As filed with the Securities and Exchange Commission on August , 1998.
File No. 333-56793
------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
TELLURIAN, INC.
(Name of small business issuer in its charter)
Delaware 3570 22-3451918
- ---------------------------- --------------------------- -------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
--------------------
Stuart French, President
Tellurian, Inc.
300 K Route 17 South
Mahwah, N.J. 07430
(201) 529-0939
(Address and telephone number of principal executive offices)
----------------------
Stuart French, President
Tellurian, Inc.
300 K Route 17 South
Mahwah, N.J. 07458
(201) 529-0939
(Address and (Name, address and telephone number of agent for service)
----------------------
Copies of all communications should be sent to:
Steven Morse, Esq. Henry C. Malon, Esq.
Lester Morse P.C. One Battery Park Plaza
111 Great Neck Road 3rd Floor
Great Neck, NY 11021 New York, NY 10004
(516) 487-1446 (212) 483-9600
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective. [X]
If any of the securities being registered on this form are to be offered on a
delayed basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.
If the delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Maximum
Amount to Offering Proposed Maximum
Title of Each Class of Securities to be be Price Per Aggregate Offering Amount of
Registered Registered Unit (1) Price (1) Registration Fee
<S> <C> <C> <C> <C>
Series 1 Preferred Stock, par value
$.01 per share (2) 1,380,000 $5.00 6,900,000 2,035.50
Preferred Stock Warrants
to purchase Series 1 Preferred
Stock (3) 1,380,000 $.25 345,000 101.78
Series 1 Preferred Stock underlying
Preferred Stock Warrants (4) 1,380,000 6.00 8,280,000 2,442.60
Representative's Warrants to
purchase Series 1 Preferred Stock 120,000 .001 120 .03
Representative's Warrants to
purchase Preferred Stock Warrants 120,000 .001 120 .03
Series 1 Preferred Stock underlying
Repesentative's Warrants to
purchase Series 1 Preferred Stock (4) 120,000 8.25 990,000 292.06
Preferred Stock Warrants
underlying Representative's
Warrants to purchase Preferred
Stock Warrants (4) 120,000 .4125 49,500 14.60
Series 1 Preferred Stock underlying
Preferred Stock Warrants issuable
upon exercise of Representative's
Warrants (4) 120,000 9.90 1,188,000 350.46
Total 17,752,740 5,237.06 (5)
</TABLE>
(1) Total estimated solely for the purpose of determining the registration fee.
(2) Includes 180,000 shares of Series 1 Preferred Stock pursuant to the
Representative's Over-Allotment Option.
(3) Includes 180,000 Preferred Stock Warrants pursuant to the Representative's
Over-Allotment Option.
(4) Reserved for issuance upon exercise of Warrants.
(5) Previously paid.
Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number of
securities issuable upon exercise of the Representative's Warrants and
Representative's Warrants to purchase Warrants are subject to the anti-dilution
provisions of the Warrant.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
TELLURIAN, INC.
Cross Reference Sheet
Form SB-2 Item Number and Caption Location of Caption in Prospectus
1. Front of Registration Statement and
Outside Front Cover Page of Prospectus Outside Cover Page
2. Inside Front and Outside Back Cover Inside Front and Outside
Pages of Prospectus Back Cover Pages
3. Summary Information and Risk Factors Prospectus Summary;
Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page;
Risk Factors
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Cover Page;
Underwriting
9. Legal Proceedings Business- Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Beneficial Security Ownership of
Owners and Management Certain Beneficial Owners
and Management; Certain
Transactions
12. Description of the Securities Description of Securities
13. Interests of named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Management
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary;
Business
17. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation Analysis of Financial
Condition and Results of
Operations
18. Description of Property Business
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and Cover Page; Risk Factors;
Related Stockholder Matters Market Information
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure Not Applicable
<PAGE>
Subject to Completion August , 1998
TELLURIAN, INC.
1,200,000 SHARES OF SERIES 1 PREFERRED STOCK AND
1,200,000 REDEEMABLE PREFERRED STOCK PURCHASE WARRANTS
Tellurian, Inc. (the "Company") is offering (the "Offering") for sale
1,200,000 shares of Series 1 Preferred Stock (the "Series 1 Preferred Stock")
and 1,200,000 Redeemable Series 1 Preferred Stock Purchase Warrants (the
"Preferred Warrants," which together with the Series 1 Preferred Stock are
collectively referred to as the "Securities"). The Series 1 Preferred Stock and
the Preferred Warrants offered hereby will be separately tradeable and
transferable immediately upon issuance and may be purchased separately.
Commencing April 30, 1999, each Preferred Share is entitled to receive a
cumulative annual dividend of $0.50 per share on April 30th of each year. See
"Description of Securities."
Each Preferred Warrant entitles the owner thereof to purchase one
share of the Company's Series 1 Preferred Stock at an exercise price of $6.00
per share (the "Warrant Exercise Price"), subject to adjustment under certain
circumstances, at any time during the three year period that commences on
___________, 1999 (one year from the date of this Prospectus) and expires
_______2002. Beginning one year from the date hereof, the Preferred Warrants may
be redeemed by the Company, at $.30 per Preferred Warrant if certain conditions
are met. See "Description of Securities ."
The offering price of the Series 1 Preferred Stock and the Preferred
Warrants and the initial exercise price of and other terms of the Preferred
Warrants were established by negotiation between the Company and J.W. Barclay &
Co., Inc., the representative (the "Representative") of the underwriters of the
Offering (collectively, including the Representative, the "Underwriters"), and
do not necessarily bear any direct relationship to the Company's assets,
earnings, book value per share or other generally accepted criteria of value.
For information regarding the factors considered in determining the initial
offering prices of the Securities and the terms of the Preferred Warrants, see
"Risk Factors" and "Underwriting." The Series 1 Preferred Stock and Preferred
Warrants are expected to trade on the Nasdaq SmallCap Market ("NASDAQ SmallCap")
under the symbols "_________" and "________", respectively. Since November 5,
1996, the Company's Common Stock and Common Stock Purchase Warrants have traded
on the NASDAQ SmallCap Market under the symbols "TLRN" and "TLRNW,"
respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION
AS DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES, SEE "RISK
FACTORS" BEGINNING ON PAGE __ AND "DILUTION" BEGINNING ON PAGE __.
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<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Proceeds
Price to Underwriting to the
Public Discounts (1) Company (2)
- -------------------- ---------------------- -------------------------- ----------------------------------
<S> <C> <C> <C>
Per Share $ 5.00 $ .50 $4.50
Per Warrant .25 .025 .225
Total (3) $6,300,000 $630,000 $5,670,000
==================== ====================== ========================== ==================================
</TABLE>
(footnotes appear on next page)
The Securities are being offered by the Underwriters on a
"firm commitment" basis subject to prior sale, when, as and if delivered to and
accepted by the several Underwriters and subject to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify the Offering
and to reject any order in whole or in part. It is expected that delivery of
certificates evidencing the Securities will be made at the offices of the
Representative in New York, New York or through the facilities of The Depository
Trust Company, against payment therefor on or about __________, 1998.
J.W. Barclay & Co., Inc.
The date of the Prospectus is September __, 1998
The following legend belongs on left side of cover page in red:
"Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State."
2
<PAGE>
(continued from cover page)
(1) Does not include additional compensation to the Underwriters in the form of
(a) a non- accountable expense allowance of three (3%) percent of the gross
proceeds of this Offering, (b) a consulting fee of 2% of the gross proceeds
of this offering and (c) Warrants giving the holders the right to acquire
120,000 shares of Series 1 Preferred Stock at an initial exercise price of
$8.25 per share (the "Underwriters' Stock Warrants") and Warrants giving
the holders the right to acquire 120,000 Warrants to purchase Series 1
Preferred Stock at an initial exercise price of $.4125 per Warrant (the
"Underwriters' Preferred Warrants"). The Underwriters' Stock Warrants and
the Underwriters' Preferred Warrants are collectively referred to as the
"Underwriters' Warrants". In addition, the Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act). See
"Underwriting."
(2) Before deducting estimated expenses (including the non-accountable expense
allowance and consulting fee payable to the Representative) of $770,000
payable by the Company.
