<PAGE>
As filed with the Securities and Exchange Commission on October 1, 1997.
File No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
TELLURIAN, INC.
(Name of small business issuer in its charter)
<TABLE>
<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.
300 K Route 17 South
Mahwah, N.J. 07430
(201) 529-0939
(Address and telephone number of principal executive offices)
----------
Stuart French
Tellurian, Inc.
300 K Route 17 South
Mahwah, N.J. 07458
(201) 529-0939
(Address and (Name, address and telephone number of agent for service)
----------
Copies of all communications should be sent to:
Steven Morse, Esq.
Lester Morse P.C.
111 Great Neck Road
Great Neck, NY 11021
(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]
<PAGE>
Pursuant to Rule 429, this Registration Statement is a Post-Effective Amendment
to Form SB-2 Registration Statement, File No. 333-9741, which relates to the
following: (i) 5,127,500 shares issuable upon exercise of warrants; (ii) 185,000
shares issuable upon exercise of Underwriter's Stock Warrants; (iii) 185,000
shares issuable upon exercise of Warrants underlying Underwriter's Warrants;
(iv) 185,000 Warrants issuable upon exercise of Underwriter's Warrants, and (v)
3,000,000 Warrants to be sold by Warrant Holders as selling security holders.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
Proposed
Maximum
Amount to Offering Proposed Maximum
Title of Each Class of Securities to be be Price Per Aggregate Offering Amount of
Registered Registered Unit (1) Price (1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par 370,000 %5.00 1,850,000 $ 560.61
value $.01 per share ("Common
Stock") (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Units, consisting of one 1,300,000 5.00 6,500,000 1,969.70
share of Common Stock and one
redeemable Common Stock
Purchase Warrants (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock 1,300,000 ___ ___ ___ (5)
included in Units (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Warrants included in Units 1,300,000 ___ ___ ___ (5)
(3)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying 1,300,000 6.00 7,800,000 2,363.64
Warrants (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Totals $16,150,000 $4,893.95
==================================================================================================================================
</TABLE>
- --------------
(1) Total estimated solely for the purpose of determining the registration fee.
(2) Includes 370,000 shares to be offered by Selling Stockholders.
(3) Reserved for issuance pursuant to terms of issuer Tender Offer.
(4) Reserved for issuance upon exercise of Warrants that may be issued in
connection with the terms of the issuer's Tender Offer.
(5) No fee due under Rule 457(g) since the Warrants are registered
contemporaneously with the Common Stock underlying the Warrants.
ii
<PAGE>
Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number of
securities issuable upon exercise of the Representative's Warrants 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.
iii
<PAGE>
TELLURIAN, INC.
Cross Reference Sheet
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Location of Caption in Prospectus
- --------------------------------- ---------------------------------
<S> <C>
1. Front of Registration Statement and
Outside Front Cover Page of Prospectus Outside Cover Page
2. Inside Front and Outside Back Cover Inside Front and Outside
Pages of Prospectus Back Cover Pages
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Risk Factors
6. Dilution Dilution
7. Selling Security Holders Selling Stockholders and Warrant
Holders
8. Plan of Distribution Outside Cover Page; The Offering by the
Company
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Beneficial Security Ownership of Certain Beneficial
Owners and Management Owners and Management;
Certain Transactions
12. Description of the Securities Description of Securities
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; Certain Transactions
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation Analysis of Financial Condition
and Results of Operations
18. Description of Property Business
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and Cover Page; Risk Factors;
Related Stockholder Matters Market Information
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure *
</TABLE>
- -----------------
* Omitted because item is inapplicable or answer is in the negative.
iv
<PAGE>
Subject to Completion, dated October 1, 1997. PROSPECTUS
TELLURIAN, INC.
1,300,000 UNITS OFFERED TO THE HOLDERS
OF 5,127,500 COMMON STOCK PURCHASE WARRANTS
This Offer shall commence on ___________, 1997 and expire 20 business days
thereafter on ____________, 1997, unless extended by the Company.
This Prospectus relates to: (I) 5,127,500 shares of Common Stock, $.01
par value (the "Common Stock") of Tellurian, Inc. (the "Company" or "Tellurian")
issuable upon exercise of 5,127,500 Redeemable Common Stock Purchase Warrants
(the "Warrants"), (ii) the resale 3,000,000 of the 5,127,500 Warrants being sold
by certain Warrant Holders (the Warrant Holders"), (iii) 185,000 shares of
Tellurian Common Stock issuable upon exercise of Underwriter's Stock Warrants at
an initial exercise price of $8.25 per share and the resale of the 185,000
shares of Common Stock by certain selling stockholders (the "Selling
Stockholders"), (iv) 185,000 warrants (the "Underlying Warrants") issuable upon
exercise of Underwriter's Warrants at an initial exercise price of $.4125 per
warrant, which Underlying Warrants are identical to the Warrants except that
they are exercisable at an initial exercise price of $9.90 per share, and (v)
the resale of 185,000 shares of Common Stock issuable upon exercise of the
Underlying Warrants by the Selling Stockholders. The Prospectus also relates to
the Issuer tender offer described below pursuant to which 1,300,000 Units may be
issued to accepting Warrant Holders. The Company will not receive any proceeds
from the resale of Warrants by the Warrant Holders or Common Stock by Selling
Stockholders. See "Warrant Holders" and "Selling Stockholders."
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
commencing on November 5, 1996 and expiring on November 5, 2001. Commencing
November 5, 1997, the Warrants may be redeemed by the Company, at $.30 per
Warrant if certain conditions are met. See "Description of Securities -
Warrants."
This Issuer tender offer (the "Offer") is on the following terms (see
"The Offer by the Company" for a complete description of the terms of the
Offer): Effective November __1997, Warrant holders who tender their Warrants and
$_____ per tendered Warrant (the "Offer Price") during the tender offer period
(as defined below), will receive one Unit for each Warrant tendered. Each Unit
consists of one share of Tellurian Common Stock and one new warrant identical to
the Warrants. The Common Stock and Warrant included in the Unit will not be
detachable or separately transferable from each other except to exercise the
Warrants until ____, 1998 (six months after the expiration date of the tender
offer) or earlier if consented to by the Company (the "Separation Date"). After
the Separation Date, Unit holders must submit their Unit certificates to the
exchange agent (as defined herein) to be exchanged for Common Stock and Warrant
certificates. The "Tender Offer Period" will commence on ________, 1997 and
expire 20 business days thereafter on December __, 1997 (the "Expiration Date"),
subject to the discretion of the Company
<PAGE>
to extend the Offering for up to an additional 10 business days. Any person
desiring to tender Warrants pursuant to the Offer, must submit the Warrants to
Continental Stock Transfer & Trust Company (the "Exchange Agent"), 2 Broadway,
19th Floor, New York, NY 10004, together with a certified check, official bank
check or money order in the amount of the Offer Price made payable to
"Continental Stock Transfer as Exchange Agent for Tellurian, Inc." and a
completed and executed "Letter of Transmittal" which accompanies this
Prospectus. In the event that Warrant holders tender more than 1,300,000
Warrants pursuant to the Offer during the Tender Offer Period, Tellurian intends
to accept Warrants tendered on a pro rata basis, disregarding fractions,
according to the number of Warrants tendered by each Warrant holder.
If a holder of Warrants does not elect to tender Warrants pursuant to
the terms of the Offer, such holder may exercise such Warrants under the present
terms of the Warrant as described above and in "Description of Securities."
Warrant holders who desire to exercise their Warrants pursuant to the current
terms of the Warrant should execute the Subscription Form on the back of their
Warrant and submit same together with an appropriate check made payable to
"Tellurian, Inc." to Continental Stock Transfer & Trust Company at the address
set forth herein.
The terms of the Offer, the Offer Price and other terms of the Units
were arbitrarily determined by the Company and do not necessarily bear any
direct relationship to the Company's assets, book value per share or other
generally accepted criteria of value. See "Risk Factors." The Common Stock and
Warrants trade on the NASDAQ SmallCap Market ("NASDAQ SmallCap") under the
symbols "TLRN" and "TLRNW", respectively. There is presently no public market in
the Units and no assurances can be given that a public market will develop in
the Units in the over-the-counter market or otherwise. The Company does not
intend to list the Units for trading on the NASDAQ Small Cap Market. On the
Separation Date, it is anticipated that the Common Stock and Warrants included
in the Units will trade on NASDAQ under the above referenced symbols. See "Risk
Factors."
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 11.
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>
The following legend should appear in red on the left side of the cover 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."
The date of this Prospectus is _________, 1997.
<PAGE>
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 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 is required to file
proxy statements and other information with the Commission.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form SB-2, File No. 333-_____ (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. Materials filed electronically
through EDGAR may also be accessed through the SEC's home page on the World Wide
Web at http://www.sec.gov.
RESTRICTION IN CERTAIN STATES
THE OFFER TO WARRANT HOLDERS WITH RESPECT TO THE UNITS TO BE ISSUED UPON THE
TENDER OF THE WARRANTS AND SUBSEQUENT ACCEPTANCE BY THE COMPANY IS EXPECTED TO
BE QUALIFIED OR IS BELIEVED TO BE EXEMPT FROM QUALIFICATION IN THE FOLLOWING
JURISDICTIONS:________________________. RESIDENTS OF OTHER JURISDICTIONS MAY NOT
TENDER THE WARRANTS AND PURCHASE THE UNITS OFFERED HEREBY UNLESS THEY CAN
DEMONSTRATE TO THE SATISFACTION OF THE COMPANY THAT THEY SATISFY CERTAIN
SPECIFIC CRITERIA FOR EXEMPTION SET FORTH IN THE APPLICABLE STATES SECURITIES
LAWS. PROSPECTUSES WILL BE MAILED TO ALL WARRANT HOLDERS OF RECORD AS OF THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OTHER THAN
THOSE TO WHICH IT SPECIFICALLY RELATES, OR A SOLICITATION OF AN OFFER TO BUY
FROM ANY PERSON OR ENTITY IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
4
<PAGE>
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. SUCH
STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE
COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS.
FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS". INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY HAS NO OBLIGATION TO RELEASE PUBLICLY ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR
CIRCUMSTANCES ARISING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
EXCHANGE RATIO
The Company has operations in Ontario, Canada. All dollar amounts in
this Prospectus have been converted into U.S. Dollars (unless specified
otherwise) based on an exchange ratio of $1 Canadian for $.72 U.S.
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.
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" includes 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.
This Prospectus does not reflect the possible issuance of up to an estimated
300,000 shares of Tellurian's Common Stock that may be issued to settle certain
legal proceedings after the completion of the Tender Offer Period. An investment
in the Securities offered hereby involves a high degree of risk and immediate
substantial dilution. See "Risk Factors", "Business-Legal Proceedings" 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
5
<PAGE>
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. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and 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.
In 1994, the Company began 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 Eagle is available in multiple resolution formats and 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 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, Tourist Entertainment Centers ("TEC") and Location Based Entertainment
Centers ("LBE"). The TEC differs from the LBE in that the market of the TEC is
intended to be the family vacationer rather than the local, repeat customer.
Utilizing the "EAGLE" technology, Tellurian has developed a prototype
helmet product to complement the Eagle for the entertainment market. This new
product is expected to be marketed and sold on two levels. The first level of
marketing will be for Tellurian to build its own complete game units either for
sale or use in establishing one or more joint ventures, or revenue share
agreements with owners and operators of TEC's or LBE's. The second level will be
components for other virtual reality game manufacturers.
See "Business."
In March 1997, Tellurian formed Cyberport Niagara Inc., an Ontario,
Canada company, as a subsidiary for the purpose of establishing a TEC in Niagara
Falls, Ontario. This 40,000 square foot facility known as "Cyberport", which
opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as an 8,000 square foot
interactive attraction leased from the Ontario Science Centre, various original
movie sets leased from Universal Studios and an Egyptian built replica of the
treasures from the tomb of King Tut. Cyberport Niagara Inc is owned 87.5% by the
Company and 12.5% by a non-affiliated person as of September 15, 1997. Tellurian
is seeking to raise money to finance its operations and is attempting to sell up
to a majority interest in Cyberport to a third party. No assurance can be given
that the Company will be successful in this regard or, if successful, that such
sale would be on terms satisfactory to the Company.
6
<PAGE>
Tellurian also formed Cyberport International, Inc., a Delaware
corporation, for the purpose of franchising the Cyberport concept to third
parties. As of the date of this Prospectus, this subsidiary which is 96% owned
by Tellurian, is inactive.
Tellurian, Inc. is located at 300K Route 17 South, Mahwah, NJ 07430 and
its telephone number at this office is (201) 529-0939.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered This Prospectus relates to: (I) 5,127,500 shares of Common
Stock, $.01 par value (the "Common Stock") of Tellurian, Inc.
issuable upon exercise of 5,127,500 Redeemable Common
Stock Purchase Warrants (the "Warrants"), (ii) the resale of
3,000,000 of the 5,127,500 Warrants being sold by certain
Warrant Holders (the Warrant Holders"), (iii) 185,000 shares
of Tellurian Common Stock issuable upon exercise of
Underwriter's Stock Warrants at an initial exercise price of
$8.25 per share and the resale of the 185,000 shares of
Common Stock by certain selling stockholders (the "Selling
Stockholders"), (iv) 185,000 warrants (the "Underlying
Warrants") issuable upon exercise of Underwriter's Warrants
at an initial exercise price of $.4125 per warrant, which
Underlying Warrants are identical to the Warrants except that
they are exercisable at an initial exercise price of $9.90 per
share, and (v) the resale of 185,000 shares of Common Stock
issuable upon exercise of the Underlying Warrants by the
Selling Stockholders. This Prospectus also relates to
1,300,000 Units which may be issued to exchanging Warrant
Holders pursuant to the Offer. The Company will not receive
any proceeds from the resale of Warrants by the Warrant
Holders or Common Stock by Selling Stockholders. See
"Warrant Holders" and "Selling Stockholders."
Common Stock
outstanding before
offering 3,025,000 shares (1)
Use of Proceeds The net proceeds from the Offer or the exercise of Warrants
pursuant to their original terms will be applied toward working
capital and will be available for all corporate purposes. 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
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Prospectus and particularly the items set forth under "Risk
Factors" and "Dilution."
NASDAQ SmallCap Common Stock "TLRN"
Symbols (2) Warrants "TLRNW"
The Offer The Offer is on the following terms (see "The Offer by the
Company" for a complete description of the terms of the Offer):
Effective November __1997, Warrant holders who tender their
Warrants and $_____ per tendered Warrant (the "Offer Price")
during the tender offer period (as defined below), will receive
one Unit for each Warrant tendered. Each Unit consists of
one share of Tellurian Common Stock and one new warrant
identical to the Warrants. The Common Stock and Warrant
included in the Unit will not be detachable or separately
transferable from each other except to exercise the Warrants
until ____, 1998 (six months after the expiration date of the
tender offer) or earlier if consented to by the Company (the
"Separation Date"). After the Separation Date, Unit holders
must submit their Unit certificates to the exchange agent (as
defined below) to be exchanged for Common Stock and
Warrant certificates. The "Tender Offer Period" will commence
on ________, 1997 and expire 20 business days thereafter on
December __, 1997 (the "Expiration Date"), subject to the
discretion of the Company to extend the Offering for up to an
additional 10 business days. Any person desiring to tender
Warrants pursuant to the Offer, must submit the Warrants to
Continental Stock Transfer & Trust Company (the "Exchange
Agent"), 2 Broadway, 19th Floor, New York, NY 10004,
together with a certified check, official bank check or money
order in the amount of the offer price made payable to
"Continental Stock Transfer as Exchange Agent for Tellurian,
Inc." and a completed and executed "Letter of Transmittal"
which accompanies this Prospectus. In the event that
Warrant holders tender more than 1,300,000 Warrants
pursuant to the Offer during the Tender Offer Period,
Tellurian intends to accept Warrants tendered on a pro
rata basis, disregarding fractions, according to the
number of Warrants tendered by each Warrant holder.
