<PAGE>
Filed pursuant to Rule 424b3
Registration No. 333-36871
PROSPECTUS
TELLURIAN, INC.
1,300,000 UNITS OFFERED TO THE HOLDERS
OF 5,127,500 COMMON STOCK PURCHASE WARRANTS
This Offer shall commence on December 19, 1997 and expire 20 business days
thereafter on January 20, 1998, 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") and (ii) the resale of 3,000,000 of the 5,127,500 Warrants
being sold by certain Warrant Holders (the Warrant Holders") 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. Warrant Holders may commence offering their securities
for resale at any time after the date of this Prospectus. Accordingly, such
securities may be sold concurrently with the Issuer tender offer described
below. Such securities may be sold for each Warrant Holder's respective account
in the open market at the prices prevailing therein, or in individually
negotiated transactions, at such prices as may be agreed upon. None of the
Warrant Holders have been engaged by the Company to perform any services for the
Company in connection with the Issuer tender offer, although Warrant Holders may
elect to tender their Warrants pursuant to the terms of the Issuer tender offer.
See "Warrant Holders."
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. Since 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 December 19, 1997, Warrant holders who tender their Warrants
and $2.625 per tendered Warrant (the "Offer Price") during the tender offer
period (as defined
<PAGE>
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 July 20, 1998 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 December 19, 1997 and expire 20 business days thereafter on January 20, 1998
(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 good check (preferably a certified check or
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 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.
FOR FLORIDA RESIDENTS ONLY:
<PAGE>
RESIDENTS OF THE STATE OF FLORIDA MAY ONLY EXERCISE THEIR WARRANTS OR
TENDER THE WARRANTS PURSUANT TO THE ISSUER TENDER OFFER THROUGH A BROKER/DEALER
REGISTERED IN THE STATE OF FLORIDA OR IN RELIANCE UPON AN EXEMPTION OR EXCEPTION
UNDER THE FLORIDA SECURITIES AND INVESTMENT AND PROTECTION ACT.
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.
The following table illustrates the per Unit and maximum gross proceeds
that may be received by the Company pursuant to the Offer.
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) the Company (2)
- ----------------------------------------------------------------------------
Per Unit $2.625 -0- $2.625
- ----------------------------------------------------------------------------
Total Maximum $3,412,500 -0- $3,412,500
- ----------------------------------------------------------------------------
______________
(1) No compensation (or indemnification) pursuant to the offer or exercise
of warrants is payable to any member of the National Association of
Securities Dealers, Inc. ("NASD") including, without limitation, J.W.
Barclay & Co., Inc. ("Barclay"), the Managing Underwriter of the
Company's initial public offering. The Company has not engaged Barclay
or any other member of the NASD to perform any services for the Company
in connection with the Offer or exercise of Warrants.
(2) Before estimated expenses of this offering of $150,000.
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 December 18, 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 is a reporting company pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is required to file proxy statements and other information with the
Securities and Exchange Commission (the "Commission").
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form SB-2, File No. 333-36871 (of which this
Prospectus is a part) under the Securities Act with respect to the securities
offered hereby and Form SB-2 Registration Statements File No. 333-9741. 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.
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RESTRICTION IN CERTAIN STATES
THE OFFER TO WARRANT HOLDERS WITH RESPECT TO THE UNITS TO BE ISSUED UPON THE
TENDER OF THE WARRANTS AND CASH AND SUBSEQUENT ACCEPTANCE BY THE COMPANY IS
EXPECTED TO BE QUALIFIED OR IS BELIEVED TO BE EXEMPT FROM QUALIFICATION IN THE
FOLLOWING JURISDICTIONS: AK, AR, CO, CT, DE, DC, FL, GA, HI, ID, IL, IA, KS, LA,
MD, MS, MT, NB, NV, NH, NY, OK, PA, PR, RI, SC, SD, TX, UT, VA, VT AND WA.
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 AFTER RECEIPT OF NOTICE FROM THE COMPANY.
PROSPECTUSES WILL BE MAILED TO ALL WARRANT HOLDERS OF RECORD AS OF THE DATE OF
THIS PROSPECTUS WHO RESIDE IN THE STATES LISTED ABOVE AND TO WARRANT HOLDERS WHO
RESIDE IN OTHER STATES WHERE THEY CAN SATISFY THE COMPANY AS TO THE
APPLICABILITY OF AN EXEMPTION FROM REGISTRATION IN THE STATE IN WHICH THE
INDIVIDUAL WARRANT HOLDER RESIDES. 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.
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.
GLOSSARY
Database: The source data for the image generator. A visual database is
comprised of a library of objects formed from 3-D polygons. Once a field of view
and viewing angle is established, the image generator constructs the picture
using appropriate elements of the database.
EAGLE: The Company's virtual reality image generator. The EAGLE is capable of
rendering 30,000 polygons every 1/30 of a second. The EAGLE is considered a
real time image generator.
Field Sequential Video: A method of producing color images from a black and
white picture tube. The technique is to present a red, green, or blue image
field on the tube; while presenting a red, green, or blue filter at the same
time. To the viewer's eye, the colors are integrated together and presented to
the brain as complete and valid color images. Field sequential video is employed
when color CRT's (cathode ray tubes) are not available in miniature sizes.
Full Immersion: A term used to depict a complete isolation into the computer's
world of virtual reality. The term is most frequently used when describing a
virtual reality helmet when only the computers image is available to the user.
Head Tracker: A means of depicting head movement when wearing a virtual reality
helmet. With a head tracker, the view presented to the eyes of the viewer is
3
<PAGE>
accurate to the world created by the computer. In most applications the head
tracker is either a magnetic sensing device or a mechanical link to the helmet.
IAAPA: The International Association of Amusement Parks and Attractions, an
industry association.
Location Based Entertainment: LBE's are venues for entertainment where the
guests can experience a wide selection of games, sports and rides all under one
roof. The LBE is usually located in large population centers and caters to
repeat customers (returning several times per month).
Real Time: A classification of speed when dealing with computer generated
images. A real time computer permits a smooth transition of motion within the
visual display. Flicker, or stepping of the image results from an update slower
than a new frame every 1/30th of a second.
Resolution: One method of measuring picture quality. The higher the resolution,
the higher the detail of the image. A typical TV image has 525 lines of data
presented on the screen. A standard computer screen has 968 lines, and thus a
more detailed image. The EAGLE is capable of 2,000 lines of data.
Resolution Formats: Common resolution formats range from low quality in the case
of 250 line LED's ("Light Emitting Diode") to mid range of video monitors at 680
lines to high resolution formats at 1,200 lines. The Company's EAGLE is capable
of 2,000 lines.
Tourist Entertainment Centers: Like the LBE, the TEC is a destination venue for
games, sports, and virtual reality experiences. The TEC however caters to an
infrequent guest and therefore must be located in a high traffic area.
Trainers/Simulators: Devices use to teach the operation and methodology of
expensive machines. The military's use of trainers/simulators has been the
foundation of virtual reality entertainment.
Virtual Reality: An artificial environment of sight, sound, and motion created
by computers.
Virtual Reality Helmet: A device placed on the head to position a video display
to the eyes of a viewer. If the helmet completely seals the viewer from all
other light except that which is presented by the computer, then the experience
is said to be one of total immersion.
4
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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 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").
5
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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 currently owned
100% by the Company. 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, Inc. is located at 300K Route 17 South, Mahwah, NJ 07430 an
its telephone number at this office is (201) 529-0939.
6
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<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")
and (ii) the resale of 3,000,000 of the 5,127,500 Warrants being sold by
certain Warrant Holders (the "Warrant Holders"). 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. See "Warrant
Holders."