(3) Solely for the purpose of covering over-allotments, if any, the Company has
granted to the Underwriters options (the "Over-Allotment Option"),
exercisable within 45 days of the date hereof, to purchase an additional
180,000 shares of Series 1 Preferred Stock and 180,000 Preferred Warrants
upon the same terms and conditions as the Securities offered hereby. If
such Over-Allotment Options are exercised in full, the Total Price to
Public will be $7,245,000 the Total Underwriting Discount will be $724,500,
and the Total Proceeds to the Company will be $6,520,500. See
"Underwriting."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S SECURITIES
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The Company furnishes its stockholders with annual reports containing
audited financial statements examined and reported upon by an independent
certified public accounting firm and makes available copies of quarterly reports
containing unaudited financial statements. The Company's fiscal year end is
December 31. The Company is a reporting company pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
required to file proxy statements and other information with the Securities and
Exchange Commission (the "Commission").
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form SB-2, File No. 333-56793 (of which this
Prospectus is a part) under the Securities Act with respect to the securities
offered hereby and Form SB-2 Registration Statements File No. 333-56793. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information about the Company
and the Securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as a part thereof. The statements
3
<PAGE>
contained in this Prospectus are not necessarily complete and, in each instance,
reference is made to a copy of the relevant contract or document filed as an
exhibit to the Registration Statement, each statement being qualified in any and
all respects by such reference. The Registration Statement, including exhibits,
may be inspected without charge at the Public Reference facilities of the
Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 10549, and at the offices of the Commission located at the
Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, NY 10048
and the Midwest Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Room 1400, Chicago, IL 60661, and copies of such material can be
obtained upon request and payment of the appropriate fee from the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Materials filed electronically
through EDGAR may also be accessed through the Commission's home page on the
World Wide Web at http://www.sec.gov.
EXCHANGE RATIO
The Company has operations in Ontario, Canada. All dollar amounts in
this Prospectus have been converted into U.S. Dollars (unless specified
otherwise) based on an exchange ratio of $1 Canadian for $.675 U.S. for 1998 and
$.72 for all prior periods.
GLOSSARY
Database: The source data for the image generator. A visual database is
comprised of a library of objects formed from 3-D polygons. Once a field of view
and viewing angle is established, the image generator constructs the picture
using appropriate elements of the database.
EAGLE: The Company's virtual reality image generator. The EAGLE is capable of
rendering 30,000 polygons every 1/30 of a second. The EAGLE is considered a real
time image generator.
Field Sequential Video: A method of producing color images from a black and
white picture tube. The technique is to present a red, green, or blue image
field on the tube; while presenting a red, green, or blue filter at the same
time. To the viewer's eye, the colors are integrated together and presented to
the brain as complete and valid color images. Field sequential video is employed
when color CRT's (cathode ray tubes) are not available in miniature sizes.
Full Immersion: A term used to depict a complete isolation into the computer's
world of virtual reality. The term is most frequently used when describing a
virtual reality helmet when only the computers image is available to the user.
Head Tracker: A means of depicting head movement when wearing a virtual reality
helmet. With a head tracker, the view presented to the eyes of the viewer is
accurate to
4
<PAGE>
the world created by the computer. In most applications the head tracker is
either a magnetic sensing device or a mechanical link to the helmet.
IAAPA: The International Association of Amusement Parks and Attractions, an
industry association.
Location Based Entertainment: LBE's are venues for entertainment where the
guests can experience a wide selection of games, sports and rides all under one
roof. The LBE is usually located in large population centers and caters to
repeat customers (returning several times per month).
Real Time: A classification of speed when dealing with computer generated
images. A real time computer permits a smooth transition of motion within the
visual display. Flicker, or "stepping" of the image results from an update
slower than a new frame every 1/30th of a second.
Resolution: One method of measuring picture quality. The higher the resolution,
the higher the detail of the image. A typical TV image has 525 lines of data
presented on the screen. A standard computer screen has 968 lines, and thus a
more detailed image. The EAGLE is capable of 2,000 lines of data.
Resolution Formats: Common resolution formats range from low quality in the case
of 250 line LED's ("Light Emitting Diode") to mid range of video monitors at 680
lines to high resolution formats at 1,200 lines. The Company's EAGLE is capable
of 2,000 lines.
Tourist Entertainment Centers: Like the LBE, the TEC is a destination venue for
games, sports, and virtual reality experiences. The TEC however caters to an
infrequent guest and therefore must be located in a high traffic area.
Trainers/Simulators: Devices use to teach the operation and methodology of
expensive machines. The military's use of trainers/simulators has been the
foundation of virtual reality entertainment.
Virtual Reality or "VR": An artificial environment of sight, sound, and motion
created by computers.
Virtual Reality Helmet: A device placed on the head to position a video display
to the eyes of a viewer. If the helmet completely seals the viewer from all
other light except that which is presented by the computer, then the experience
is said to be one of total immersion.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read
in conjunction with, the more detailed information and the Company's financial
statements (including the notes thereto) appearing elsewhere in the Prospectus.
Unless otherwise noted, all information included in this Prospectus assumes that
the Underwriters' Over-Allotment Option will not be exercised. All share and per
share amounts in the Prospectus give retroactive effect to a 98.52216749-for-1
forward stock split effective March 15, 1995. Also, all references to
"Tellurian" or the "Company" includes Tellurian, Inc., a South Carolina
corporation, which was formed on August 10, 1988 and reincorporated in Delaware
via merger into its wholly-owned subsidiary effective July 2, 1996. An
investment in the Securities offered hereby involves a high degree of risk and
immediate substantial dilution. See "Risk Factors," "Business-Legal Proceedings"
and "Dilution."
THE COMPANY
Tellurian, Inc. ("Tellurian" or the "Company"), a Delaware corporation,
is engaged in the design, development and marketing of virtual reality products
which include image generators, related software, helmets and motion systems.
The Company also makes available consulting services via developing customized
software and databases for customers who purchase its image generators and need
such services for specific application requirements.
Since 1988, the Company has been designing, building and selling a line
of specialized computers and ancillary software which are used to generate
visual images in realtime for use in flight trainers and other simulation
equipment. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and selling this product and ancillary
software for use in virtual reality entertainment devices to companies such as
Fightertown Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight
Corp.
In 1994, the Company began designing and engineering a new image
generation product known as the "EAGLE", a specialized computer, which is
specifically designed for the virtual reality entertainment market. In 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").
6
<PAGE>
The TEC differs from the LBE in that the market of the TEC is intended to be the
family vacationer rather than the local, repeat customer.
Utilizing the "EAGLE" technology, Tellurian has developed a helmet
product to complement the Eagle for the entertainment market. This new product
is intended 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 helmet has been ready for
introduction to the market since early 1998, but the Company needs at least
$250,000 of financing to produce and market the Tellurian Helmet. The Company
has attempted to offer the helmet based experience for delivery within 4 months
from the date of order, but that offer was subject to receipt of sufficient
deposit funds from the customer. Thus far, the market place has been unwilling
to accept these terms. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
The Company has worked diligently to create a line of virtual reality
games that can be sold to a broader market than its original line of virtual
reality experiences allowed. These games are based in part on the powerful
capabilities of the EAGLE and in part through the use of low cost,
over-the-counter technology. Management believes that these products are now
ready to be successfully marketed to the arcade industry. Financing for the
manufacturing of the game units and for financing support to the customers of
these products will come from the proceeds of the Offering. Management believes
that this step is the key to creating a significant on-going revenue stream from
this marketplace.
In March 1997, Tellurian formed Cyberport Niagara Inc., an Ontario,
Canada company, as a subsidiary for the purpose of establishing a TEC in Niagara
Falls, Ontario. This 40,000 square foot facility known as "Cyberport", which
opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as other family oriented
entertainment exhibits. The Company was dependent upon Cyberport as a show place
for its new technology and as a source of revenue. While the use as a show place
has proven successful, there is a concern regarding the revenue generating
capability of Cyberport. Should the revenues generated during the third quarter
of 1998 prove insufficient to provide Cyberport with the funding necessary to
carry it through to the 1999 Spring/Summer tourism season, the Company may
choose to sell up to a majority interest in Cyberport or close it in order to
preserve working capital for other corporate purposes. Cyberport Niagara Inc.'s
Common Stock is currently owned 100% by the Company. The Company has no other
active subsidiaries. See "Risk Factors," "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
In March 1998, the Company engaged the services of Carousel Consulting,
specialists in identifying merger and/or acquisition candidates, to assist it in
seeking out companies with complimentary products and services in the
entertainment and financing industries to merge with or be acquired by
Tellurian. The Company has investigated
7
<PAGE>
numerous complimentary business opportunities which may be acquired with the use
of limited amounts of cash and securities. Said transactions would, in the
opinion of Management, significantly improve the Company's marketing position
and would not likely require diversion of significant amounts of cash except on
a "profit sharing" (earn-out) basis. As of the date of this Prospectus, the
Company has no agreement, understanding or arrangement to complete any such
transaction and no assurances can be given that any transaction will be
successfully completed in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and "Business."