Warrant Terms 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
commencing on November 5, 1996 and expiring on November
5, 2001. Commencing November 5, 1997, the Warrants may
be redeemed by the Company, at $.30 per Warrant if certain
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
conditions are met; however, the Company
does not intend to redeem the Warrants prior
to the Separation Date. If a holder of
Warrants does not elect to tender his
Warrants pursuant to the terms of this
Offer, such holder may exercise such
Warrants under the present terms of the
Warrants as described above and in
"Description of Securities." Warrant holders
who desire to exercise their Warrants
pursuant to the current terms of the Warrant
should execute the Subscription Form on the
back of their Warrant and submit same
together with an appropriate check made
payable to "Tellurian, Inc." to Continental
Stock Transfer & Trust Company at the
address set forth herein. See "Description
of Securities - Warrants."
</TABLE>
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(1) Does not include the following: (I) up to 5,127,500 shares of Common
Stock issuable upon exercise of Warrants or included in the 1,300,000
Units issuable pursuant to the Offer; (ii) up to 1,300,000 shares of
Common Stock issuable upon exercise of the Warrants included in the
Units issuable pursuant to the Offer; (iii) up to 185,000 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 Underlying Warrants issuable upon exercise of the
Underwriters' Warrants; and (v) up to 400,000 shares of Common Stock
issuable under Tellurian's Stock Option Plan.
(2) While the Company's Common Stock and Warrants trade on NASDAQ SmallCap
Market, there can be no assurance that a trading market 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 Maintaining Listing
Securities on NASDAQ SmallCap."
9
<PAGE>
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.
Income Statement Data:
<TABLE>
<CAPTION>
=================================================================================================================================
Six Months Ended Year Ended Year Ended
=================================================================================================================================
June 30, June 30 Dec. 31, Dec. 31,
1997 1996 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 299,616 $542,284 $819,380 $ 477,311
Gross Profit 137,536 460,225 535,373 138,091
Net Loss (1) (1,060,051) ( 95,010) ( 962,410) (699,665)
Net Loss per
Common Share (.35) (.06) (.53) (.48)
Weighted Average
Number of
Common Shares
Outstanding (2) 3,025,000 1,600,000 1,817,708 1,450,000
Balance Sheet Data:
-------------------------------------------------
June 30, 1997 Dec. 31, 1996
-------------------------------------------------
Working Capital $ ( 734,930) $1,943,851
Total Assets 4,411,210 4,498,379
Long-Term Debt -0- -0-
Total Liabilities 2,154,633 1,181,751
Stockholders' Equity
2 ,256,577 3,316,628
=================================================================================================================================
</TABLE>
(1) Although the Company's S corporation status terminated effective
December 31, 1995, the Company is an S corporation for that year. 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 to Financial Statements for an explanation of the calculation
of shares used in computing net loss per share.
10
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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.
Financial Condition: Losses. The Company sustained net losses of
$1,060,051 and $95,010 for the six months ended June 30, 1997 and 1996,
respectively, and $962,410 and $699,665 for the years ended December 31, 1996
and 1995, respectively, and continues to incur losses from operations. As of
June 30, 1997, the Company has stockholders' equity of $2,256,577. In the past
two fiscal years and the six months ended June 30, 1997 the Company has spent an
aggregate of $1,509,716 for research and product development purposes. For the
six months ended June 30, 1997 and June 30, 1996 and for the years ended
December 31, 1996 and 1995, the Company had sales of $299,616, $542,284,
$819,380, and $477,311, 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."
Tellurian's Dependence Upon Cyberport. Tellurian's principal
source of revenues is the TEC it has established through a subsidiary in Niagara
Falls, Ontario. This 40,000 square foot facility known as Cyberport has only
been in operation since late June 1997 and has had limited revenues. The success
of the Company is highly dependent upon Cyberport realizing significant revenues
from operations. Cyberport's operations are anticipated to be seasonal in nature
with the high season being the warm summer months and the low season being the
cold winter months when tourism is at a low. No assurances can be given that the
operations of Cyberport will result in either positive cash flow to the Company
or profitable operations.
Management's Lack of Experience in Running Tourist Entertainment
Centers (TEC's); Possible Failure of Cyberport to Promote Tellurian Products;
Possible Difficulty in Selling Off Majority Interest in Cyberport. The Cyberport
Niagara tourist entertainment center is believed by Management to represent a
new concept in family entertainment. While Management is encouraged by the
initial reception which the facility has gained, the lack of clear parallels to
compare the facility to makes it difficult for Management to properly evaluate
its progress against other facilities. The Company has no prior experience in
owning and operating a TEC. There can be no assurances that the Cyberport
facility in Niagara Falls, Ontario will operate profitably, nor can there be any
assurance that the facilities role in promoting the sale of Tellurian products
will be successful in the marketplace. Failure of the center to make progress in
its marketplace would materially affect Management's ability to sell up to a
majority share of this facility to an outside investor in accordance with its
stated desire as described herein. See "Business."
Uncertain Market Acceptance; Lack of Marketing Organization; and
Distribution Network. The Company's future success heavily depends upon the
acceptance of its new
11
<PAGE>
virtual reality entertainment products, parts of which are currently in the
developmental testing phase. 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 products
will depend in large part upon the ability of the Company to demonstrate the
technological and commercial 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 implement its marketing and sales plan and the successful operation
of its Cyberport TEC. There can be no assurances that the Company can implement
its marketing and sales plan with the resources available to it or, if
implemented, that such plan will be successful in penetrating the Company's
proposed markets. See "Business."
Uncertain Performance of the Company's Helmet Visual and Audio
System. The Company's virtual reality helmet is a critical component in the
Company's plan to deliver high performance virtual reality experiences that are
affordable and commercially viable. While the Company has observed the
performance of the helmet in laboratory conditions, it has not yet placed its
proprietary helmet into arcade conditions in order to evaluate its performance
over longer periods under less desirable conditions. While the initial studies
have not given management causes for concern about the likely results of such
tests, there can be no assurances that problems that affect market acceptance of
the product will not be found once the product is subjected to tests under true
market conditions. See "Business."
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. Further, the Company has entered the TEC market through its
subsidiary, Cyberport Niagara, Inc.
12
<PAGE>
There can be no assurances that other competitors for the family tourist market
will not be more successful than the Company in marketing to this group
especially since many of these competitors are larger and more experienced than
the Company, in addition to which many have significantly greater resources than
the Company. See "Business."
Possible Legal Proceedings Against 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, will
result in a deferral of any action by creditors until January 15, 1998 and may
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 Common Stock (estimated at a maximum of 300,000
shares) 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 determine the
components of the final resolution of this matter at this time.
Should Cyberport Management be unable to resolve the issues with
the contractors and the lessor, it is possible that the resulting action against
Cyberport could require Tellurian to assist Cyberport. If such action is
required, either to support Cyberport or because Management is incorrect in its
belief that Tellurian has no direct liability in this issue, there can be no
assurances that Tellurian will have the resources necessary, or that it will
have access to the resources necessary, to resolve the issue in a manner
acceptable to the Company. Nevertheless, if Cyberport is unable to settle this
legal matter and keep its facility open to the public, there would likely be a
material adverse affect on the operations of the Company. See "Business - Legal
Proceedings."
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
protections 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 pay to copy or reverse engineer certain portions
of the Company's products or 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
13
<PAGE>
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. In addition, the
Company entered into a licensing agreement dated January 1, 1996 with Voyager
Graphics, Inc., a Republic of China corporation, ("Voyager") which granted
Voyager certain irrevocable, exclusive under an assignable license to be the
exclusive supplier of the EAGLE image generator within a restricted group of
countries and which allows Voyager to sell the product worldwide. Such agreement
could have a negative competitive impact upon the Company's marketing efforts.
See "Licensing of Tellurian Technology."
Notes Due to Related Party. The Company has notes payable to
related parties in the principal amount of $496,736 and against which the
Company owes accrued interest of $340,684 as of August 31, 1997. These notes
become payable on demand as of November 1, 1997. Should these noteholders demand
payment in whole or significant part on or after that date, there can be no
assurance that the Company will have the cash resources to meet such demands.
Management is presently negotiating with the noteholders endeavoring to get the
demand date extended for at least one year. However, there can be no assurance
that Management will be successful in gaining such an extension.
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. The Company has entered into employment agreements with
each of Dr. Swallow and Mr. French and has obtained 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. See
"Management."
Control by Principal Shareholders. Without giving effect to the
potential exercise or tender of the Warrants, the current principal shareholders
and Management of the
14
<PAGE>
Company beneficially own 1,351,699 shares of Common Stock, or approximately 40%
of the then outstanding shares of Common Stock of the Company. Accordingly, the
current principal shareholders and Management may be in a position to influence
the election of the Board of Directors of the Company. See "Security Ownership
of Management and Others."
Management's Broad Discretion in Use of Proceeds. Since all the
net proceeds of this Offering are allocated to working capital, Management of
the Company has broad discretion in the application of the net proceeds of the
Offering. 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. 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 Terms of the Offer. The terms of the Offer, the
Offer Price and Units were arbitrarily determined by the Company and do not
necessarily bear any direct relationship to the Company's assets, book value per
share or other generally accepted criteria of value.
Immediate and Substantial Dilution. The purchasers of the Units
from the assumed tender of all Warrants pursuant to the Offer 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 included in the Units
immediately after this Offering will be $___ per share as compared to the Offer
Price of $____ per share pursuant to the Offer, representing a dilution to new
investors of $___ per share, or approximately __%. Additional dilution to public
investors will result to the extent that Warrants are exercised pursuant to
their current exercise terms of $6.00 per share. Significant dilution will also
occur to persons exercising the Underwriters' Stock Warrants and the Underlying
Warrants issuable upon exercise of the Underwriters' Warrants.
Shares Eligible for Future Sale. Sales of substantial amounts of
Common Stock or the perception that such sales could occur could adversely
effect the market price for the Common Stock. The Company has 3,025,000 shares
of Common Stock and 5,127,500 Warrants outstanding as of the date of this
Prospectus. In addition, the Company has 185,000 Underwriters' Stock Warrants
and 185,000 Underwriters' Warrants outstanding. Of these shares of Common Stock
and warrants, 1,875,000 shares of Common Stock, 5,127,500 Warrants held by the
Warrant Holders, 185,000 Underwriters' Stock Warrants and 185,000 Underwriters'
Warrants are freely tradeable in the public market without restriction under the
Securities Act, except for securities owned by an "affiliate" of the
15
<PAGE>
Company (as that term is defined under the rules and regulations of the
Securities Act), which are subject to the resale limitations of Rule 144 under
the Securities Act ("Rule 144"), and except that (i) 3,000,000 Warrants (and
shares of Common Stock issuable upon exercise of same) owned by the Warrant
Holders and registered for resale herein may not be sold until November 5, 1997
and (ii) the Underwriters' Stock Warrants and Underwriters' Warrants may not
generally be transferred by the holders thereof until November 5, 1997. Of the
remaining shares of Common Stock outstanding, 1,150,000 shares of Common Stock
are "restricted securities" as that term is defined in the Securities Act and
have not been registered under the Securities Act. The holders of 1,000,000 such
shares of Common Stock have agreed with J.W. Barclay & Co., Inc. ("Barclay") not
to sell or otherwise transfer any of their shares of Common Stock until November
5, 1998, without the prior written consent of Barclay. At the end of the
aforesaid lock-up period (or earlier with the consent of Barclay) these 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 1,000,000 shares as
soon as they are permitted to do so. Ordinarily, under Rule 144, a person
holding restricted securities for a period of one year 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. See
"Shares Eligible For Future Sale."
Requirements for Maintaining Listing of Securities on NASDAQ
Smallcap. The Company's Common Stock and Warrants trade on NASDAQ SmallCap
Market. The rules of NASDAQ SmallCap establish criteria for continued quotation
of securities on such market. There can be no assurance that Tellurian will be
able to maintain the standards for continued quotation. These standards will
require the Company to maintain net tangible assets of $2,000,000 or net income
of $500,000 in two of the last three years or a market capitalization of at
least $35 million and a minimum bid price for its Common Stock of $1.00 per
share among other requirements. If the Company fails to meet the criteria for
continued quotation which result is likely in the absence of additional
financing, the market for the Common Stock and Warrants 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 Common
Stock and Warrants.
No Public Market for the Units. There is presently no public
market for the Units. The Company does not intend to list the Units for trading
on NASDAQ. No assurances can be given that a public market for the Units will
develop in the over-the-counter market on the NASDAQ Electronic bulletin Board
or in the "pink sheets."
"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
16
<PAGE>
price of less than $5.00 per share, subject to certain exceptions. If the
Company has less than $2,000,000 in net tangible assets, the Units, Common Stock
and Warrants 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 acknowledgment 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 Common Stock and Warrants should they cease to
be quoted on NASDAQ SmallCap. Such rules may also affect the ability of
broker-dealers to sell the Common Stock and Warrants (and Units should a public
market develop) and may impede the ability of holders of such securities to sell
such securities in the secondary market.
Current Prospectus and State "Blue Sky" Registration Required to
Exercise the Warrants. The Warrants and terms of the Offer provide that the
Company shall not be obligated to issue shares of Common Stock upon exercise of
the Warrants or Units upon tender of the Warrants pursuant to the Offer unless
there is a current prospectus relating to the underlying securities under an
effective registration statement filed with the Commission and unless such
securities are 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 above referenced securities under an
effective Registration Statement filed with the Commission. Although the Company
has agreed to use its best efforts to meet such regulatory requirements in the
jurisdictions in which the Warrants were sold in the Company's initial public
offering, there can be no assurance that the Company can continue to meet these
requirements.
17
<PAGE>
The exercise of the Warrants or tender of Warrants pursuant to the Offer is
qualified for sale or exempt under the securities laws of the states named in
the inside cover page of this Prospectus. Purchasers may buy Warrants in the
secondary market or may move to jurisdictions in which the securities issuable
upon exercise or tender of the Warrants are not so qualified or exempt. In this
event, the Company would be unable lawfully to issue securities to those persons
upon exercise or tender of the Warrants unless and until the securities issuable
upon exercise or tender 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 securities issuable upon exercise or tender of
the Warrants is not available pursuant to an effective registration statement or
if such securities 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. The Warrants are redeemable by the
Company, in whole or in part, upon 30 days' prior written notice at $.30 per
Warrant, beginning November 5, 1997 and provided certain specified market
conditions are met; however, the Company does not intend to redeem the Warrants
prior to the Separation Date. 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 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. 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." As a result of the Warrants, 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 remain outstanding, their existence might limit increases in the
price of the Common Stock.
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
18
<PAGE>
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 four directors
each of whom are officers 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.
In order to maintain Tellurian's NASDAQ listing, Tellurian is required to obtain
two outside directors by February 23, 1998. No assurances can be given that
Tellurian will be successful in this regard.
19
<PAGE>
THE OFFER BY THE COMPANY
Terms of the Offer
The Company hereby offers to the holders of its issued and
outstanding Warrants the opportunity to exchange such Warrants and cash for
Units, subject to the terms and conditions set forth herein and in the Letter of
Transmittal.
Effective November __, 1997, Warrant holders who tender their
Warrants and $_____ per tendered Warrant (the "Offer Price") during the Tender
Offer Period (as defined below), will receive one Unit for each Warrant
tendered. Each Unit consists of one share of Tellurian Common Stock and one new
warrant identical to the Warrants. The Common Stock and Warrant included in the
Unit will not be detachable or separately transferable from each other except to
exercise the Warrants until ____, 1998 (six months after the expiration date of
the tender offer) or earlier if consented to by the Company (the "Separation
Date"). After the Separation Date, Unit holders must submit their Unit
certificates to the exchange agent (as defined below) to be exchanged for Common
Stock and Warrant certificates. The "Tender Offer Period" will commence on
________, 1997 and expire 20 business days thereafter on December __, 1997 (the
"Expiration Date"), subject to the discretion of the Company to extend the
Offering for up to an additional 10 business days. Any person desiring to tender
Warrants pursuant to the Offer, must submit the Warrants to Continental Stock
Transfer & Trust Company (the "Exchange Agent"), 2 Broadway, 19th Floor, New
York, NY 10004, together with a certified check, official bank check or money
order in the amount of the offer price made payable to "Continental Stock
Transfer as Exchange Agent for Tellurian, Inc." and a completed and executed
"Letter of Transmittal" which accompanies this Prospectus. In the event that
Warrant holders tender more than 1,300,000 Warrants pursuant to the Offer during
the Tender Offer Period, Tellurian intends to accept Warrants tendered on a pro
rata basis, disregarding fractions, according to the number of Warrants tendered
by each Warrant holder.
