SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-21645
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TELLURIAN, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 22-3451918
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization (Identification No.)
300K Route 17 South
Mahwah, New Jersey 07430
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (201) 529-0939
------------------
Securities registered pursuant to Section 12(b) of the Act:
None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01par value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) , and (2)
has been subject to such filing requirements for the past 90 days. Yes x . No
___.
The number of shares issued of the Registrant's Common Stock, as of March 31,
1998 was 3,959,763 shares of common stock.i
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INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . 3
March 31, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Operations. . . . . . . . . . . . . . 4
Three Months ended March 31, 1998 (Unaudited)
and March 31, 1997 (Unaudited)
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . 5
Three Months ended March 31, 1998 (Unaudited)
and March 31, 1997 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 9
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . 20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
EXHIBIT 27. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
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(Unaudited) (a)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 12,036 $ 187,189
Marketable Securities 109,992 108,912
Accounts Receivable, net of allowance for
doubtful accounts of $-0- and $-0-, respectively 24,141 9,029
Inventories 647,554 662,364
Prepaid Consulting Fees 310,654 62,187
Prepaid Expenses and Other Current Assets 21,272 23,206
---------------- ----------------
Total Current Assets 1,125,649 1,052,887
---------------- ----------------
PROPERTY AND EQUIPMENT- at cost
less accumulated depreciation 2,575,861 2,688,346
---------------- ----------------
OTHER ASSETS:
Security Deposits 63,778 70,070
Prepaid Consulting Fees 100,183 0
Deferred Costs 0 92,099
---------------- ----------------
Total Other Assets 163,961 162,169
---------------- ----------------
$ 3,865,471 $ 3,903,402
================ ================
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 518,825 $ 1,953,481
Current Maturities of Long-term debt 34,953 34,953
Notes Payable 100,000 100,000
Notes Payable- other 0 200,000
Notes Payable--Related Parties 496,736 496,736
Interest Payable--Related Parties 368,409 354,980
---------------- ----------------
Total Current Liabilities 1,518,923 3,140,150
---------------- ----------------
LONG-TERM DEBT - net of current maturities 122,635 125,630
---------------- ----------------
MINORITY INTEREST 640,027 0
STOCKHOLDERS' EQUITY:
Common Stock--$.01 par value
Authorized -25,000,000 and 10,000,000 shares, respectively
Issued and Outstanding - 3,959,763 and 3,025,000 shares, respectively 39,598 30,250
Additional Paid-in Capital 7,997,964 6,345,162
Accumulated Deficit (6,535,119) (5,767,777)
Other Comprehensive Income 81,442 29,987
---------------- ----------------
Total Stockholders' Equity 1,583,886 637,622
---------------- ----------------
$ 3,865,471 $ 3,903,402
================ ================
</TABLE>
(a) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that time.
The accompanying notes are an integral part of the financial statements.
Page 3
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TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
(unaudited) (unaudited)
REVENUES $ 34,908 $ 81,285
COST OF GOODS SOLD 117,930 63,662
--------- ----------
GROSS PROFIT (LOSS) (83,023) 17,623
--------- ----------
OPERATING EXPENSES:
Research and Development 209,989 204,087
Selling 101,270 115,256
General and Administrative 343,126 372,837
--------- ----------
654,385 692,180
--------- ----------
LOSS FROM OPERATIONS (737,408) (674,557)
--------- ----------
OTHER INCOME AND EXPENSES:
Other Income 1,899 50,097
Loss on Sale of Fixed Asset (14,571) 0
Interest Expense (3,833) 0
Interest Expense--Related Parties (13,429) (12,300)
--------- ----------
(29,934) 37,797
--------- ----------
NET LOSS $(767,342) $(636,760)
======== =========
NET LOSS PER COMMON SHARE $ (0.24) $ (0.21)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,195,885 3,025,000
========= =========
The accompanying notes are an integral part of the financial statements.