As of June 30, 1998, the Company's total assets and stockholders'
equity were $3,551,475 and $2,302,477, respectively. The Company's net losses
for the six months ended June 30, 1998 and 1997 and year ended December 31, 1997
were $1,363,604, $1,060,049, $2,708,993 respectively. See "Risk Factors,"
Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Financial Statements."
Tellurian, Inc. is located at 300K Route 17 South, Mahwah, NJ 07430 and its
telephone number is (201) 529-0939.
8
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered This Prospectus relates to 1,200,000 shares of Series 1
Preferred Stock and 1,200,000 Preferred Warrants. See
"Description of Securities.
Common Stock
outstanding 4,730,041 shares (1)
Common Stock
Purchase Warrants
outstanding 5,127,500
Series 1 Preferred
Stock outstanding
before Offering -0- shares
Series 1 Preferred
Stock outstanding
after the Offering 1,200,000 shares (2)
Preferred Warrants
outstanding before
the Offering -0- warrants
Preferred Warrants
outstanding after
the Offering 1,200,000 warrants
Use of Proceeds The net proceeds from the Offering will be applied towards
financing support for the marketing of Tellurian products,
reduction of current liabilities and notes payable, production
and marketing of the Tellurian helmet, payment to Fightertown
and working capital. See "Use of Proceeds."
Risk Factors The Securities offered hereby involve a high degree of risk
and substantial immediate dilution to investors. Prospective
investors, before purchasing any securities offered, should
review carefully and consider the information contained in the
Prospectus and particularly the items set forth under "Risk
Factors" and "Dilution."
NASDAQ SmallCap Common Stock "TLRN"
Symbols (3) Common Stock Purchase Warrants "TLRNW"
Series 1 Preferred Stock "_________"
Preferred Warrants "__________"
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Warrant Terms Each Preferred Warrant entitles the owner thereof to purchase
one share of the Company's Series 1 Preferred Stock at an
exercise price of $6.00 per share (the "Warrant Exercise
Price"), subject to adjustment under certain circumstances, at
any time during the three year period that commences on
___________, 1999 (one year from the date of this
Prospectus) and expires _______2002. Beginning one year
from the date hereof, the Preferred Warrants may be
redeemed by the Company, at $.30 per Preferred Warrant if
certain conditions are met. See "Description of Securities ."
</TABLE>
- ----------------
(1) Does not include the following: (i) up to 5,127,500 shares of Common Stock
issuable upon exercise of outstanding Common Stock Purchase Warrants; (ii)
up to 185,000 shares of Common Stock issuable upon exercise of the Warrants
to purchase Common Stock at an exercise price of $8.25 per share sold to
the Underwriters of the Company's initial public offering in November 1996;
(iii) up to 185,000 Common Stock Purchase Warrants issuable upon exercise
of certain warrants at an exercise price of $.4125 per Warrant (and the
underlying 185,000 shares of Common Stock issuable upon exercise thereof at
$9.90 per share) which warrants were sold to the Underwriters of the
Company's initial public offering in November 1996; (iv) up to 1,500,000
shares of Common Stock issuable under Tellurian's Stock Option Plan; and
(v) options to purchase 100,000 shares granted to the landlord of
Cyberport, which options expire on September 30, 1998.
(2) Does not include the possible exercise of the Underwriters' Warrants (and
underlying Warrants) covering 240,000 shares of Series 1 Preferred Stock
and 1,200,000 shares of Series 1 Preferred Stock issuable upon exercise of
the Preferred Warrants.
(3) While the Company's Common Stock and Warrants trade on NASDAQ SmallCap
Market and it is expected that the Securities offered hereby will also be
listed on the NASDAQ Small Cap Market on the date of this Prospectus, there
can be no assurance that a trading market in the Securities will be
established or will be sustained. The Company currently may not meet the
maintenance requirements for having its securities listed on NASDAQ and
unless the Company is successful in meeting such standards, delisting of
all of its securities from NASDAQ SmallCap is likely. See "Risk Factors -
Requirements for Maintaining Listing Securities on NASDAQ SmallCap."
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SUMMARY FINANCIAL INFORMATION
The following selected information has been derived from the historical
financial statements of Tellurian included elsewhere in this Prospectus and
should be read in conjunction therewith, including the notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Year Year
Six Months Ended Ended Ended
June 30, June 30, Dec. 31 Dec. 31
1998 1997 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $154,982 $ 299,616 $521,045 $819,380
Gross Profit (Loss) (225,968) 137,536 165,913 535,373
Net (Loss) (1,363,604) (1,060,049) (2,708,993) (962,420)
Net (Loss) per
Common Share (1) (.38) (.21) (.90) (.53)
Weighted Average
Number of Common Shares
Outstanding 3,577,824 3,025,000 3,025,000 1,817,708
</TABLE>
Balance Sheet Data:
June 30, Pro Forma
1998 (2)
Working Capital
(deficit) $(262,516) $3,959,918
Total Assets 3,551,475 6,363,975
Long-Term Debt 116,912 116,912
Total Liabilities 1,248,998 161,498
Net Tangible Assets 2,302,477 7,202,475
Stockholders' Equity
2,302,477 7,202,475
- --------------
(1) See Notes to Financial Statements for an explanation of the calculation
of shares used in computing net loss per share.
(2) Gives effect to the sale of 1,200,000 shares of Series 1 Preferred
Stock and 1,200,000 Preferred Warrants offered hereby and the
anticipated application of the net proceeds of $4,900,000 including the
reduction of liabilities by $1,350,000 less $262,500 borrowed in third
quarter 1998. See "Use of Proceeds."
11
<PAGE>
RISK FACTORS
An investment in the Securities involve a high degree of risk and
immediate substantial dilution. Prospective investors should consider carefully
the following risk factors, in addition to other information contained in this
Prospectus, in evaluating an investment in the Securities offered hereby.
Independent Auditors have Qualified Their Report. The independent
auditors have qualified their report upon the assumption that the Company will
continue as a going concern. 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) or the Company does
not receive the proceeds of the Offering, the Company and/or its subsidiary may
need to seek reorganization protection under applicable bankruptcy laws. See
"Financial Statements" and "Management's Discussion and Analysis and Results of
Operations."
Possible Closing of Cyberport. Cyberport Niagara, Inc.,
Tellurian's subsidiary in Niagara Falls, Ontario, began operations in June 1997.
The Company was dependent upon Cyberport as a showplace for its new technology
and as a source of revenue. While the use as a showplace has proven successful,
there is a concern regarding the revenue generating capability of Cyberport.
Since inception, Cyberport has generated cash of $91,271 and incurred operating
losses of $385,613 and $1,135,112 for the six months ended June 30, 1998 and the
period March 1997 through December 31, 1997. Should the revenues generated
during the third quarter of 1998 prove insufficient to provide Cyberport with
the funding necessary to carry it through to the next tourism season, the
Company may choose to sell up to a majority interest in Cyberport or close it in
order to preserve working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Financial Condition: Continuing Losses. The Company sustained net
losses of $1,363,604, $1,060,049, $2,708,993, $962,410 and $699,665 for the six
months ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996
and 1995, respectively, and continues to incur losses from operations. As of
June 30, 1998, the Company has stockholders' equity and net tangible assets of
$2,302,477 and a working capital deficit of $940,082. For the six months ended
June 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995,
the Company had sales of $154,982, $299,616, $521,045, $819,380 and $477,311,
respectively. There can be no assurance that the Company will be able to
generate substantial revenues from operations or operate profitably in the
future. See "Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Deficit Working Capital-Dependence upon Proceeds of the Offering.
At June 30, 1998, Tellurian has a deficit working capital of $262,576. The
Company is currently meeting its cash requirements from limited cash generated
from operations and recent loans made between April and July 1998 by Joseph
Radcliffe ($125,000) and
12
<PAGE>
Peter Colgan ($125,00), a director of the Company. The Company is currently
negotiating an additional loan of up to $200,000 from Mr. Radcliffe and/or Mr.