If a holder of Warrants does not elect to tender Warrants pursuant
to the terms of the Offer, such holder may exercise such Warrants under the
present terms of the Warrant as described above and in "Description of
Securities." Warrant holders who desire to exercise their Warrants pursuant to
the current terms of the Warrant should execute the Subscription Form on the
back of their Warrant and submit same together with an appropriate check made
payable to "Tellurian, Inc." to Continental Stock Transfer & Trust Company at
the address set forth herein.
Subject to the terms and conditions as set forth herein and in the
Letter of Transmittal, the Company will accept all Warrants tendered under the
terms of the Offer during the Tender Offer Period which commences on __________,
1997 and expires _________, 1997, the "Expiration Date" (20 business days after
the commencement of the Offer) unless the Warrant Holder withdraws the tender by
5:00 p.m. Eastern Standard Time on the Expiration Date. The Company at its sole
option may extend the Offer for an additional period of 10 business days by
giving written or oral notification of such
20
<PAGE>
extension to Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor,
New York, NY 10004 (the "Exchange Agent"). In addition, the Company may at its
election cause notice of any extension of the Offer to be published in the "New
York Times," the "Wall Street Journal" or any other newspaper selected by the
Company. The Company has no present intention to extend this Offer beyond the
original Expiration Date.
The Company reserves right to withdraw, cancel, modify or
terminate the Offer at any time during the Tender Offer Period (by written or
oral notice to the Exchange Agent) if, in the opinion of counsel for the
Company, there exists any actual or threatened legal impediment to the Offer,
including any material legal action or administrative proceeding instituted or
threatened against the Company or the Exchange Agent with respect to the Offer.
No such impediments are presently known by the Company to exist. Upon any such
termination of the Offer, the Company will, at its option, either accept the
Warrants and cash payment theretofore tendered or return all Warrants and cash
payments, without interest thereon or deduction therefrom, theretofore tendered
and have no further obligation or liability with respect to the Offer.
Should any funds of an exchanging Warrant holder whose exchange
has not been accepted by the Company be left on deposit with the Exchange Agent
for any reason including, but not limited to, termination of the Offer, the
Exchange Agent will promptly refund such funds without interest thereon or
deduction therefrom.
No variation in the terms of the Offer is presently contemplated.
However, if for any reason the rate of exchange should be increased, the rate of
exchange will apply for all tendering Warrant holders whether they tendered
before or after any such increase.
If the Company is unable to or does not qualify the Units for
sale in particular states prior to the Expiration Date of theTender Offer
Period, Warrant holders in those states will not be permitted to tender the
Warrants. The Company is not obligated to accept any Warrants which are
exercised or tendered pursuant to the Offer where applicable state law would
prohibit the issuance of the Units.
Requests for additional copies of this Prospectus or the Letter of
Transmittal or assistance in completing an exchange should be made by mail or
telephone to the Exchange Agent. The Exchange Agent is Continental Stock
Transfer & Trust Company and its telephone number is (212) 509-4000. All
correspondence with respect to the Offer, for delivery by hand or by mail,
should be directed to the Exchange Agent at 2 Broadway, 19th Floor, New York, NY
10004.
In the event the Company's stockholders do not approve an increase
in the authorized number of shares of Common Stock from 10,000,000 shares, $.01
par value, to 25,000,000 shares, $.01 par value, at its scheduled annual
stockholder meeting on November 17, 1997 or any adjourned date thereof, the
Company reserves the right to terminate the Offer and to return all tendered
Warrants and cash payments to the Warrant Holders.
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<PAGE>
Procedure for Tendering Warrants
Except as otherwise stated below, to be properly tendered pursuant
to the Offer, the Warrants together with a properly completed and executed
Letter of Transmittal, the applicable cash payment and any other documents
required by the Letter of Transmittal must be received by the Exchange Agent
during the Tender Offer Period. The certificates, Letter of Transmittal and the
cash payment should not be sent to the Company. The method of delivery of the
Warrants, the cash payment and other documents forwarded to the Exchange Agent
is at the election and risk of the holder, but if such delivery is by mail it is
suggested that registered mail with return receipt requested be used. The
applicable cash payment accompanying the Warrants must be made by certified
check, official bank check or money order payable in United States dollars to
"Continental Stock Transfer, as Exchange Agent for Tellurian, Inc."
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of the Warrants or cash payments tendered will
be determined by the Company, which determination shall be final and binding.
The Company reserves the absolute right to reject any or all tenders of any
particular Warrants and cash payments not properly tendered or the acceptance of
which would, in the opinion of the Company, be unlawful. The Company also
reserves the right to waive any irregularities or conditions of tender as to any
particular Warrants, and the Company's interpretation of the terms and
conditions of this Offer (including the instructions and Letter of Transmittal)
shall be final and binding. Any irregularities in connection with the tenders,
unless waived, must be cured within such time as the Company shall determine,
which time may be extended beyond the Tender Offer Period. Neither the Company
nor the Exchange Agent shall be under any duty to give notification of defects
in such tenders or incur any liability for failure to give such notification.
Tenders of the Warrants and cash payments received by the Exchange Agent that
are not properly tendered and as to which the irregularities have not been cured
or waived will be returned (without interest on the cash payment or deduction
therefrom) by the Exchange Agent to the appropriate Warrant holder as soon as
practicable.
Withdrawal Rights
Tenders of Warrants and cash payments during the Tender Offer
Period may be withdrawn: (i) at any time prior to 5:00 p.m. Eastern Time on
_________, 1997 (which represents the last day that the tender offer remains
open, and (ii) at any time subsequent to 5:00 p.m. Eastern Time on __________,
1997 (40 business days after the commencement of the Offer) if such Warrants and
cash payments have not been previously accepted for payment by the Company. The
Company has no reason to believe that any other exchange offer will be made.
For a withdrawal to be effective, a written, telegraphic or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address as set forth above. Such notice of withdrawal must
set forth the name of the tendering Warrant holder, the name of the registered
holder if different from that of the Warrant holder, the
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<PAGE>
number of Warrants (and, if available, the certificate numbers) and the amount
of the cash payment to be withdrawn. All questions as to the validity (including
the time of receipt) or notices of withdrawal will be determined by the Company,
whose determination shall be final and binding. Warrants and cash payments
withdrawn in the manner specified above will not be considered to have been duly
tendered.
Delivery of Units
Upon the terms and subject to the conditions of the Offer,
delivery of the Units in exchange for Warrants and cash payments validly
tendered and accepted by the Company will be made as soon as practicable after
receipt by the Exchange Agent of the Letter of Transmittal, the Warrants
tendered and the applicable cash payment. The maximum number of days after
receipt of such documents and cash payment by the Exchange Agent by which the
Unit certificates will be mailed to the Warrant holders is thirty (30). All
deliveries will be made through the Exchange Agent.
Position of the Board of Directors
The Board of Directors of the Company believes the Offer is in the
best interests of the Company inasmuch as it will benefit from the receipt of
cash proceeds received pursuant to the Offer and provides for the possible
receipt of additional financing in the future from the exercise of the Warrants
included in the Units. However, the Board of Directors is not making any
recommendations to the holders of the Warrants as to whether they should
exchange or refrain from exchanging any or all of their Warrants. Each Warrant
holder must make his or her own decision as to whether to exchange all or any
portion of the Warrants owned. In addition, no assurances can be given that any
of the Warrants included in the Units will be exercised in the future.
Tender Offer Open to all Warrant Holders
Pursuant to Regulation 13e-4(f)(8)(i) of the Exchange Act, the
Company's tender offer is required to be open to all holders of the Company's
Warrants. Pursuant to Regulation 13-4(f)(9)(ii) of the Act, the Company is not
prohibited from making a tender offer where it excludes all security holders in
a state where the Company is prohibited from making the tender offer by
administrative or judicial action after a good faith effort by the Company to
comply with such statute.
USE OF PROCEEDS
The net proceeds of this offering, if any, after the payment
of offering expenses estimated at $150,000 is anticipated to be applied to
general working capital and be available for all corporate purposes. It is
anticipated that such purposes would include the following:
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<PAGE>
o Provide funds to meet general operating expenses and
make payment towards accounts payable and other
liabilities of Tellurian and Cyberport corporations.
See "Business - Legal Proceedings;"
o Carry out the Company's marketing plan for the
introduction of the Tellurian helmet and game units;
o Allow the continued introductory marketing of the
Cyberport concept to the organized tourism industry;
o Allow the Company to produce the components necessary
to deliver the new helmet-based product in lead-times
acceptable to the arcade marketplace; and
o Allow the Company to actively pursue investors in
Cyberport and investors to establish new TEC
facilities elsewhere in the North American market.
The foregoing represents the Company's best estimate of its
expected specific uses of the net proceeds of the Offering allocated to working
capital. The resulting amounts actually expended for certain purposes described
above may vary significantly depending on numerous factors, including but not
limited to, the success of Cyberport, a possible settlement of certain
outstanding indebtedness of Cyberport, establishing other TEC's or LBE's, 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
specific uses of the 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 within working capital in response thereto.
The estimated net proceeds from this Offering will depend upon
the amount of Warrants, if any, tendered pursuant to the Offer or exercised
pursuant to the terms of the Warrants, Underwriters' Stock Warrants and
Underlying Warrants issuable upon exercise of the Underwriters' Warrants.
Pending application of the net proceeds of this Offering, if
any, 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.
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
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<PAGE>
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."
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of June 30, 1997. This table should be read in conjunction with the
Company's financial statements and the related notes thereto included elsewhere
in this Prospectus.
Actual
------
Long-term debt $ -0-
-----------
Stockholders' equity (1):
Common stock-$.01 par value:
authorized 10,000,000 shares (2),
issued 3,025,000 shares 30,025
Additional paid-in capital 6,345,387
Accumulated deficit (4,118,835)
-----------
Stockholders' equity 2,256,577
-----------
Total capitalization $2,256,577
===========
-----------
(1) Does not include the following: (i) up to 5,127,500 shares of
Common Stock issuable upon exercise of Warrants or included in
the 1,300,000 Units issuable pursuant to the Offer; (ii) up to
1,300,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Units issuable pursuant to the Offer;
(iii) up to 185,000 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
Underlying Warrants issuable upon exercise of the
Underwriters' Warrants; and (v) up to 400,000 shares of Common
Stock issuable under Tellurian's Stock Option Plan.
(2) The Company's Board of Directors has approved an increase in
the authorized Common Stock to 25,000,000 shares subject to
shareholder approval.
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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.
Income Statement Data:
<TABLE>
<CAPTION>
======================================================================================================================
Six Months Ended Year Ended Year Ended
======================================================================================================================
June 30, June 30 Dec. 31, Dec. 31,
1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 299,616 $542,284 $819,380 $ 477,311
Gross Profit 137,536 460,225 535,373 138,091
Net Loss (1) (1,060,051) ( 95,010) ( 962,410) (699,665)
Net Loss per
Common Share (.35) (.06) (.53) (.48)
Weighted Average
Number of
Common Shares
Outstanding (2) 3,025,000 1,600,000 1,817,708 1,450,000
Balance Sheet Data:
------------------------------------------------
June 30, Dec. 31
1997 1996
------------------------------------------------
Working Capital $ ( 734,930) $1,943,851
Total Assets 4,411,210 4,498,379
Long-Term Debt -0- -0-
Total Liabilities 2,154,633 1,181,751
Stockholders'
Equity 2 ,256,577 3,316,628
======================================================================================================================
</TABLE>
(1) Although the Company's S corporation status terminated effective
December 31, 1995, the Company is an S corporation for that year. 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 to Financial Statements for an explanation of the calculation
of shares used in computing net loss per share.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
During 1997 the Company has been able to make significant progress
towards meeting its objectives which included:
o Development of its virtual reality helmet and motion and
motion system;
o Establishment of a virtual reality showplace for
demonstrations of Tellurian products; and
o Establishing a TEC for the purpose of operating and partially
owning such a facility in order to generate a consistent
revenue stream.
The Virtual Reality Helmet
The virtual reality helmet (with a disposal liner) is critical to the
broad market acceptance of Tellurian's products since it removes one of the
major sources of market resistance to the Company's virtual reality units--the
amount of physical space required by the viewing screens. The arcade market
represents by far the largest grouping of potential buyers for the units and
these potential buyers are heavily influenced by the return per square foot of
floor space occupied. The helmet would reduce the square footage needed by
approximately 50% while improving the quality of the sound through the almost
complete elimination of background noise coming from other activities in the
facility and significantly reducing the Company's cost per virtual reality unit.
The Tellurian helmet has been specifically engineered to be driven by the
proprietary Tellurian EAGLE image generator.
Management expects that the quality of the experience gained through
use of the helmet coupled with the head motion tracker will be significantly
superior to the experience currently offered in the marketplace either by
Tellurian or by any of its competitors. Management further believes that, if
successful in its field tests, the helmet and the related game units that drive
it will represent a significant portion of Tellurian's future revenue.
Cyberport
In late June 1997, the Company was able to begin conducting operations
in its subsidiary, Cyberport Niagara, Inc. Although the limited opening of
Cyberport was not done early enough in the second quarter to have an noticeable
impact on revenue for the quarter, Management believes that it was essential to
open the facility in close to final form before the heavy tourist traffic months
of July and August 1997 arrived. While Management does not believe that the 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 and, more importantly, to the tour groups that conduct
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<PAGE>
summer business in Niagara Falls, was critical to Management's plans to develop
the group tour business for the Fall and subsequent seasons.
As a result of operating the facility during the summer months, the
Company was able to develop significant marketing contacts which in turn have
allowed it to book groups from schools, social camps and local businesses.
Combined marketing programs with important other local attractions have also
been instrumental in allowing Cyberport to obtain substantial press and
television exposure as well as prominent position in important tourism documents
such as the CAA and AAA (Canadian and American Automobile Associations)
guidebooks.
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. Also,
the Company faces competition from existing and new entrants into the tourism
market in the Niagara Falls region. Most of the competitors have more experience
than the Company in opening and managing tourist facilities and most have more
financial resources than the Company. There can be no assurances that this
project will perform successfully.
The Company is endeavoring to locate an investor desirous of owning an
interest or a controlling interest in Cyberport Niagara. There can be no
assurance that the Company will be successful in this effort or that, if
successful, that the terms and conditions of the sale will be satisfactory to
the Company. Nonetheless, the Company expects that a significant portion of its
future revenues are dependent upon the successful operation of Cyberport
facilities.
Voyager
In 1996, Tellurian entered into a Technology Transfer Agreement with
Voyager (a Republic of China corporation) pursuant to which Tellurian granted
Voyager certain rights in return for a net fee of $850,000 to Tellurian. The
Company has recently been contacted by Voyager to discuss an additional transfer
agreement dealing with the virtual reality helmet technology. Management is
currently evaluating the impact such an agreement would have upon its operations
prior to making an decision regarding its willingness to share this technology
with Voyager. Should Management decide to enter into negotiations with Voyager
on this matter, there can be no assurances that an agreement satisfactory to the
Company can be reached.
PLAN OF OPERATION
The Company plans to focus its efforts on the following three areas:
o 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;
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<PAGE>
o Increasing revenues through marketing efforts of its new EAGLE
product now on display at its Cyberport facility; and
o Completing the development of its virtual reality helmet with
head tracking and establishing products utilizing the helmet
technology.
Marketing of the new EAGLE image generator will be accomplished by
directing efforts towards three different customer groups:
o The training and simulation market where Tellurian has been
selling its AT-200 unit;
o The virtual reality game developer market through trade show
exhibits, advertisements and newsletters; and
o Pursuing the interactive thrill ride market.
The Company intends to expand its customer base through trade show
involvement beginning in the third and fourth quarters of 1997 at which it can
demonstrate its EAGLE product and, if available, its helmet technology. The
Company intends to continue its ongoing research and development efforts and to
expand and enhance the technical capability, design features and range of uses
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 no prior 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 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.
Results of Operations
Six Months Ended June 30, 1997 vs. June 30, 1996
Tellurian and its subsidiary had net sales for the six months ended
June 30, 1997 of $299,616, a decrease of $242,668, or 44.7% from the comparable
period of the prior year. For the six months ended June 30, 1997, the Company's
gross profit was $137,536, a decrease of $322,689, or 70.1% from the prior year.
The principal cause of this reduction was the completion of the Voyager
consulting contract at the end of 1996. During 1997, the Company did recognize
approximately $200,000 of revenue with regard
29
<PAGE>
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.