Page 4
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TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (767,342) $ (636,760)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 81,827 13,674
Reclassification of Marketable Securities 0 4,136
Accrued Interest on Marketable Securities (1,080) 0
Loss on Sale of Fixed Asset 14,571 0
Changes in Assets and Liabilities
Accounts Receivable (15,112) (48,443)
Inventories 14,810 (270,000)
Prepaid Expenses and Other Current Assets 41,284 (9,282)
Deferred Costs 92,099 50,000
Security Deposits 6,292 (37,822)
Prepaid Consulting Fees (8,000) 18,656
Accounts Payable and Accrued Expenses (95,490) (14,553)
Payroll Payable 0 (98,399)
Payroll Taxes Payable 0 (26,398)
Consulting Fees Payable 0 (13,950)
Interest Payable--Related Parties 13,429 8,550
Deferred Revenue 0 (24,440)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (622,712) (1,085,031)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Fixed Assets 18,000 0
Purchases of Property and Equipment (1,912) (157,007)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,088 (157,007)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES:
Repayments of notes payable--other (250,000) 0
Repayment of Long-term Debt (2,995) 0
Proceeds of notes payable - other 50,000 0
Proceeds from Issuance of Stock 603,011 0
Payments of deferred offering costs (20,000) 0
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 380,016 0
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES 51,455 0
------------ ------------
NET CHANGE IN CASH (175,153) (1,242,038)
CASH-- Beginning 187,189 1,761,186
------------ ------------
CASH-- Ending $ 12,036 $ 519,148
============ ============
</TABLE>
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<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 3,833 $ 3,750
Cash Paid for Income Taxes $ 200 $ 150
SCHEDULE OF NON-CASH ACTIVITIES:
Reduction of Trade Payables through issuance of common
stock $ 699,056 $ -
Reduction of Trade Payables through issuance of subisdiary
Series B special shares $ 640,027
Issuance of Common Stock for Consulting Fees $ 380,000
--------- ---------
$ 1,719,083 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of the financial
statements.
Page 6
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TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
NOTE 1--Presentation Basis
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1997 which were included in its Form 10-K filing dated April 15,
1998. Such statements should be read in conjunction with the data herein.
NOTE 2--Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at March 31, 1998 and the
consolidated statements of operations and cash flows for the three months ended
March 31, 1998 and 1997 are unaudited but include all adjustments which, in the
opinion of management, are necessary for the fair presentation of the Company's
financial position and results of operations for the periods then ended. All
such adjustments are of a normal recurring nature. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for a full fiscal year.
NOTE 3--Minority Interest in Subsidiaries
In March 1998, Cyberport and certain of its vendors agreed to
restructure approximately $1,349,000 of accounts payable as follows:
1. The vendors transferred Canadian $1,000,000 of payables to Cyberport's
landlord. The landlord was given the right to convert the payables into
restricted shares of the Company's common stock. In March 1998, the
landlord converted the payables into 350,000 shares of common stock.
2. Cyberport issued 915,559 Series B Special Shares at Canadian $1.00 per
share for balance of the monies owed. At March 31, 1998, the value of the
shares issued by Cyberport is shown as a minority interest on the Company's
consolidated balance sheet.
In March 1997 the Company formed a subsidiary, Cyberport Niagara, Inc.,
in the Province of Ontario, Canada, in which the Company holds an 87.5 percent
interest In the fourth quarter of 1997, the Company acquired the balance of the
interest in Cyberport.
On March 24,1997 the Company formed a subsidiary, Cyberport
International, Inc. ("CII") in the state of Delaware in which the Company held a
96 percent interest. In the fourth quarter of 1997, the Company acquired the
balance of the interest in CII.
NOTE 4---Stock Options
In June of 1997 the Company authorized stock options to two
individuals, Michael Hurd and David Turner, President and General Manager of
Cyberport Niagara, Inc, respectively. These options allow Mr. Turner to purchase
500 shares of Cyberport stock for $1.00 (Canadian) per share and allow Mr. Hurd
to purchase 2,000 shares of Cyberport stock at $1.00 (Canadian) per share. Mr.