Colgan. Such borrowings are (will be) due and payable upon the completion of the
Offering together with accrued and unpaid interest at the rate of 12% per annum.
See "Use of Proceeds." In light of the Company's working capital deficit and
continuing negative operating cash flows, the Company is dependent upon the
proceeds from this Offering to meet its obligations as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Possible Failure to Comply with Tellurian's Agreement with
Fightertown. The Company recently entered into a mutual Release and Settlement
Agreement with Fightertown Entertainment, Inc. to settle certain disputes that
resulted in Fightertown filing a law suit against Tellurian in the United States
District Court, Central District of California. The Settlement Agreement calls
for the release of all claims against each party other than claims arising out
of the parties' obligations under the Settlement Agreement which obligations are
discussed under "Business - Agreement with Fightertown." In the event that
Tellurian breaches its obligations under the Settlement Agreement and such
breach is not cured within 15 days of notice of the breach, Fightertown may
enter a $500,000 stipulated judgment in favor of Fightertown for Tellurian's
failure to comply with the terms of the agreement and the damages caused to
Fightertown's business. In the event that Tellurian breaches the Settlement
Agreement and fails to timely cure the breach, the stipulated judgment may
adversely impact Tellurian's operations. See "Business- Agreement with
Fightertown."
Possible Need for Additional Financing Beyond the Proceeds of the
Offering. Management believes that the proceeds of the Offering together with
anticipated cash from operations will provide sufficient cash for its operations
for at least 12 months following the completion of the Offering. Thereafter, the
Company may require additional financing beyond the proceeds of the Offering to
support the promotion and financing of virtual reality game units, or for its
general operations due to unforeseen circumstances or continuing operating
losses. No assurances can be given that such financing will be available in the
amount required and, if required, that such financing can be obtained on terms
satisfactory to the Company, if at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management's Lack of Experience in Running Tourist Entertainment
Centers (TEC's); Possible Failure of Cyberport to Promote Tellurian Products;
Possible Difficulty in Selling Off Majority Interest in Cyberport. The Cyberport
Niagara tourist entertainment center was believed by Management to represent a
new concept in family entertainment. While Management was encouraged by the
initial reception which the facility has gained, the lack of clear parallels to
compare the facility to makes it difficult for Management to properly evaluate
its progress against other facilities. Cyberport's failure to reach a breakeven
cash flow after 12 months of operations is a matter of serious concern. The
Company has no prior experience in owning and operating a TEC. There can be no
assurances that the Cyberport facility in Niagara Falls, Ontario will operate
profitably. Failure of the center to make progress in its marketplace would
materially affect
13
<PAGE>
Management's ability to sell up to a majority share of this facility to an
outside investor and could require the Company to close the facility in whole or
in part in order to conserve capital. See "Business."
Certain Market Restrictions. As a result of the 1996 Agreement
with Voyager (see "Business - Licensing of Tellurian Technology") and
Fightertown (see "business Agreement with Fightertown"), the Company is
prohibited from selling certain of its products into several defined markets.
Such restrictions could have an adverse affect on the Company's ability to
successfully develop and sell its products in volumes necessary for the Company
to be successful in its marketplace. See "Business-Licensing of Tellurian
Technology."
Uncertain Market Acceptance; Lack of Marketing Organization; and
Distribution Network. The Company's future success depends upon the acceptance
of its new virtual reality products and the ability of the Company to profitably
finance the needs of its customers . With any new technology, there is a
substantial risk that the market may not appreciate the benefits or recognize
the potential of the technology. Market acceptance of the Company's virtual
reality helmet will depend in large part upon the ability of the Company to
demonstrate the technological and commercial advantages of the Company's helmet
over other types of virtual reality helmets or its free-standing virtual reality
games units. The inability of the Company to successfully introduce its virtual
reality helmet will have a material adverse effect on the Company's financial
condition and results of operation. Successful penetration of the Company's
proposed markets will be substantially dependent on the Company's ability to
implement its marketing and sales plan. There can be no assurances that the
Company can implement its marketing and sales plan with the resources available
to it or, if implemented, that such plan will be successful in penetrating the
Company's proposed markets. See "Business."
Uncertain Performance of the Company's Helmet Visual and Audio
System. The Company's virtual reality helmet is a critical component in the
Company's plan to deliver high performance virtual reality experiences that are
affordable and commercially viable. While the Company has observed the
performance of the prototype helmet in laboratory conditions, it has not yet
placed its proprietary helmet prototype into arcade conditions in order to
evaluate its performance over longer periods and under less desirable
conditions. While the initial studies have not given Management causes for
concern about the likely results of such tests, there can be no assurances that
problems that affect market acceptance of the product will not be found once the
product is subjected to tests under true market conditions. See "Business."
Search for Possible Acquisitions of Complimentary Business. In March 1998,
the Company engaged the services of Carousel Consulting, specialists in
identifying merger and/or acquisition candidates, to assist it in seeking out
companies with complimentary products and services in the entertainment and
financing industries to merge with or be acquired by Tellurian. The Company has
investigated numerous complimentary business opportunities which may be acquired
with the use of limited amounts of cash and securities. Said transactions would,
in the opinion of Management,
14
<PAGE>
significantly improve the Company's marketing position and would not likely
require diversion of significant amounts of cash except on a "profit sharing"
(earn-out) basis. As of the date of this Prospectus, the Company has no
agreement, understanding or arrangement to complete any such transaction and no
assurances can be given that any transaction will be successfully completed in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and "Business."
Revenues Dependent Upon a Limited Number of Customers. The Company
has in the past been dependent upon a limited number of customers which have
accounted for substantially all of the Company's revenues. See "Business -
Products." While Management believes that future revenues (from sources other
than Cyberport) are expected to be from a larger group of customers who are in
the entertainment market rather than from a limited group of customers that are
primarily in the simulation and training market, no assurances can be given that
the Company will be successful in expanding its customer base so as not to rely
on sales from a limited number of customers.
Rapid Changes in Technology. The Company has recently reduced its
expenditures for research and development and is now somewhat dependent on its
consulting and licensing agreement with Ronald Swallow to continue the
development of its custom application VR products. The technology underlying
Tellurian's products is subject to rapid change. The Company maintains a limited
research and development program and its success will depend in part upon its
ability to respond quickly and successfully to technological advances by
developing and introducing new and improved products. There can be no assurance
that the Company will be able to foresee and respond to such advances or that
competitors, including those with greater financial and other resources, will
not succeed in developing technologies and products that are more effective than
the Company's. See "Business - Research and Development."
Competition. Competition in the virtual reality entertainment
market comes primarily from defense related manufacturers, many of which have
much greater financial, technical, manufacturing and sales and marketing
resources than the Company. In addition, as the virtual reality market develops
and continues to grow, many larger companies can be expected to enter this
market, thereby increasing the competition. Although the Company believes that
its developing virtual reality system and other virtual reality devices will be
highly competitive due to performance and cost factors, there can be no
assurance that the marketplace will consider the Company's products to be
superior to competing products or that the Company can effectively compete with
these larger companies in the future. Further, the Company has entered the TEC
market through its subsidiary, Cyberport Niagara, Inc. There can be no
assurances that other competitors for the family tourist market will not be more
successful than the Company in marketing to this group especially since many of
these competitors are larger and more experienced than the Company, in addition
to which many have significantly greater resources than the Company. See
"Business."
Dependence on Key Employees. Upon the completion of the Offering, the
Company intends to retain the services of Michael Hurd as its President and
Chief
15
<PAGE>
Executive Officer pursuant to a three-year employment contract. The Company's
operations will be dependent upon the services of Mr. Hurd. The loss of his
services could have a material adverse effect on the Company's operations. The
Company intends to obtain key man life insurance in the amount of $1,000,000 on
the life of Mr. Hurd. No assurances can be given that such insurance will
adequately compensate Tellurian in the event of the loss of Mr. Hurd. The
Company believes that its success will depend in large part upon its ability to
attract and retain highly-skilled technical, managerial, sales and marketing
personnel. The business of the Company is highly technical in nature. The
Company's future growth is dependent upon its ability to attract and retain
qualified technical personnel. There can be no assurance that the Company will
be successful in attracting and retaining the personnel it requires to market
its products. Competition for such personnel in the computer technology industry
is intense. Failure to attract and retain such personnel could have an adverse
effect on the Company's business, operating results and financial condition. See
"Management. "
Dependence Upon Proprietary Technology; Intellectual Property
Rights; Lack of Patent Protection. Tellurian regards its products as proprietary
and relies primarily on a combination of technological complexity and employee
non-disclosure agreements, and other intellectual proprietary protection methods
to protect its proprietary rights. Although the Company believes that its
products are uncopyable, it may be possible in the future for unauthorized third
parties to pay to copy or reverse engineer certain portions of the Company's
products or obtain or use information that the Company regards as proprietary.
