SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization (Identification No.)
300K Route 17 South
Mahwah, New Jersey 07430
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 529-0939
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01par value
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(Title of Class)
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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
___.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
As of April 8, 1998 at 4:00 P.M., the aggregate market value of the voting
stock held by non-affiliates, approximately 2,709,906, Common Stock, $.01 par
value, was approximately $7,113,503 based on the last sale price of $2.625 for
one share of Common Stockon such date. The number of shares issued and
outstanding of the Registrant's Common Stock, as of April 8, 1998 was 3,596,605,
without giving effect to the 350,000 shares to be issued in April as part of the
Cyberport creditor settlement (see Item 1).
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PART I,
Item 1. Description of 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 provide sconsulting 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 tocustomers 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 andancillary 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 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. The Company is currently completing
the first game product to be sold for the helmet-basedgame. The helmet is now
being actively offered for sale and delivery within 90 days of order.
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In March 1997, Tellurian formed Cyberport Niagara, Inc. ("Cyberport
Niagara"), 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, an Egyptian built replica of the treasures from the tomb of KingTut and
an arcade area. Tellurian currently owns all of the outstanding common stock in
Cyberport Niagara Inc. However, as part of a recently completed refinancing of
Cyberport (see "Recent Developments"), 912,634 shares of non-voting preferred
stock (par value $1 Canadian) were issued by Cyberport Niagara to various
creditors in return for the forgiveness of payables owed. In addition, Tellurian
is seeking to raise money to financeits 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. This subsidiary which is wholly-owned by Tellurian, is inactive.
Recent Developments
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The Company experienced a net loss of approximately $2,709,000 for 1997 and
had a working capital deficit of approximately $2,106,000 at December 31, 1997.
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. At February 28, 1998, after giving
effect to such debt conversions and the completion of the exchange offering, the
Company has net tangible assets of approximately $2,250,000, a working capital
deficit of approximately $460,000 and total liabilities of approximately
$1,877,000. Such debt conversions included the following:
(a) In March 1998, the Company entered into an agreement with Interactive
Media Concepts, Inc. pursuant to which Interactive, a consultant of the Company
which was owed approximately $56,000, accepted Interactive's offer to convert
such indebtedness into 100,000 shares of the Company's Common Stock.
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(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, EccoElectric 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 anadditional 47,075 Series B Special Shares
for goods and services taxes owing at closing (also known as Preferred Stock) of
Cyberport Niagara. The Cyberport creditors also agreedto assign to Cyberport
Niagra's landlord (also known as 1174757 Ontario Inc.) $694,444U.S. (equivalent
to $1,000,000 Canadian) of the Company's indebtedness. Contemporaneously,
1174757 Ontario Inc. entered into an agreement to convert the entiredebt into
350,000 restricted shares of the Company's Common Stock. The Company alsoagreed
to pay the landlord $36,111 U.S. ($52,000 Canadian) in rent arrears and
$33,333U.S. ($48,000 Canadian) in additional security deposit. In connection
with suchagreement, the Company granted the Landlord options to purchase 100,000
additionalshares of the Company's Common Stock at an exercise price of $1.75 per
share betweenApril 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. As a result of the above referenced
settlement, the Company cancelled $34,722 in over accruals.
Not withstanding the foregoing, the independent auditors of the Company
have included an explanatory note in its Report of Independent Certified Public
Accountants dated March 10, 1998 (except for notes 18 and 19 which is March 31,
1998) that 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 thatthe
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.
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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. The Company has been advised that the results of such hearing
will not be known until at least the week of April 13, 1998. If the Company is
not granted an exception, it has the right to request (and intends torequest) an
oral hearing pursuant to which it will be given the opportunity to demonstrate
compliance with the net tangible asset test or reasons why an exception should
be grantedby 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 rais additional financing from private or public
financing and would materially adversely effect the liquidity and price of the
Company's securities.
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, expected to be signed on or about April 15, 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 have a
total 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 giventhat 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.
Background
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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 due to its inability to obtain adequate
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funding and by disagreements among its shareholders. Quantum 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 byQuantum and Gustin to TTY for a
cash consideration of $150,000 and royalties to be paidby TTY or Tellurian equal
to two-thirds of four percent of revenues derived from the licensing of, or
sales of products incorporating, the Quantum flat-shaded technology and one
percent of revenues derived from the licensing of, or sales of products
incorporating, computer graphics technology other than the Quantum flat-shaded
technology. Payment of the royalties was secured by a security agreement
granting the bankruptcy trustee of Quantum and Gustin a lien on the Quantum
flat-shaded technology and all revenues, products, accounts receivable and
contract rights arising from or related to the technology, and providing that
TTY could not, except for non-exclusive licenses sell, contract to sell,
encumber or otherwise dispose of the Quantum flat-shaded technology without the
prior written consent of the trustee of Quantum. Except for the above mentioned
payment of royalties of one percent, the foregoing provisions were not
applicable to the EAGLE, which is not based upon the technology of the AT-100
and AT-200.
TTY assigned the Purchase Agreement to Tellurian in exchange for the
forgiveness of certain financing provided by Tellurian to TTY and a royalty of
one-third of four percent of all sales of Quantum flat-shaded technology up to a
maximum of $500,000. In August 1996, TTY agreed to cancel its right to receive
future royalties in exchange for Tellurian agreeing to pay accrued and unpaid
royalties to it of $10,529 and an additional $70,000. Of such $80,529, $45,529
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
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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
under gone 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.
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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, andinteractivity with other players. Tellurian's P-51 simulator
at Cyberport is a prime example of virtual reality entertainment. The unit
consists of a fiberglass cockpit similar to that ofa P-51 fighter aircraft, and
it is outfitted with a control stick and a throttle. Once seated, the player
views what appears to be the outside world via five 27" video monitors. Game
play begins with the player escorting bombers that are under attack from enemy
fighters. 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 P-51'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 aircraft, for example, the computer will
create and control a visual image of an attacking aircraft for the player to
destroy-or bedestroyed by! If the player moves in a direction away from enemy
aircraft, the player is free to practice his flying skills without being
confronted by an enemy aircraft.
Cyberport Niagara, Inc.
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Cyberport opened a "pay-one-price" tourist entertainment center (TEC) at
the end of June. Cyberport Niagara is designed for the vacationing family. The
various activity rooms contained within the facility 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. The facility is not likely to achieve a
status capable of causing people to plan vacations around it (such as
DisneyWorld), exposure to large numbers of walking tourists is essential to
marketing plans. These groups alone will not support a venture like Cyberport.
However, in addition to the walking tourist family, bus tour groups are capable
of providing large volumes of customers although at some what 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 been actively marketing to the tour operators and has attended
numerous industry meetings and conventions to further these activities. In
addition, Cyberport has recruited the assistance of several individuals from
Niagara Falls who have had many years of experience in working with the bus tour
companies.
Another factor critical to Management's plans for Cyberport is inclusion of
educational aspects to the recreational activity to attract school tours to the
facility in theslower fall to spring periods. 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 addition, the Companywas able to purchase
exhibits of a space shuttle cockpit, Sputnik and a lunar rover 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
immediately before the pyramid opening to the replicas of artifacts found in the
Tomb of Tut.
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Cyberport was unable to do any significant marketing or advertising prior
to itsopening in summer of 1997. As a consequence, very little revenue was
generated fromthe abbreviated time it was open. However, by opening the facility
Cyberport was able todevelop marketing contacts and has assisted it in booking
student outings for the springseason. Also, combined marketing programs with
important other local attractions, most notably the Butterfly Museum, have begun
to create bookings for future visits to Cyberport.
From mid-December thru mid-April Cyberport is closed. Cyberport employees
use that time to continue contacting the major hotels and tour operators in
Niagara Falls (both Canadian and U.S. sides) These hotel and tour operators are
key to gaining a share ofthe organized tour market. Cyberport personnel have
also obtained press and television exposure including a morning feature on a
Buffalo television station.
Management believes that it will take time and further financing for the
marketing efforts of Cyberport to translate into a volume of traffic necessary
to support Cyberport. Cyberport's business is seasonal with the spring through
summer months being the high seasons. Publicly available statistics from
attractions such as the Butterfly Museum demonstrate that tourists come to
Niagara Falls in sufficient number to make Cyberporta profitable venture. In
addition, the long-delayed announcement of the site approved for the second
Niagara Falls casino has recently been made. The announcement of that site is
expected to spur construction in the Niagara Falls area, followed by another
increase in the number of tourists coming to the area. 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 limited cash resources
presently at its command.