Turners options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options. The
remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares on
July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors or
in the employ of Tellurian on those dates. The options expire on June 30, 2007.
No options have been exercised as at March 31, 1998.
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NOTE 5--Translation of Foreign Currency
The foreign currency financial statements of subsidiaries operating outside the
United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities at current exchange
rates; and stockholders equity at historical rates. Translation adjustments were
accumulated and have been included as a separate component of equity at March
31, 1998.
NOTE 6--Inventories
Inventories consist of the following:
March 31 , December 31,
1998 1997
---- ----
(Unaudited)
Raw materials $217,164 $221,575
Work-in-process 196,500 206,899
Finished Goods 233,890 233,890
--------- ---------
$647,554 $662,364
========= =========
NOTE 7--Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included as their effect would be anti-dilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
RECENT DEVELOPMENTS
- -------------------
Refinancing of Certain Debt
---------------------------
The Company experienced a net loss of approximately $767,300 for the
quarter ended March 31, 1998 and had a working capital deficit of approximately
$393,000 at March 31, 1998. The Company's operations require additional
financing to sustain the Company as a going concern. In this respect, in
February 1998, the Company completed an exchange offering to its existing
warrant holders pursuant to which warrant holders tendered 321,605 warrants and
approximately $603,000 and received in return 321,605 Units which included
321,605 shares of the Company's Common Stock and 321,605 Warrants identical to
those tendered pursuant to the exchange offering. The Company currently has
limited cash and such cash was derived from such exchange offering.
At December 31, 1997, the Company had current liabilities and long
term debt of approximately $3,266,000. In order to reduce such debt, the Company
sought to convert all or a portion of such debt of the Company into equity. As
of March 31, 1998, the Company succeeded in converting approximately $1,400,000
of such indebtedness as described below. Such debt conversions included the
following:
(a) In March 1998, the Company entered into an agreement with
Interactive Media Concepts, Inc. pursuant to Interactive, a consultant of
the Company which was owed approximately $56,000. Further, the Company had a
contractual obligation to Interactive Media which would have required the
Company to pay an additional $88,000 for its services during 1998. In March,
1998 the Company accepted Interactive's offer to convert such indebtedness into
100,000 shares of the Company's Common Stock.
(b) The Company owed $1,295,527 U.S. (equivalent to $1,865,559
Canadian) to certain contractors in Canada for work done on improvements to its
Cyberport facility. These contractors included Newman Bros. Limited, Phoenix
Wood Products Corporation (formerly known as Trigin Management Corporation),
Star Tile Centre Limited, Ecco Electric Limited, DBN Drywall & Acoustics
Limited, Expoplex Incorporated (the "Cyberport Creditors"). On March 26, 1998,
the Cyberport Creditors agreed to convert $601,083 U.S. (equivalent to $865,559
Canadian) into 865,559 Series B Special Shares plus an additional 47,075 Series
B Special Shares for goods and services taxes owing at closing (also known as
Preferred Stock) of Cyberport
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Niagara. The Cyberport creditors also agreed to assign to Cyberport Niagara's
landlord (also known as 1174757 Ontario Inc.) $694,444 U.S. (equivalent to
$1,000,000 Canadian) of the Company's indebtedness. Contemporaneously, 1174757
Ontario Inc. entered into an agreement to convert the entire debt into 350,000
restricted shares of the Company's Common Stock. The Company also agreed to pay
the landlord $36,111 U.S. ($52,000 Canadian) in rent arrears and $33,333 U.S.
($48,000 Canadian) in additional security deposit. In connection with such
agreement, the Company granted the Landlord options to purchase 100,000
additional shares of the Company's Common Stock at an exercise price of $1.75
per share between April 1, 1998 and September 30, 1998. Tellurian also granted
the landlord security interests in certain simulators located at the Company's
Cyberport facility. The aforesaid agreements concluded various creditor law
suits that were initiated against the Company and its subsidiary demanding
payment of the aforementioned debt.