Common Stock
outstanding before
offering 3,025,000 shares (1)
Common Stock
outstanding after
the offer 4,325,000 shares (2)
Use of Proceeds The net proceeds from the Offer or the exercise of Warrants
pursuant to their original terms will be applied toward general,
operating and administrative expenses, reduction of current
liabilities and notes payable, production and marketing of the
Tellurian helmet and working capital. See "Use of Proceeds."
Risk Factors The Securities offered hereby involve a high degree of risk
and substantial immediate dilution to investors. Prospective
investors, before purchasing any securities offered, should
review carefully and consider the information contained in the
Prospectus and particularly the items set forth under "Risk
Factors" and "Dilution."
</TABLE>
7
<PAGE>
NASDAQ SmallCap Common Stock "TLRN"
Symbols (3) Warrants "TLRNW"
<TABLE>
<CAPTION>
<S> <C>
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 December 19, 1997, Warrant holders who tender their
Warrants and $2.625 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 July 20, 1998 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 December 19, 1997 and expire 20 business days thereafter on
January 20, 1998 (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 good check (preferably a certified check or
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. Since November 5, 1997, the Warrants may be
redeemed by the Company, at $.30 per Warrant if certain
conditions are met; however, the Company does not intend to
redeem the Warrants prior to the Separation Date. If a holder
</TABLE>
8
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<TABLE>
<CAPTION>
<S> <C>
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 "to
Continental Stock Transfer & Trust Company
at the address set forth herein. See
"Description of Securities - Warrants."
- -----------------
(1) Does not include the following: (I) up to 5,127,500 shares of Common Stock
issuable upon exercise of Warrants or up to 1,300,000 shares 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) Does not include the securities referred to in note 1 above except for
the issuance of 1,300,000 Units pursuant to the Offer based upon the
assumption that 1,300,000 Warrants are tendered and accepted by the
Company, of which no assurances can be given in this regard.
(3) 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."
</TABLE>
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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>
Nine Months Ended
--------------------------------------- Year Ended Year Ended
September 30, September 30, Dec. 31, Dec. 31,
1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 370,701 $ 812,572 $ 819,380 $ 477,311
Gross Profit (74,603) 706,223 535,373 138,091
Net Loss (1) (1,815,209) (313,941) ( 962,410) (699,665)
Net Loss per
Common Share (.60) (.20) (.53) (.48)
Weighted Average
Number of
Common Shares
Outstanding (2) 3,025,000 1,600,000 1,817,708 1,450,000
</TABLE>
Balance Sheet Data:
- ------------------------------------------------------------------
September 30, Dec.31,
1997 1996
- ------------------------------------------------------------------
Working Capital $ (1, 712,631) $1,943,851
Total Assets 4,296,363 4,498,379
Long-Term Debt -0- -0-
Total Liabilities 2,794,944 1,181,751
Stockholders' Equity 1,501,419 3,316,628
================================================================================
(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
$1,815,209 and $313,941 for the nine months ended September 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
September 30, 1997, the Company has stockholders' equity of $1,501,419 and a
working capital deficit of $1,712,631. In the past two fiscal years and the nine
months ended September 30, 1997 the Company has spent an aggregate of $1,695,240
for research and product development purposes. For the nine months ended
September 30, 1997 and September 30, 1996 and for the years ended December 31,
1996 and 1995, the Company had sales of $370,701, $812,572, $819,380, and
$477,311, respectively. There can be no assurance that the Company will be able
to generate substantial revenues from operations or operate profitably in the
future. See "Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Deficit Working Capital-Need for Additional Financing. At
September 30, 1997, Tellurian has a deficit working capital of $1,712,631. The
Company is currently meeting its cash requirements from limited cash generated
from operations and limited cash resources that are left from the proceeds of
Tellurian's initial public offering. In light of the Company's working capital
deficit and continuing negative operating cash flows, the Company is dependent
upon immediate and substantial additional revenues from operations, the sale of
up to a majority interest in its Cyberport facility, the proceeds from this
offering and/or private financing to meet its obligations as a going concern.
With respect to a possible sale of up to majority interest in Cyberport, the
Company has active negotiations with various firms interested in acquiring the
Company's Cyberport interest as well as the right to open other Cyberport
licensed facilities. No assurances can be given that the Company will be
successful in its efforts to obtain the necessary cash to remain a going
concern. The unaudited financial statements have been prepared by Management on
a going concern basis. In the event that cash generated from the Company's plan
of operation as specified above are insufficient to meet its existing
obligations and on-going expenses (including those of Cyberport Niagara Inc.),
the Company may need to seek reorganization protection under applicable
bankruptcy laws. See "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 of $32,942
through September 30, 1997. The success of the Company is highly dependent upon
11
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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 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 such as its virtual reality helmet which the Company
has completed the development of working prototypes and intends to introduce the
prototypes at a trade show in November 1997, 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."
Revenues Dependent Upon a Limited Number of Customers. The Company
has in the past been dependent upon a limited number of customers which have
accounted for substantially all of the Company's revenues. See "Business -
Products." While Management believes that future revenues (from sources other
than Cyberport) are expected to be from a larger group of customers who are in
the entertainment market rather than from a limited group of customers that are
primarily in the simulation and
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training market, no assurances can be given that the Company will be successful
in expanding its customer base so as not to rely on sales from a limited number
of customers.
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 prototype helmet in laboratory conditions, it has not yet
placed its proprietary helmet prototype 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. 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
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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; Lack of Patent Protection. 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 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 rights under an assignable license
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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,
subject to the payment of certain royalties to Tellurian. Such agreement could
impact the Company's marketing efforts of the EAGLE should Voyager elect to sell
the EAGLE in North America. See "Licensing of Tellurian Technology."
Notes Due to Related Parties. The Company has a note payable to
Charles Powers, a founder of the Company, in the principal amount of $346,736
and against which the Company owes accrued interest of $337,464 as of September
30, 1997. This note became payable on demand on November 1, 1997. Should Mr.
Powers demand payment in whole or significant part, there can be no assurance
that the Company will have the cash resources to meet such demands. Management
is presently negotiating with Mr. Powers endeavoring to get the demand date
extended for at least one year. However, there can be no assurance that the
Company will be successful in obtaining such an extension. If an extension is
obtained, the Company has estimated that approximately $100,000 of the proceeds
of this offering, if any, may be paid to Mr. Powers. In the event such extension
is not obtained from Mr. Powers and he demands payment of his note at a time
when the Company is unable to pay such note, the Company may find it necessary
to seek protection from creditors by reorganizing under applicable bankruptcy
laws. See Risk Factor titled "Deficit Working Capital - Need for Additional
Financing." Also see "Use of Proceeds" and "Certain Transactions."
The Company has a $150,000 demand note payable to Celia Klimas, an
aunt of Dr. Richard Swallow, an officer and director of the Company. Dr. Swallow
has advised the Company that he controls the investment decisions of Ms. Klimas.
For this reason, the Company does not believe that the demand note will be
called in the immediate future, although no assurances can be given in this
regard. Accordingly, the Company has not allocated any proceeds of this offering
to repay such note. See "Certain Transactions."