Research and development activities for the six months ended June 30,
1997 was $397,843, representing an increase of $122,813 over the respective
period of the prior year. The increase in research and development activities,
relates to the development of the EAGLE equipment for Cyberport and to the work
on the virtual reality helmet.
Selling, general and administrative expenses for the six months ended
June 30, 1997 was $822,367, an increase of $589,339 or 253% from the comparable
period of the prior year. The increases in selling, general and administrative
expenses were substantially due to the costs incurred in connection with the
development 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. These increases were partially offset in this quarter due to
the reduction of the allowance for doubtful accounts.
Selling, general and administrative expenses was approximately 274%
for the six months ended June 30, 1997, an increase of 231% 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 six months ended June 30, 1997, interest expense was $28,292
compared to $55,888 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 six months ended June 30, 1997 was
$1,060,051 as compared to a loss of $95,010 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, increased cost of research
and development activities, and the loss of revenues from the Voyager contract.
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Tellurian's net sales for the year ended December 31, 1996 were
$819,380, an increase of $342,069 or approximately 72% over the comparable
period of the prior year. Such increase was primarily derived from Tellurian's
license agreement with Voyager. For the year ended December 31, 1996, the
Company's gross profit was $535,373 as compared to $138,091 for the comparable
period of the prior year. Such increase in gross profit is primarily due to
revenues received from Voyager. Revenues derived from the sale of image
generators and ancillary software decreased by $101,042 for the year ended
December 31, 1996 as compared to 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 its AT-200.
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<PAGE>
Tellurian's research and development activities for the year ended
December 31, 1996 were $688,103, representing an increase of $264,333 over the
comparable period of the prior year. The 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. Also included in research and development are the costs of
purchasing certain royalty rights for the "flat-shaded" technology.
Selling, general and administrative expenses for the year ended
December 31, 1996 were $585,121, an increase of $235,491 from the comparable
period of the prior year. The increase in selling, general and administrative
expenses was substantially due to increases in sales payroll and commissions and
the establishment of the reserve for the potential failure to collect the open
billing to Voyager.
Selling, general and administrative expenses expressed as a percentage
of sales was approximately 71% for the year ended December 31, 1996, a decrease
of approximately 2% from the comparable period of the prior year. This decrease
was due to the increase in sales derived from Voyager.
For the year ended December 31, 1996, interest expense was $111,333 as
compared to $64,356 for the comparable period of the prior year. This increase
was due to the issuance of promissory notes in the amount of $895,000 issued in
connection with the Company's private placement.
Tellurian's net loss for the year ended December 31, 1996 was $962,410
as compared to $699,665 for the comparable period of the prior year. The
increase in the net loss was primarily due to increased costs in development of
the Eagle and the inability to recognize certain revenues due from Voyager.
Liquidity and Capital Resources
In December 1995 and January 1996, the Company raised approximately
$675,000 from the sale of promissory notes and 3,000,000 warrants which were
automatically convertible into 3,000,000 warrants identical to those Warrants
sold in Tellurian's public offering. In June 1996, the Company received proceeds
of approximately $149,000 from the sale of its promissory notes, $25,000 of
which automatically converted into 25,000 shares of the Company's Common Stock
upon the completion of its public offering in November 1996.
In November 1996, the Company sold 1,400,000 shares of its Common Stock
at an offering price of $5.00 per share and 2,127,500 Common Stock Purchase
Warrants at an offering price of $.25 per share. The Company received net
proceeds of approximately $6,200,000 from the offering.
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<PAGE>
During the six months ended June 30, 1997 and 1996 net cash of $768,809
and $216,534, respectively, was used in operating activities. The net loss from
operations for the period ended June 30, 1997, $1,060,051, was partially offset
by increases in accounts payable of $943,331. The other primary uses of cash
were the increase in accounts receivable resulting from the booking of the
Voyager receivable and the increase in Other Current Assets which stems from a
large GST (a Canadian tax) receivable due to the Cyberport subsidiary. This tax
was deposited in order to import exhibits into Canada but is refundable since
the material is not for resale. During the six months ended June 30, 1997 and
1996 net cash was used in investment activities totaling $509,854 and $7,209
respectively. The 1997 activity reflects additions to the Cyberport facility and
exhibits offset by the sale of marketable securities held by the Company at
December 31, 1996. During the six months ended June 30, 1997, the Company
received a $90,000 loan for the purchase of property and equipment. During the
six months ended June 30, 1996, the Company received $467,985 from financing
activities, primarily from the net proceeds of long-term debt in connection with
a private placement of securities.
For the year ended December 31, 1996, net cash of $1,851,540 was used
in operating activities as a result of the Company's net loss and substantial
decreases in the Company's payables and accrued expenses as well as increases in
inventory. For the year ended December 31, 1996, $5,783,829 was provided from
financing activities. The primary sources of this cash were the proceeds of the
initial public offering completed in November 1996 and certain loans completed
prior to the public offering. These amounts were partially offset by the
repayment of certain notes after the completion of the initial public offering.
For the year ended December 31, 1996, net cash of $2,210,233 was used in
investment activities. This is significantly related to the purchase of
marketable securities with cash that was not required for short-term business
operations at the time.
During the six months ended June 30, 1996, the Company received
$467,985 from financing activities, primarily from the net proceeds of long-term
debt in connection with a private placement of securities.
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.
Financing activities provided $284,056 primarily from the issuance of Common
Stock and from the net proceeds of long-term debt in connection with a private
placement of securities.
The Company expects to meet its liquidity and cash needs on a
short-term basis from funds generated from operations together with the use of
its available cash supplemented by any funds raised from this Offering and the
possible sale of an interest or controlling interest in Cyberport. In addition,
unexpected future developments may result in the Company requiring additional
private or public financing. There can be no assurances given that such
financing, if required, will be available, or if available, that it can be
obtained under terms satisfactory to the Company.
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<PAGE>
The Company is concerned that a financing arrangement made with the
owner of the building leased for its Cyberport facility has not, as of the date
hereof, been honored. Under the terms of that commitment, the Company expected
the landlord to provide $1million Canadian dollars (approximately $725,000 US
dollars) of financing for leasehold improvements made in that building.
Accordingly, Management has elected to show these expenditures as leasehold
improvements on its consolidated balance sheet and to recognize the debt
obligation associated with these improvements in spite of its agreement with the
owner for those payments to be made by the owner directly to the contractors.
While Management believes that the owner is legally obligated to make this
payment and further believes that the owner is financially capable of meeting
this obligation, there can be no assurance that this obligation will be met. See
"Business - Legal Proceedings."
BUSINESS
General
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. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and 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.
In 1994, the Company began 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 Eagle is available in multiple resolution formats and 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 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, Tourist Entertainment Centers ("TEC") and Location Based Entertainment
Centers ("LBE").
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<PAGE>
The TEC differs from the LBE in that the market of the TEC is intended to be the
family vacationer rather than the local, repeat customer.
Utilizing the "EAGLE" technology, Tellurian has developed a prototype
helmet product to complement the Eagle for the entertainment market. This new
product is expected to be marketed and sold on two levels. The first level of
marketing will be for Tellurian to build its own complete game units either for
sale or use in establishing one or more joint ventures, or revenue share
agreements with owners and operators of TEC's or LBE's. The second level will be
components for other virtual reality game manufacturers.
See "Business."
In March 1997, Tellurian formed Cyberport Niagara Inc., an Ontario,
Canada company, as a subsidiary for the purpose of establishing a TEC in Niagara
Falls, Ontario. This 40,000 square foot facility known as "Cyberport", which
opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as an 8,000 square foot
interactive attraction leased from the Ontario Science Centre, various original
movie sets leased from Universal Studios and an Egyptian built replica of the
treasures from the tomb of King Tut. Cyberport Niagara Inc is owned 87.5% by the
Company and 12.5% by a non-affiliated person as of September 15, 1997. Tellurian
is seeking to raise money to finance its operations and is attempting to sell up
to a majority interest in Cyberport to a third party. No assurance can be given
that the Company will be successful in this regard or, if successful, that such
sale would be on terms satisfactory to the Company.
Tellurian also formed Cyberport International, Inc., a Delaware
corporation, for the purpose of franchising the Cyberport concept to third
parties. As of the date of this Prospectus, this subsidiary which is 96% owned
by Tellurian, is inactive.
Background
The Company's AT-100 and AT-200 image generators were, in part, based
upon developments by Ronald Swallow 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
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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 was 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 could not, 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
were 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. Of such $80,529.50,
$45,529.50 was paid in November of 1996, and the balance is due in November of
1997. 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 has been paid.
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 to train pilots 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 provide not only motion, but also
visual pictures and sound effects, which are altered as the controls are
manipulated. Simulators are used in training ship pilots and air traffic
controllers.
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
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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.
Cyberport Niagara, Inc.
Cyberport Niagara, Inc. opened a "pay-one-price" tourist entertainment
center (TEC) at the end of June, 1997. Cyberport Niagara is primarily
constructed to market to the vacationing family. The various activity rooms
contained within Cyberport have been carefully chosen to ensure that the amount
of time that a person of any tourist age group spends is approximately the same
as that of all other tourist age groups. By having a balanced blend of
attractions, Management believes that it can attract large numbers of
vacationers to the facility. Since Cyberport is not likely to achieve a status
capable of causing people to plan vacations around it (a la Disneyland),
exposure to large numbers of walking tourists is essential to marketing plans.
These groups alone will not support a venture like Cyberport. However, in
addition to the walking tourist family, bus tour groups are capable of providing
large volumes of customers although at somewhat less of a net price per person.
Both the walking tourist and the bus tour groups are in Niagara Falls in large
numbers from late Spring through late September. Cyberport has begun active
marketing to the tour operators and will attend various industry meetings and
conventions to further these activities. In addition, Cyberport has recruited
the assistance of several individuals from Niagara who have had many years of
experience in working with the bus tour companies.
Another factor that is critical to Management's plans for Cyberport is
to include educational aspects to the recreational activity in order to attract
school bus tours to the facility in the significantly slower late Fall to Spring
seasons. This was done by contracting with the Ontario Science Centre for
exclusive use of the traveling Science Circus, a display originally developed to
promote science learning in the lesser populated sectors of Ontario but which,
due to budget cuts, was no longer able to leave Toronto or to be properly
staffed in Toronto. In addition, the Company was able to purchase exhibits of a
space shuttle cockpit, Sputnik and a lunar rover (full-scale) when the space
exhibit closed at the Canadian National Expo. These exhibits are interactive,
and provide an interesting contrast of the old to the new when placed into the
hall immediately before the pyramid opening to the nearly perfect replicas of
artifacts found in the Tomb of Tut.
As a result of operating the facility during the summer months,
Cyberport has been able to develop significant marketing contacts which in turn
have allowed it book an average of over 1.5 busloads of students per day since
the opening of school in September. Also, combined marketing programs with
important other local attractions, most notably the Butterfly Museum (which had
500,000 visitors from January through July of 1997) have just begun to create
bookings for future visits to Cyberport.
During September, Cyberport has contacted the major hotels and tour
operators in Niagara Falls (both Canadian and U.S. sides) and has extended an
offer to allow their
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guests to visit Cyberport free during the month of September. These facilities
are the key to gaining an important share of the organized tour markets which
will surge again beginning around the end of November through year end (the
Festival of Lights in Niagara Falls). Cyberport personnel have also been able to
obtain substantial press and television exposure including a morning feature on
network television on a prominent Buffalo television station.
Management believes that it will take some time for all of the
marketing efforts of Cyberport to translate into the volume of traffic that is
necessary to support Cyberport. However, the publicly available statistics from
attractions such as the Butterfly Museum prove that the potential customers are
in Niagara Falls in number adequate to make Cyberport a profitable venture.
However, there can be no assurances that the Company will be successful in
gaining the necessary market share in order to make Cyberport successful with
the resources presently at its command.
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. Also,
the Company faces competition from existing and new entrants into the tourism
market in the Niagara Falls region. Most of the competitors have more experience
than the Company in opening and managing tourist facilities and most have more
financial resources than the Company. There can be no assurances that this
project will perform successfully.
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 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 December 31, 1996,
the Company had built and sold over 250 AT-200 systems.
The Company currently offers for sale 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 years ended December 31,
1996 and 1995, revenues from this category amounted to 5.5% 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 years ended December 31, 1996 and
1995, revenues from this group amounted to 0% and 69%, respectively, of the
Company's total revenues
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for each applicable period. There were no sales of AT-200 unites during the
first six months of 1997.
The Company's marketing efforts prior to completion of the 1996 public
offering had been concentrated on selling image generating systems to
manufacturers of trainers and simulators. The sales and marketing efforts were
conducted by officers of the Company. During 1995, three customers, namely, Ride
& Show Engineering Corp. (a vendor to Six Flags), Virtual Images and Voyager
Graphics accounted for 32%, 21% and 11%, respectively, of the Company's
revenues. During 1996, two principal customers, namely, Voyager and Ship
Analytics Corp. accounted for 76% and 16%, respectively, of the Company's
revenues.
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 motion and sound to simulate a
full-immersion experience. The EAGLE is intended for use at amusement/ theme
parks, video arcades, TEC's and LBE's.
Using the EAGLE, the Company is currently developing a class of games
which can be free standing or in which a portion of the TEC facility is themed
to represent a particular time and place and which provides a more complete
experience around the game. For example, the Company's "Battle of the Bulge"
adventure currently in place at Cyberport Niagara is based on the legendary P-51
Mustang fighter plane of WW II. The following paragraphs describe this
experience.
The Battle of the Bulge VR experience is a themed area within
Cyberport. The entertainment area includes a briefing bunker where the guests
are prepared for the P-51 experience by uniformed instructors. This area is
decorated to appear as a sandbag protected flight operations room. In addition
to receiving instructions on how to best use the P-51, each guest is greeted by
the "Flight Leader" (a uniformed employee). The Flight Leader's purpose is to
describe the war-time situation, instruct the guests on the purpose of their
mission and to answer any questions. The floor of the Briefing Area is a special
compound made to look like a dirt floor. The walls have military aeronautical
maps, detailed maps of certain target areas, and silhouettes of various aircraft
(both friendly and foe). A rough wooden tunnel with anti-aircraft netting
provides the entrance to the "Cyberfield Airport".
As the guests leave the briefing room, they pass through a simulated
neighborhood of London that has been ravaged by a bombing. Fires burn, bombs are
heard bursting in the distance, and aircraft can be heard overhead. Statues have
been destroyed. Destruction lies all around the guest. It's up to them to save
Britain.
The "Squadron Leader" meets the guests as they enter the "Cyberfield"
and escorts them to their P-51 aircraft. Each P-51 is a scale model of the
Mustang cockpit. The aircraft is made of fiberglass and painted with authentic
markings. Each aircraft has two
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seats (the pilot's cockpit and a back seat "observer"). The interior of the P-51
is equipped with simulated instruments, control stick and throttle. The
experience is generally the same: the guests meet and escort B-17 bombers on a
raid over enemy territory. However, the experience can be varied by allowed some
or all of the flyers to fly the planes that are attacking the bombers. The
flight time is varied between 6 and 10 minutes, depending upon the backlog of
guests waiting to fly.
Notwithstanding the installation size and content described above, the
Company believes that there is a large and growing market for a modified version
of the P-51 game product in single, free-standing units.
At the conclusion of the flight, the guests are directed to the WW-II
Officers Club at the end of the Cyberfield. This club is a Quonset hut with
rustic wood tables and counters and planked wood floors. Walls are adorned with
maps, squadron insignias, news clippings from the period and has period music
(such as Glen Miller) playing. While in the Club, guests receive their scores
and are invited to purchase soft drinks and snack items or just to relax and
enjoy the ambiance of the place.
In the gift shop on the way out from Cyberport, guests can purchase
items such as T-shirts, hats, jackets, models, and coffee mugs bearing the P-51
logo (the "Real Time Baby").
The Company has placed 16 stations of P-51 flight simulators at the
Cyberport facility. Because of the importance of the Tellurian experience in the
overall presentation of the Cyberport program, it currently utilizes
approximately 8,000 square feet of the Cyberport facility. However, the Company
hopes to reduce the total size of the Cyberfield as new products utilizing
helmet viewing technology become available.
Initial reactions of guests, based on extensive exit and spot
interviews, has been excellent. The Company continues to monitor the performance
of the game and the network servers supporting the overall experience, making
modifications and improvements as warranted.