The Company believes that its ability to operate this facility successfully
depends on elements both within and outside of its control, including the
success of its own products incorporated into this venture. In addition, the
Company faces competition from existingand 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
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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. TheAT-200
provides real time image generation with high resolution, multi-channel
operationand full color using proprietary hardware and software. As of March 31,
1998, the Company had built and sold over 250 AT-200 systems.
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The Company currently offers for sale its image generation 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, 1997 and 1996, revenues from this category amounted to
approximately 27% and 16%, respectively, of the Company's total revenues for
each applicable period. The latter group includes MaxFlight Corp., Ride &
ShowEngineering, and the Fightertown Entertainment Centers. During the years
ended December 31, 1997 and 1996, revenues from this group amounted to
approximately 15%and 0%, respectively, of the Company's total revenues for each
applicable period. There were no sales of AT-200 units during 1997.
Tellurian's most recently developed image generation product is the
"EAGLE," a system specifically designed for the VR entertainment market. The
EAGLE, which is available in multiple resolution formats, is faster and less
expensive to produce than the AT-200. Each unit is composed of proprietary
hardware and software which combined with motion and sound to simulate a
full-immersion experience. The EAGLE is intended for use at amusement/ theme
parks, video arcades, TEC's and LBE's.
The Company's marketing efforts prior to completion of the 1996 public
offering hadbeen 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 1996, two principal customers,
namely, Voyager and Ship Analytics Corp. accounted for 76% and 16%,
respectively, of the Company's revenues. These same two companies represented
38% and 27%, respectively, of the Company's 1997 revenues.
Backlog
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At December 31, 1997, the Company had no backlog. At December 31, 1996 the
Company had a backlog of 32 Eagle units with a sales value of $160,896. The
backlog was entirely under the Fightertown order which dates back before January
1, 1996 and under which Fightertown did not accept deliveries in 1995 or 1996.
As of December 31,1997 all of these units have been delivered. (See Agreement
with Fightertown.).
Other Products and Services
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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 toutilize all of the advantages of the Eagle
without adding unnecessary cost.
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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 was completed in the Fall of 1997. (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 showed that prototype unit at
the important industry trade show (IAPPA) in November 1997.
The helmet mounted visual system was displayed and offered for sale at the
IAAPA trade show in November 1997. While the reaction to the visual system was
extremely positive, it was clear that game software had to be completed before
customers would commit to the purchase of these units. The Company has recently
begun 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, subject to the availability of
adequate financing, to be in full production and delivery of helmet basedunits
late 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
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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 avariety 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 - LosAngeles, CA) and
Fightertown - Lake Forest, CA. Entering the entertainment market is anatural
progression of the technology and products which the Company has been
developing.
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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 has received, and is currently trying to close, numerous
sales leads as a result of the Cyberport exposure.
Due to the specialized nature of sales, significant training is required
before newly hired sales persons are likely to be effective. While the Company
hopes to add sales personnel in the future, it intends for the moment 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 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.
Licensing of Tellurian Technology
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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, SriLanka (Ceylon), Syria, Thailand, Turkey, United Arab Emirates,
Vietnam, Yemen (Adenand 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 asthe "Intellectual Property"), and
the right to grant sub-licenses to third parties without the consent of
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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, which
amount has been paid.
The Company is currently in discussion with Voyager regarding a further
technology transfer license with certain aspects of the helmet product. No
assurances can be given that such discussions will result in an agreement
satisfactory to the Company.
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 November 1997, the Company entered into a settlement agreement with
Fightertown Entertainment, Inc.("Fightertown"). Tellurian 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
resulted in Fightertown initiating a law suit 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.
12
<PAGE>
During the third quarter of 1997 and extending into November 1997, the
Company worked diligently to complete installation of the first group of EAGLES
that were shipped to Fightertown and restore the confidence and working
relationship that had previously existed between the two companies. In November
1997, the Company signed a mutual release and settlement agreement (the
"Agreement") with Fightertown Entertainment, Inc.("Fightertown") to release all
claims the parties have against each other except for obligations created by the
Agreement. The terms of the Agreement included the following:(1) The Company was
required to and did 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 accepted
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 agreed to (and has paid) 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 acknowledgment that the Tellurian flight 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 executed 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 five 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 fiscal 1997
and fiscal 1996 were $862,031 and $688,103, respectively. See "Note 1 to the
Notes to Consolidated Financial Statements."
13
<PAGE>
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 producea non-textured polygon image. Although these competitive systems
provide very desirable images, the Company's products are substantially less
expensive than those of such competitors. The second type of competitors are the
manufacturers of "low end" (less costly) video arcade devices. These electronic
devices have no computers and are limited as to the quality and complexity of
the images they produce. Management believes that both categories of competitors
will continue to improve their products in either price or performance as
developments permit. The Company believes that its products provide a balanced
approach the proper mix of image quality with price. Most of the Company's
current and prospective competitors have (or will likely have) significantly
greater financial, technical, manufacturing and marketing resources and
experience, and a larger installed base, than the Company.
The Company believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new product
development by the Company and its competitors, product performance and price,
distribution and customer support. Although the Company believes that it offers
products with price and performance characteristics competitive with other
manufacturers' products, there is no assurance that products can be developed,
produced or marketed successfully in the future. In order to be successful in
the future, the Company must continue to respond promptly and effectively to the
challenges of technological change and its competitors' innovations. Performance
in these areas will, in turn, depend on the Company's ability to attract and
retain highly qualified technical personnel in a competitive market for
experienced and talented computer hardware developers and managers. There is no
assurance that the Company will be able to compete successfully in its chosen
markets.
The Company has established Cyberport and, 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
14
<PAGE>
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
- ---------
Tellurian has 12 full-time employees, including 2 executive employees, 3
technicaland production persons and 2 engineers at its New Jersey facility and 5
administrative and sales personnel at Cyberport. It should be noted that the
Cyberport facility is not currently open to the public and that the number of
employees will increase when it reopens on a full time basis in April. The
Company believes that its relations with its employees is good. None of the
Company's employees are represented by a union.
Item 2. Description of Property.
- ------- ------------------------
In January, 1997, the Company commenced a ten year lease expiring January,
2007 for approximately 10,000 square feet of space at 300K Route 17 South,
Mahwah, NJ. 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. The Company does not intend to renew this 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
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. Under the terms of the recent restructuring of debt at Cyberport (see
"Recent Developments") Cyberport has been granted a three month moratorium
(March, April and May) on its rent payments. This moratorium requires Cyberport
to make double payments in July, August and September in order to restore itself
to a current rental status.
15
<PAGE>
Item 3. Legal Proceedings.
- ------- ------------------
In September 1997, both Tellurian and Cyberport 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 at the site that
houses Cyberport have not beenfully paid for. The amounts claimed was for an
estimated $1,400,000.
As of March 31, 1998, the Company has reached an agreement with the
representatives of the creditor group and Cyberport's landlord which resulted in
aresolution of this matter in a form acceptable to Management and to the
creditors. This agreement resulted in all of the debt being converted into
350,000 restricted shares of Tellurian common stock and 912,634 shares of
Cyberport Series "B" Special Shares (preferred stock) with a $1 (Canadian) par
value. The Company has the right to redeem this preferred stock until October
10, 1998 at $1.10 Canadian ( approximately $.77 U.S.).per share. Should the
Company choose not redeem this stock, the holders of the stockhave the right to
convert the preferred stock into restricted Tellurian common shares at therate
of 2.28 shares of preferred for each share of common. This conversion right
expireson December 31, 1998. (See "Recent Developments" under Item 1.)