The Company currently has no patents. Although the Company's competitive
position may be adversely affected by unauthorized use of its proprietary
information, the Company believes that the ability to fully protect its
intellectual property is less significant to its success than are other factors,
such as the knowledge, ability and experience of its employees and its ongoing
product development and customer support activities. There can be no assurance
that third parties will not assert infringement or other claims against the
Company with respect to any existing or future products, or that licenses would
be available if any Tellurian technology were successfully challenged by a third
party , or if it became desirable to use any third party technology to enhance
Tellurian's products. Litigation to protect the Company's proprietary
information or to determine the validity of any third party claims could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is determined
in favor of the Company. In addition, the Company entered into a licensing
agreement dated January 1, 1996 with Voyager Graphics, Inc., a Republic of China
corporation, ("Voyager") which granted Voyager certain irrevocable, exclusive
rights under an assignable license to be the exclusive supplier of the EAGLE
image generator within a restricted group of countries and which allows Voyager
to sell the product worldwide, subject to the payment of certain royalties to
Tellurian. Such agreement could impact the Company's marketing efforts of the
EAGLE should Voyager elect to sell the EAGLE in North America. See "Licensing of
Tellurian Technology."
Notes Due to Related Parties. As of the date of this Prospectus, the
Company has a note payable to Charles Powers, a founder of the Company, in the
amount of $100,000, which note is due upon the completion of the Offering. The
Company also has
16
<PAGE>
(i) $100,000 plus legal fees of $21,500 due to certain former Preferred
shareholders of Cyberport Niagara and (ii) a $125,000 note to Peter Colgan, a
director of the Company, which note may increase by up to an additional $200,000
prior to the completion of this Offering. Such notes and reimbursed legal fees
totaling $346,500 and any additional borrowings (together with accrued interest
thereon) is payable upon the completion of the Offering. See "Use of Proceeds"
and "Certain Transactions."
Management's Broad Discretion in Use of Proceeds. Since an
estimated 24% or $1,200,000 of the estimated $4,900,000 of net proceeds of this
Offering are allocated to working capital and Management has reserved the right
to re-allocate the other uses of the net proceeds of this Offering within the
categories specified under "Use of Proceeds," Management of the Company has
discretion in the application of the net proceeds of the Offering. As a result
of the foregoing, the success of the Company will be substantially dependent
upon the discretion and judgment of the Management of the Company. See "Use of
Proceeds."
Control by Principal Shareholders. Without giving effect to the
potential exercise of the Preferred Warrants, Common Stock Purchase Warrants and
Common Stock Options, the current principal shareholders, Management and
founders of the Company beneficially own approximately 2,056,700 shares of
Common Stock, or approximately 44% of the then outstanding shares of Common
Stock of the Company. Accordingly, the current principal shareholders,
Management and founders of the Company may be in a position to influence the
election of the Board of Directors of the Company. See "Security Ownership of
Management and Others."
No Cash Dividends on Common Stock and None Anticipated. The
payment by Tellurian of cash dividends on its Preferred Stock and Common Stock,
if any, in the future rests within the discretion of its Board of Directors and
will depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition as well as other relevant factors.
Tellurian has not paid or declared any cash dividends upon its Preferred Stock
or Common Stock since its inception and, by reason of its present financial
status and its contemplated future financial requirements, does not contemplate
or anticipate making any cash distributions upon its Preferred Stock and Common
Stock in the foreseeable future, except for the preference of $.50 per share
payable to holders of Series 1 Preferred Stock. It should be noted that the
Company has the right to pay such dividend by issuing additional shares of
Series 1 Preferred Stock in lieu of cash. See "Description of Securities" and
"Dividend Policy."
Determination of Terms of the Offering. The terms of the Offering,
the exercise price of the Preferred Warrants and offering price of the Series 1
Preferred Stock were arbitrarily determined by the Company and the
Representative and do not necessarily bear any direct relationship to the
Company's assets, book value per share or other generally accepted criteria of
value. See "Underwriting."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock or the perception that such sales could occur could adversely effect the
market price for
17
<PAGE>
the Common Stock. The Company has 4,730,041 shares of Common Stock and 5,127,500
Common Stock Purchase Warrants outstanding as of the date of this Prospectus. Of
these shares of Common Stock, 2,331,605 shares of Common Stock are freely
tradeable in the public market without restriction under the Securities Act,
except for securities owned by an "affiliate" of the Company (as that term is
defined under the rules and regulations of the Securities Act), which are
subject to the resale limitations of Rule 144 under the Securities Act ("Rule
144"). The remaining shares of Common Stock outstanding are "restricted
securities" as that term is defined in the Securities Act and have not been
registered under the Securities Act. The holders of 1,000,000 such shares of
Common Stock have agreed with the Representative not to sell or otherwise
transfer any of their shares of Common Stock until November 5, 1998, without the
prior written consent of the Representative. The holders of 1,182,438 shares of
the Company's Common Stock (including 886,699 shares included in the
aforementioned lock-up agreement until November 5, 1998) have agreed with the
Representative not to sell or otherwise transfer any of their shares of Common
Stock until at least July 31, 2000, without the prior written consent of the
Representative.
At the end of the aforesaid lock-up periods (or earlier with the
consent of the Representative) these shares will be eligible for sale, subject
to the restrictions imposed by Rule 144. Some of these stockholders may elect to
sell some or all of their shares as soon as they are permitted to do so.
Ordinarily, under Rule 144, a person holding restricted securities for a one
year may, every three months thereafter, sell in ordinary brokerage transactions
or in transactions directly with a market maker, an amount of shares equal to
the greater of one percent of the Company's then-outstanding Common Stock or the
average weekly trading volume in the same securities during the four calendar
weeks prior to such sale. See "Shares Eligible For Future Sale."
Requirements for Maintaining Listing of Securities on NASDAQ
SmallCap. The Company's Common Stock and Common Stock Purchase Warrants trade on
NASDAQ SmallCap Market and the Company is seeking to have its Preferred Stock
and Preferred Warrants listed on NASDAQ. The rules of NASDAQ SmallCap establish
criteria for continued quotation of securities on such market. The Company was
notified by the NASDAQ Stock Market that it did not meet the net tangible
assets/market capitalization/net income requirements and that the Company will
require an exception to such requirement in order to maintain its NASDAQ
listing. In this regard, the Company had filed documents with the NASDAQ Stock
Market and requested an oral hearing, which hearing was held on August 14, 1998.
At this hearing, the Company was given the opportunity to demonstrate compliance
with the net tangible asset test or reasons an exception should be granted by
the Hearings Committee. The Company is currently awaiting NASDAQ's decision.
There can be no assurance that Tellurian will be able to obtain an exception
from NASDAQ for continued listing or that it will be able to maintain the
standards for continued quotation. These standards will require the Company to
maintain net tangible assets of $2,000,000 or net income of $500,000 in two of
the last three years or a market capitalization of at least $35 million and a
minimum bid price for its Common Stock of $1.00 per share among other
requirements. If the Company's securities are delisted from NASDAQ, the market
for the Company's securities will likely be affected adversely and holders may
be unable to sell their Securities. Trading, if any, in the listed securities
would
18
<PAGE>
thereafter be conducted in the over-the-counter market in what are commonly
referred to as the "pink sheets" or on the OTC electronic Bulletin Board. If
this result were to occur, an investor may find it more difficult to dispose of,
or in the case of the "pink sheets," to obtain accurate quotations as to the
price of the Company's securities.
No Public Market for the Units. There is presently no public
market for the Company's Series 1 Preferred Stock and Preferred Warrants. The
Company intends to list the Series 1 Preferred Stock and Preferred Warrants for
trading on NASDAQ on the date of this Prospectus. No assurances can be given
that a public market for the Securities will develop on the NASDAQ Small Cap
Market, on the OTC Electronic Bulletin Board or, in the over-the-counter market
in the "pink sheets."