Backlog
At December 31, 1996 and at December 31, 1995 the Company had a backlog
of 32 Eagle units with a sales value of $160,896. The backlog was entirely under
the Fightertown purchase order which dates back before January 1, 1996 and under
which Fightertown did not accept deliveries in 1995 or 1996. As of August 31,
1997 10 units have been delivered to Fightertown and the remaining 22 units
remain in backlog (at the request of Fightertown) with a sales value of
$107,536.
Other Products and Services
Helmets. There are various manufacturers which produce helmets for
virtual reality experiences. Tellurian believes that it is advantageous to
utilize the unique technologies
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of the "Eagle" in developing its own line of proprietary products since this
allows it to utilize all of the advantages of the Eagle without adding
unnecessary cost.
Upon completion of the 1996 Public Offering, the Company began a
development project to finalize the design and building of a helmet mounted
visual system to take maximum advantage of the EAGLE image generator. This
device is expected to replace the cumbersome 27" and 35" 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 in full color with
surround sound. The first working prototype of its custom designed helmet is
presently under evaluation. Based on the initial performance and evaluations,
Management has decided to concentrate its resources on incorporating the helmet
into a game structure and to show that unit at the important industry trade show
(IAPPA) in November 1997.
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.
Product Marketing Strategies
Tellurian's core product line is the computer image generator. These
units 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 market for these products is in both the training/ simulation
sector and the entertainment sector. Location based entertainment operations
which currently utilize the Company's devices are Six Flags (Great Adventure -
Jackson, NJ, Magic Mountain - Los Angeles, CA) and Fightertown - Lake Forest,
CA. Entering the entertainment market is a natural progression of the technology
and products which the Company has been developing.
Subsequent to completion of the public offering, the Company chose to
concentrate its efforts on the completion of the product and game which is now
at the heart of Cyberport. This game--which includes the hardware, the theme
package, and the control network--along with the development of the helmet
represent the best possible large volume, high profit market for the Company's
products. Management believes that this approach was the only sound approach to
convince the general marketplace that the products made by the Company
represented significant income potential for them. While this approach has
caused the short-term sale of small quantities of image generators to suffer,
the significant sales leads that the Company has received as a result of the
Cyberport exposure has more than justified this sacrifice.
Due to the specialized nature of sales, significant training is
required before newly hired salespersons are likely to be effective. While the
Company hopes to add sales personnel in the future, for the moment it intends to
continue its primary sales efforts through the officers based in its New Jersey
facility. Traditional trade magazine
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advertising will be done on a regional scale, while trade show participation
will be done on a national level. One of the objectives of the current offering
is to raise additional funding needed to bring the Company's new array of
products to the attention of its potential customers at various high profile
industry trade shows.
One of the goals of the Company is to produce complete game units for
use in TCE's, LBE's, video arcades, and theme parks. The second market for the
Company's products consists of companies which develop virtual reality games.
Still another venue for sale of the Company's products is into the creation of
mobile entertainment facilities which would allow their operators to move the
games to the site of fairs, sporting events or association meetings. Each of
these venues will be pursued as resources permit, but the Company does not
currently have the resources to properly pursue these markets. If the current
offering is successful in raising additional funds adequate to allow marketing
in these areas, the Company will do so since it considers these markets to be
very lucrative even if they are not its primary market objective.
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") as 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 was 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 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
agreed to pay Tellurian $1,500,000, of which Tellurian agreed that Voyager will
pay $650,000 to two parties unrelated to Tellurian for their services in
connection with such contract resulting
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in a net amount of $850,000 to Tellurian. As of August 31, 1997, Tellurian has
been paid in full.
Manufacturing of Eagle Units
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 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.
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 August 31, 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. 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 Fightertown'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/technicians 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 revenue producing activities 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.
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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 very desirable images, the Company's products are
substantially less expensive 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 the proper mix of image quality with price.
Most 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 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.
The Company has established Cyberport and may establish one or more
additional TCE's and/or LBE's. The Company anticipates significant competition
in this market. While the Company knows of no single dominant company in this
marketplace, it is aware that many companies are currently planning, developing
and/or operating similar businesses. Most of these companies have better
financial resources than the Company and have more experience in developing
these facilities. No assurances can be given that the Company will be able to
compete successfully in this market or that the Company will be successful in
establishing or entering into revenue sharing agreements or financing agreements
for Cyberport or other similar facilities. Further, there can be no assurances
that, if the Company is successful in obtaining such financing, the resulting
businesses can be operated at a profit.
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.
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Employees
Currently, Tellurian has thirteen full-time employees, including four
executive employees, four technical and production persons and five engineers at
its New Jersey facility. Cyberport Niagara has 31 employees, the majority of
which are part time. The Company believes that its relations with its employees
is good. None of the Company's employees is represented by a union.
Description of Property.
In January, 1997, the Company commenced a 10 year lease expiring
January, 2007 for approximately 10,000 square feet of space at 300K Route 17
South, Mahwah, NJ 07430. Pursuant to the lease, the Company pays a monthly base
rent of $6,250. The Company believes that suitable additional facilities, if
needed, can be found on terms satisfactory to the Company.
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, NJ 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. Approximately two-thirds of the space is currently
sublet. Based on the projected volume of P-51's needed for the Cyberport Niagara
project, Management may choose to retain the remaining space at Industrial
Avenue for warehouse use or sublet such space.
In February 1997, Cyberport entered into a five year lease expiring
January 2002 with two five year renewal options for approximately 40,000 square
feet of space at 5781 Ellen Avenue in Niagara Falls, Ontario, Canada. Pursuant
to this lease, Cyberport pays an average annual rental over the life of the
lease of $247,298. The Company believes this space is adequate to house its
Cyberport Niagara operations for the foreseeable future. The Company has an
option to purchase the facility for $2,160,000 at any time beginning January 1,
1998 and ending July 31, 1998.
Legal Proceedings
In September 1997 both Tellurian and its Niagara Falls, Ontario, Canada
controlled subsidiary, Cyberport Niagara, Inc. were named in legal actions in
Ontario by various construction firms claiming that services performed by them
in the Niagara Falls site that houses Cyberport have not been fully paid for.
The amounts claimed is for an estimated $1,400,000. Cyberport management has
acknowledged that it believes certain monies remain outstanding. Cyberport has
notified these creditors that it believes that a significant portion of the
monies currently due and outstanding were to have paid directly to the
contractors by the owner and lessor of the building which domiciles Cyberport
and in which the alleged work was performed. The owner and landlord has failed
to make the payments to the contractors despite, in the opinion of Cyberport
management, a legally binding obligation to do so. If the landlord were to meet
this obligation, the monthly rent at the Cyberport facility would double. The
landlord has not acknowledged that the making of said payment is a legally
binding obligation upon him. Tellurian Management does not believe that
Tellurian has any direct obligation in this matter, nor does it believe that it
acted in any way to lead the claimants to believe that Tellurian had any
responsibility for
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these payments. 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 will result
in a deferral of any action by creditors until January 15, 1998 and may 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 common stock (estimated at a maximum of 300,000
shares) 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 determine the
components of the final resolution of this matter at this time. In spite of the
existence of the agreement in principle referenced herein, there can be no
assurances that the Company, either at the parent level, subsidiary level or
both, will be successful in resolving this matter. As of September 22, 1997,
Management is not aware of any other material legal proceedings involving the
Company or its subsidiaries.
MANAGEMENT
Executive Officers and Directors
The names of the executive officers and directors of the Company are as
follows:
Name Age Position
- ---- --- --------
Dr. Ronald Swallow* 63 Chairman of the Board of
Directors and
Chief Executive Officer
Stuart French 52 President and Director
Dr. Richard Swallow* 59 Vice President of Program
Management, Secretary and
Director
Michael Hurd 50 Vice President of Administration
and Finance and Chief Financial
and Accounting Officer and Director
- ----------
* 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:
45
<PAGE>
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.
Michael Hurd joined the Company in February 1997 and was elected a
director and Vice President of Administration and Finance and Chief Financial
and Accounting in March 1997. Mr. Hurd has a BBS degree in Accounting from New
Hampshire College and has been a Certified Public Accountant in New Jersey since
1973. Since 1985, he served in various officer capacities for Bobst Group Inc.,
a Swiss machinery manufacturing and sales company with revenues in excess of
$200 million. Previously, Mr. Hurd was a partner in a printing machinery
manufacturing and sales company in New Jersey. Prior to that, he served in
various positions with the consulting group of a then Big 8 public accounting
firm.
The Company does not currently have any audit or compensation
committees of the Board of Directors. However, in accordance with recently
promulgated regulations from NASDAQ, the Company is required to obtain two
independent directors to join its Board of Directors and to serve on its Audit
Committee on or before February 23, 1998. Pursuant to an underwriting agreement
dated November 5, 1996, J.W. Barclay & Co., Inc. ("Barclay"), the representative
of the Company's initial public offering, has the right to designate one person
to attend board of Directors meetings until November 8, 2001. 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 Barclay for his
out-of-pocket expenses incurred in connection with his attendance at such
meetings. As of the date of this Prospectus, Barclay has not designated any
person.
46
<PAGE>
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."
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.
47
<PAGE>
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.
48
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by Tellurian
for services rendered during the years ended December 31, 1996, 1995 and 1994 to
Tellurian's Chief Executive Officer, Dr. Ronald Swallow and Stuart French,
President.
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 Other
and Compen- Stock Number LTIP Compen-
Principal Bonus sation Award(s) of Payouts sation
Position Year Salary ($) ($) ($) ($) Options ($) ($)(2)(5)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ronald 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436
Swallow,
Chief Executive
Officer(3) 1995 108,000 -0- -0- -0- -0- -0- 4,200
1994 108,000 -0- -0- -0- -0- -0- 4,200
Stuart French 1996 84,000 -0- 23,359 -0- (1) 150,000 -0- 14,200
President (4)
1995 84,000 -0- 13,814 -0- -0- -0- 4,200
1994 84,000 -0- 13,420 -0- -0- -0- 4,200
==================================================================================================================================
</TABLE>
- ---------------
(1) Does not include shares issued in connection with the Company's
reincorporation in Delaware. See "Certain Transactions."
(2) Includes the value of car leases paid by the Company at a rate of
approximately $350 per month.
(3) During 1994 and 1995, the Company accrued salaries for Dr. Swallow of
$22,000 and $43,143, respectively. As of December 31, 1996, Dr. Swallow
was owed accrued salary and expense reimbursement totaling $17,400.
(4) Stuart French earns other annual compensation in the form of a sales
commission which is reflected in column (e). During 1994, 1995 and
1996, the Company accrued salaries and commissions of $1,420, $9,614
and $23,359 respectively. During 1994, Mr. French also received payment
of $2,000 toward prior years accrued salaries. As of December 31, 1996,
Mr. French was owed accrued salary and expense reimbursement totaling
$45,098.
(5) During 1996 the Company created a SEP program for employees who had
been with the Company for at least three years prior to the end of
1996. The cost of this program in 1996 was $33,691, of which Ronald
Swallow was credited with $15,236 and Stuart French was credited with
$10,000.
Since inception, the Company has not granted stock appreciation rights.
49
<PAGE>
Employment Agreements
As of November 8, 1996, the Company entered into employment agreements
with Dr. Ronald Swallow and Stuart French. The agreements provide for annual
salaries of $108,000 and $84,000, respectively, and for Mr. French to receive a
sales commission of five percent. The agreements 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 contain 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. In June 1996, 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".
The Board of Directors has authorized the creation of a 401(K) program
to begin in 1997 in order to provide a retirement planning vehicle for its
employees. As employees of the Company, both Mr. Swallow and Mr. French will be
eligible to participate in this program once created. This program is intended
to replace the SEP program discussed in Note (5) above.
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 options granted to holders of 10% or more
50
<PAGE>
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 provides that no new options may be granted
by the Board of Directors of the Company after June 1, 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 and Dr. Richard Swallow received options to
purchase 73,000 shares, 150,000 shares, 27,000 shares, respectively. Two other
persons (not employees) received options to purchase 25,000 shares each. The
Company has also granted options to purchase 40,000 shares to Michael Hurd
allowing him to purchase shares at $5.25 per share. These options vested on July
1, 1997 but are not exercisable until January 1, 1998. The Company has agreed
with J.W. Barclay, the managing underwriter of the Company's Initial Public
Offering, that it will not grant the remaining available options to purchase
55,000 shares to 5% or greater shareholders for a period of three years, ending
November 8, 1999 without the consent of said firm.
51
<PAGE>
Options Grants Table - The following table provides information with
respect to individual grants of stock options by Tellurian during fiscal 1996 to
each of the executive officers named in the preceding summary compensation
table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential
Realized Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Option Term
(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Number of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal Price Expiration
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Ronald 73,000 32.7 5.00 6/1/06 229,220 581,810
Swallow
- ------------------------------------------------------------------------------------------------------------------------------------
Stuart French 150,000 67.3 5.00 6/1/06 471,000 1,195,500
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A - not applicable
(1) The % of Total Options Granted to Employees in Fiscal Year' is based
upon options granted to Tellurian employees only and excludes options
granted to non-employees.
(2) The potential realizable value of each grant of options assumes that
the market price of Tellurian's Common Stock appreciates in value from
the date of grant to the end of the option term at annualized rates of
5% and 10%, respectively, after subtracting out the applicable exercise
price.
52
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Table - The
following table provides information with respect to each exercise of stock
options during fiscal 1996 by each of the executive officers named in the
preceding summary compensation table and the fiscal year-end value of
unexercised options.
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR -
END OPTION VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options
Shares FY-End (#) at FY-End ($)
Acquired on Value
Exercise Realized (1) Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dr. Ronald -0- -0- 73,000 / 0 82,125 / -0-
Swallow
- ------------------------------------------------------------------------------------------------------------------------------------
Stuart French -0- -0- 150,000 / 0 168,750 / -0-
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the options at
exercise or fiscal year end, respectively. Tellurian's last sale price
at the close of business on December 31, 1996 was $6.125.
53
<PAGE>
Director Compensation
The 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 and are receiving compensation as
employees of the Company. See "Stock Option Plan." The Board of Directors has
the right to compensate its directors in their capacity as directors in the
future.
In March 1997 Michael Hurd was elected to the Board of Directors and
received options to purchase 40,000 shares of Tellurian stock at $5.25 per
share. In June 1997, he received options to purchase 1,000 shares of Cyberport
Niagara stock at $.50 per share and further options of 500 shares vesting on
July 1, 1998 and 500 shares vesting on July 1, 1999 under certain restrictive
conditions. The option price on these shares is also $.50 per share. There are
currently 10,000 shares of Cyberport Niagara stock outstanding.
54
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth certain information as of August 31,
1997 (except as otherwise noted below) regarding the beneficial ownership of the
Company's Common Stock by all persons known by the Company to be beneficial
owners of more than 5% of its Common Stock and all executive officers and
directors, both individually and as a group. For purposes of calculating the
amount of beneficial ownership and the respective percentages, the number of
shares of Common Stock which may be acquired by a person within sixty days of
August 31, 1997 are considered outstanding, but shall not be deemed to be
outstanding for the purpose of computing the percentage of Common Stock owned by
any other person.
Amount
and Nature Approximate
Name and Address of of Beneficial Percent
Beneficial Owner (1) Ownership (1) of Class (2)
- -------------------- -------------- ------------
Dr. Ronald Swallow (3)(4) 370,908 12.0
Dr. Richard Swallow(3)(5) 136,481 4.5
Stuart French(3)(6) 199,261 6.3
Michael Hurd (3)(7) 0 0
All officers and directors
as a group (4 persons)(7)(8) 706,650 21.6
Mary Elizabeth
Huggins Trust (9) 430,049 14.2
John A. Bruno (10) 215,000 6.9
Jericho Limited
c/o InterTrust Management
S.A. P.O. Box 3292
126 rue de la
Pelisserie 1211 Geneva 3
Switzerland (11) 2,200,000 42.1
Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (11) 800,000 20.9
- -------------
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
55
<PAGE>
(2) Based upon 3,025,000 shares outstanding without giving effect to the
issuance of shares under the Company's outstanding Warrants and Stock
Options.
(3) The address for Dr. Ronald Swallow, Stuart French, Dr. Richard Swallow
and Michael Hurd is c/o Tellurian, Inc. at 300K Route 17 South, Mahwah,
NJ 07430.