As of March 31, 1998, Management is not aware of any other material legal
proceedings involving the Company or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
<PAGE>
PART II
Item 5. 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 March 31, 1998 at 4:00 P.M. Eastern Standard Time, the last sale
price of the Common Stock andWarrants in the over-the-counter market were
$2.8325 and $.5625, 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:
<TABLE>
<CAPTION>
Common Stock
Common Stock Purchase Warrants
------------ -----------------
High Low High Low
---- ---- ---- ----
<S> <C> <C> <C> <C>
1997
First Quarter 6.875 4.750 3.750 1.375
Second Quarter 6.375 3.500 1.875 .750
Third Quartr 5.250 2.750 1.250 .4375
Fourth Quarter 5.875 2.250 2.000 .5000
--------
1996
November 5
(first day of trading)
through
December 31, 1996 71/2 53/4 41/4 21/2
</TABLE>
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 ofrecord holders of the Company's Common Stock, as of
April 7, 1998, the record date, was approximately 31. 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 550 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.
As disclosed in Item 1, the Company has been advised by NASDAQ that it may
be inviolation of NASDAQ's requirements for continued listing. The Company has
submitted a written appeal to NASDAQ indicating that, as a result of the debt
17
<PAGE>
restructuring with the creditors of Cyberport, the Company may now be in
compliance with the requirements of NASDAQ. As of the date of this filing, the
Company has not heard the results of its appeal. Should the Company be
unsuccessful in this appeal and any subsequent actions which it may take to
preserve its listing on NASDAQ, the resulting loss of its listing may materially
adversely affect the Company's ability to raise required financing and the
market value of the Company's securities and the ability of investors to
liquidate their securities. Further, the Company's securities may become subject
to the "penny stock" rules.
The Securities and Exchange Commission has adopted "penny stock"
regulations which applies to securities traded over-the-counter. These
regulations generally define "penny stock" to be any equity security that has a
market price of less than $5.00 per share or a warrant that has an exercise
price of less than $5.00 per share or an equity security of anissuer with net
tangible assets of less than $2,000,000 as indicated in audited financial
statements, if the corporation has been in continuous operations for at least
three years. Subject to certain limited exceptions, the rules for any
transaction involving a "penny stock" require the delivery, prior to the
transaction, of a risk disclosure document prepared by the Commission that
contains certain information describing the nature and level of risk associated
with investments in the penny stock market. The broker-dealer also must disclose
the commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Monthly account
statements must be sent by the broker-dealer disclosing the estimated market
value of each penny stock held in the account or indicating that the estimated
market value cannot be determined because of the unavailability of firm quotes.
In addition, the rules impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and institutional accredited investors (generally institutions with
assets in excess of $5,000,000). These practices require that, prior to the
purchase, the broker-dealer determined that transactions in penny stocks were
suitable for the purchaser and obtained the purchaser's written consent to the
transaction. If the Company's securities trade below $5.00 per security after
the Offering, they will be a penny stock unless the Company has audited
financial statements demonstrating net tangible assets of at least $2,000,000.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the Company's securities and may affect the ability of purchasers in the
Offering to sell the Company's securities in the secondary market.
18
<PAGE>
Item 6. Managements Discussion and Analysis of Financial or Plan of Operation.
- ------- ----------------------------------------------------------------------
INTRODUCTION
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 show place for demonstrations of Tellurian
products; and
* Establishing a TEC for the purpose of operating and owning such afacility
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 imited 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 hanged
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 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 requiredby the viewing screens. The arcade market represents
by far the largest grouping of otential buyers for the units and these potential
buyers are heavily influenced by there turn per square foot of floor space
occupied. The helmet would reduce the square footage needed by approximately 50%
19
<PAGE>
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 ofthe 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 approximately $250,000 of financing to produce and market the Tellurian
Helmet. The Company plans to offer the helmet based experience for delivery
within 4 months from dateof 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 ubsequent 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 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
20
<PAGE>
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
interestor 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.
21
<PAGE>
PLAN OF OPERATION
The Company plans to focus its efforts on the following areas:
* Pursuing the merger/acquisition of companies offering products
and/orservices complementary to the entertainment market presently being
marketed to by the Company;
* Finding and entering into join 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 gameunits;
* Increasing revenues through marketing efforts of its new EAGLE productnow
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 on goingresearch 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 aportion 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
<PAGE>
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 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.
Results of Operations
Year Ended December 31, 1997 ("1997") vs. December 31, 1996 ("1996")
Tellurian's net sales for 1997 were $521,045, a decrease of $298,335 or 36%
over the comparable period of the prior year. Such decrease was primarily due to
the completion of the Voyager consulting contract at the end of 1996. Also, the
Company's concentration on developing the helmet display unit and on opening
Cyberport may have negatively impacted sales from the image generation
equipment. For 1997, the Company's gross profit was $165,913 as compared to
$535,373 for the comparable period of the prior year. Such decrease in gross
profit is partially due to the loss of revenue from the completion of the
Voyager contract and partially due to the costs related to the operation of the
Cyberport Niagara facility.
Tellurian's research and development activities for 1997 were $862,031,
representing an increase of $173,928, or 25%, over the comparable period of the
prior year. The increase in research and development activities related to
Tellurian's concentrated effort to complete 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 1997 were $1,934,319, an
increase of $1,349,198, or 230%, over the comparable period of the prior year.
This increase is principally due to the cost of developing and operating
Cyberport (approximately $950,000) as well as the increased costs related to
becoming a public entity (insurance, professional fees and similar items).
For 1997 interest expense was $121,186, and increase of 9,853, or 8.7%,
over the comparable period of the prior year.
Tellurian's net loss for 1997 was $2,708,993 as compared to a loss of
$962,410 for the comparable period of the prior year.
23
<PAGE>
Liquidity and Capital Resources
In December 1995 and January 1996, the Company raised approximately
$675,000 from the sale of promissory notes and 3,000,000 warrants which were
automatically convertible into 3,000,000 warrants identical to those Warrants
sold in Tellurian's public offering. In June 1996, the Company received proceeds
of approximately $149,000 from the sale of its promissory notes, $25,000 of
which automatically converted into 25,000 shares of the Company's Common Stock
upon the completion of its public offering in November 1996.
In November 1996, the Company sold 1,400,000 shares of its Common Stock at
an offering price of $5.00 per share and 2,127,500 Common Stock Purchase
Warrants at an offering price of $.25 per share. The Company received net
proceeds of approximately $6,200,000 from the offering.
For the year ended December 31, 1997, net cash of $1,107,900 was used
inoperating activities as a result of the Company's net loss which was partially
offset by substantial increases in the Company's accounts payable. For the year
ended December 31, 1996, $1,851,540 was used in operating activities.
For the year ended December 31, 1997, net cash of $864,568 was used in
investing activities. Funds of approximately $2.06 million were provided from
the sale of marketable securities and approximately $2.77 million was used in
the purchase of property and equipment, almost entirely at the Cyberport
facility. For the year ended December 31,1996, $2,210,233 was used in investing
activities.
For the year ended December 31, 1997, $368,484 was provided from financing
activities. The primary sources of this cash were the proceeds of certain loans
completed during the year. For the year ended December 31, 1996, $5,783,829 was
provided from financing activities. The primary source of these funds from the
public offering completed in November of 1996.
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.
24
<PAGE>
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.
In March 1998, the Company and certain of the vendors of Cyberport 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 issues 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.
During 1997, 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 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 an estimated $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
25
<PAGE>
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. 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 December 31, 1997, Tellurian had a working capital deficit of
$2,087,263. The impact of the warrant exchange offer and the recently completed
debt conversion has significantly reduced, but not eliminated, that deficit. 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 cashflows, 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 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 audited financial statements have been prepared by Management on a
going concern basis. See "Note 1 in the Notes to Consolidated Financial
Statements." 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 issued letters of intent to merge with 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.
Item 7. Financial Statements
- ------- --------------------
The information required by Item 7, and an index thereto commences on
page F-1,which pages follow this page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable.
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-27
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Tellurian, Inc.
Mahwah, New Jersey
We have audited the accompanying consolidated balance sheet of Tellurian, Inc.
and Subsidiaries as at December 31, 1997, and the related consolidated
statements of operations, comprehensive operations, stockholders' equity and
cash flows for the years ended December 31, 1997 and 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tellurian, Inc. and
Subsidiaries as at December 31, 1997, and the results of its operations and cash
flows for the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company experienced a net
loss for the year ended December 31, 1997 of approximately $2,709,000 and at
December 31, 1997 has a deficit working capital of approximately $2,106,000.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern. The Company has been engaged in continuous
efforts since June 1997 to formulate a restructuring plan as well as to raise
additional capital through the sale of common stock and warrants, as more fully
discussed in Notes 18 and 19. During March 1998 the restructuring plan was
accepted, and additional funds were raised through a public offering. However,
to achieve profitable operations, continuation of the business thereafter is
dependent on the Company's ability to achieve sufficient cash flow and to meet
its restructured debt obligations as well as its current operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities that
might be necessary should the Company be unable to continue as a going concern.
MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 10, 1998, except for Notes 18
and 19 which is March 31, 1998
F-2
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 187,189
Marketable securities 108,912
Accounts receivable, net of allowance for
doubtful accounts of $-0- 9,029
Inventories 662,364
Prepaid consulting fees 62,187
Prepaid expenses and other current assets 23,206
------------
Total current assets 1,052,887
------------
PROPERTY AND EQUIPMENT - at cost
less accumulated depreciation 2,688,346
------------
OTHER ASSETS:
Security deposits 70,070
Deferred offering costs 92,099
------------
Total other assets 162,169
------------
$ 3,903,402
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 34,953
Note payable - bank 100,000
Notes payable - other 200,000
Accounts payable and accrued expenses 1,953,481
Notes payable - related parties 496,736
Interest payable - related parties 354,980
------------
Total current liabilities 3,140,150
------------
LONG-TERM DEBT - net of current maturities 125,630
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value
Authorized - 25,000,000 shares
Issued and outstanding - 3,025,000 shares 30,250
Additional paid-in capital 6,345,162
Accumulated deficit (5,767,777)
Other comprehensive income 29,987
------------
Total stockholders' equity 637,622
------------
$ 3,903,402
============
The accompanying notes are an integral part of the consolidated financial
statements
F-3
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
REVENUES $ 521,045 $ 819,380
COST OF SALES 355,132 284,007
------------- ------------
GROSS PROFIT 165,913 535,373
------------- ------------
OPERATING EXPENSES:
Research and development 862,031 688,103
Selling 300,662 189,429
General and administrative 1,630,637 395,692
------------- ------------
2,793,330 1,273,224
------------- ------------
LOSS FROM OPERATIONS (2,627,417) (737,851)
------------- ------------
OTHER INCOME AND EXPENSES:
Interest expense (71,512) (50,313)
Interest expense - related parties (49,674) (61,020)
Interest income 68,339 21,087
Deferred debt costs - (152,398)
Other income (expenses) (28,729) 18,085
------------- ------------
(81,576) (224,559)
------------- ------------
NET LOSS $ (2,708,993) $ (962,410)
============= ============
NET LOSS PER COMMON SHARE $(.90) $(.53)
===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,025,000 1,817,708
========= =========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
YEARS ENDED
DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Net loss $ (2,708,993) $ (962,410)
Other comprehensive income:
Foreign currency translation adjustment 29,987 -
------------- ------------
Comprehensive loss $ (2,679,006) $ (962,410)
============= ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
ADDITIONAL OTHER STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT January 1, 1996 .................. 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 ... 1,400,000 14,000 7,517,875 -- -- 7,531,875
Offering costs in connection with
initial public offering ................... -- -- (1,326,728) -- -- (1,326,728)
Conversion of promissory notes in
connection with initial public offering ... 25,000 250 24,750 -- -- 25,000
Issuance of warrants in connection with
private placement ......................... -- -- 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 30,250 6,345,162 (3,058,784) -- 3,316,628
Foreign currency translation adjustment ..... -- -- -- -- 29,987 29,987
Net loss for the year ended December 31, 1997 -- -- -- (2,708,993) -- (2,708,993)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT December 31, 1997 ................ 3,025,000 $ 30,250 $ 6,345,162 $(5,767,777) $ 29,987 $ 637,622
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996
- -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,708,993) $ (962,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred costs 50,000 -
Accrued interest income on marketable securities (3,912) (6,118)
Depreciation and amortization 231,442 17,500
Amortization of deferred debt costs - 152,398
Loss on sale of property and equipment 8,954 -
Loss on sale of marketable securities 12,388 -
Changes in assets and liabilities:
Accounts receivable 125,333 (129,362)
Allowance for doubtful accounts (115,000) 115,000
Inventories (374,513) (200,633)
Prepaid consulting fees 74,625 (136,812)
Prepaid expenses and other current assets (9,350) (6,045)
Security deposits (22,320) (46,825)
Accounts payable 1,710,814 (384,836)
Consulting fees payable (46,594) (209,099)
Interest payable - related parties 39,674 21,702
Deferred revenue (80,448) (76,000)
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,107,900) (1,851,540)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 48,000 -
Purchases of property and equipment (2,770,566) (190,965)
Sale of marketable securities 2,062,998 -
Purchases of marketable securities (205,000) (1,969,268)
Deferred costs - (50,000)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (864,568) (2,210,233)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - bank 100,000 -
Proceeds from notes payable - other 200,000 -
Proceeds from long-term debt 264,764 703,000
Repayment of long-term debt (104,181) (870,000)
Payments of deferred offering costs (92,099) -
Payments of offering costs - (1,326,728)
Proceeds from issuance of warrants in connection with private placement - 22,000
Proceeds from notes payable - related parties - 248,000
Repayments of notes payable - related parties - (422,185)
Proceeds from issuance of common stock - 7,531,875
Repayments of notes payable - other - (500)
Payments of deferred debt costs - (101,633)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 368,484 5,783,829
------------- ------------
EFFECT OF EXCHANGE RATE CHANGES 29,987 -
------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,573,997) 1,722,056
CASH AND CASH EQUIVALENTS - beginning 1,761,186 39,130
------------- ------------
CASH AND CASH EQUIVALENTS - ending $ 187,189 $ 1,761,186
============= ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
- -------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
SCHEDULE OF NON-CASH ACTIVITIES:
Conversion of long-term debt into common stock $ - $ 25,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 81,517 $ 89,631
Cash paid for income taxes - -
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-8
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company
experienced a net loss for the year ended December 31, 1997 of
approximately $2,709,000 and at December 31, 1997 has a deficit in working
capital of approximately $2,106,000. These matters, among others, raise
substantial doubt about the Company's ability to continue as a going
concern.
Management's plan includes the raising of additional capital through the
public sale of common stock and warrants (Note 18) and the formulation of a
restructuring plan with a majority of its trade creditors of its Canadian
subsidiary (Note 19). The unaudited pro forma effect of these items are
presented in Note 20.
During March 1998 the restructuring plan was accepted and additional funds
were raised as contemplated by the public offering. However, continuation
of the business thereafter is dependent on the Company's ability to achieve
sufficient cash flow to achieve profitable operations and to meet its
restructured debt obligation as well as its current operations.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
NOTE 2 - 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 wholly-owned subsidiary, Cyberport
Niagara, Inc. ("Cyberport") in the province of Ontario, Canada. Cyberport
operates a tourist entertainment center in Niagara Falls, Ontario, Canada
which opened in late June 1997. In addition, the Company formed a second
wholly-owned subsidiary, Cyberport International, Inc., a Delaware
corporation. This corporation is inactive and has no assets.
F-9
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Consolidation
----------------------
The consolidated financial statements for the year ended December 31, 1997
include the accounts of the Company and its subsidiary. All significant
intercompany transactions have been eliminated in consolidation.
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
treasury bills were sold in 1997. At December 31, 1997, the Company's
held-to-maturity securities consisted of a certificate of deposit with an
original maturity of one year. The certificate matures in April 1998.
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-10
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - 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 Offering Costs
-----------------------
Deferred offering costs represent costs incurred in the filing of a
registration statement on Form SB-2 for the purpose of registering
securities for sale to the holders of its warrants. Such costs are charged
to additional paid-in capital when the registration is complete.
Deferred Debt Costs
-------------------
Deferred debt costs represented costs incurred in connection with the
Company's 1996 private placement agreement. The costs were amortized over
the respective terms of the promissory notes issued. All the promissory
notes were repaid from the proceeds of the public offering.
Deferred debt costs amounted to $-0- and $152,398 for 1997 and 1996,
respectively.
Research and Development
------------------------
Research and development costs, related to present and future products, are
charged to expense in the period incurred. Research and development costs
amounted to $862,031 and $688,103 for 1997 and 1996, respectively.
Advertising Costs
-----------------
Advertising costs are charged to operations when incurred. Advertising
costs amounted to $73,399 and $-0- for 1997 and 1996, respectively.