Management's Broad Discretion in Use of Proceeds. Since an
estimated 25% or $500,000 of the estimated $2,000,000 of net proceeds of this
Offering, if any, are allocated to working capital and Management has reserved
the right to re-allocate the other uses of the net proceeds of this Offering
within the categories specified under "Use of Proceeds," Management of the
Company has broad discretion in the application of 100% of the net proceeds of
the Offering. Although the Company does not intend to use more than an estimated
$600,000 of the net proceeds of this Offering, if any, toward repayment of
related party debt or to settle certain litigation involving the Company and its
subsidiary, Cyberport Niagara, as describe herein, it is possible that
Management will be required to re-allocate a substantial portion of the net
proceeds of this Offering for said purposes if Management believes that it is in
the best interest of the Company. 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. Further, although the foregoing discussion and
use of proceeds estimate the net proceeds of this Offering at $2,000,000, since
the Offering is not underwritten, no assurances can be given that the Company
will realize any specified amount of proceeds from the Offer or exercise of
Warrants. See "Use of Proceeds."
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Agreement with Fightertown The Company recently entered into a
mutual Release and Settlement Agreement with Fightertown Entertainment, Inc. to
settle certain disputes that resulted in Fightertown filing a law suit against
Tellurian in the United States District Court, Central District of California.
The Settlement Agreement calls for the release of all claims against each party
other than claims arising out of the parties obligations under the Settlement
Agreement which obligations are discussed under "Business - Agreement with
Fightertown." In the event that Tellurian breaches its obligations under the
Settlement Agreement and such breach is not cured within 15 days of notice of
the breach, Fightertown may enter a $500,000 stipulated judgment in favor of
Fightertown for Tellurian's failure to comply with the terms of the agreement
and the damages caused to Fightertown's business. In the event that Tellurian
breaches the Settlement Agreement and fails to timely cure the breach, the
stipulated judgment may adversely impact Tellurian's operations. See "Business -
Agreement with Fightertown."
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 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."
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 (without any value being given to the Warrants
included in the Units) will be $1.10 per share as compared to the Offer Price of
$2.625 per share pursuant to the Offer, representing a dilution to new investors
of $1.90 per share, or approximately 72%. Additional dilution to public
investors will result to the extent that Warrants are exercised pursuant to
their
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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. Of these shares of Common Stock and warrants, 1,875,000 shares of
Common Stock and 5,127,500 Warrants held by the Warrant Holders are freely
tradeable in the public market without restriction under the Securities Act,
except for (i) securities owned 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 (ii) 3,000,000 Warrants (and shares of Common Stock issuable upon
exercise of same) owned by the Warrant Holders and registered for resale in
Tellurian's Registration Statement on Form SB-2, File No. 333-9741 which may not
generally be sold except with a current prospectus. Of the remaining shares of
Common Stock outstanding, 1,150,000 shares of Common Stock were issued as
"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
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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 OTC 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 OTC 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 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 acknowledgment 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.
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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. The 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
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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 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 and Committees Thereof. The
Company has four directors each of whom are officers of the Company. The absence
of outside or disinterested directors and committees composed of such
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.
However, in order to maintain Tellurian's NASDAQ listing, Tellurian is required
to obtain two outside directors by February 23, 1998 and establish an audit
committee composed of at least two independent directors. As of the date of this
Prospectus, the Company has not identified the anticipated outside directors. No
assurances can be given that Tellurian will be successful in this regard.
Continuing Influence of J.W. Barclay & Co., Inc. on the Company.
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. Further, John Bruno, a
principal of Barclay, is a principal stockholder of the Company by virtue of his
ownership of Underwriter's Stock Warrants to purchase 85,000 shares and
Underwriter's Warrants to purchase 85,000 Warrants which entitle the holder to
purchase an additional 85,000 shares. See "Security Ownership of Management and
Others" and "Selling Stockholders."
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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 December 19, 1997, Warrant holders who tender their
Warrants and $2.625 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 January 20, 1998 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 December 19, 1997 and expire 20 business days thereafter on
January 20, 1998 (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 good check (preferably
a certified check or 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 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 December
19, 1997 and expires January 20, 1998, the "Expiration Date" (20 business days
after the commencement of the Offer) unless the Warrant Holder withdraws the
tender by 12 midnight 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
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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 the Tender 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.
Procedure for Tendering Warrants
Except as otherwise stated below or in the Letter of Transmittal,
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
22
<PAGE>
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 good check (preferably a
certified check or 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 12:00 midnight Eastern Time on
January 20, 1998 (which represents the last day that the tender offer remains
open, and (ii) at any time subsequent to 12:00 midnight Eastern Time on February
18, 1998 (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 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.
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<PAGE>
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.
24
<PAGE>
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 the
corporate purposes specified below. Assuming that the Company receives net
proceeds from the Offer of $2,000,000, of which no assurances can be given, it
is anticipated that such proceeds will be applied over a period of approximately
12 months as follows:
Amount Percentage
------ ----------
Payment to Fightertown $20,000 (1%)
General operating, administrative
and marketing expenses of the
Company (including Cyberport) 380,000 (19%)
Reduction of current liabilities
and notes payable of the
Company including Cyberport (1) 600,000 (30%)
Capital outlay to produce and
market the Tellurian Helmet to
be used in conjunction with its
proprietary image generators 500,000 (25%)
Working Capital (2) 500,000 (25%)
------- ------
Total $ 2,000,000 (100%)
- ---------
(1) The Company owes $337,464 in principal and an additional $346,736 in
accrued interest to Charles Powers. Such funds are payable to Mr.
Powers upon his demand since November 1, 1997. Such funds were used
for general working capital purposes. The Company is attempting to
negotiate a one year extension of the note due to Mr. Powers which
would include a partial paydown of the accrued interest due on the
note. At September 30, 1997, Tellurian has current liabilities
totaling approximately $2,800,000.
(2) Amounts allocated to general working capital can be used for all
corporate purposes including without limitation payment toward current
liabilities and opportunities to establish other TEC's (or LBE's) as a
joint venture with other firms.
In the event that the net proceeds of this offering are less than
$2,000,000, such funds will first be applied on a pro rata basis to
meet general operating expenses and toward reduction of current
liabilities up to the estimated amounts described in the table above,
secondly toward production and marketing of the Tellurian-Helmet and
lastly toward general working capital. Any net proceeds received in
excess of $2,000,000 will be allocated toward working capital and will
be available for all proper corporate purposes.
25
<PAGE>
The Company is currently negotiating a $250,000 short-term loan
with a non-affiliated party. If successful, the loan would be made to the
Company and be repayable from the proceeds of the offering as the Company's
first priority in payment of funds. Any such payment would reduce the amount of
funds allocated to working capital. It is anticipated that such loan would bear
interest at the rate of 12% per annum and not be convertible into capital stock
of the Company. No assurances can be given that such financing will be
successful.