(4) Includes options to purchase 73,000 shares, which options became
exercisable at $5.00 per share commencing July 1, 1997.
(5) Includes options to purchase 27,000 shares, which options became
exercisable at $5.00 per share commencing July 1, 1997.
(6) Includes options to purchase 150,000 shares, which options became
exercisable at $5.00 per share commencing July 1, 1997.
(7) Does not include options to purchase 40,000 shares, which options
became exercisable at $5.25 per share commencing January 1, 1998.
(8) Includes options to purchase 250,000 shares, which options became
exercisable at $5.00 per share commencing July 1, 1997.
(9) 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. The Trustee's
address is 2419 West Sumter, Florence, SC 29572.
(10) The address for Mr. Bruno is c/o J.W. Barclay & Co., Inc., One Battery
Park Plaza, 23rd Floor, New York, NY 10004. John A. Bruno, is a
principal of Barclay, a registered broker-dealer. Michael J. Wills and
John C. Cioffeletti, who are also principals of Barclay, beneficially
own shares of the Company's Common Stock. See "Selling Stockholders."
Mr. Bruno does not affirm the existence of a group and none of the
shares owned by Barclay, if any, or Messrs. Wills or Cioffeletti are
included in the table above as beneficially owned by Mr. Bruno.
(11) Represents Common Stock issuable upon exercise of Warrants. See
"Warrant Holders."
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 Certain Transactions to the "Company" or "Tellurian" include
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.
56
<PAGE>
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 Langden (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. Bruno, Cioffoletti and Wills are principals, and Mr.
Spinosa is an employee of J.W. Barclay & Co., Inc.
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 August 31, 1997, Mr. Powers was owed approximately $685,400, inclusive of
interest at a rate of 10% per annum. Such $685,400 includes $346,736 of
principal and $338,464 of accrued and unpaid interest (including $23,158 of
interest accumulated between January 1, 1994 and August 31, 1997). From January
1, 1994 until August 31, 1997, the Company has repaid Powers a total of
$221,200. This loan is due November 1, 1997. The Company is seeking an extension
of these obligations to Mr. Powers. However, no assurances can be given that Mr.
Powers will agree to this extension, or that any extension granted will be on
terms and conditions acceptable to the Company.
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 August
31, 1997, Tellurian owed approximately $162,000 (inclusive of interest) to a
family member of Doctors Ronald and Richard Swallow.
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. The Warrants provided that in the event that the
Company completed an initial public offering, the warrants shall be
automatically exchanged for Warrants identical to those sold to the public. This
exchange became effective on November 8, 1996, the completion date of the
Company's public offering. 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.
57
<PAGE>
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 Company's Public
Offering in November of 1996.
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 incurring commissions and other
expenses to the Placement Agent, J.W. Barclay & Co., Inc. On November 8, 1996,
the closing date of Tellurian's initial public offering, $150,000 was repaid and
$25,000 was converted into 25,000 shares of the Company's Common Stock.
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.
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 Board of Directors has approved an increase of the
authorized number of shares of Common Stock to 25,000,000 shares, subject to
stockholder approval. 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.
Units
Each Unit consists of one share of Tellurian Common Stock and one new
warrant identical to the Warrants. The Common Stock and Warrant included in the
Unit will not be detachable or separately transferable from each other except to
exercise the Warrants until ____, 1998 (six months after the expiration date of
the tender offer) or earlier if consented to by the Company (the "Separation
Date"). After the Separation Date, Unit holders must submit their Unit
certificates to the exchange agent (as defined herein) to be exchanged for
Common Stock and Warrant certificates.
Common Stock
As of the date hereof, 3,025,000 shares of Common Stock were
outstanding. 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
58
<PAGE>
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. While the Company has no authorized Preferred Stock, the
Company agreed with J.W. Barclay & Co., Inc. not to issue any shares of
Preferred Stock without such firm's consent until November 1999.
Warrants
The Warrants were issued pursuant to a Warrant Agreement (the
"Warrant Agreement") between Tellurian, J.W. Barclay & Co., Inc., and
Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agent") and are in registered form. The Warrant Agreement was amended on
__________, 1997 to provide for the issuance of Warrants included in the Units
pursuant to the terms of the Offer. The following summary of the provisions of
the Warrants is qualified in its entirety by reference to the Warrant Agreement,
as amended on _________, 1997, a copy of which is filed as an exhibit to the
Registration Statement, of which this Prospectus is a part.
Each Warrant is separately transferable and entitles 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
November 5, 1996 and expiring on November 5, 2001. Unless exercised or extended
by the board of directors, the Warrants will expire on November 5, 2001. 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 as described below, commencing
November 5, 1997, J.W. Barclay & Co., Inc. will receive a warrant solicitation
fee equal to 10% of the exercise price of all Warrants solicited by an NASD
member; however, such firm intends to make a market during the Tender Offer
Period and will not be entitled to receive a warrant solicitation fee in
connection with the Offer.
59
<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 is required to file post-effective
amendments 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 November 5, 1998, 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
equaled or exceeded $9.25. However, the Company does not intend to redeem the
Warrants until at least after the Separation Date. 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.
Warrant Solicitation Agreement
The Company will pay J.W. Barclay & Co., Inc. commencing November 5,
1997, 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)
60
<PAGE>
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 Regulation M under the Securities Exchange Act of 1934. A portion
of such commission may be reallocated to any dealer who solicited such exercise.
However, such firm intends to make a market during the Tender Offer Period and
will not be entitled to a warrant solicitation fee in connection with the Offer.
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.
Other Warrants
The Company issued to various persons named in Selling Stockholders a
total of 185,000 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 are exercisable at a price of $8.25
per share and the Underwriters' Warrants are exercisable at a price of $.4125
per Common Stock Purchase Warrant for a period of four years commencing November
5, 1997 and they are not transferable until November 5, 1997 with certain
limited exceptions. The Common Stock Purchase Warrants are identical to the
Warrants except that they are exercisable at $9.90 per share. Any profit
realized upon any resale of such securities 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.
Pursuant to such "piggy-back" registration rights, this Prospectus includes: (I)
185,000 shares of Tellurian Common Stock issuable upon exercise of Underwriter's
Stock Warrants and the resale of the 185,000 shares of Common Stock by certain
selling stockholders (the "Selling Stockholders"), (ii) Underwriter's Warrants
to
61
<PAGE>
purchase 185,000 warrants (the "Underlying Warrants") issuable upon exercise of
Underwriter's Warrants, and (iii) 185,000 shares of Tellurian Common Stock
issuable upon exercise of the Underlying Warrants and the resale of the 185,000
shares of Common Stock by the Selling Stockholders.
Transfer Agent, Warrant Agent and Exchange Agent
Continental Stock Transfer & Trust Company, 2 Broadway, 19th floor,
New York, New York 10004, is the Company's transfer agent, warrant agent and
exchange agent for the Company's securities.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock or the perception that
such sales could occur could adversely effect the market price for the
Securities. The Company has 3,025,000 shares of Common Stock and 5,127,500
Warrants outstanding as of the date of this Prospectus. In addition, the Company
has 3,000,000 warrants outstanding held by the Warrant Holders, 185,000
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), 5,127,500 Warrants held by the Warrant Holders, 185,000
Underwriters' Stock Warrants and 185,000 Underwriters' Warrants are 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 are
subject to the resale limitations of Rule 144 under the Securities Act ("Rule
144"), and except that (I) 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 until November 5, 1997 and (ii) the Underwriters' Securities may not
generally be transferred by the holders thereof until November 5, 1997. Of the
remaining shares of Common Stock outstanding, 1,150,000 shares of Common Stock
are "restricted securities" as that term is defined in the Securities Act and
have not been registered under the Securities Act. The holders of 1,000,000 such
shares of Common Stock have agreed with J.W. Barclay & Co., Inc. ("Barclay") not
to sell or otherwise transfer any of their shares of Common Stock until November
5, 1998, without the prior written consent of Barclay. At the end of the
aforesaid lock-up period (or earlier with the consent of Barclay) these 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 1,000,000 shares as
soon as they are permitted to do so. Ordinarily, under Rule 144, a person
holding restricted securities for a period of one year 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.
62
<PAGE>
WARRANT HOLDERS
This Prospectus relates to the resale of 3,000,000 Warrants held by
certain companies that may be deemed to be affiliates of the Company by virtue
of the number of Warrants that each company beneficially owns. 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) until November 8, 1997.
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 November 8, 1997 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 that may be 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 the Warrants. The Warrant Holders have been
advised that Regulation M 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 Regulation M promulgated under the Exchange Act. If any such
transaction were a "distribution" for purposes of Regulation M, then such
broker-dealers might be required to cease making a market in the Company's
equity securities for a period of time prior to a sale in such transaction.
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.
63
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================================
Approximate Approximate
% of Class % of Class
Number of Number of Number of Owned Prior Owned After
Name and Address Warrants Warrants Warrants to Offering the Offering
of Security Holders Held Offered Retained (1) (1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jericho Limited 2,200,000 2,200,000 -0- 42.9 -0-
c/o Intertrust
Management S.A.
S.A.
P.O. Box 3292
16 rue de la
Pelisserie
1211 Geneva 3
SWITZERLAND
(2)
- ----------------------------------------------------------------------------------------------------------------------------
Imafina S.A. 800,000 800,000 -0- 15.6 -0-
c/o Hubert
Hendrick
21 Rue de Camps
75116 Paris
FRANCE (3)
============================================================================================================================
</TABLE>
- ------------------
(1) Based upon 5,127,500 warrants outstanding without giving effect to the
possible issuance of any Warrants pursuant to the Underwriters'
Warrants.
(2) The beneficial owner of Jericho Limited is Louis Carlos SantaMaria. The
directors of Jericho Limited are Louis Carlos SantaMaria, and Jane
Borgognon.
(3) The beneficial owner and sole officer and director of Imafina S.A. is
Hubert Hendrickx.
SELLING STOCKHOLDERS
The Company has registered for sale on behalf of certain security
holders named in the table below commencing at anytime after November 5, 1997,
the resale of 185,000 shares of Common Stock issuable upon exercise of
Underwriters' Stock Warrants and the resale of an additional 185,000 shares
issuable upon exercise of the "Underlying Warrants issuable upon exercise of the
Underwriters' Warrants (the "Registered Shares"). The Registered Shares are not
being underwritten and the Company will not receive any proceeds from the sale
of such shares.
The Selling Stockholders may offer their Registered Shares 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. The Selling Stockholders have also been
advised that Regulation M of the General Rules and Regulations promulgated under
the Securities Exchange Act of 1934 the ("Act") will be applicable to sales of
the Registered Shares. Such rules contain various prohibitions
64
<PAGE>
against trading by persons interested in a distribution and against so-called
"stabilization" activities.
The Selling Stockholders may be deemed to be "underwriters" of the
Registered Shares, as that term is defined under the Securities Act. The Selling
Stockholders have never held any position or office with Tellurian or had any
material relationship with the Company or any of its predecessors or affiliates
except that Messrs. Bruno, Wills and Cioffoletti purchased shares from the
Company in March 1995 and are principals of J.W. Barclay & Co., Inc., the
managing underwriter of Tellurian's initial public offering and placement agent
on certain private placements as described under "Certain Transactions" and
Mason Hill & Co., Inc. acted as co-underwriter of Tellurians's initial public
offering.
65
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Number of
Shares
to be Approximate Approximate
Number of Number of Retained on % of Class % of Class
Name and Address Shares Shares Completion Owned Prior Owned After
of Security Holders Held Offered of Offering to Offering Offering (3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John A. Bruno (1) 215,000 170,000 45,000 6.8 1.5
One Battery Park
Plaza, 23rd Floor
New York, NY 10004
- --------------------------------------------------------------------------------------------------------------------------------
Michael J. Wills (1) 111,750 80,000 31,750 3.6 1.0
One Battery Park
Plaza, 23rd Floor
New York, NY
10004
- --------------------------------------------------------------------------------------------------------------------------------
John C. Cioffoletti(1) 60,000 60,000 -0- 1.9 -0-
One Battery Park
Plaza, 23rd Floor
New York, NY
10004
================================================================================================================================
Mason Hill & Co.,
Inc. (2)
110 Wall Street
6th Floor 60,000 60,000 -0- 1.9 -0-
New York, NY 10005
================================================================================================================================
</TABLE>
- ---------------
(1) Principal of J.W. Barclay & Co., Inc., the managing underwriter of
Tellurian's initial public offering.
(2) Co-Underwriter of Tellurian's initial public offering.
(3) Assumes no exercise of outstanding warrants or options or tender of
Warrants pursuant to the Offer.
66
<PAGE>
MARKET INFORMATION
The Company's Common Stock and Common Stock Purchase Warrants are each
quoted as a Small Cap issue on the National Association of Securities Dealers'
Automated Quotation System ("NASDAQ") under the symbols "TLRN" and "TLRNW." As
of September 25, 1997 at 4:00 P.M. Eastern Standard Time, the last sale price of
the Common Stock and Warrants in the over-the-counter market were $5.00 and
$1.00, respectively.
The following table reflects the high and low sales prices for the
Company's Common Stock and Warrants for the periods indicated as reported by the
National Association of Securities Dealers, Inc. ("NASD") from its NASDAQ
system:
Common Stock
Common Stock Purchase Warrants
------------ -----------------
High Low High Low
---- --- ---- ---
1997
- ----
First Quarter 6.875 4.750 3.750 1.375
Second Quarter 6.375 3.500 1.875 .750
1996
- ----
November 5
(first day of trading)
through
December 31, 1996 7 1/2 5 3/4 4 1/4 2 1/2
The over-the-counter market quotations reported above reflects inter-dealer
prices, without retail markup, markdown or commission.
Management has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the approximate number of record holders of the
Company's Common Stock, as of March 7, 1997, the record date, was approximately
33. However, the Company has been advised by J.W. Barclay & Co., Inc., the
Underwriter of its initial public offering, that it has in excess of 700 persons
who beneficially own the Company's Common Stock as of the above referenced date.
No cash dividends have been paid by the Company on its Common Stock and no such
payment is anticipated in the foreseeable future.
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. Members of the
family of Lester Morse own options to purchase 50,000 shares of the Company's
Common Stock.
67
<PAGE>
EXPERTS
The Company's financial statement, 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.