F-11
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - 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.
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.
Loss Per Common Share
---------------------
The Company adopted SFAS No. 128, "Earnings Per Share" which establishes
new standards for computing and presenting earnings per share. The
statement also requires restatement of all prior period earnings per share
data presented.
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. Common stock equivalents have
not been included as their effect would be antidilutive.
Recently Issued Pronouncements
------------------------------
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components in a full set of financial
statements and is effective for fiscal years beginning after December 15,
1997. Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The Company has elected to adopt SFAS No. 130 in 1997.
American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities," establishes specific
criteria for the recognition and measurement of environmental remediation
liabilities. The adoption of the statement in 1997 did not have a
significant effect on the Company's financial condition or results of
operations.
F-12
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 3 - INVENTORIES
Inventories at December 31, 1997, consist of the following:
Raw materials $ 221,575
Work-in-process 206,899
Finished goods 233,890
----------
$ 662,364
==========
NOTE 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at December 31, 1997, consists of:
Estimated
Useful Lives
<S> <C> <C>
Display and entertainment units $ 661,275 7 Years
Equipment 234,444 7 Years
Vehicles 44,415 5 Years
Computer software 62,863 5 Years
Office furniture 67,010 7 Years
Leasehold improvements 1,901,686 5 to 10 years
-------------
2,971,693
Less: Accumulated depreciation and amortization 283,347
-------------
$ 2,688,346
=============
</TABLE>
Depreciation expense amounted to $231,442 and $17,500 for 1997 and 1996,
respectively.
NOTE 5 - NOTE PAYABLE - BANK
In March 1997, the Company entered into an agreement with a bank to borrow
up to a maximum of $100,000. The note is due on March 25, 1998 with
interest charged at 8.38% per annum and is collateralized by a certificate
of deposit in the amount of $105,000 maturing on April 1, 1998.
Interest on the note amounted to $1,080 for 1997.
F-13
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 6 - NOTE PAYABLE - OTHER
The note bears interest at the rate of 12% per annum compounded monthly
and is due on demand. The Company borrowed an additional $50,000 in January
1998 and the note was repaid in March 1998.
The note is secured by the Company's accounts receivable, inventory and
proceeds from the sale or offering of securities.
Interest on the note was not accrued as the funds were received on December
31, 1997 and such amount was deemed to be immaterial.
NOTE 7 - LONG-TERM DEBT
Long-term debt at December 31, 1997, consists of the following:
Promissory note payable to a Canadian bank in irregular principal
installments totalling $50,000 Canadian per year through December
2001 and $29,714 Canadian in 2002 plus interest at three percent (3%)
above the prime rate as charged by the Bank Of Canada. The note is
secured by all of the tangible assets of
Cyberport. $ 160,583
Less: Current maturities 34,953
----------
$ 125,630
==========
Interest on long-term debt amounted to $9,363 and $-0- for 1997 and 1996,
respectively.
Maturities at December 31, 1997 are payable as follows:
Year Ended
December 31, Amount
1998 $ 34,953
1999 34,953
2000 34,953
2001 34,953
2002 20,771
----------
$ 160,583
==========
F-14
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 8 - 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 and accrued interest payable amounted to
$354,980 at December 31, 1997.
Interest expense charged to operations amounted to $49,674 and $61,020 for
1997 and 1996, respectively.
NOTE 9 - FINANCIAL INSTRUMENTS
The amounts at which cash, accounts receivable, accounts payable, advances
on line of credit, notes payable - related parties and notes payable -
other are presented in the balance sheet approximate their fair value due
to their short maturities.
The amount at which long-term debt is presented approximates its fair value
as its interest rate is comparable to other similar types of debt.
NOTE 10 - 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.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Loss before provision for income taxes $ (2,708,993) $ (962,410)
============= ===========
The components of the provision for income taxes by taxing
jurisdiction are as follows:
Federal $ - $ -
State - -
Foreign - -
------------- -----------
$ - $ -
============= ===========
</TABLE>
F-15
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 10 - INCOME TAXES (CONTINUED)
The major component of the deferred tax asset at December 31, 1997, is as
follows:
Net operating loss carryforwards $ 1,468,561
Less: Valuation allowance (1,468,561)
------------
$ -
============
A 100% valuation allowance is being provided at December 31, 1997 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:
YEARS ENDED
DECEMBER 31,
---------------------------
1997 1996
----------- ----------
Income tax credit at statutory rate $ (887,701) $ (336,844)
State income tax credits (126,815) (48,120)
Foreign income taxes (454,045) -
Net operating loss carryforwards 1,468,561 384,964
---------- ----------
$ - $ -
=========== ==========
At December 31, 1997, the Company had unused net operating loss
carryforwards of approximately $3,671,400 expiring in 2011 and 2012.
F-16
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - 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, 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
approximately $263,000. 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,
1998 $ 325,022
1999 340,537
2000 344,276
2001 344,276
2002 97,440
Thereafter 300,000
------------
$ 1,751,551
============
Rent expense amounted to $298,689 and $62,574 net of rental income of
$31,124 and $18,085 for 1997 and 1996, respectively.
F-17
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - 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:
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 $192,000 and $32,000 for 1997
and 1996, 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 13). 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 $74,625 and $12,438 for 1997 and
1996, respectively.
In March 1998, the Company entered into a consulting agreement with a
corporation whereby such corporation would provide various consulting
services for an eighteen (18) month period. Terms of the agreement include
the following:
1. A monthly fee of $5,000.
2. The issuance of 150,000 shares of common stock. Such shares were
issued in March 1998.
Settlement Agreement
--------------------
In November 1997, the Company signed a mutual release and settlement
agreement (the "Agreement") with Fightertown Entertainment, Inc.
("Fightertown"), a customer. 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.
F-18
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Settlement Agreement (Continued)
--------------------
3. The Company agrees to pay Fightertown $20,000 no later than January
31, 1998 for future consulting services as defined in the Agreement.
Such amount was paid on January 30, 1998.
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 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.
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.
F-19
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Technology Agreement (Continued)
--------------------
In October 1995, the Company assigned proceeds received under the agreement
and granted a security interest to a stockholder.
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, 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.
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 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.
NOTE 12 - MAJOR CUSTOMERS
As of December 31, revenues from major customers are as follows:
1997 1996
------ --------
Customer A 38.0% 75.9%
Customer B 26.7% 16.0%
Customer C 15.4% -
F-20
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 13 - BUSINESS SEGMENT DATA
The Company's operations are conducted through two business segments, Image
Corporation Equipment and the Entertainment Center.
<TABLE>
<CAPTION>
Net sales of each segment are as follows:
Years Ended
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Image generation equipment:
United States $ 271,324 $ 197,760
Republic of China 198,000 621,620
----------- -----------
469,324 819,380
Entertainment center - Canada 51,721 -
----------- -----------
$ 521,045 $ 819,380
=========== ===========
Operating loss of each segment is as follows:
Years Ended
December 31,
--------------------------
1997 1996
------------- -----------
Image generation equipment $ (1,562,269) $ (737,851)
Entertainment center (1,068,168) -
------------- -----------
Operating loss of segments (2,630,437) (737,851)
Other expenses (25,709) (134,313)
Interest expense - net of interest income (52,847) (90,246)
------------- -----------
$ (2,708,993) $ (962,410)
============= ===========
</TABLE>
F-21
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 13 - BUSINESS SEGMENT DATA (CONTINUED)
Identifiable assets of each segment at December 31, 1997 are as follows:
Image generation equipment $ 1,558,587
Entertainment center 2,081,616
-------------
Identifiable assets 3,640,203
General corporate assets 263,199
-------------
$ 3,903,402
=============
Identifiable assets by segment are those assets that are used in the
operation of each segment. General corporate assets consist of marketable
securities, prepaid consulting fees and deferred offering costs.
NOTE 14 - 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 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.
F-22
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
Warrants (Continued)
--------
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.
Outstanding warrants at December 31, 1997, are as follows:
Outstanding Exercise Exercise
Warrants Price Period
------------ --------- -------------------
5,127,500 $6.00 November 6, 1996 -
November 5, 2001
No warrants were exercised during 1996 nor 1997.