The consolidated financial statements of the Company have been prepared
assuming that the Company will continue as a going concern. Further, the
explanatory note states that certain matters raise substantial doubt about the
Company's ability to continue as a going concern. In order to continue as a
going concern, the Company is dependent upon the Company raising additional
financing, receiving substantial revenues from operations and/or selling a
majority interest in its Cyberport facility. No assurances can be given that the
Company will be successful in its efforts to obtain the necessary cash to remain
as a going concern.
The Company's plan to continue as a going concern also includes the
possible completion of the two acquisitions pursuant to which the Company has
entered into letters of intent which are described below. Conditions precedent
to the completion of such transactions include, without limitation, the
completion of due diligence, the Company maintaining its NASDAQ listing and the
Company arranging for a public financing of its equity securities of
approximately $6,000,000. The Company has had preliminary discussions with a
prospective underwriter and it believes that a letter of intent for such an
offering can be executed shortly.
NASDAQ Listing.
---------------
The Company has been notified by the NASDAQ Stock Market that it does
not meet the net tangible assets/market capitalization/net income requirement
and that the Company will require an exception to such requirement in order to
maintain its NASDAQ listing. In this regard, the Company has filed documents
with the NASDAQ Stock Market requesting a written hearing scheduled for the week
of April 6, 1998.
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As of the date of this filing, the Company has not been advised of the results
of such hearing. If the Company is not granted an exception, it has the right to
request (and intends to request) an oral hearing pursuant to which it will be
given the opportunity to demonstrate compliance with the net tangible asset test
or reasons an exception should be granted by the Hearings Committee. No
assurances can be given that the Company will be successful in maintaining its
NASDAQ listing and if unsuccessful, the potential acquisitions described herein
are unlikely to be completed. Further, the loss of the Company's NASDAQ listing
would make it very difficult if not impossible for the Company to raise
additional financing from private or public financing and would materially
adversely effect the liquidity and price of the Company's securities.
Letters of Intent Regarding Potential Acquisitions.
---------------------------------------------------
The following describes two letters of intent issued by the Company:
On April 3, 1998 the Company issued letters of intent to acquire two
separate companies, both actively involved in the manufacture, sale and
distribution of various doll and souvenir products. One of these companies,
headquartered in New York City, has been in existence for in excess of 10 years
and the other, headquartered in New Jersey, has been in existence for 25 years.
The letters of intent were signed by the prospective companies during April of
1998. These agreements specifically prohibit the Company from announcing the
names of these companies without their written consent which they have not
provided as of the date of this filing.
Under the terms of the letters of intent, Tellurian would issue a total of
4,000,000 shares of common stock in return for the assets of these companies.
Based on financial statements provided to Tellurian, these companies had an
annual revenue for 1997 in excess of $30,000,000 and book value of assets in
excess of $3,000,000.
Under the terms of the letters of intent, the Company and the acquisition
candidates have 30 days to complete their respective due-diligence research. No
assurance can be given that this research can be completed within this time
constraint or that the results of that research, if completed, will provide the
necessary assurances for all parties to proceed with the merger proposal.
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
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influenced by the return per square foot of floor space occupied. The helmet
would reduce the square footage needed by approximately 50% while improving the
quality of the sound through the almost complete elimination of background noise
coming from other activities in the facility and significantly reducing the
Company's cost per virtual reality unit. The Tellurian helmet has been
specifically engineered to be driven by the proprietary Tellurian EAGLE image
generator. Management expects that the quality of the experience gained through
use of the helmet coupled with the head motion tracker will be significantly
superior to the experience currently offered in the marketplace either by
Tellurian or by any of its competitors.
The helmet is now ready for introduction to the market, but the Company
needs at least $250,000 of financing to produce and Emarket the Tellurian
Helmet. The Company plans to offer the helmet based experience for delivery
within 4 months from date of order, but its ability to do that is subject to the
receipt of sufficient financing. However, the Company cannot be certain that the
design principles it has decided upon will be successful in the marketplace.