"Penny Stock" Regulations. The Commission has adopted regulations
under the Exchange Act which generally define a "penny stock" to be any equity
security that has a market price (as defined in the Exchange Act) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. If the Company has less than $2,000,000 in net tangible
assets, the Securities and Common Stock may be deemed to be "penny stocks" and
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. In addition, the
broker-dealer must obtain a written acknowledgment from the customer that such
disclosure information was provided and must retain such acknowledgment for at
least three years. Further, monthly statements must be sent disclosing current
price information for the penny stock held in the account. Transactions in a
non-NASDAQ security would be exempt from all but the sole market maker provision
for (i) issuers who have $2,000,000 in tangible assets if such issuer has been
in continuous operation for three years, or $5,000,000 in tangible assets if
such issuer has been in continuous operation for less than three years, (ii)
transactions in which the customer is an institutional accredited investor and
(iii) transactions that are not recommended by the broker-dealer. In addition,
transactions in a NASDAQ security directly with a NASDAQ market maker for such
securities would be subject only to the sole market marker disclosure, and the
disclosure with respect to commissions to be paid to the broker-dealer and the
registered representative.
The above-described rules may materially adversely affect the
liquidity for the market of the Common Stock and Securities should they cease to
be quoted (or not listed for trading) on the NASDAQ SmallCap. Such rules may
also affect the ability of broker-dealers to sell the Company's Common Stock
(and the Securities should a public market develop) and may impede the ability
of holders of such securities to sell such securities in the secondary market.
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<PAGE>
Current Prospectus and State "Blue Sky" Registration Required to
Exercise the Preferred Warrants. The Preferred Warrants provide that the Company
shall not be obligated to issue shares of Series 1 Preferred Stock upon exercise
of the Preferred Warrants unless there is a current prospectus relating to the
Series 1 Preferred Stock under an effective registration statement filed with
the Commission and unless such securities are qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Preferred Warrants reside. In accordance with
the Securities Act, a prospectus ceases to be current nine months after the date
of such prospectus if the information therein (including financial statements)
is more than sixteen months old or sooner if there have been other fundamental
changes in the matters discussed in the prospectus. The Company intends to
utilize its best efforts to maintain a current prospectus relating to the above
referenced securities under an effective Registration Statement filed with the
Commission. Although the Company has agreed to use its best efforts to meet such
regulatory requirements in the jurisdictions in which the Preferred Warrants are
sold in the Company's Offering, there can be no assurance that the Company can
continue to meet these requirements. Purchasers may buy Preferred Warrants in
the secondary market or may move to jurisdictions in which the securities
issuable upon exercise of the Preferred Warrants are not so qualified or exempt.
In this event, the Company would be unable lawfully to issue securities to those
persons upon exercise of the Preferred Warrants unless and until the securities
issuable upon exercise of the Preferred Warrants is qualified for sale or exempt
from qualification in jurisdictions in which such persons reside. There is no
assurance that the Company will be able to effect any required registration or
qualification. The value of the Preferred Warrants could be adversely affected
if a then current prospectus covering the securities issuable upon exercise of
the Preferred Warrants is not available pursuant to an effective registration
statement or if such securities is not qualified for sale or exempt from
qualification in the jurisdictions in which the holders of the Preferred
Warrants reside. Further, under the terms of the agreement under which the
Preferred Warrants will be issued, the Company is not permitted to redeem such
Preferred Warrants unless a current prospectus is available at the time of
notice of redemption and at all subsequent times to and including the date of
redemption. See "Description of Securities -Warrants."
Potential Adverse Effect of Redemption of Preferred Warrants;
Possible Expiration Without Value; Effect of Preferred Warrants. The Preferred
Warrants are redeemable by the Company, in whole or in part, upon 30 days' prior
written notice at $.30 per Preferred Warrant, beginning one year after the date
of this Prospectus and provided certain specified market conditions are met.
Redemption of the Preferred Warrants could force the holders to exercise the
Preferred Warrants and pay the Preferred Warrant Exercise Price at a time when
it may be disadvantageous for the holders to do so, to sell the Preferred
Warrants at the then current market price when they might otherwise wish to hold
the Preferred Warrants for possible additional appreciation or to accept the
redemption price, which is likely to be substantially less than the market value
of the Preferred Warrants at the time of redemption. In addition, if the market
price of the Common Stock does not exceed the Preferred Warrant Exercise Price
at the expiration of the exercise period, the Preferred Warrants may expire
without value. See "Description of Securities - Preferred Warrants." The
exercise of the Preferred Warrants and the sale
20
<PAGE>
of the underlying securities (or even the potential of such exercise or sale)
may have a depressive effect on the market price of the Company's securities.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected because the holders of such outstanding
Preferred Warrants can be expected to exercise them, to the extent that they are
able to, at a time when the Company would, in all likelihood, be able to obtain
any needed capital on terms more favorable to the Company than those provided in
such Preferred Warrants. See "Description of Securities." As a result of the
Preferred Warrants, the Company may be deprived of favorable opportunities to
obtain additional equity capital, if it should then be needed, for its business.
It is also possible that, as long as the Preferred Warrants remain outstanding,
their existence might limit increases in the price of the Common Stock.
Limitation on Director Liability. As permitted by Delaware
corporation law, the Company's Certificate of Incorporation limits the liability
of Directors to the Company or its stockholders to monetary damages for breach
of a Director's fiduciary duty except for liability in certain instances. As a
result of the Company's charter provision and Delaware law, stockholders may
have a more limited right to recover against Directors for breach of their
fiduciary duty other than as existed prior to the enactment of the law. See
"Management-Limitation of Directors' Liability; Indemnification."
No Compensation Committee. The Company currently does not have a
Compensation Committee of its board of directors. No assurances can be given
that the Company will elect a Compensation Committee in the future. See
"Management."
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USE OF PROCEEDS
The net proceeds of this offering, estimated at $4,900,000 after
the payment of offering expenses, is anticipated to be applied to the corporate
purposes specified below over a period of approximately 12 to 15 months as
follows:
Amount
-----------
Financing support for marketing
of Tellurian products (1) $1,933,000
Capital outlay to produce and
market the Tellurian Helmet to be
used in conjunction with its
proprietary image generations(2) 350,000
Reduction of current liabilities(3) 700,000
Payment of Notes owed to
bridge financiers (4) 450,000
Payment of Notes owed to
Charles Powers and former
shareholders of Cyberport
Niagara, Inc. including
reimbursement of legal fees (5) 222,000
Payment to Fightertown (6) 45,000
Working Capital (7) 1,200,000
---------
$4,900,000
==========
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(1) The Company intends to provide financing support for (a) purchase of its
game units by customers, (b) placement of its games units in revenue
sharing locations, and (c) other financing transactions that Management
deems to be in the best interest of the Company.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and "Business."
(3) At June 30, 1998, the Company has current liabilities of $1,132,086 which
were incurred in the general operation of the Company's business.
(4) At June 30, 1998, the Company owed $187,500 under a bridge financing
agreement with Joseph Radcliffe and Peter Colgan, a director of the
Company. The Company anticipates that a total of up to $450,000 may be
borrowed under that agreement by the completion of the Offering. See
"Certain Transactions." Such monies have been and will be used to meet
general obligations of the Company,
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to support the costs of the Offering and to meet other costs incurred in
the general operation of the Company's business. The repayment of these
notes is to be paid from the proceeds of the Offering together with
interest accrued at the rate of 12% per annum.
(5) The Company owed approximately $714,000 (inclusive of principal and accrued
interest) to Charles Powers. Effective June 30, 1998, Mr. Powers converted
such monies into 345,000 shares of the Company's Common Stock and a
$100,000 Note due upon the completion of this Offering. Such borrowed funds
were utilized for general working capital purposes. An additional $100,000
is payable to certain former Preferred stockholders of Cyberport Niagara,
Inc. Effective June 30, 1998, such persons converted their Preferred Stock
into 325,278 shares of the Company's Common Stock and an approximate
$100,000 Note ($150,000 Canadian) due upon the completion of the Offering.
In addition, the Company has agreed to reimburse legal fees of $21,500
($30,000 Canadian). See "Certain Transactions."
(6) See "Business - Fightertown."
(7) Amounts allocated to working capital may be used for all corporate
purposes, including, without limitation, acquisition of companies with
complimentary products and/or services, general and administrative
expenses, salaries of officers and other employees, consultant fees,
insurance and professional and other costs of being a publicly-held
company. In the event that the Underwriters exercise the Over- Allotment
Option, amounts allocated to working capital would increase by
approximately $800,000. See "Underwriting."