NOTE 15 - STOCK OPTION PLAN
On June 1, 1996, the Company adopted a Stock Option Plan (the "Plan")
covering 400,000 shares of common stock (subject to adjustment to cover
stock splits, stock dividends, recapitalizations and other capital
adjustments) for employees, including officers and directors and
consultants of the Company. The Plan provides that options to be granted
under the Plan will be designated as incentive stock options or
non-incentive stock options by the board of directors or a committee
thereof, which also will have discretion as to the persons to be granted
options, the number of shares subject to the options and the terms of the
options. Options designated as 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-23
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 15 - 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
Options Price Exercise Period
---------- --------- -----------------------------
<S> <C> <C> <C>
December 31, 1997
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.
The Plan was cancelled on March 2, 1998 and concurrently, the 1998
Incentive and Non-Statutory Stock Plan ("New Plan") was created (subject to
stockholder approval). The New Plan has substantially the same terms and
conditions as the Plan and no options can be exercised until the
stockholders approve the New Plan.
NOTE 16 - 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- and $33,691 for 1997 and
1996, respectively.
F-24
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 17 - 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>
Year Ended December 31, 1997 Year Ended December 31, 1996
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net loss $ (2,708,993) $ (2,779,685) $ (962,410) $ (1,228,660)
Loss per share (.90) (.92) (.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% to 19%; risk free interest
rates of 6% to 6.5%; and an expected holding period of three years.
NOTE 18 - PUBLIC OFFERING (UNAUDITED)
In December 1997, the Company filed 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.
Pursuant to the registration statement, the Company's tender offer is on
the following terms:
1. Warrant holders who tender their warrants at $1.875 per tendered warrant
will receive one unit for each warrant tendered.
2. Each unit consists of one share of the Company's common stock and one
new warrant identical to the tendered warrant.
The offering was completed in March 1998. The Company sold a total of
321,605 units for $490,912, net of offering costs of $112,099.
F-25
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 19 - RESTRUCTURING OF CYBERPORT ACCOUNTS PAYABLE
In March 1998, Cyberport and certain of its vendors agreed to restructure
approximately $1,349,000 ($1,314,000 at December 31, 1997 of accounts
payable as follows:
1. The vendors transferred Canadian $1,000,000 of the 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 912,634 Series B Special Shares ("Series B") at
Canadian $1.00 per share for the balance of the monies owed. Additional
shares will be issued for any goods and services tax found owing on
closing.
The Series B shares have certain rights and conditions including the
following:
1. The shares are non-voting
2. A preferred 12% annual cumulative cash dividend, payable quarterly,
with the first payment due on June 30, 1998
3. Cyberport has the right to redeem any and all of the shares at any time
prior to October 10, 1998 at a price of Canadian $1.10 per share.
The payment will include any accrued and unpaid dividend payments that
are outstanding at such time
For the period October 11, 1998 to December 31, 1998, the vendors have a
right to convert all unredeemed Series B shares into common stock of the
Company at a conversion rate of 2.28 to 1.
F-26
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 20 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma, condensed, consolidated balance sheet
assumes the consummation of a proposed public offering on December 31, 1997 of
the Company's tender offer of 321,605 units consisting of common stock and
warrants and the restructuring of certain trade payables of the Company's
wholly-owned Canadian subsidiary into convertible non-voting Series B shares of
the Canadian subsidiary.
The financial information presented herein does not purport to be indicative of
what would have occurred had both transactions actually been made as of such
date or of results which may occur in the future.
The unaudited pro forma condensed consolidated balance sheet of the Company
at December 31, 1997 assume the following:
<TABLE>
<CAPTION>
1. The consummation of the public offering occurred on December 31, 1997
2. The restructuring of certain accounts payable of Cyberport, the Company's wholly-owned Canadian subsidiary,
occurred on December 31, 1997
Company,
As Pro Forma
Reported Adjustments Pro Forma
<S> <C> <C> <C>
Current assets $ 1,052,887 (3) $ 490,910 $ 1,543,797
Property and equipment 2,688,346 - 2,688,346
Other assets 162,169 - 162,169
-------------- ----------- -------------
$ 3,903,402 $ 490,910 $ 4,394,312
============== =========== =============
Current liabilities $ 3,140,150 (1) $ (699,056) $ 1,803,111
(2) (637,983)
Long-term debt 125,630 - 125,630
Stockholders' equity 637,622 (1) 699,056 2,465,571
(2) 637,983
- (3) 490,910 -
-------------- ----------- -------------
$ 3,903,402 $ 490,910 $ 4,394,312
============== =========== =============
</TABLE>
(1) To record assignment of payables to landlord and conversion into
350,000 shares of common stock
(2) To record issuance of Series B shares to vendors and assume conversion
into common stock of the Company
(3) To record the consummation of the proposed public offering net of
deferred offering costs
F-27
<PAGE>
PART III
Item 9. Directors, Executive Officers,
- ------- ------------------------------
Promoters and Control Persons; Compliance With Section 16(a) of the Exchange
----------------------------------------------------------------------------
Act.
----
(a) Identification of Directors
- --- ---------------------------
The names, ages and principal occupations of the Company's present
directors, andthe date on which their term of office commenced and expires, are
as follows:
First
Term of Became Principal
Name Age Office Director (2) Occupation
- --------- --- -------- ------------------------------
Dr. Ronald Swallow 63 (1) 1988 Chairman of the
Board and Chief
Executive Officer
of the Company
Stuart French 52 (1) 1995 President of the
Company
Dr. Richard Swallow 59 (1) 1988 Faculty Member
and Director of
Information Service
at Coker College,
Hartsville, SC
Peter Colgan 63 (3) l998 Senior Vice President
---------
Computer Horizons Corp.
James Lin 46 (3) 1998 President, Asian
--------- International Management
(1) Directors are elected at the annual meeting of stockholders and hold
office until thefollowing annual meeting.
(2) Tellurian, Inc., a South Carolina corporation, reincorporated in
Delaware in 1996 via a merger of itself into a corporation formed in
January 1996 under the same name.
(3) Elected at a Board of Directors meeting on March 2, 1998
<PAGE>
(b) Identification of Executive Officers.
- --- -------------------------------------
Dr. Ronald Swallow is Chairman of the Board and Chief Executive Officer of
the Company. Stuart French is President of the Company. Michael Hurd is
Vice-President of Administration and Finance and Chief Financial and Security
Officer of the Company. Dr.Richard Swallow is Secretary of the Company.
The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Subject to their contract rights to
compensation, if any, officers may be removed, either with or without cause, by
the Board of Directors, and a successor elected by a majority vote of the Board
of Directors, at any time.
(c) Business Experience
- --- -------------------
Dr. Ronald Swallow has been the Chief Executive Officer, Chairman of the
Boar 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 served as a member of the Board of Directors since March
1995, President of the Company since October 1993, and prior thereto was the
Vice President of Operations and Marketing from August 1991. Mr. French joined
the Company after the sale of Flightmatic Corp. which he owned and operated from
1987 through 1991. Flightmatic was a flight simulation company manufacturing and
selling low cost general aviation training equipment. Previously, he spent ten
years at Grumman Aerospace as a Business Development Manager for US Air Force
contracts. After receiving a BS degree in Marketing from New England College,
Mr. French was a pilot in the US Navy.
Dr. Richard Swallow has been a director of Tellurian and its predecessor
under the same name since its inception in 1988. From 1988 to October 1993 Dr.
Swallow also held the position of President. Since 1973, Dr. Swallow has been a
member of the faculty and staff of 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.
Peter Colgan joined the Board of Directors on March 2, 1998. He has served
as the Senior Vice President of Computer Horizons Corp. since 1977. He is a
graduate of City College of New York with an accounting major and holds his
Master of Business Administration from New York University.
28
<PAGE>
James G.H. Lin joined the Board of Directors on March 2, 1998. He is has
been the President of Asian International Management since 1992. Mr. Lin is a
graduate of National Chuang Hsin University in Taiwain and holds his MBA from
North Texas State University with a major in Accounting.
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 resigned from his position as a director of
the Company in March 1998. 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.
In March 1998, the Company established an Audit Committee consisting of
Messrs. Colgan and Lin.
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 March 31, 1998, Barclay
has not designated any person.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"ExchangeAct"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownershipand changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than ten percent stockholders are required by the Commission's
regulations to furnish the Company with copies of all Section 16(a)forms they
file. To Management's knowledge, no officer, director or person owning more than
10% of the Company's Common Stock filed any reports late during its fiscal year
ended December 31, 1997.