The foregoing represents the Company's best estimate of its
expected specific uses of the net proceeds of the Offering. 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, the sale of up to a majority interest in Cyberport, a
possible settlement of certain outstanding indebtedness of Cyberport, an
extension and partial payment of a note payable to a related party, establishing
other TEC's or LBE's with other joint venture partners, the market demand for
the Company's virtual reality products, and the market success of Tellurian's
products (including its new helmet). 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 the above categories 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 payment of dividends will be at the
discretion of the Board of Directors of Tellurian and will depend on the
Company's operating results, financial condition, capital requirements and such
other factors as the Board of Directors of Tellurian may deem relevant. See
"Risk Factors - No Dividends and None Anticipated" and "Description of
Securities."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Company as of September 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 (4,873,993)
-----------
Stockholders' equity 1,501,419
-----------
Total capitalization $ 1,501,419
===========
-----------
(1) Does not include the following: (i) up to 5,127,500 shares of
Common Stock issuable upon exercise of Warrants or up to
1,300,000 shares 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 from 10,000,000 to 25,000,000
shares and stockholders consented to such action on November
17, 1997.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected information has been derived from the historical
financial statements of Tellurian included elsewhere in this Prospectus and
should be read in conjunction therewith, including the notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
- ----------------------------------------------------------------------------------------------------
September
30, September 30 Dec. 31, Dec. 31,
1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 370,701 $ 812,572 $ 819,380 $ 477,311
Gross Profit (74,603) 706,223 535,373 138,091
Net Loss (1) (1,815,209) (313,941) (962,410) (699,665)
Net Loss per
Common Share (.60) (.20) (.53) (.48)
Weighted Average
Number of
Common Shares
Outstanding (2) 3,025,000 1,600,000 1,817,708 1,450,000
</TABLE>
Balance Sheet Data:
- ------------------------------------------------------------
September Dec. 31,
30, 1997 1996
- ------------------------------------------------------------
Working Capital $ (1,712,631) $ 1,943,851
Total Assets 4,296,363 4,498,379
Long-Term Debt -0- -0-
Total Liabilities 2,794,944 1,181,751
Stockholders'
Equity 1 ,501,419 3,316,628
================================================================================
(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.
28
<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;
o Establishment of a virtual reality showplace for
demonstrations of Tellurian products; and
o Establishing a TEC for the purpose of operating and
owning such a facility in order to generate revenues.
The market for free-standing image generators has proven to be
extremely limited. The development of the data-base to complete the experience
is a skill possessed by a limited number of companies in the industry, but the
majority of the potential customers for Tellurian products are arcades,
restaurants, and other entertainment facilities who rely on their supplier to
deliver a complete, ready to run experience. The Tellurian image generator has
the advantage of being able to display a 360 degree world in which all of the
players can be linked. The competitive edge that Tellurian has is that its'
world can be changed by any of the players and the resulting world is changed
for all of the players. Game software for this type of world must be developed
specifically for that world. Without both the image generator and the database
software, Tellurian has in the past been trying to sell to an extremely limited
market. The Tellurian product which now exists is one which is a free-standing
experience. Further, the completion of the helmet as described herein allows the
experience to be delivered to the end-user requiring very little physical space.
The space issue is also critical to end-users who evaluate the performance of
their investments on a "revenue per square foot basis". This combination will
allow Tellurian to market its products to distributors and large end users of
arcade type games, a market in which it had no access to before these
developments.
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
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<PAGE>
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 is encouraged by the progress it is making in completing the
virtual reality helmet to be used in conjunction with its proprietary image
generators. The helmet is now ready for introduction to the market and the
Company has allocated $500,000 of the proceeds of this offering for capital
outlay to produce and market the Tellurian Helmet to be used in conjunction with
its proprietary image generators. Working prototypes now exist which will be
unveiled for the first time at the IAAPA trade show in Orlando during November
of 1997. The Company will be offering the helmet based experience for delivery
by the second quarter of 1998. However, the Company cannot be certain that the
design principles it has decided upon will be successful in the marketplace.
While the initial reports indicate that the product can be manufactured at a
cost low enough to allow the Company to market the helmet at favorable sales
margins, the Company cannot be sure that the marketplace will accept the product
and the pricing which the Company intends to utilize. Management recognizes that
many competitors are actively engaged in the design and manufacture of products
intended for this use. Many of these competitors have more experience in helmet
design and manufacturing that the Company does, and many of these competitors
have more financial resources to draw upon than the Company. There can be no
assurance that the Company's design will be successful, nor that the Company
will find a ready market for the helmet. The Company expects that, if the helmet
design is successful, this medium will replace the larger and more expensive
means of delivering the video and audio images to its customers. Management
believes that, if successful, the helmet will represent a significant portion of
its future revenue.
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 summer business
in Niagara Falls, was critical to Management's plans to develop the group tour
business for the Fall and subsequent seasons. The exit interviews of those
people attending Cyberport have been extremely encouraging as has the early
interest shown by tour groups controlling important segments of the Niagara
Falls market. The Company promoted the facility in general and the Tellurian
experience extensively during the third quarter of 1997. Numerous
"free-of-charge" events were run in order to hasten the awareness of the
facility to the tourism industry in the Niagara region. Efforts concentrated on
ensuring strong relationships with group tour operators and guaranteeing prime
exhibit spots in the many tourist information booths in and around the Niagara
area
30
<PAGE>
for the 1998 season. As a result, revenues for the third quarter were not
strong, but Management remains confident that the marketing programs and overall
direction of Cyberport remains on target. Management is particularly encouraged
by the number of sales leads it has received for Tellurian products as a result
of the promotional efforts done by Cyberport staff.
The Company believes that its ability to operate this facility
successfully depends on elements both within and outside of its control,
including the success of its own products incorporated into this venture. 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.
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 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.
31
<PAGE>
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;
o Increasing revenues through marketing efforts of its new EAGLE
product now on display at its Cyberport facility; and
o Marketing 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 in the fourth quarter of 1997 at which it can demonstrate its EAGLE
product and its helmet technology. Also, the Company is actively pursuing sales
leads generated from the market recognition gained from the Cyberport
operations. The Company intends to continue its ongoing research and development
efforts and to expand and enhance the technical capability, design features and
range of its products. Tellurian has designed and installed complete games units
in its Cyberport facility and intends to pursue this concept in developing any
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 Tellurian's capital to allow
it to pursue subsequent opportunities. The Company has limited experience in
owning, financing and operating such centers, and is dependent in such areas
upon third parties to assist it or participate with it in completing such
centers. The Company is dependent upon joint ventures or revenue sharing
agreements with third parties or the sale of up to a majority interest in
Cyberport (or other financing) in order to establish other TEC's or LBE's.
Management estimates that opening entertainment facilities in addition to
Cyberport could range in cost from $2,000,000 to $4,000,000 dependent upon
location and the size of facility. The Company anticipates participating in any
future joint venture or revenue sharing project by providing its equipment to
the entertainment facility and having another party provide most (if not all) of
the financing. Any cash provided by the Company to a new entertainment facility
would be minimal unless the Company were able to obtain additional external
financing or sell up to a majority interest in the Company's Cyberport facility.
Of course, the amount of financing provided by the Company to any joint venture
or revenue sharing agreement would likely increase the Company's joint venture
interest or amount of revenues that it would be entitled to receive. There can
be no assurances that the Company will be successful in this regard or that it
will be able to derive profits from such operations.
32
<PAGE>
Results of Operations
Nine Months Ended September 30, 1997 vs. September 30, 1996
Tellurian and its' subsidiary had net sales for the nine months ended
September 30, 1997 of $370,701, a decrease of $441,871, or 54.4% from the
comparable period of the prior year. For the nine months ended September 30,
1997, the Company's gross profit was a ($74,603), a decrease of $750,826 from
the prior year. The principal cause of this reduction was the completion of the
Voyager consulting contract at the end of 1996 and the opening of the Cyberport
facility.
Research and development activities for the nine months ended September
30, 1997 was $583,367, representing an increase of $15,627 over the respective
period of the prior year. The increase in research and development activities
relates to the work on the virtual reality helmet earlier in the year.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 were $1,165,656, an increase of $787,648 or 208.4% from the
comparable period of the prior year. The increases in selling, general and
administrative expenses were partially due to the costs incurred in promotion of
the Cyberport facility, increased costs of professional services related to the
requirements imposed by virtue of the Company's recently concluded Initial
Public Offering, and rent on the new Company facility in Mahwah, New Jersey.