The foregoing represents the Company's best estimate of its
expected specific uses of the net proceeds of the Offering. The resulting
amounts actually expended for certain purposes described above may vary
significantly depending on numerous factors, including but not limited to, the
success of Cyberport, the sale of up to a majority interest in Cyberport, the
market demand for the Company's virtual reality products, and the market success
of Tellurian's products (including its new helmet). The Company may, in the
future, find it necessary or desirable to change the specific uses of the net
proceeds due to certain exigencies of the business and, therefore, there could
be significant variations in the above use of proceeds. In the event one or more
of such exigencies occurs, the Company will reallocate the net proceeds of this
Offering within the above categories in response thereto.
Pending application of the net proceeds of the Offering, if any,
the Company may make temporary investments in interest-bearing savings accounts,
certificates of deposit, United States government obligations, money market
accounts, interest-bearing securities or other insured short-term,
interest-bearing investments.
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DIVIDEND POLICY
The payment by Tellurian of cash dividends on its Preferred Stock
and Common Stock, if any, in the future rests within the discretion of its Board
of Directors and will depend, among other things, upon the Company's earnings,
its capital requirements and its financial condition as well as other relevant
factors. Tellurian has not paid or declared any cash dividends upon its
Preferred Stock or Common Stock since its inception and, by reason of its
present financial status and its contemplated future financial requirements,
does not contemplate or anticipate making any cash distributions upon its
Preferred Stock and Common Stock in the foreseeable future, except for the
preference of $.50 per share payable to holders of Series 1 Preferred Stock. It
should be noted that the Company has the right to pay such dividend by issuing
additional shares of Series 1 Preferred Stock in lieu of cash. See "Description
of Securities."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
During the first six months of 1998 the Company has only been able to
make limited progress towards meeting its objectives since it has been severely
hampered by a lack of cash. Despite this limitation, the Company has
substantially completed the technical development of its virtual reality helmet
and completed the establishment of a virtual reality showplace for
demonstrations of Tellurian products at Cyberport.
The market for free-standing image generators has proven to be
extremely limited. The development of the data-base to complete the experience
is a skill possessed by a limited number of companies in the industry, but the
majority of the potential customers for Tellurian products are arcades,
restaurants, and other entertainment facilities who rely on their supplier to
deliver a complete, ready to run experience. The Tellurian image generator has
the advantage of being able to display a 360 degree world in which all of the
players can be linked. The competitive edge that Tellurian has is that its world
can be changed by any of the players and the resulting world is changed for all
of the players. Game software for this type of world must be developed
specifically for that world. Without both the image generator and the database
software, Tellurian has in the past been trying to sell to an extremely limited
market. The Tellurian product which now exists is one which is a free-standing
unit. 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. Unfortunately, this market requires rapid delivery and a
willingness to support product through some form of financing. Revenue sharing
is the most common form of financing required. Thus far, the Company has been
unable to meet either the delivery or the financing demands of this market.
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The Virtual Reality Helmet
The virtual reality helmet is critical to the market acceptance of
Tellurian's products since it removes one of the major sources of market
resistance to the Company's virtual reality units--the amount of physical space
required by the viewing screens. The arcade market represents the largest
grouping of potential buyers for the units and these potential buyers are
heavily influenced by the return per square foot of floor space occupied. The
helmet would reduce the square footage needed by approximately 50% while
improving the quality of the sound through the almost complete elimination of
background noise coming from other activities in the facility and significantly
reducing the Company's cost per virtual reality unit. The Tellurian helmet has
been specifically engineered to be driven by the proprietary Tellurian EAGLE
image generator. Management expects that the quality of the experience gained
through use of the helmet coupled with the head motion tracker will be
significantly superior to the experience currently offered in the marketplace
either by Tellurian or by any of its competitors.
The helmet has been ready for introduction to the market for some time,
but the Company needs at least $250,000 of financing to produce and market the
Tellurian Helmet. The Company has attempted to offer the helmet based experience
for delivery within four months from date of order, but that offer was subject
to receipt of customer deposits. 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.
One of the principal objectives of the pending Offering is to provide
the funding necessary to produce the VR helmet and to allow the Company to
market the product on a "revenue sharing" or partial financing basis. See "Use
of Proceeds."The Company also believes that these sales opportunities will also
provide opportunity for the Company to provide other profitable financing to its
potential and actual customers. While Management believes that this approach
will substantially improve its likelihood of successfully completing these
sales, there can be assurance that the Company will be able to complete sales
and/or revenue sharing agreements in number and a profitability adequate to
cover the continuing costs of promoting the VR product. Management is presently
evaluating the possibility of limiting its marketing efforts to standard units
using the existing databases. Should Management determine that an adequate
market exists for this marketing approach, significant further reductions will
be possible in the level of R&D expenditures.
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Cyberport
In late June 1997, the Company was able to begin conducting operations
in its subsidiary, Cyberport Niagara, Inc. and opened a "pay-one-price" TEC.
Although the limited opening of Cyberport was not done early enough to have a
noticeable impact on revenue for the season, Management believed 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 believed that the
exposure to the summer tourists and, more importantly, to the tour groups that
conduct summer business in Niagara Falls, was critical to Management's plans to
develop the group tour business for the 1998 and subsequent seasons. The Company
promoted the facility in general and the Tellurian experience extensively since
the 1997 opening. Numerous "free-of-charge" events were run in order to hasten
the awareness of the facility to the tourism industry in the Niagara region.
Efforts concentrated on ensuring strong 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.
Revenue during the six months ended June 30, 1998 did not reach the
objectives in the Company's business plan. While tourism in Niagara seems to be
off dramatically in 1998 compared to 1997, the limited turnout at the Cyberport
facility during June 1998 and July 1998 is nonetheless extremely disappointing.
While Management believes that the marketing programs and overall direction of
Cyberport has been correct, unless Cyberport revenues improve dramatically in
the third quarter, the Company may have no choice but to find an equity partner
in Cyberport or seek some form of protection under the prevailing bankruptcy
reorganization laws of Ontario.
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. See "Business-Competition."
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 vs. Three and Six Months Ended June 30,
1997
Tellurian and its subsidiary had net sales for the three months ended
June 30, 1998 of $120,074, a decrease of $98,257 or 45% over the comparable
period of the prior year. For the three months ended June 30, 1998, the
Company's gross profit (loss) was ($142,946), a decrease of $262,859 over the
comparable period of the prior year. Such decrease in gross profit is primarily
due to the costs related to the Cyberport Niagara facility during the period
where it was open for business but significantly underloaded
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compared to its potential throughput. Also, during the second quarter of 1997
the Company recognized the last portion of the technology transfer sale to
Voyager.
Tellurian and its subsidiary had net sales for the six months ended
June 30, 1998 of $154,982, a decrease of $144,634 or 48.3% over the comparable
period of the prior year. For the six months ended June 30, 1998, the Company's
gross profit (loss) was ($225,968), a decrease in gross profit of $363,504 over
the comparable period of the prior year. Such decrease in gross profit is
primarily due to the costs related to the Cyberport Niagara facility which was
either closed or dramatically underloaded for most of this period and due to the
loss of margin generated by the last of the Voyager billings in 1997.
Tellurian's research and development ("R&D") expenses for the three
months ended June 30, 1998 were $170,822, representing a decrease of $22,934, or
11.8%, over the comparable period for the prior year. The R&D activities related
to Tellurian's concentrated effort to complete the virtual reality helmet and to
develop software for use with that helmet and other versions of virtual reality
products. The R&D staff and expenditures were dramatically reduced during the
second quarter of 1998. Such reductions will become more noticeable in the third
quarter results.
Tellurian's R&D expenses for the six months ended June 30, 1998 were
$380,811, representing a decrease of $17,032, or 4.2%, over the comparable
period for the prior year. The R&D activities related to Tellurian's
concentrated effort to complete the virtual reality helmet and to develop
software for use with that helmet and other versions of virtual reality
products.
Selling, general and administrative expenses for the three months ended
June 30, 1998 were $267,900, a decrease of $66,374, or 19.8%, over the
comparable period of the prior year. This decrease is principally due to the
continuing reduction of costs implemented by management partially offset by
increased consulting costs incurred for assistance in finding merger/acquisition
candidates and for assistance in seeking interim financing arrangements.
Discretionary spending for selling, general and administrative expenses staff
and support services have reduced during the first and second quarters of 1998.
Due to termination costs and other costs of unwinding agreements, the full
impact of those charges will not affect the Company results until the fourth
quarter of 1998.