68
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-23
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, 1996, and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995. 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, 1996, and the results of its operations and cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
/s/ MILLER, ELLIN & COMPANY
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 3, 1997
F-2
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 572,523 $ 1,761,186
Marketable securities - 968,722
Accounts receivable, net of allowance for
doubtful accounts of $10,000 and $115,000 (Note 10) 254,261 19,362
Inventories (Note 2) 379,339 287,851
Prepaid consulting fees (Note 10) 74,625 74,625
Prepaid expenses and other current assets 138,955 13,856
------------ ------------
Total current assets 1,419,703 3,125,602
------------ ------------
PROPERTY AND EQUIPMENT - at cost
less accumulated depreciation (Note 3) 2,734,894 206,176
------------ ------------
OTHER ASSETS:
Security deposits 232,740 47,750
Prepaid consulting fees (Note 10) 23,873 62,187
Deferred costs (Note 4) - 50,000
Marketable securities - 1,006,664
------------ ------------
Total other assets 256,613 1,166,601
------------ ------------
$ 4,411,210 $ 4,498,379
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 993,085 $ 49,754
Accrued expenses (Note 6) 82,444 60,020
Payroll payable - 98,399
Payroll taxes payable 6,491 34,494
Consulting fees payable 25,000 46,594
Notes payable 162,464 -
Notes payable - related parties (Note 5) 496,736 496,736
Interest payable - related parties (Note 5) 332,405 315,306
Deferred revenue 56,008 80,448
------------ ------------
Total current liabilities 2,154,633 1,181,751
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value (Note 12)
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 (4,118,835) (3,058,784)
------------ ------------
Total stockholders' equity 2,256,577 3,316,628
------------ ------------
$ 4,411,210 $ 4,498,379
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
F-3
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- ---------------------------
1997 1996 1996 1995
------------- -------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 11) $ 299,616 $ 542,284 $ 819,380 $ 477,311
COST OF GOODS SOLD 162,080 82,059 284,007 339,220
------------ --------- ----------- ----------
GROSS PROFIT 137,536 460,225 535,373 138,091
------------ --------- ----------- ----------
OPERATING EXPENSES:
Research and development 397,843 275,030 688,103 423,770
Selling 161,159 53,131 189,429 92,505
General and administrative 661,210 179,897 395,692 257,125
------------ --------- ----------- ----------
1,220,212 508,058 1,273,224 773,400
------------ --------- ----------- ----------
LOSS FROM OPERATIONS (1,082,676) (47,833) (737,851) (635,309)
------------ --------- ----------- ----------
OTHER INCOME AND EXPENSES:
Other income 50,917 8,711 18,085 -
Interest expense (3,694) (26,342) (50,313) -
Interest expense - related parties (Note 5) (24,598) (29,546) (61,020) (64,356)
Interest income - - 21,087 -
Deferred debt costs - - (152,398) -
------------ --------- ----------- ----------
22,625 (47,177) (224,559) (64,356)
------------ --------- ----------- ----------
NET LOSS $ (1,060,051) $ (95,010) $ (962,410) $ (699,665)
============ ========= =========== ==========
NET LOSS PER COMMON SHARE $(.35) $(.06) $(.53) $(.48)
===== ===== ===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,025,000 1,600,000 1,817,708 1,450,000
========= ========= ========= =========
PRO FORMA INFORMATION (Note 15):
Net loss as presented N/A N/A N/A $ (699,665)
Provision for income tax benefits
reflecting C corporation status N/A N/A N/A -
------------ --------- ----------- ----------
Pro forma net loss N/A N/A N/A $ (699,665)
============ ========= =========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
F-4
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT January 1, 1995 1,000,000 $ 10,000 $ 15,000 $ (1,396,709) $ (1,371,709)
Issuance of common stock for cash
(Note 12) 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 7 and 12) - - 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 common stock and warrants
in connection with initial public
offering (Notes 7 and 12) 1,400,000 14,000 7,517,875 - 7,531,875
Offering costs in connection with
initial public offering (Note 12) - - (1,326,728) - (1,326,728)
Conversion of promissory notes in
connection with initial public offering
(Note 12) 25,000 25 24,975 - 25,000
Issuance of warrants in connection with
private placement (Notes 7 and 12) - - 22,000 - 22,000
Net loss for the year ended
December 31, 1996 - - - (962,410) (962,410)
---------- -------- ----------- ------------- ------------
BALANCE AT December 31, 1996 3,025,000 30,025 6,345,387 (3,058,784) 3,316,628
Net loss for the six months ended
June 30, 1997 (Unaudited) - - - (1,060,051) (1,060,051)
---------- -------- ----------- ------------- ------------
BALANCE AT June 30, 1997
(Unaudited) 3,025,000 $ 30,025 $ 6,345,387 $ (4,118,835) $ 2,256,577
========== ======== =========== ============= ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
F-5
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- --------------------------
1997 1996 1996 1995
------------- ------------- ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,060,051) $ (95,010) $ (962,410) $ (699,665)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred costs 50,000 - - -
Accrued interest income on marketable securities - - (6,118) -
Depreciation and amortization 28,986 44,560 17,500 41,611
Amortization of deferred debt costs - - 152,398 -
Changes in assets and liabilities:
Restricted cash - (112,023) - -
Accounts receivable (129,899) (278,602) (129,362) (5,000)
Allowance for doubtful accounts (105,000) 115,000 115,000 -
Inventories (91,488) (47,232) (200,633) 75,981
Prepaid consulting fees 38,314 - (136,812) -
Prepaid expenses and other current assets (125,099) 7,811 (6,045) (7,811)
Security deposits (184,990) 925 (46,825) (925)
Accounts payable 943,331 64,794 20,433 (55,801)
Accrued expenses 22,424 (19,732) (84,111) 99,898
Payroll payable (98,399) 70,895 (113,903) 79,864
Payroll taxes payable (28,003) (127,678) (207,255) 89,520
Consulting fees payable (21,594) 23,775 (209,099) 79,231
Interest payable - related parties 17,099 29,378 21,702 63,306
Deferred revenue (24,440) 106,605 (76,000) 6,000
------------ ---------- ----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (768,809) (216,534) (1,851,540) (233,791)
------------ ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,485,240) (7,209) (190,965) (11,214)
Sale of marketable securities 1,975,386 - - -
Purchases of marketable securities - - (1,969,268) -
Deferred costs - - (50,000) -
------------ ---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (509,854) (7,209) (2,210,233) (11,214)
------------ ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - other 90,000 - - 7,000
Payments of offering costs - (188,360) (1,326,728) -
Proceeds from issuance of warrants in connection with
private placement - 28,000 22,000 8,000
Proceeds from notes payable - related parties - 25,494 248,000 53,190
Repayments of notes payable - related parties - (100,000) (422,185) (8,635)
Proceeds from long-term debt - 703,000 703,000 192,000
Proceeds from issuance of common stock - - 7,531,875 90,266
Repayments of notes payable - other - (149) (500) (7,000)
Repayment of long-term debt - - (870,000) -
Payments of deferred debt costs - - (101,633) (50,765)
------------ ---------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 90,000 467,985 5,783,829 284,056
------------ ---------- ----------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,188,663) 244,242 1,722,056 39,051
CASH AND CASH EQUIVALENTS - beginning 1,761,186 39,130 39,130 79
------------ ---------- ----------- ----------
CASH AND CASH EQUIVALENTS - ending $ 572,523 $ 283,372 $ 1,761,186 $ 39,130
============ ========== =========== ==========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment through
issuance of note payable $ 72,464 $ - $ - $ -
============ ========== =========== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 11,193 $ 9,000 $ 89,631 $ -
Cash paid for income taxes - - - -
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
F-6
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
Tellurian, Inc. ("Tellurian"), 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. Tellurian also provides consulting and parts/repair services
related to computer image generator technology. These operations constitute
a single business segment. Tellurian 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, Tellurian formed a wholly-owned subsidiary in the State of
Delaware (the "Company") and merged Tellurian into such corporation on July
2, 1996. Pursuant to the merger, the holders of all of the shares of common
stock of Tellurian exchanged their 1,600,000 shares outstanding for
1,600,000 shares of the Company on a pro rata basis.
In March 1997, the Company formed a subsidiary, Cyberport Niagara, Inc.
("Cyberport") in the province of Ontario, Canada in which the Company holds
a 87.5% interest. Cyberport operates a tourist entertainment center in
Niagara Falls, Ontario, Canada which opened on or about June 27, 1997. No
minority interest has been reflected in Cyberport at June 30, 1997 since
the loss applicable to the minority interest exceeds the minority interest
in the equity capital of this corporation.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
(and its subsidiary in 1997) as at December 31, 1996 and June 30, 1997
(unaudited), the years ended December 31, 1996 ("Fiscal 1996") and 1995
("Fiscal 1995") and the six months ended June 30, 1997 ("1997 Period")
(unaudited) and 1996 ("1996 Period") (unaudited).
Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at June 30, 1997 and the
consolidated statements of operations, stockholders' equity and cash flows
for the six months ended June 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.
F-7
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Consolidation
The consolidated financial statements for the six months ended June 30,
1997 (unaudited) include the accounts of the Company and its subsidiary.
All significant intercompany transactions have been eliminated in
consolidation.
Deferred Revenue
Deferred revenue consists of customer advances which are reflected in
current liabilities and are expected to be recognized as revenue when the
finished product is shipped.
Revenue Recognition
Sales are recognized when the finished product is shipped or when services
are performed.
Cash Equivalents
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
Marketable Securities
The Company classified all of its marketable securities as
held-to-maturity, and accounted for these investments at amortized cost.
Accordingly, no adjustment for unrealized holding gains or losses was
reflected in the Company's consolidated financial statements. At December
31, 1996, the Company's held-to-maturity securities consisted of treasury
bills with contractual maturities from six months to two years and the
carrying amount of these investments approximated market value. The
marketable securities were sold in 1997 (unaudited).
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.
F-8
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Leasehold improvements are amortized over the life of the lease.
Expenditures for repairs and maintenance are charged to expense as
incurred.
Deferred Debt Costs
Deferred debt costs represent costs incurred in connection with the
Company's private placement agreement (see Note 7). The costs were to be
amortized over the respective terms of the promissory notes issued. As the
promissory notes were repaid from the proceeds of the public offering (see
Note 12), all incurred costs were charged to operations.
Deferred debt costs amounted to $-0-, $-0-, $152,398 and $-0- for the 1997
period (unaudited), 1996 period (unaudited), fiscal 1996 and fiscal 1995,
respectively.
Research and Development
Research and development costs are charged to expense in the period
incurred. Research and development costs amounted to $397,843, $275,030,
$688,103 and $423,770 for the 1997 period (unaudited), 1996 period
(unaudited), fiscal 1996 and fiscal 1995, respectively.
F-9
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation of Foreign Currency
The foreign currency financial statements of divisions 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 and intercompany balances at
historical exchange rates. Translation adjustments were accumulated but
have not been included as a separate component of equity at June 30, 1997,
because it has been deemed to be immaterial.
Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they occur.
In 1995, Tellurian was an "S" corporation for federal and South Carolina
purposes whereby net income or loss was recorded by the stockholders on
their individual income tax returns. There were no corporate income taxes
or deferred income taxes.
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.
New Accounting Standards
The new pronouncements issued in 1997 will not have any material impact on
the 1997 consolidated financial statements. The disclosures required under
these pronouncements will be implemented at their respective effective
dates.
F-10
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $ 265,000 $ 217,663
Work-in-process 114,339 43,942
Finished goods - 26,246
---------- ----------
$ 379,339 $ 287,851
========== ==========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- -----------------
(Unaudited)
<S> <C> <C>
Display and entertainment units $ 770,163 $ -
Equipment 193,016 135,279
Vehicles 117,558 84,039
Computer software 62,863 29,900
Office furniture 62,998 4,973
Leasehold improvements 1,627,167 21,220
------------ ----------
2,833,765 275,411
Less: Accumulated depreciation
and amortization 98,871 69,235
------------ ----------
$ 2,734,894 $ 206,176
============ ==========
</TABLE>
Depreciation expense amounted to $28,986, $5,750, $17,500 and $10,448 for
the 1997 period (unaudited), 1996 period (unaudited), fiscal 1996 and
fiscal 1995, respectively.
F-11
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 4 - DEFERRED COSTS
Deferred costs represent expenditures made on behalf of Cyberport. Deferred
costs were classified as a non-current asset as it was management's
intention to capitalize these expenditures when the corporation was formed.
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 commencing November 1, 1997 and
bear interest at the rate of 10% per annum.
Notes payable amounted to $496,736 at June 30, 1997 (unaudited) and
December 31, 1996. Accrued interest payable amounted to $332,405 at June
30, 1997 (unaudited) and $315,306 at December 31, 1996.
Interest expense charged to operations amounted to $24,598, $29,546,
$61,020 and $64,356 for the 1997 period (unaudited), 1996 period
(unaudited), fiscal 1996 and fiscal 1995, respectively.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Royalties (Note 10) $ 35,000 $ 35,000
Interest and penalties on unpaid
payroll taxes 27,168 20,698
Others 20,276 4,322
--------- ---------
$ 82,444 $ 60,020
========= =========
</TABLE>
F-12
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of 8% promissory notes totalling $895,000 issued
in connection with the Company's private placement of securities.
Subsequent to the completion of the public offering in November 1996, as
provided by their terms, notes totalling $870,000 were repaid and one
$25,000 note was converted into 25,000 shares of common stock.
Interest amounted to $-0-, $26,342, $50,313 and $-0- for the 1997 period
(unaudited), 1996 period (unaudited), fiscal 1996 and fiscal 1995,
respectively.
NOTE 8 - FINANCIAL INSTRUMENTS
The amounts at which cash and cash equivalents, accounts receivable,
accounts payable, notes payable-related parties and other current
liabilities are presented in the balance sheet approximate their fair value
due to their short maturities.
NOTE 9 - INCOME TAXES
Company operations are located in the United States and Canada (in 1997).
As such, loss before provision for income taxes and the provision for
income taxes are generated from domestic and foreign sources. The loss from
the Canadian operation in 1997 is not segregated as it was deemed not to be
material.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- ------------
(Unaudited)
<S> <C> <C>
Loss before provision for income taxes $ (1,060,051) $ (962,410)
============= ===========
The components of the provision for income taxes by taxing jurisdiction
are as follows:
Federal $ - $ -
State - -
------------- -----------
$ - $ -
============= ===========
</TABLE>
F-13
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (CONTINUED)
The major components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- -----------------
(Unaudited)
<S> <C> <C>
Net operating loss carryforwards $ 804,584 $ 338,964
Allowance for doubtful accounts 4,000 46,000
---------- ----------
808,584 384,964
Less: Valuation allowance (808,584) (384,964)
---------- ----------
$ - $ -
========== ==========
</TABLE>
A 100% valuation allowance is being provided at June 30, 1997 (unaudited)
and December 31, 1996 as it is uncertain if the above items would be
utilized.
A reconciliation of the Company's income tax expense computed at the U.S.
federal statutory tax rate of 35% and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996 1996
------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Income tax credit at statutory rate $ (371,018) $ (33,254) $ (336,844)
State income tax credits (53,003) (4,751) (48,120)
Net operating loss carryforwards 424,021 38,005 384,964
----------- --------- -----------
$ - $ - $ -
=========== ========= ===========
</TABLE>
The above information is not presented for 1995 as Tellurian was an S
corporation.
At December 31, 1996, the Company had unused net operating loss
carryforwards of approximately $847,000 expiring in 2011.
F-14
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
All of the Company's operations take place in leased facilities.
In April 1995, the Company entered into a five year lease for its office
and manufacturing facility. In May 1996, the Company terminated the lease
and moved to a new facility (first facility) entering into a two year lease
expiring in May 1998. The Company is also responsible for its share of
operating expenses (as defined). In November 1996, the Company entered into
a ten year lease for a second facility effective January 1, 1997, and moved
to such new facility. The Company is also responsible for its share of
operating expenses (as defined). In addition, the Company is still
responsible for the rent and operating expenses for the first facility
under the two year lease expiring in May 1998.
The Company also sublets a portion of the first facility under the May 1998
lease and receives approximately $1,400 per month.
In February 1997 (unaudited), Cyberport entered into a five year lease
for its tourist entertainment center in Niagara Falls, Ontario, Canada. The
lease expires in January 2002 and the average annual rental over the life
of the lease is $247,298. Cyberport, at its sole option, may purchase this
facility for $3,000,000 Canadian at any time from January 1, 1998 to July
31, 1998.
Future minimum lease payments are as follows:
Year Ending
December 31,
(Unaudited)
1997 $ 295,705
1998 331,745
1999 348,492
2000 352,344
2001 352,344
Thereafter 398,112
------------
$ 2,078,742
============
Rent expense amounted to $129,848, $48,742, $62,574 and $70,018 net of
rental income of $7,373, $-0-, $18,085 and $-0- for the 1997 period
(unaudited), 1996 period (unaudited), fiscal 1996 and fiscal 1995,
respectively.
F-15
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements
In November 1996, the Company entered into employment agreements with two
of its principal officers covering four year terms ending in November 2000.
The agreements provide for annual salaries aggregating $192,000 which are
payable as follows:
1997 $ 192,000
1998 192,000
1999 192,000
2000 160,000
In addition, the agreements provide for bonuses to be paid at the
discretion of the board of directors from a bonus pool equal to ten percent
(10%) of pre-tax income beginning in the year ended December 31, 1997.
Compensation under the agreements amounted to $96,000, $-0-, $32,000 and
$-0- for the 1997 period (unaudited), 1996 period (unaudited), fiscal 1996
and fiscal 1995, respectively.
Consulting Agreements
In connection with its initial public offering, the Company entered into a
financial consulting agreement with its underwriter for the period November
6, 1996 to November 5, 1998 (see Note 12). Consulting fees of $149,250 were
paid in November 1996 and the fees are being amortized over the two year
period. Consulting expense amounted to $37,313, $-0-, $12,438 and $-0- for
the 1997 period (unaudited), 1996 period (unaudited), fiscal 1996 and
fiscal 1995, respectively.
F-16
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
Of the agreed fee of $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).
The contract was substantially completed in October 1996 at which time
amounts were due to the Company. As of March 3, 1997, the Company had not
received any additional payments and it was the opinion of management that
the Company would not receive any payments in the future. As such, the
Company provided a reserve in allowance for doubtful accounts equal to the
recorded balance owed of $105,000. In addition, the Company did not record
any other future amounts owed under the agreement.