29
<PAGE>
Bankruptcy of Quantum Graphics Corporation
On March 16, 1987, Dr. Ronald Swallow founded and served as Chairman of the
Board and principal stockholder of Quantum Graphic Corporation, an image
generator research and development private company which owned certain rights to
a prototype of the AT-100. Dr. Richard Swallow was also a founder and a director
of Quantum. On April 12, 1988, Quantum, as a result of its inability to raise
sufficient funding and due to disagreements among Quantum stockholders, filed
for bankruptcy protection in the Western District of Texas, Austin Division
under Chapter 11, which was converted into a Chapter 7 filing on May 12, 1988.
On May 27, 1988, the Chapter 7 filing was dismissed and on May 31, 1988, a new
Chapter 7 filing was made with the Court and the case was closed by the
Bankruptcy Court on April 19, 1995. In November, 1991, the Bankruptcy Court
confirmed the sale of the technology relating to the AT-100 prototype to
TTY Graphics, Inc. ("TTY"). See "Business-Background."
Limitation of Directors' Liability; Indemnification
Pursuant to Tellurian's By-Laws, Tellurian must, to the fullest extent
permitted by the General Corporation Law of the State of Delaware (the "GCL"),
as amended from time to time, indemnify all persons (e.g., directors and
officers) whom it may indemnify pursuant thereto and to advance expenses
incurred in defending any proceeding for which such right to indemnification is
applicable, provided that, if the GCL so requires, the indemnitee must provide
Tellurian with an undertaking to repay all amounts advanced if so determined by
a final judicial decision. Tellurian's Certificate of Incorporation contains a
provision eliminating, to the full extent permitted by Delaware law, the
personal liability of Tellurian's directors for monetary damages for breach of a
fiduciary duty. By virtue of this provision, under current Delaware law, a
director of Tellurian will not be personally liable for monetary damages for
breach of his fiduciary duty as a director, except for liability for (I) any
breach of his duty of loyalty to Tellurian or to its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividendsor 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.
30
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion ofthe Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
31
<PAGE>
Item 10. Executive Compensation
- -------- ----------------------
The following table sets forth the amount of all compensation paid by Tellurian
for services rendered during the years ended December 31, 1997, 1996 and 1995 to
Tellurian's Chief Executive Officer, Dr. Ronald Swallow and Stuart French,
President. No other executive officers earned $100,000 or more in salaries and
bonuses during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other All
Name Annual Restricted Other
and Compen- Stock Number LTIP Compen-
Principal Bonus sation Award(s) of Payouts sation
Position Year Salary ($) ($) ($) ($) Options ($) ($)(2)(5)
======================== ------- ------------- -------- ---------- ------------ ------------- ----------- ==========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ronald 1997 108,000 -0- -0- -0- -0- -0- -0-
Swallow,
------- ------------ --------- --------- ------------- ------------- ----------- ==========
Chief Executive
Officer(3) 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436
------- ------------ --------- --------- ------------- ------------- ----------- ==========
1995 108,000 -0- -0- -0- -0- -0- 4,200
======================= ------- ------------ --------- --------- ------------- ------------- ----------- ==========
Stuart French 1997 84,000 -0- 12,000 -0- -0- -0- -0-
President (4)
------- ------------ --------- --------- ------------- ------------- ----------- ==========
1996 84,000 -0- 23,359 -0- (1) 150,000 -0- 14,200
======= ============ ========= ========= ============= ============= =========== ==========
1995 84,000 -0- 13,814 -0- -0- -0- 4,200
======================= ======= ============ ========= ========= ============= ============= =========== ==========
</TABLE>
<PAGE>
- ---------------
(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 1997, the Company accrued salaries for Dr. Swallow of $0. As of
December 31, 1997, Dr. Swallow was owed accrued salary and expense
reimbursement totaling $4,500. This amount was paid subsequent to
year-end.
(4) Stuart French earns other annual compensation in the form of a sales
commission which is reflected in column (e). During 1995, 1996 and
1997, the Company accrued salaries and commissions of $9,614, $23,359 and
$12,000, respectively. As of December 31, 1997, Mr.French was owed
accrued salary and expense reimbursement totaling $18,996.
(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.
No contributions were made in 1997.
Since inception, the Company has not granted stock appreciation rights.
32
<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 full estextent permitted by
applicable law. No assurance can be given that such non-competeclauses 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 Plans". During 1998, the Board of Directors approved a resolution to
modify the contract of Dr. Swallow by agreeing to allow him to continue to
design and manufacture image generation equipment if (a) the Company chose to
terminate his contract; and (b) he agreed to forfeit one-half of the salary
continuation benefit to which he would otherwise have been entitled. To date,
the contract itself has not been amended.
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 Plans
1996 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 1996 Plan (the "1996
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
33
<PAGE>
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 stockoptions 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.
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 stockoptions 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 optionsto 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 were 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,
34
<PAGE>
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. In March 1998, all outstanding options
granted under the 1996 Plan were terminated and are available for grant under
the Plan.
1998 Plan. The Board of Directors adopted a revised stock incentive plan at its
meeting of March 2, 1998. The revised plan is identical to the original plan
described above in all aspects with the following exceptions:
1. The total number of options was increased to 750,000 from the
original 600,000.
2. The minimum price to per share was changed from the $5 minimum price
to the fair market value of the stock on the date of grant.
In addition, the Board issued 585,000 options to various officers,
employees and consultants to the Company. These options are non-qualified,
ten-year options exercisable at $2.625 per share. The Board also authorized the
issuance of 25,000 options to David Turner, general manager of the Cyberport if,
in the opinion of operating management, such option was merited. Management
subsequently chose to issue those options. The options for Mr. Turner are issued
under the same conditions as the other 585,000 options referenced earlier in
this paragraph.
In April, as part of an agreement to defer rent due on the Cyberport facility
for three months, the Board agreed to issue 100,000 options at a price of $1.75
to the landlord in Niagara Falls. With that agreement, the total number of
options outstanding is 710,000.
35
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Table - Thefollowing
table provides information with respect to each exercise of stock options during
fiscal 1997 by each of the executive officers named in the preceding summary
compensation table and the fiscal year-end value of unexercised options.
<TABLE>
<CAPTION>
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR -END OPTION VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options
Shares FY-End (#) at FY-End ($)
Acquired on Value
Exercise Realized (1) Exercisable/ Exercisable/
Name (#) ($) Unexercisable(1) Unexercisable(1)
- ------------------- ------------------------- ------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. RonaldSwallow
-0- -0- 73,000 / 0 -0-
- ------------------- ------------------------- ------------------------- ------------------------- -------------------------
Stuart French -0- -0- 150,000 / 0 -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 31,1997 was $3.00. Since the
exercise price of these options is in excess of $3.00, the value of
the options is zero.
36
<PAGE>
Director Compensation
The directors of the Company do not currently receive cash compensation for
their services as directors, although certain directors have been granted stock
options under the Company's Stock Option Plan and are receiving compensation as
employees of the Company. See "Stock Option Plans." The Board of Directors has
the right to compensateits 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 atapproximately $.72 per share and further options of 500 shares
vesting on July 1, 1998and 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. Mr. Hurd resigned from the Board on March 2, 1998 in order to allow
the Company to comply with the NASDAQ requirementthat at least two Board members
be independent of Company operations.
37
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The following table sets forth certain information as of March 31, 1998
(except as otherwise noted below) after giving effect to 350,000 shares to be
issued in April 1998 as described under item 1 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 March 31, 1998 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 11.0%
Dr. Richard Swallow(3)(5) 136,481 4.1%
Stuart French(3)(6) 249,261 6.0%
Michael Hurd (3)(7) 200,000 4.8%
All officers and directors
as a group (6 persons)(7)(8) 956,650 32.8%
1174757 Ontario Inc. (9) 450,000 11.1%
Mary Elizabeth
Huggins Trust (10) 430,049 10.9%
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 35.8%
Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (11) (13) 800,000 16.9%
38
<PAGE>
- -------------
(1) Unless otherwise indicated below, all shares are owned beneficially and
of record.
(2) Based upon 3,946,605 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.
(5) Includes options to purchase 27,000 shares.