Selling, general and administrative expenses expressed as a percentage
of sales was approximately 314.4% for the nine months ended September 30, 1997,
an increase of 267.9% from the comparable period of the prior year. The
increased levels of administrative effort required as noted above coupled with
the reduced revenue due to the completion of the Voyager contract caused this
result.
For the nine months ended September 30, 1997, interest expense was
$42,500 compared to $87,813 for the comparable period of the prior year. This
decrease was due to the repayments of debt made following the completion of the
Company's Initial Public Offering.
The Company's net loss for the nine months ended September 30, 1997 was
$1,815,209 as compared to a loss of $313,941 for the comparable period of the
prior year. The increase in the net loss was primarily due to increases in
levels of activity in the development of Cyberport Niagara, increased cost of
research and development activities, and the loss of revenues from the Voyager
contract.
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.
33
<PAGE>
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.
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
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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.
During the nine months ended September 30, 1997 and 1996 net cash of
$713,864 and $298,533, respectively, was used in operating activities. The net
loss from operations for the period ended September 30, 1997, $1,815,209, was
partially offset by increases in accounts payable of $1,338,125. The primary
uses of cash were the increase in inventory and the increase in security
deposits principally related to the Cyberport facility. During the nine months
ended September 30, 1997 and 1996 net cash of $1,011,638 and $24,132,
respectively was used in investing activities. The 1997 activity relates
primarily to the construction of the Cyberport facility and the acquisition of
various display assets for that facility, net of the sale of marketable
securities. During the nine months ended September 30, 1997 and 1996, net cash
was provided by financing activities totaling $358,831 and $289,811,
respectively. The 1997 activity reflects financing notes obtained for the
Cyberport subsidiary as well as proceeds of notes used to finance the
acquisition of various property and equipment.
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.
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 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
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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."
The Company has experienced some delays in completing the virtual
reality helmet and has suffered from its inability to attract a major investor
to the Cyberport project as planned. These two events, coupled with the limited
revenues from sales of the Company's existing products and less than expected
receipts from Cyberport, have caused a continued drain of the Company's limited
capital . As a result, Management has been forced to devote significant efforts
to raising capital in support of the plan of operations. While many potential
investors have been approached about Cyberport, the financial difficulties that
the subsidiary is experiencing due to lower than expected revenues and to the
failure of a third party to honor certain financing obligations, has made it
difficult to complete the sale of any of the Company's Cyberport interest.
Management believes that the introductory marketing costs of the
virtual reality helmet and the working capital required to be able to meet
expected delivery needs will require the Company to utilize an estimated
$500,000 of additional capital. If the Company is not successful in obtaining
those funds, the introduction of the helmet will be negatively impacted and the
Company's operating results will be adversely impacted.
The Company is currently negotiating a $250,000 short-term loan with a
non-affiliated party. If successful, the loan would be made to the Company and
be repayable from the proceeds of the offering as the Company's first priority
in payment of funds. It is anticipated that such loan would bear interest at the
rate of 12% per annum and not be convertible into capital stock of the Company.
No assurances can be given that such financing will be successful. See "Use of
Proceeds."
At September 30, 1997, Tellurian has a deficit working capital of
$1,712,631. The Company is currently meeting its cash requirements from limited
cash generated from operations and limited cash resources that are left from the
proceeds of Tellurian's initial public offering. In light of the Company's
working capital deficit and continued negative operating cash flows, the Company
is dependent upon immediate and substantial additional revenues from operations,
the sale of up to a majority interest in its Cyberport facility, private
financing or the success of the Offer to Warrant holders described in this
Prospectus to meet its obligations as a going concern. With respect to a
possible sale of up to majority interest in Cyberport, the Company has active
negotiations with various firms interested in acquiring the Company's Cyberport
interest as well as the right to open other Cyberport licensed facilities. No
assurances can be given that the Company will be successful in its efforts to
obtain the necessary cash to remain a going concern. The foregoing represents
the Company's plan to meet its cash requirements for the next 12-15 months. The
unaudited financial statements have been prepared by Management on a going
concern basis. In the event that cash generated from the Company's plan of
operation as specified above are insufficient to meet its existing obligations
and on-going expenses (including those of Cyberport Niagara Inc.), the Company
may need to seek reorganization protection under applicable bankruptcy laws.
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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 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"). 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.
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,
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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
currently a wholly-owned subsidiary of the Company. 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
wholly-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 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
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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 was due in November 1997 and is in arrears. 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 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
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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 guests to visit Cyberport free during the month of
September. These hotel and tour operators are the key to gaining an important
share of the organized tour market which market 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 and that Cyberport's business is likely to be
seasonal with the spring through summer months being the high seasons. However,
the publicly available statistics from attractions such as the Butterfly Museum
demonstrate that tourists come to Niagara Falls in sufficient number 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.
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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 October 31, 1997,
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 for each applicable period. There were no sales of
AT-200 units during the first nine 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
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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 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
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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
anticipates reducing 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 June 30, 1997, 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 September 30, 1997 10 units have been delivered to
Fightertown and the remaining 22 units were in backlog. See "Agreement with
Fightertown."
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 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 the Company's custom designed
helmet has been completed. See "Management's Discussion and Analysis and Results
of Operations." 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.
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The helmet mounted visual system will be displayed and offered for sale
at the IAAPA trade show beginning on November 19, 1997. The Company will be
offering the unit with its air battle theme for delivery in 3 to 4 months. If a
customer wishes to purchase the hardware with a different VR experience, the
time required to program the data base would have to be added to that delivery
cycle. Since several variations of the air battle experience are nearing
software completion, the Company expects to be in full production and delivery
of helmet based units in the second quarter of 1998.
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. The Company is seeking to market its
products to distributors and large users of arcade type games. 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 by concentrating its efforts on the
displaying of Tellurian's products at Cyberport, it would be able to develop
sales leads for its products to the entertainment market. While this approach
has caused the short-term sale of small quantities of image generators to
suffer, the Company anticipates receiving significant sales leads as a result of
the Cyberport exposure.
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 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.
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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 (and expiring
January 1, 2001) 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 in a net amount of $850,000 to
Tellurian. As of August 31, 1997, Tellurian has been paid in full.
45
<PAGE>
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 September 30, 1997 Tellurian has
delivered 18 EAGLES to Fightertown and has a backlog of 22 EAGLES. Tellurian has
agreed with respect to future orders of EAGLE from Fightertown to deliver EAGLES
at a maximum price of $7,500 per EAGLE ($10,000 per EAGLE where certain
improvements to the EAGLE are made) and that Fightertown will receive the best
pricing offered to any Tellurian customers regardless of volume. In March 1994,
Tellurian has also agreed to give Fightertown a right of first refusal to
participate with Tellurian in any LBE site or product in which Tellurian wishes
to utilize conventional fighter jet simulation and to not copy Fightertown's
method of operating LBE's.
In November 1997, the Company entered into a settlement agreement with
Fightertown Entertainment, Inc. Tellurian has had an order and cash deposit
from Fightertown for several years which was, at the time it was received, a
vote of confidence in the Tellurian vision as seen at that time. Due to the
Company's financial difficulties prior to the Initial Public Offering completed
in November 1996, Tellurian was unable to complete the EAGLE and deliver units
to Fightertown until late in the second quarter of 1997. This extensive delay
caused significant strain between the two companies which recently resulted in
Fightertown initiating a lawsuit in The United States District Court, Central
District of California against Tellurian alleging various breaches of good faith
and demanding, among other things, return of their deposit plus interest on
those funds.