Also, 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 and sufficient financing 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 may 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 to have an noticeable impact on revenue for
the season, Management believes that it was essential to open the facility in
close to final form in order to attract the various tour operators to view the
facility. 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 1998 and subsequent seasons. The Company promoted the facility in general
and the Tellurian experience extensively since the 1997 opening. 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
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relationships with group tour operators and guaranteeing prime exhibit spots in
the many tourist information booths in and around the Niagara area for the 1998
season. As a result, revenues for 1997 were minimal, but Management believes
that the marketing programs and overall direction of Cyberport is correct.
Management is particularly encouraged by the 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.
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 been contacted by Voyager to discuss an additional transfer
agreement dealing with the virtual reality helmet technology. Management is
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.
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RESULTS OF OPERATIONS
During 1997 the Company has been able to make progress towards meeting
its objectives which included:
* Development of its virtual reality helmet;
* Establishment of a virtual reality showplace for
demonstrations of Tellurian products; and
* 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 should
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 Company plans to focus its efforts on the following areas:
* Pursuing the merger/acquisition of companies
offering products and/or services complementary to the
entertainment market presently being marketed to by the
Company;
* Finding and entering into joint ventures or revenue
sharing agreements with third parties for the purpose of
owning, operating and/or having an interest in one or more
Tourist Entertainment Centers (TEC) or Location Based
Entertainment Centers (LBE) for the sale and/or use of its
virtual reality game units;
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* Increasing revenues through marketing efforts of its new EAGLE
product now on display at its Cyberport facility; and
* Marketing its virtual reality helmet with head
tracking and establishing products utilizing the helmet
technology.
Marketing of the EAGLE image generators and helmets will be
accomplished by directing efforts towards three different customer groups:
* The training and simulation market where Tellurian has been
selling its AT-200 unit;
* The virtual reality game developer market through trade show
exhibits, advertisements and newsletters; and
* The interactive thrill ride market.
The Company intends to expand its customer base through trade show
involvement 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 public offering and is now actively seeking investors and/or
lenders to meet the remaining capital needs of the venture and to 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 $1,000,000 to $2,500,000 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 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.
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Results of Operations
Three Months Ended March 31, 1998 vs. March 31, 1997
Tellurian and its' subsidiary had net sales for the three months ended March 31,
1998 of $34,908, a decrease of $46,377 or 57% over the comparable period of the
prior year. For the three months ended March 31, 1998, the Company's gross
profit (loss) was ($83,023) as compared to $17,623 for the comparable period of
the prior year. Such decrease in gross profit is primarily due to the costs
related to the Cyberport Niagara facility during the period where it was almost
completely closed for business.
Tellurian's research and development activities for the three months
ended March 31, 1998 were $209,989, representing an increase of $5,902, or 2.9%,
over the comparable period for the prior year. The research and development
activities related to Tellurian's concentrated effort to complete the virtual
reality helmet and to develop software for use with that helmet and other
versions of virtual reality products.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $444,396, a decrease of $46,397, or 9%, over the comparable
period of the prior year. This decrease is principally due to the continued
cutting of any variable costs available for reduction by management action.
For the three months ended March 31, 1998 interest expense was $17,262,
an increase of 4,962, or 40%, over the comparable period of the prior year.
Tellurian's net loss for the three months ended March 31, 1998 was
$767,342 as compared to a loss of $636,760 for the comparable period of the
prior year.
Liquidity and Capital Resources
For the three months ended March 31, 1998 and 1997 net cash of $622,712
and $1,085,031, respectively was used in operating activities. The net loss from
operations for the period ended March 31, 1998 was partially offset by increases
in the Company's non-cash depreciation and amortization expense. The increase in
deferred costs was offset by a similar increase in accrued expenses and accounts
payable.
For the three months ended March 31, 1998 net cash of $16,088 was
generated from investing activities. For the three months ended March 31, 1997,
$157,007 was used in investing activities. Funds were generated from the sale of
certain of the Company's fixed assets while all non-essential expenditures were
stopped.