(6) Includes options to purchase 200,000 shares.
(7) Includes options to purchase 200,000 shares.
(8) Includes options to purchase 500,000 shares.
(9) Includes options to purchase 100,000 shares.
(10) Trust set up by Charles H. Powers, a founder and former
shareholder, officer anddirector of the Company, for the benefit of
his granddaughter, with Jane PowersHuggins as Trustee. The Trustee's
address is 2419 West Sumter, Florence, SC29572.
(11) Represents Common Stock issuable upon exercise of Warrants. See
"Warrant Holders."
(12) The beneficial owner of Jericho Limited is Louis Carlos Santa Maria. 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.
39
<PAGE>
Item 12. Certain Relationships and Related 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, Cioffolettiand 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 therefor, 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 December 31, 1997, Mr. Powers was owed approximately $694,200, inclusive
of interest at a rate of 10% per annum. Such $694,200 includes $346,736 of
principal and $347,464 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 March 31, 1998, Mr.Powers has not demanded
payment. The Company is seeking either an extension ofthese obligations to Mr.
Powers or the conversion of these obligations into restrictedcommon stock in the
Company. However, no assurances can be given that Mr. Powerswill agree to this
extension or conversion, or that any extension or conversion granted will be on
terms and conditions acceptable to the Company.
From inception through the completion of the initial public offering in
November 1996, Sophia Swallow, Richard Swallow, Celia Klimas, Stuart French and
Sandra Swallow made various cash loans to Tellurian and were repaid from the
proceeds of theinitial 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 March 31,1998, Tellurian owed Ms. Klimas the principal of her loan
plus accrued interest therein.
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
40
<PAGE>
in principal amount of unsecured and subordinated 8% Promissory Notes due
December 27, 1997 and $528,000 in principal amount of unsecured and subordinated
8% Promissory Notes due January 22, 1998, with such Notes providing for
accelerated payment upon the completion of the Offering, and (ii) 3,000,000
Common Stock Purchase warrants sold at a price of $.01 per warrant. Each warrant
entitles the holder thereof to purchase one share of Common Stock at a price of
$6.00 per share, subject to adjustment, at any time for a period of five years
from the date of issuance. The Warrants provided that in the event that the
Company completed an initial public offering, the warrants shall be
automatically exchanged for Warrants identical to those sold to the public. This
exchange became effective on November 8, 1996, the completion date ofthe
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.
In March of 1998 the Company entered into a consulting contract with
Carousel Consulting. Under the terms of this contract, the Company issued
150,000 shares of common stock to Carousel and agreed to pay $5,000 per month
for continued consulting services by Carousel. Carousel has agreed to actively
search for merger/acquisition candidates on behalf of Tellurian and to provide
general consulting to the Company onan "as-needed" basis.
In March of 1998 the Company reached an agreement with Interactive
Mediaunder which Interactive Media agreed to accept 100,000 shares of the
Company'scommon stock in return for outstanding amounts owed for services
provided by Interactive and for payment on services to be provided during the
year 1998. At December 31, 1997, the Company owed Interactive Media $56,000. The
Company's obligation for 1998 would have been an additional $70,000.
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.
41
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
- -------- ---------------------------------
(a)(1)(2) Financial Statements/Schedules.
-------------------------------
A list of the Financial Statements and Financial Statement Schedules filed
as a part of this Report is set forth in Item 7, and appears at Page F-1 of this
Report; which list is incorporated herein by reference and follows Item 8.
(a)(3) Exhibits
--------
All exhibits have been previously filed and are incorporated by
reference from theRegistrant's Form SB-2 Registration Statement (File no.
333-9741) unless otherwise noted below.
2 Agreement and Plan of Merger; Certificate of Ownership and Merger
(Delaware); Articles of Merger (South Carolina)
3(a) Articles of Incorporation of Registrant
3(b) By-Laws of Registrant
4(a) Specimen of Common Stock
4(b) Form of Warrant Agreement (including form of Warrant)
4(c) Form of Underwriter's Warrant
10(a) Indemnification Agreement dated October 10, 1995 between Charles
Powers and the Registrant and an amendment thereto dated June 17, 1996
10(b) Assignment of Contract Rights dated October 9, 1995 between Charles
Powers and the Registrant and an amendment thereto dated June 17, 1996
10(c) Employment Agreement dated November 8, 1996 between Dr. Ronald Swallow
and the Registrant *
10(d) Employment Agreement dated November 8, 1996 between Stuart French and
the Registrant *
10(e) Lease for Facilities in Mahwah, New Jersey
10(f) Transfer Technology Agreement dated January 1, 1996 between Voyager
Graphics, Inc. and the Registrant
42
<PAGE>
10(g) Agreement dated November 14, 1994 between TTY Graphics, Inc., Voyager
Simulation Ltd. and the Registrant.
10(h) Letter Agreement dated May 26, 1995 between the Registrant and TTY
Graphics, Inc. and amendment thereto dated July 17, 1996.
10(i) Agreement dated November 5, 1991 by and among Greg Gustin, Pat Lowe
as Trustee for the Estate of Quantum Graphics, Inc. and TTY
Graphics, Inc.
10(j) Assignment Agreement dated as of November 5, 1991 between TTY Graphics,
Inc. and the Registrant
10(k) Letter Agreement dated August 1, 1996 and August 2, 1995 between Greg
Gusting and the Registrant
10(l) Agreement dated July 23, 1996 between TTY Graphics, Inc. and the
Registrant
10(m) 1996 Incentive and Non-Statutory Stock Option Plan
10(n) Promissory Note dated December 27, 1995, issued to Imafina S.A.
10(o) Promissory Note dated January 22, 1996 issued to Jericho Limited
10(p) Form of Convertible Promissory Note dated June 27, 1996 issued to
Andrew Nicoletta, Karen Bulavinetz and Alec McDonald
10(q) Form of Non-Convertible Promissory Note dated June 27, 1996 issued to
Andrew Nicoletta, Karen Bulavinetz and Alec McDonald
10(r) Common Stock Purchase Warrants dated December 27, 1995 issued to
Imafina S.A.
10(s) Common Stock Purchase Warrants dated January 22, 1996 issued to Jericho
Limited.
10(t) Letter dated March 19, 1996 between Eye Wonder Studios and the
Registrant
10(u) Consulting Agreement dated November 5, 1996 with J.W. Barclay & Co.,
Inc.
10(v) Merger and Acquisition Agreement dated November 5, 1996 with J.W.
Barclay & Co., Inc.
10(w) Letter Agreement between the Registrant and Charles Powers
10(x) Letter Agreement between the Registrant and Fightertown
43
<PAGE>
10(y) Letter Agreement between the Registrant, Voyager Graphics Inc., Voyager
Simulation Company, Ltd. and TTY Graphics, Inc.
10(z) Agreement dated Mfarch 25, 1998 by and among Cyberport Niagara, Inc.,
Tellurian Inc. and 1174757 Ontario, Inc.**
10(aa) Agreement dated March 26, 1998 by and among Cyberport, Tellurian and
Cyberport creditors**
11 Earnings per share - See notes to financial statements
21 Subsidiaries of Registrant - None
23 Consent of Miller Ellin & Co.
27 Selected Financial Data*
* Filed herewith.
**incorporated by reference into the registrants form 8-K dated March 25, 1998
(b) Reports on Form 8-K
-------------------
During the three months ended December 31, 1997, a Form 8-K was not
filed or required to be filed.
44
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TELLURIAN, INC.
By: /s/ Stuart French
-----------------------------
Stuart French, President
Dated: Mahwah, New Jersey
April 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Titles Date
/s/ Ronald Swallow Chairman of the Board, April 14, 1998
- ---------------------------- Chief Executive Officer
Dr. Ronald Swallow
/s/ Stuart French President and Director April 14, 1998
- ---------------------------- of the Company
Stuart French
/s/ Richard Swallow Secretary and Director April 14, 1998
- ----------------------------
Dr. Richard Swallow
/s/ Michael Hurd Vice President of April 14, 1998
- ---------------------------- Administration and
Michael Hurd Finance and Chief
Financial and Accounting
Officer
/s/ Peter Colgan Director April 14,1998
- ----------------------------
Peter Colgan
/s/ James Lin Director April 14,1998
- ----------------------------
James Lin
45
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