During the third quarter of 1997 and extending into November 1997, the
Company has worked diligently to complete installation of the first group of
EAGLES that were
46
<PAGE>
shipped to Fightertown and restore the confidence and working relationship that
had previously existed between the two companies. In November 1997, the Company
signed a mutual release and settlement agreement (the "Agreement") with
Fightertown Entertainment, Inc. ("Fightertown") to release all claims the
parties have against each other except for obligations created by the Agreement.
The terms of the Agreement include the following: (1) The Company must deliver
to Fightertown twenty-five (25) EAGLE units between November 13, 1997 and
January 31, 1998 and relinquish all ownership interest in eight AT-200 units
currently in Fightertown's possession. The Company accepts all payments (i.e.
the remaining deposit of $80,448) made to date in full payment of the 25 EAGLES;
(2) Fightertown will have the right to purchase up to thirty (30) additional
EAGLE units at any time on or before June 30, 1999 at a price of $6,000 per unit
and delivery terms as specified in the Agreement; (3) The Company agrees to pay
Fightertown $20,000 no later than January 31, 1998 for future consulting
services regarding the performance of Tellurian's EAGLES; (4) The Company agrees
to pay Fightertown $67,500 in three installments of $22,500 on August 15, 1998,
August 15, 1999 and August 15, 2000. The payments are for the prominent use and
display of the Fightertown name at the Cyberport facility, Fightertown's
expertise in the theming and running of air battle games and the Company's
acknowledgement that the Tellurian fight experience at Niagara Falls was modeled
after Fightertown's flight simulation experience; (5) The Company agrees not to
build a jet fighter based experience in which the image generators are housed in
the fuselage resembling any type of airplane or in any way intended to be used
in an experience similar to that which Fightertown employs. The Company may
offer jet fighters in free standing game units designed for arcades; (6) The
Company agrees to offer its new virtual reality helmet and new generation EAGLE
which would employ textured images to Fightertown for its own use at a price
such that no other customer is paying a lower price (except for a limited number
of promotional units sold or placed to potentially new users of these products);
and (7) The Company is executing a stipulated judgment in the amount of $500,000
in favor of Fightertown to be entered against the Company should the Company
fail to comply with any term of this Agreement. In the event of a breach of the
Agreement, Fightertown must notify the Company of the breach and give the
Company 15 days to cure the default before filing the stipulated judgment.
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. Research and development costs for the nine
months ended September 30, 1997, fiscal 1996 and fiscal 1995 were $583,367,
$688,103 and $423,770, respectively. See "Note 1 to the Notes to Consolidated
Financial Statements."
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. 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
47
<PAGE>
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, if financial resources
permit, 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.
Employees
- ---------
As of September 1997, 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.
48
<PAGE>
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. The Company is currently negotiating with the landlord to be released
from its lease.
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 eight construction firms (namely, Newman Bros. Limited, Unistrut
Canada Limited, Phoenix Wood Products, Star Tile Centre Limited, Ecco Electric
Limited, DBN Drywall & Acoustics Limited, PRW Excavating Contractors Ltd. and
Expoplex Incorporated) 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 these
payments. Management has reached an agreement in principle with the
representatives of the creditor group which, assuming the
49
<PAGE>
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 the date of
this Prospectus, Management is not aware of any other material legal proceedings
involving the Company or its subsidiaries.
50
<PAGE>
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 51 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:
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
51
<PAGE>
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 Choker 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. As of the date of this Prospectus, the
Company has not identified the two persons that it intends to invite to join its
Board of Directors as independent directors. 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.
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
52
<PAGE>
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.
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.
53
<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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
====================================================================================================================================
Long Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(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)
- ------------------------------------------------------------------------------------------------------------------------------------
Dr. Ronald 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436
Swallow,
Chief Executive
Officer (3)
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.
54
<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 ($54,000 for Mr. Swallow and
$42,000 for Mr. French) 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. No assurance can be given that such non-complete clauses will be
enforceable under applicable State laws. 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".
In 1997, the Board of Directors authorized the creation of a 401(K)
program in order to provide a retirement planning vehicle for its employees. As
employees of the Company, both Mr. Swallow and Mr. French would be eligible to
participate in this program. However, since the Board authorization for the
creation of the 401(K) program, the Company has taken no action to implement the
program (other than filing same with the Internal Revenue Service) and no
contributions have been made by the Company to this program nor are any
contemplated in the future.
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
55
<PAGE>
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.
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, Richard Swallow , Steven Morse and Lester
Morse received options to purchase 73,000 shares, 150,000 shares, 27,000 shares,
25,000 shares and 25,000 shares, respectively. The Company has also granted
options to purchase 40,000 shares to Michael Hurd allowing him to purchase
shares at $5.25 per share. These options vested on July 1, 1997 but are not
exercisable until January 1, 1998. All options granted by the Company were in
connection with services rendered to the Company. The Company has agreed with
J.W. Barclay, the managing underwriter of the Company's Initial Public Offering,
that it will not grant the remaining available options to purchase 55,000 shares
to 5% or greater shareholders for a period of three years, ending November 8,
1999 without the consent of said firm.
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<PAGE>
Options Grants Table - The following table provides information with
respect to individual grants of stock options by Tellurian during fiscal 1996 to
each of the executive officers named in the preceding summary compensation
table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential
Realized Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Option Term
(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
% of
Number of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal Price Expiration
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
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.
57
<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>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(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)
- ------------------------------------------------------------------------------------------------------------------------------------
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.
58
<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 approximately $.72 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 approximately
$.72 per share. There are currently 10,000 shares of Cyberport Niagara stock
outstanding.
59
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth certain information as of December 15,
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
December 15, 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) 40,000 1.3
All officers and directors
as a group (4 persons)(7)(8) 746,650 22.5
Mary Elizabeth
Huggins Trust (9) 430,049 14.2
John A. Bruno (10) 170,000 5.3
Jericho Limited
c/o InterTrust Management
S.A. P.O. Box 3292
126 rue de la
Pelisserie 1211 Geneva 3
Switzerland (11) (12) 2,200,000 42.1
Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (11) (13) 800,000 20.9
- -------------
60
<PAGE>
(1) Unless otherwise indicated below, all shares are owned beneficially and
of record.
(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) Includes options to purchase 40,000 shares, which options become
exercisable at $5.25 per share commencing January 1, 1998.
(8) Includes options to purchase 290,000 shares.
(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. Mr.
Bruno's shares include 170,000 shares issuable upon exercise of the
Underwriter's Stock Warrants and Warrants underlying the Underwriter's
Warrants, issued in connection with Tellurian'a initial public
offering.
(11) Represents Common Stock issuable upon exercise of Warrants. See
"Warrant Holders."
(12) The beneficial owner of Jericho Limited is Louis Carlos SantaMaria. The
directors of Jericho Limited are Louis Carlos SantaMaria, and Jane
Borgognon.
(13) The beneficial owner and sole officer and director of Imafina S.A. is
Hubert Hendrickx.
61
<PAGE>
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.
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 September 1, 1997, Mr. Powers was owed approximately $684,200, inclusive
of interest at a rate of 10% per annum. Such $684,200 includes $346,736 of
principal and $337,464 of accrued and unpaid interest . Previously, the Company
has repaid Powers a total of $221,200. This loan is payable upon demand after
November 1, 1997. However, as of November 17, 1997, Mr. Powers has not demanded
payment. 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.
From inception through the completion of the initial public offering in
November 1996, Seophia Swallow, Richard Swallow, Celia Klimas, Stuart French and
Sandra Swallow made various cash loans to Tellurian and were repaid from the
proceeds of the initial public offering $25,000, $72,600, $28,000, $8,160 and
$18,000, respectively, inclusive of accrued interest. Subsequent to the
completion of the public offering in November 1996, Celia Klimas loaned $150,000
to the Company and the Company agreed to pay her interest at the rate of 10% per
annum. As of September 30,1997, Tellurian owed Ms. Klimas the principal of her
loan.