During the second quarter of 1997 (unaudited), the Company received a
partial payment of the amount owed and negotiated a payment schedule for
the balance. Such balance was fully repaid as of August 31, 1997
(unaudited).
F-17
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Technology Agreement (Continued)
In May 1995, the Company entered into an agreement to pay 15% of the
amounts 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 was
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 $8,573 for the year ended December 31, 1995.
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
public offering (see Note 12) but no later than March 31, 1997. These
amounts were paid in November 1996.
2. $72,500 will be due and payable one year after the initial payments.
$37,500 of this amount was paid in 1996.
Litigation (Unaudited)
In September 1997, actions were brought against the Company and Cyberport
by various construction firms claiming that services performed at the
tourist entertainment center (TEC) have not been fully paid for. The amount
of the claims total approximately $1,400,000.
Management has acknowledged that it believes certain monies remain
outstanding and owed by Cyberport but that a significant amount of such
monies were to be paid directly to the construction firms by the owner and
landlord of the facility housing the TEC. The owner and landlord has failed
to make the payments, nor has acknowledged the obligation to do so.
Management does not believe that the Company has any direct obligation in
this matter, nor does it believe the Company acted in a way to lead the
claimants to believe that the Company had any responsibility for the
payments. However, if the Company and Cyberport are unsuccessful in
defending these claims, Cyberport will be responsible for the obligation.
F-18
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 11 - REVENUES
Revenues consist of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- ---------------------------
1997 1996 1996 1995
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Real time image generators $ 100,030 $ 32,610 $ 166,386 $ 267,428
Consulting fees 193,029 458,000 598,245 169,558
Parts and repairs 4,850 51,674 54,749 40,325
Cyberport admissions 1,707 - - -
---------- ---------- ----------- ----------
$ 299,616 $ 542,284 $ 819,380 $ 477,311
========== ========== =========== ==========
</TABLE>
The following is a summary of information by geographic area:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- ---------------------------
1997 1996 1996 1995
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
Revenues
<S> <C> <C> <C> <C>
United States $ 104,866 $ 84,596 $ 197,760 $ 379,311
Republic of China 192,953 457,688 621,620 71,000
Canada 1,797 - - 27,000
---------- ---------- ----------- ----------
$ 299,616 $ 542,284 $ 819,380 $ 477,311
========== ========== =========== ==========
</TABLE>
As of December 31, revenues from major customers are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------- -----------------------
1997 1996 1996 1995
------------- ------------- ------------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Customer A 64.4% 72.9% 75.9% 31.8%
Customer B 17.5% 8.9% 16.0% 20.5%
Customer C 16.3% 5.6% - 10.7%
</TABLE>
F-19
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - STOCKHOLDERS' EQUITY
Initial Public Offering
In November 1996, the Company completed its initial public offering by
filing a registration statement on Form SB-2 under the Securities Act of
1933, as amended. The Company offered 1,400,000 shares of $.01 par value
common stock and 2,127,500 five-year warrants (including the underwriter's
over-allotment option) to purchase 2,127,500 shares of its common stock at
$6.00 per share. The Company raised $6,205,147, which was net of offering
costs of $1,326,728. In addition, 450,000 shares were sold by certain
existing stockholders for $2,250,000 before offering costs. The Company did
not receive any proceeds from the sale of these shares.
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.
Warrants
On December 27, 1995 and January 22, 1996, the Company issued a total of
3,000,000 warrants to purchase 3,000,000 shares of its common stock at an
exercise price of $6.00 per share. The warrants were issued in connection
with the subordinated promissory notes and were valued at $.01 per warrant
amounting to $30,000. Such amount was credited to additional paid-in
capital. In addition, the Company issued 300,000 warrants to purchase
300,000 shares of its common stock at $6.00 per share for $6,000.
On June 27, 1996, an agreement was signed cancelling 300,000 of the
warrants. In addition, upon the completion of the initial public offering,
the balance of the warrants (3,000,000) automatically converted to warrants
identical to those sold to the public.
F-20
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)
Outstanding warrants at June 30, 1997 (unaudited) and December 31, 1996 are
as follows:
Outstanding Exercise Exercise
Warrants Price Period
-------- ----- ------
5,127,500 $6.00 November 6, 1996 -
November 5, 2001
No warrants were exercised during 1996 nor 1997.
NOTE 13 - 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 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 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 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.
F-21
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 13 - STOCK OPTION PLAN (CONTINUED)
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 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 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 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).
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.
Outstanding stock options are as follows:
<TABLE>
<CAPTION>
Outstanding Exercise
Warrants Price Exercise Period
-------- ----- ---------------
<S> <C> <C> <C>
June 30, 1997 (unaudited)
300,000 $ 5.00 July 1, 1997 - June 1, 2006
40,000 $ 5.25 January 1, 1998 - June 1, 2006
December 31, 1996
300,000 $ 5.00 July 1, 1997 - June 1, 2006
</TABLE>
No options were exercised during 1996 nor 1997.
NOTE 14 - RETIREMENT BENEFITS
On January 1, 1996, the Company established a simplified employee pension
plan covering substantially all employees who meet eligibility
requirements. Retirement costs amounted to $-0-, $-0-, $33,691 and $-0- for
the 1997 period (unaudited), 1996 period (unaudited), fiscal 1996 and
fiscal 1995, respectively.
NOTE 15 - 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-22
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 16 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for the stock options granted. No expense was recognized. If the Company
had elected to recognize expense for the stock options granted based on the
fair value at the date of grant consistent with the method prescribed by
SFAS No. 123, net loss and loss per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 (Unaudited) December 31, 1996
----------------------------- -----------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss $ (1,060,051) $ (1,077,243) $ (962,410) $ (1,228,660)
Loss per share (.35) (.36) (.53) (.68)
</TABLE>
The fair value of the stock options used to compute pro forma net loss and
loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted
average assumptions: expected volatility of 5%; risk free interest rates of
6.3% to 6.5%; and an expected holding period of three years.
NOTE 17 - PROPOSED PUBLIC OFFERING (UNAUDITED)
The Company is filing a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, for the purpose of registering
securities for sale to the holders of its warrants (see Note 12).
Pursuant to the registration statement, the Company's tender offer is on
the following terms:
1. Warrant holders who tender their warrants and $________ per tendered
warrant will receive one unit for each warrant tendered.
2. Each unit consists of one share of the Company's common stock and one
new warrant identical to the tendered warrant, except that the new
warrant will not be exerciseable until _______________.
The tender offer is being limited to 1,300,000 units. If the offering is
oversubscribed, the number of units subscribed to will be offered on a pro
forma basis.
F-23
<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
II-1
<PAGE>
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.
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 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.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
Securities and Exchange Commission
Filing Fee $
NASDAQ Filing Fee $
Legal Fees $
Accounting Fees $
Blue Sky Fees and Disbursements $
Printing $
Miscellaneous $
--------
Total $150,000
- ---------------
* All amounts in the table above will be supplied by amendment except as
otherwise set forth.
** 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.
II-3
<PAGE>
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 Albert Donald
Wangerin, 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 shares to Richard
Mathiesen, 2,958 shares to Mat Adams, 45,000 shares to John A. 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 C.
Cioffoletti and 125,000 shares to Matthew Langdon.
Item 27. Exhibits
(a) Exhibits. The following exhibits have been previously filed unless
otherwise noted. All previously filed exhibits are incorporated by reference
unless otherwise indicated to Form SB-2 Registration Statement, File #333-9741.
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation of Registrant
3(b) By-Laws of Registrant
3(c) Amendment to Articles of Incorporation to be
submitted to stockholders for approval at
Tellurian's upcoming annual meeting **
4(a) Specimen of Common Stock
II-4
<PAGE>
4(b) Form of Warrant Agreement including Form of
Warrant
4(c) Form of Underwriter's Stock Warrants
4(d) Form of Underwriter's Warrants
4(e) Form of Amendment to Warrant Agreement**
4(f) Unit Certificate **
5 Opinion re: legality **
10(a) Employment Agreement dated November 8, 1996
to be entered into between Dr. Ronald Swallow
and the Registrant (1)
10(b) Employment Agreement dated November 8, 1996
between Stuart French and the Registrant (1)
10(c) Lease for Facilities in Mahwah, New Jersey (1)
10(d) Transfer Technology Agreement dated January 1,
1996 between Voyager Graphics, Inc. and the
Registrant
10(e) Agreement dated November 14, 1994 between TTY
Graphics, Inc., Voyager Simulation Ltd. and
the Registrant.
10(f) Letter Agreement dated May 26, 1995 between
the Registrant and TTY Graphics, Inc. and
amendment thereto dated July 17, 1996.
10(g) 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(h) Assignment Agreement dated as of November 5,
1991 between TTY Graphics, Inc. and the
Registrant
10(i) Letter Agreement dated August 1, 1996 and
August 2, 1995 between Greg Gustin and the
Registrant
10(j) Agreement dated July 23, 1996 between TTY
Graphics, Inc. and the Registrant
10(k) 1996 Incentive and Non-Statutory Stock Option
Plan
II-5
<PAGE>
10(l) Letter Agreement between the Registrant,
Voyager Graphics Inc., Voyager Simulation
Company Ltd. and TTY Graphics Inc.
10(m) Consulting Agreement with J.W. Barclay& Co.,
Inc.
10(n) Merger and Acquisition Agreement with J.W.
Barclay & Co., Inc.
10(o) Letter Agreement between the Registrant and
Charles Powers
10(p) Letter Agreement between the Registrant and
Fightertown
10(q) Consulting Agreement dated March 26, 1997 with
Eye Wonders Studios, Inc. (2)
10(r) Employment Contract with Robert Winterford (2)
10(s) Purchase Agreement Option with Niacan Ltd. (2)
10(t) Intellectual Property Agreement with Eye
Wonder (2)
10(u) Lease with Niacam Ltd. (3)
11 Earnings per share - See notes to financial
statements
21 Subsidiaries of Registrant (4)
23 Consent of Miller, Ellin & Co.*
27 Selected Financial Data *
99 Letter of Transmittal **
---------------
* Filed herewith.
** To be filed by Amendment
(1) Incorporated by reference to the Registrant's
Form 10-KSB for its fiscal year ended December
31, 1996.
(2) Incorporated by reference to the Registrant's
Form 10-QSB for its quarter ended March 31,
1997.
(3) Incorporated by reference to the Registrant's
Form 10-QSB for its quarter ended June 30,
1997.
II-6
<PAGE>
(4) Cyberport Niagra, Inc., an 87.5% owned
subsidiary of Tellurian, incorporated in
Ontario, Canada, and does business under the
name Cyberport.
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
II-7
<PAGE>
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-8
<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 Mahwah,
State of New Jersey on the 30th day of September, 1997.
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:
Signatures Titles Date
- ---------- ------ ----
/s/ Dr. Ronald Swallow Chairman of the
- ------------------------- Board, Chief
Dr. Ronald Swallow Executive Officer September 30,1997
/s/ Stuart French President and a Director
- ------------------------- of the Company September 30,1997
Stuart French
/s/ Richard Swallow Vice-President of
- ------------------------- Program Management,
Dr. Richard Swallow Secretary and a Director
of the Company September 30,1997
/s/ Michael Hurd Vice President of
- ------------------------- Administration and
Michael Hurd Finance and Chief
Financial and Accounting
Officer September 30, 1997
II-9
<PAGE>
EXHIBIT INDEX
(a) Exhibits. The following exhibits have been previously filed unless
otherwise noted. All previously filed exhibits are incorporated by reference
unless otherwise indicated to Form SB-2 Registration Statement, File #333-9741.
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation of Registrant
3(b) By-Laws of Registrant
3(c) Amendment to Articles of Incorporation to be
submitted to stockholders for approval at
Tellurian's upcoming annual meeting **
4(a) Specimen of Common Stock
4(b) Form of Warrant Agreement including Form of
Warrant
4(c) Form of Underwriter's Stock Warrants
4(d) Form of Underwriter's Warrants
4(e) Form of Amendment to Warrant Agreement**
4(f) Unit Certificate**
5 Opinion re: legality **
10(a) Employment Agreement dated November 8, 1996
to be entered into between Dr. Ronald Swallow
and the Registrant (1)
10(b) Employment Agreement dated November 8, 1996
between Stuart French and the Registrant (1)
10(c) Lease for Facilities in Mahwah, New Jersey (1)
10(d) Transfer Technology Agreement dated January 1,
1996 between Voyager Graphics, Inc. and the
Registrant
10(e) Agreement dated November 14, 1994 between TTY
Graphics, Inc., Voyager Simulation Ltd. and
the Registrant.
10(f) Letter Agreement dated May 26, 1995 between
the Registrant and TTY Graphics, Inc. and
amendment thereto dated July 17, 1996.
10(g) 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(h) Assignment Agreement dated as of November 5,
1991 between TTY Graphics, Inc. and the
Registrant
10(i) Letter Agreement dated August 1, 1996 and
August 2, 1995 between Greg Gustin and the
Registrant
10(j) Agreement dated July 23, 1996 between TTY
Graphics, Inc. and the Registrant
10(k) 1996 Incentive and Non-Statutory Stock Option
Plan
<PAGE>
10(l) Letter Agreement between the Registrant,
Voyager Graphics Inc., Voyager Simulation
Company Ltd. and TTY Graphics Inc.
10(m) Consulting Agreement with J.W. Barclay& Co.,
Inc.
10(n) Merger and Acquisition Agreement with J.W.
Barclay & Co., Inc.
10(o) Letter Agreement between the Registrant and
Charles Powers
10(p) Letter Agreement between the Registrant and
Fightertown
10(q) Consulting Agreement dated March 26, 1997 with
Eye Wonders Studios, Inc. (2)
10(r) Employment Contract with Robert Winterford (2)
10(s) Purchase Agreement Option with Niacan Ltd. (2)
10(t) Intellectual Property Agreement with Eye
Wonder (2)
10(u) Lease with Niacam Ltd. (3)
11 Earnings per share - See notes to financial
statements
21 Subsidiaries of Registrant (5)
23 Consent of Miller, Ellin & Co.*
27 Selected Financial Data (4)
99 Letter of Transmittal**
- ---------------
* Filed herewith.
** To be filed by Amendment
(1) Incorporated by reference to the Registrant's
Form 10-KSB for its fiscal year ended December
31, 1996.
(2) Incorporated by reference to the Registrant's
Form 10-QSB for its quarter ended March 31,
1997.
(3) Incorporated by reference to the Registrant's
Form 10-QSB for its quarter ended June 30,
1997.
(4) Previously filed with reports under Exchange
Act.
(5) Cyberport Niagra, Inc., an 87.5% owned
subsidiary of Tellurian, incorporated in
Ontario, Canada, and does business under the
name Cyberport.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form SB-2 of Tellurian, Inc.
of our report dated March 3, 1997 relating to the financial statements of the
Company for the years ended December 31, 1996 and 1995.
We also consent to the reference to us under the heading "Experts".
CERTIFIED PUBLIC ACCOUNTANTS
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX
MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 572,523 1,761,186
<SECURITIES> 0 1,975,386
<RECEIVABLES> 264,261 134,362
<ALLOWANCES> 10,000 115,000
<INVENTORY> 379,339 287,851
<CURRENT-ASSETS> 1,419,703 3,125,602
<PP&E> 2,833,765 275,411
<DEPRECIATION> 98,871 69,235
<TOTAL-ASSETS> 4,411,210 4,498,379
<CURRENT-LIABILITIES> 2,154,633 1,181,751
<BONDS> 0 0
0 0
0 0
<COMMON> 30,025 30,025
<OTHER-SE> 2,226,552 3,286,603
<TOTAL-LIABILITY-AND-EQUITY> 4,411,210 4,498,379
<SALES> 299,616 819,380
<TOTAL-REVENUES> 299,216 819,380
<CGS> 162,080 284,007
<TOTAL-COSTS> 162,080 284,007
<OTHER-EXPENSES> 1,220,212 1,273,224
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,292 111,333
<INCOME-PRETAX> (1,060,051) (962,410)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,060,051) (962,410)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,060,051) (962,410)
<EPS-PRIMARY> (.35) (.53)
<EPS-DILUTED> (.35) (.53)
</TABLE>