Page 16
<PAGE>
For the three months ended March 31, 1998 and March 31, 1997,
$380,016 and $-0- was provided from financing activities. The primary sources
of this cash were the proceeds of the warrant conversion completed by the
Company which is described in the following paragraphs.
During March 1998, the Company completed a warrant exchange offer. The
offer was made on the following terms:
1. Warrant holders who tendered their warrants at $1.875 per
tendered warrant received one unit for each warrant tendered.
2. Each unit consisted of one share of the Company's common stock and one
new warrant identical to the tendered warrant.
The Company sold a total of 321,605 units resulting in gross proceeds
of $603,011 and net proceeds of $490,912 after offering costs of $112,099.
During the quarter ended March 31, 1998 the Company completed several stock
transactions which impacted upon the liquidity of the Company. The most
significant of these transactions was an agreement between the Company and
certain of the vendors of Cyberport in which the vendors agreed to restructure
approximately $1,349,000 of accounts payable as follows:
1. The vendors transferred Canadian $1,000,000 (approximately $700,000
U.S.) of the payables to Cyberport's landlord. The landlord was given the right
to convert the payables into restricted shares of the Company's stock. In March
1998, the landlord converted the payables into 350,000 shares of common stock.
2. Cyberport issued 912,634 Series B Special Shares at Canadian $1.00
per share for the balance of the monies owed.
These shares are non-voting shares that carry a 12% annual cumulative cash
dividend payable quarterly. The Company has the right to redeem these shares at
any time prior to October 10, 1998 at a price of Canadian $1.10 per share
including any accrued and unpaid dividends outstanding at that time. Should the
Company choose not to redeem those shares, the vendors have the right to convert
any or all of those shares into Tellurian common stock at the conversion rate of
2.28 Series B shares for 1 common share. This right expires on December 31,
1998.
During 1997 and the first quarter of 1998, the Company experienced
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
Page 17
<PAGE>
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 lack of a
demonstrable financial track record 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 at least $250,000 of
capital beyond that which could be allocated to the helmet from the recently
completed warrant conversion offer. 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 recently negotiated a $250,000 short-term loan with a
non-affiliated party. The loan was made to the Company to assist it in operating
while the recently completed public offering was in process. That loan was
repaid from the proceeds of the offering as the Company's first priority in
disbursement of funds. The Company is presently negotiating a renewal of that
loan in anticipation of a cash need to complete the helmet, for working capital
at Cyberport, and to do the work necessary to pursue the potential acquisitions
that the Company is presently evaluating. As of the date of this filing, the
Company has received an advance of $125,000 from this funding source. 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.
At March 31, 1998, Tellurian had a working capital deficit of $393,274.
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 recent warrant conversion 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 and
private or public 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 held negotiations with various firms interested in
acquiring the Company's Cyberport interest as well as the right to open other
Cyberport licensed facilities. Management does not believe that any of these
negotiations is likely to result in a significant change in its' ownership
interest in Cyberport in the foreseeable future.
Page 18
<PAGE>
No assurances can be given that the Company will be successful in its
efforts to obtain the necessary cash to remain a going concern. 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), the Company may need to seek reorganization
protection under applicable bankruptcy laws.
The Company has received signed letters of intent to merge from two
companies and has a proposal to underwrite a financing of an estimated
$6,000,000 to $8,000,000 from an investment banking firm. The Company believes
that these mergers and the proposed financing represent the best alternative
available to the Company in order to carry out its proposed business plan.
However, no assurances can be given that either the proposed mergers or the
proposed financing will be successful. Management believes that these mergers
and the subsequent public offering of stock in the redefined Company represent
the best course of action available to it at this time.
Page 19
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security
Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
A form 8-K was filed on March 25. No other form 8-k's or other
reports were required to be filed during the quarter.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLURIAN, INC.
---------------------------
(Registrant)
Dated: May 18, 1998
---------------------------
/s/ Stuart French, President
----------------------------
/s/ Michael Hurd, Chief
Financial and Accounting
Officer
Page 21
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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