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%
62
<PAGE>
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. 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 25,000,000 shares of Common Stock,
$.01 par value, which amount was recently increased from10,000,000 shares, $.01
par value. The following are brief descriptions of Tellurian's securities. The
rights of the stockholders of Tellurian are established by Tellurian's
Certificate of Incorporation, the Bylaws, and law of the State of Delaware. The
descriptions set forth below are intended as summaries only and are qualified in
their entirety by reference to the Certificate of Incorporation, the Bylaws, and
the relevant Delaware law.
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
63
<PAGE>
until July 20, 1998 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 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 in
December 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 in December 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,
64
<PAGE>
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, commencing November 5, 1997, J.W. Barclay & Co., Inc. would have
been eligible to receive a warrant solicitation fee equal to 10% of the exercise
price of all Warrants solicited by an NASD member; however, such firm has
irrevocably waived its right to receive any solicitation fees from the exercise
of Tellurian's warrants (including the tender of Warrants pursuant to the
Offer) and intends to make a market in the Company's securities during the
Tender Offer Period.
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, 1997, 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
65
<PAGE>
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 had agreed to 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) 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. However, such firm has
irrevocably waived its right to receive any solicitation fees from the exercise
of Tellurian's warrants (including the tender of warrants pursuant to 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
66
<PAGE>
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 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 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. Of these shares of Common Stock
and warrants, 1,875,000 shares of Common Stock and 5,127,500 Warrants held by
the Warrant Holders are freely tradeable in the public market without
restriction under the Securities Act, except for (i) securities owned 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 (ii) 3,000,000 Warrants
(and shares of Common Stock issuable upon exercise of same) owned by the Warrant
Holders and registered for resale in Tellurian's Registration Statement on Form
SB-2, File No. 333-9741 which may not be generally sold except with a current
prospectus. Of the remaining shares of Common Stock outstanding, 1,150,000
shares of Common Stock were issued as "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
67
<PAGE>
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.
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 had 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 the date of this Prospectus 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.
68
<PAGE>
The following table provides a list of the names, addresses and
amount of warrants to purchase shares of Common Stock beneficially owned by
Warrant Holders.
<TABLE>
<CAPTION>
Approximate 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
Hendrickx
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.
69
<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
Third Quarter 5.250 2.750 1.250 .4375
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.
70
<PAGE>
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 which were granted to them for services rendered. See "Executive
Compensation-Stock Option Plan."
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.
71
<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 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-24
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
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 394,515 $ 1,761,186
Marketable securities - 968,722
Accounts receivable, net of allowance for
doubtful accounts of $10,000 and $115,000 (Note 10) 61,436 19,362
Inventories (Note 2) 433,696 287,851
Prepaid consulting fees (Note 10) 74,625 74,625
Prepaid expenses and other current assets 118,041 13,856
------------ ------------
Total current assets 1,082,313 3,125,602
------------ ------------
PROPERTY AND EQUIPMENT - at cost
less accumulated depreciation (Note 3) 3,063,306 206,176
------------ ------------
OTHER ASSETS:
Security deposits 127,591 47,750
Prepaid consulting fees (Note 10) 6,219 62,187
Deferred costs (Note 4) 16,934 50,000
Marketable securities - 1,006,664
------------ ------------
Total other assets 150,744 1,166,601
------------ ------------
$ 4,296,363 $ 4,498,379
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,387,879 $ 49,754
Accrued expenses (Note 6) 110,033 60,020
Payroll payable 2,952 98,399
Payroll taxes payable - 34,494
Consulting fees payable - 46,594
Notes payable 363,765 -
Notes payable - related parties (Note 5) 496,736 496,736
Interest payable - related parties (Note 5) 337,464 315,306
Deferred revenue 96,115 80,448
------------ ------------
Total current liabilities 2,794,944 1,181,751
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value (Note 12)
Authorized - 25,000,000 shares (1996 - 10,000,000 shares)
Issued and outstanding - 3,025,000 shares 30,025 30,025
Additional paid-in capital 6,345,387 6,345,387
Accumulated deficit (4,873,993) (3,058,784)
------------ ------------
Total stockholders' equity 1,501,419 3,316,628
------------ ------------
$ 4,296,363 $ 4,498,379
============ ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-3
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1997 1996 1996 1995
------------ ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 11) $ 370,701 $ 812,572 $ 819,380 $ 477,311
COST OF GOODS SOLD 445,304 106,349 284,007 339,220
------------ --------- ----------- ----------
GROSS PROFIT (74,603) 706,223 535,373 138,091
------------ --------- ----------- ----------
OPERATING EXPENSES:
Research and development 583,367 567,740 688,103 423,770
Selling 271,573 66,432 189,429 92,505
General and administrative 894,083 311,576 395,692 257,125
------------ --------- ----------- ----------
1,749,023 945,748 1,273,224 773,400
------------ --------- ----------- ----------
LOSS FROM OPERATIONS (1,823,626) (239,525) (737,851) (635,309)
------------ --------- ----------- ----------
OTHER INCOME AND EXPENSES:
Other income 50,917 13,397 18,085 -
Interest expense (7,853) (44,389) (50,313) -
Interest expense - related parties (Note 5) (34,647) (43,424) (61,020) (64,356)
Interest income - - 21,087 -
Deferred debt costs - - (152,398) -
------------ --------- ----------- ----------
8,417 (74,416) (224,559) (64,356)
------------ --------- ----------- ----------
NET LOSS $ (1,815,209) $(313,941) $ (962,410) $ (699,665)
============ ========= =========== ==========
NET LOSS PER COMMON SHARE $(.60) $(.20) $(.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)
============ ========= =========== ==========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
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 nine months ended
September 30, 1997 (Unaudited) - - - (1,815,209) (1,815,209)
---------- -------- ---------- ------------- -----------
BALANCE AT September 30, 1997
(Unaudited) 3,025,000 $ 30,025 $6,345,387 $(4,873,993) $1,501,419
========== ======== ========== ============= ===========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ -----------------------
1997 1996 1996 1995
---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,815,209) $(313,941) $ (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 117,894 14,002 17,500 41,611
Amortization of deferred debt costs - 64,109 152,398 -
Changes in assets and liabilities:
Restricted cash - (9,199) - -
Accounts receivable (42,074) (129,362) (129,362) (5,000)
Allowance for doubtful accounts - - 115,000 -
Inventories (155,845) (81,352) (200,633) 75,981
Prepaid consulting fees 55,968 - (136,812) -
Prepaid expenses and other current assets (94,185) 4,311 (6,045) (7,811)
Security deposits (79,841) (2,637) (46,825) (925)
Accounts payable 1,338,125 98,848 20,433 (55,801)
Accrued expenses 50,013 136,820 (84,111) 99,898
Payroll payable (95,447) 100,884 (113,903) 79,864
Payroll taxes payable (34,494) (176,610) (207,255) 89,520
Consulting fees payable (46,594) (47,661) (209,099) 79,231
Interest payable - related parties 22,158 43,255 21,702 63,306
Deferred revenue 15,667 - (76,000) 6,000
----------- --------- ---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (713,864) (298,533) (1,851,540) (233,791)
----------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,987,024) (24,132) (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 (1,011,638) (24,132) (2,210,233) (11,214)
------------ --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - other 375,765 - - 7,000
Payments of offering costs - - (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 - 45,494 248,000 53,190
Repayments of notes payable - related parties - (160,000) (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 - (500) (500) (7,000)
Repayment of long-term debt - - (870,000) -
Payments of deferred debt costs - - (101,633) (50,765)
Payments of deferred offering costs (16,934) (326,183) - -
------------ --------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 358,831 289,811 5,783,829 284,056
------------ --------- ---------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,366,671) (32,854) 1,722,056 39,051
CASH AND CASH EQUIVALENTS - beginning 1,761,186 39,130 39,130 79
------------ --------- ---------- ---------
CASH AND CASH EQUIVALENTS - ending $ 394,515 $ 6,276 $ 1,761,186 $ 39,130
============ ========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-6
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------- -------------------
1997 1996 1996 1995
----------- ----------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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 $ 16,842 $ 9,000 $ 89,631 $ -
Cash paid for income taxes - - - -
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
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
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 September 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 September 30,
1997 (unaudited), the years ended December 31, 1996 ("Fiscal 1996") and
1995 ("Fiscal 1995") and the nine months ended September 30, 1997 ("1997
Period") (unaudited) and 1996 ("1996 Period") (unaudited).
Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at September 30, 1997 and
the consolidated statements of operations, stockholders' equity and cash
flows for the nine months ended September 30, 1997 and 1996 are unaudited
but include all adjustments which, in the opinion of management, are
necessary for the fair presentation of the Company's financial position
and results of operations for the periods then ended. All such
adjustments are of a normal recurring nature. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for a full fiscal year.
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)
Basis of Consolidation
The consolidated financial statements for the nine months ended September
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-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)
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 $583,367, $567,740,
$688,103 and $423,770 for the 1997 period (unaudited), 1996 period
(unaudited), fiscal 1996 and fiscal 1995, respectively.
F-10
<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 at historical exchange
rates. Translation adjustments were accumulated but have not been
included as a separate component of equity at September 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-11
<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:
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Raw materials $ 249,339 $ 217,663
Work-in-process 115,000 43,942
Finished goods 69,357 26,246
---------- ----------
$ 433,696 $ 287,851
========== ==========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
September 30, December 31, Estimated
1997 1996 Useful Lives
----------------- ----------------- ------------
(Unaudited)
<S> <C> <C> <C>
Display and entertainment units $ 827,576 $ - 7 Years
Equipment 232,623 135,279 7 Years
Vehicles 117,558 84,039 5 Years
Computer software 62,863 29,900 5 Years
Office furniture 63,398 4,973 7 Years
Leasehold improvements 1,946,417 21,220 5 to 15 years
------------ ----------
3,250,435 275,411
Less: Accumulated depreciation
and amortization 187,129 69,235
------------ ----------
$ 3,063,306 $ 206,176
============ ==========
</TABLE>
Depreciation expense amounted to $117,894, $14,002, $17,500 and $10,448
for the 1997 period (unaudited), 1996 period (unaudited), fiscal 1996 and
fiscal 1995, respectively.
F-12
<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 September 30, 1997 (unaudited) and
December 31, 1996. Accrued interest payable amounted to $337,464 at
September 30, 1997 (unaudited) and $315,306 at December 31, 1996.
Interest expense charged to operations amounted to $34,647, $43,424,
$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>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Royalties (Note 10) $ 35,000 $ 35,000
Interest and penalties on unpaid
payroll taxes 24,831 20,698
Professional fees 24,000 -
Others 26,202 4,322
---------- ---------
$ 110,033 $ 60,020
========== =========
</TABLE>
F-13
<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 $7,853, $44,389, $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>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Loss before provision for income taxes $(1,815,209) $(962,410)
=========== =========
The components of the provision for income taxes by taxing
jurisdiction are as follows:
Federal $ - $ -
State - -
----------- ---------
$ - $ -
=========== =========
</TABLE>
F-14
<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>
September 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 September 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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Income tax credit at statutory rate $ (635,323) $ (109,879) $ (336,844)
State income tax credits (90,760) (15,697) (48,120)
Net operating loss carryforwards 726,083 125,576 384,964
----------- ----------- -----------
$ - $ - $ -
=========== =========== ===========
</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-15
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease
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 $214,078, $50,874, $62,574 and $70,018 net of
rental income of $15,573, $11,715, $18,085 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)
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 $144,000, $-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 $55,969, $-0-,
$12,438 and $-0- for the 1997 period (unaudited), 1996 period
(unaudited), fiscal 1996 and fiscal 1995, respectively.
Settlement Agreement
In November 1997, the Company signed a mutual release and settlement
agreement (the "Agreement") with Fightertown Entertainment, Inc.
("Fightertown"). The terms of the Agreement include the following:
1. The Company must deliver to Fightertown twenty five (25) Eagle units
based on a delivery schedule in the Agreement.
2. Fightertown will have the right to purchase up to thirty (30)
additional Eagle units at any time on or before June 30, 1999 at a
price and delivery terms as specified in the Agreement.
3. The Company agrees to pay Fightertown $20,000 no later than January 31,
1998 for future consulting services as defined in the Agreement.
4. The Company agrees to pay Fightertown $67,500 in three installments of
$22,500 on August 15, 1998, August 15, 1999 and August 15, 2000. The
payments are for the use and display of the Fightertown name at the
Cyberport facility and for Fightertown's expertise in the theming and
running of air battle games.
5. The Company is executing a stipulated judgement in the amount of
$500,000 in favor of Fightertown to be entered against the Company
should the Company fail to comply with any term of this Agreement.
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
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-18
<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 $1,320,000. Such amount has been
included in accounts payable at September 30, 1997.
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 and has not acknowledged its 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-19
<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>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------
1997 1996 1996 1995
---------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Real time image generators $139,880 $166,385 $166,386 $267,428
Consulting fees 193,029 599,666 598,245 169,558
Parts and repairs 4,850 46,521 54,749 40,325
Cyberport admissions 32,942 - - -
-------- -------- -------- --------
$370,701 $812,572 $819,380 $477,311
======== ======== ======== ========
The following is a summary of information by geographic area:
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------
1997 1996 1996 1995
---------- -------- -------- --------
(Unaudited) (Unaudited)
Revenues
United States $144,944 $212,894 $197,760 $379,311
Republic of China 193,135 599,678 621,620 71,000
Canada 32,622 - - 27,000
-------- -------- -------- --------
$370,701 $812,572 $819,380 $477,311
======== ======== ======== ========
As of December 31, revenues from major customers are as follows:
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------
1997 1996 1996 1995
---------- -------- -------- --------
(Unaudited) (Unaudited)
Customer A 52.1% 73.8% 75.9% 31.8%
Customer B 24.9% 8.9% 16.0% 20.5%
Customer C 13.2% 5.6% - 10.7%
</TABLE>
F-20
<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.
On November 17, 1997, the Company increased its authorized common stock
to 25,000,000 shares at a par value of $.01 per share.
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-21
<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 September 30, 1997 (unaudited) and December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Outstanding Exercise Exercise
Warrants Price Period
----------------- ----------------- -----------------
<S> <C> <C>
5,127,500 $6.00 November 6, 1996 -
November 5, 2001
</TABLE>
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-22
<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>
September 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-23
<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>
Nine Months Ended Year Ended
September 30, 1997 (Unaudited) December 31, 1996
------------------------------ -------------------------------
As Reported Pro Forma As Reported Pro Forma
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,815,209) $(1,832,401) $(962,410) $(1,228,660)
Loss per share (.60) (.61) (.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 an amount per tendered
warrant (such amount to be determined at a later date) 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.
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-24
