its new virtual reality helmet and new generation EAGLE which
would employ textured images to Fightertown for its own use at a price such
that no other customer is paying a lower price (except for a limited number of
promotional units sold or placed to potentially new users of these products);
and (7) The Company is executing a stipulated judgment in the amount of
$500,000 in favor of Fightertown to be entered against the Company should the
Company fail to comply with any term of this Agreement. In the event of a
breach of the Agreement, Fightertown must notify the Company of the breach and
give the Company 15 days to cure the default before filing the stipulated
judgment.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Legal Proceedings Against Tellurian and Cyberport Niagara, Inc. A group of
contractors who performed work on Cyberport facility in Niagara Falls,
Ontario, Canada have alleged that they have not been fully paid for the work
performed, estimated to be approximately $1,400,000 U.S. dollars. Cyberport
management has acknowledged that some amounts do in fact remain unpaid, but
believes that a significant portion of the funds owed should have been paid by
the owner and lessor of the facility under an agreement entered into as part
of the lease agreement. Tellurian has also been named in this contractor
action demanding collection. Management believes that this matter does not
directly involve Tellurian since it has not been a party to any of the
contractual agreements made in Canada.
Management has reached an agreement in principle with the representatives of
the creditor group which, assuming the necessary legal documentation can be
created in a manner satisfactory to all parties, should result in a resolution
of this matter in a form acceptable to Management and to the creditors. This
agreement in principle may result in some or all of the debt being converted
to restricted stock and it may result in some portion of the proceeds of this
offering being used to satisfy some or all of the debt. Management cannot
estimate the components of the final resolution of this matter at this time.
As of the filing date, the verbal agreement is in the process of formal
documentation by attorneys for the various companies involved.
Item 2. Changes In Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
During the quarter ended September 30, 1997 no form 8-K were filed or required
to be filed.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLURIAN, INC.
------------------------------
(Registrant)
Dated: December 16, 1997
/s/ Stuart French
------------------------------
Stuart French, President
/s/ Michael Hurd
------------------------------
Michael Hurd, Chief Financial
and Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND STATEMENTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 394,515
<SECURITIES> 0
<RECEIVABLES> 71,436
<ALLOWANCES> 10,000
<INVENTORY> 433,696
<CURRENT-ASSETS> 1,082,313
<PP&E> 3,251,085
<DEPRECIATION> 187,779
<TOTAL-ASSETS> 4,296,363
<CURRENT-LIABILITIES> 2,794,944
<BONDS> 0
0
0
<COMMON> 30,025
<OTHER-SE> 1,471,384
<TOTAL-LIABILITY-AND-EQUITY> 4,296,363
<SALES> 370,701
<TOTAL-REVENUES> 370,701
<CGS> 445,304
<TOTAL-COSTS> 445,304
<OTHER-EXPENSES> 1,749,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,500
<INCOME-PRETAX> (1,815,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,815,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,815,209)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