Selling, general and administrative expenses for the six months ended
June 30, 1998 were $712,296, a decrease of $110,071, or 13.4%, over the
comparable period of the prior year. The reason for this decrease is noted in
the above paragraph.
For the three months ended June 30, 1998 interest expense was $13,786,
a decrease of 2,206, or 13.8%, over the comparable period of the prior year.
For the six months ended June 30, 1998 interest expense was $31,048, an
increase of 2,756, or 9.7%, over the comparable period of the prior year.
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Tellurian's net loss for the three months ended June 30, 1998 was
$596,273 as compared to a loss of $423,289 for the comparable period of the
prior year. The principal reasons for this increase are described above. In most
cases, the increased costs relates to the Cyberport facility being open for most
of the quarter in 1998 while costs were deferred to a large extent prior to its
opening at the end of the second quarter in 1997.
Tellurian's net loss for the six months ended June 30, 1998 was
$1,363,604 as compared to a loss of $1,060,049 for the comparable period of the
prior year. The principal reasons for this increase are described above. In most
cases, the increased costs relates to the Cyberport facility being open for most
of the quarter in 1998 while costs were deferred to a large extent prior to its
opening at the end of the second quarter in 1997.
While Management has made numerous reductions in costs and continues to
seek out and eliminate any non-essential expenditures, the Company must take
action to generate sales and gross profit in amounts adequate, when compiled
with said lost reductions, to allow the Company to operate profitably.
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 of 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 for 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.
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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 because of the aforesaid
decreases in sales and increases in costs.
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. 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 in its initial public offering,
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 exercisable at $6.00 per share through
November 5, 2001 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
in operating activities. This cash usage, while principally attributable to the
Company's net loss, was somewhat less than the actual loss due to the increase
in accounts payable due to the Company's suppliers. 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.
For the three months ended June 30, 1998 and 1997, respectively, net
cash of $762,758 and $768,809, respectively was used in operating activities.
The net loss from operations for the period ended June 30, 1998, $1,363,604, was
partially offset by the Company's non-cash depreciation and amortization expense
and a decrease in inventory as well as an increase in payroll due to officers
and any employees.
For the six months ended June 30, 1998 net cash of $71,216 was
generated from investing activities while $509,854 was used in investing
activities in 1997. Funds were generated from the sale of a marketable security
while some expenditures were made to acquire capital equipment necessary for the
continued safe operation of the Company.
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For the six months ended June 30, 1998 and June 30, 1997, $461,863 and
$90,000 respectively was provided from financing activities. The primary sources
of this cash were the proceeds of the warrant conversion completed by the
Company and the completion of a new bridge loan arrangement. Details of the
warrant conversion are as follows:
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
received net proceeds of $490,912 after offering costs of $112,099 from the
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 June 30, 1998, the Company succeeded in converting approximately $2,100,000
of such indebtedness as described below. Such debt conversions included the
following:
(a) In March 1998, the Company entered into an agreement with
Interactive Media Concepts, Inc., a consultant of the Company which was
owed approximately $56,000. Further, the Company had a contractual
obligation to Interactive Media which would have required the Company
to pay an additional $88,000 for its services during 1998. In March,
1998 the Company accepted Interactive's offer to convert such
indebtedness into 100,000 shares of the Company's Common Stock.
(b) The Company owed $1,295,527 U.S. (equivalent to $1,865,559
Canadian) to certain contractors in Canada for work done on
improvements to its Cyberport facility. These contractors included
Newman Bros. Limited, Phoenix Wood Products Corporation (formerly known
as Trigin Management Corporation), Star Tile Centre Limited, Ecco
Electric Limited, DBN Drywall & Acoustics Limited, Expoplex
Incorporated (the "Cyberport Creditors"). On March 26, 1998, the
Cyberport Creditors agreed to convert $601,083 U.S. (equivalent to
$865,559 Canadian) into 865,559 Series B Special Shares plus an
additional 47,075 Series B Special Shares for goods and services taxes
owing at closing (also known as Preferred Stock of Cyberport Niagara).
The Cyberport Creditors also agreed to assign to Cyberport Niagara's
landlord (also known as 1174757 Ontario Inc.) $694,444 U.S. (equivalent
to $1,000,000 Canadian) of the Company's indebtedness.
Contemporaneously, 1174757 Ontario Inc. entered into an agreement to
convert the
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entire debt into 350,000 restricted shares of the Company's Common
Stock. The Company also agreed to pay the landlord $36,111 U.S.
($52,000 Canadian) in rent arrears and $33,333 U.S. ($48,000 Canadian)
in additional security deposit. In connection with such agreement, the
Company granted the Landlord options to purchase 100,000 additional
shares of the Company's Common Stock at an exercise price of $1.75 per
share between April 1, 1998 and September 30, 1998. Tellurian also
granted the landlord security interests in certain simulators located
at the Company's Cyberport facility. The aforesaid agreements concluded
various creditor lawsuits that were initiated against the Company and
its subsidiary demanding payment of the aforementioned debt.
(c) The Company has entered into an agreement with the holders
of the Cyberport Niagara Preferred Stock effective June 30, 1998, which
resulted in conversion of that preferred stock into 325,278 shares of
Tellurian Common Stock and $100,000 (US dollars) plus $21,500 legal
fees payable on or before September 15, 1998. The completion of this
transaction resulted in the elimination of the minority interest of
$640,027 previously shown on the Company balance sheet.
(d) The Company has entered into an agreement with Mr. Charles
Powers effective June 30, 1998. Pursuant to such agreement, Mr. Powers
converted his demand note which, together with accrued interest,
represented $713,754 into 345,000 shares of Tellurian Common Stock and
a promissory note in the amount of $100,000 (payable on or before
December 31, 1998) in return for the aforesaid note and accrued
interest. Of the $713,754, $696,966 was owed and outstanding at
December 31, 1997.
(e) The Company has entered into an agreement with Ronald
Swallow and Richard Swallow, former officers and directors of the
Company. Pursuant to such agreement, the Swallows agreed to convert a
note, which they recently purchased from Celia Klimas, representing
$163,750 of debt inclusive of interest, into 100,000 shares of
Tellurian's Common Stock effective June 30, 1998. Of the $163,750,
$154,750 was owed and outstanding at December 31, 1997.
During 1997 and 1998, the Company experienced delays in completing the
virtual reality helmet and has suffered from its inability to attract a major
investor to the Cyberport project as planned. These two events, coupled with
limited revenues from sales of the Company's existing products and less than
expected receipts from Cyberport,
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have caused a continued drain of the Company's limited capital . As a result,
Management has been forced to devote significant efforts to raising capital in
support of the plan of operations. While many potential investors have been
approached about Cyberport, the lack of a demonstrable financial track record
has made it difficult to complete the sale of any of the Company's Cyberport
interest.
Management believes that the introductory marketing costs of the
virtual reality helmet and the working capital required to be able to meet
expected delivery needs will require the Company to utilize at least $250,000 of
capital beyond that which could be allocated to the helmet from the recently
completed warrant conversion offer. If the Company is not successful in
obtaining those funds, the introduction of the helmet will be negatively
impacted and the Company's operating results will be adversely impacted.
The Company recently obtained a $250,000 short-term loan. This loan was
made to the Company to assist it in operating while the planned public offering
of preferred stock and warrants is being developed. This loan bears interest at
the rate of 12% per annum. Negotiations are under way to attempt to increase the
availability of funds from this agreement by up to an additional $200,000 in
order to provide the capital necessary to allow the Company to operate while it
proceeds with the Offering. No assurances can be given that the Company will be
successful in obtaining this additional funding on terms and conditions
acceptable to the Company. See "Certain Transactions."
At June 30, 1998, Tellurian had a working capital deficit of $262,576.
The Company is currently meeting its cash requirements from limited cash
generated from operations and the above referenced short-term loan. In light of
the Company's working capital deficit and continued negative operating cash
flows, the Company is dependent upon immediate and substantial additional
revenues from operations, the sale of up to a majority interest in its Cyberport
facility and private or public financing (including the proceeds of the
Offering) to meet its obligations as a going concern.
With respect to a possible sale of up to majority interest in
Cyberport, the Company has held negotiations with various firms interested in
acquiring the Company's Cyberport interest as well as the right to open other
Cyberport licensed facilities. While one of these discussions appears hopeful,
no assurances can be given that any of these negotiations will result in a
change in the Company's ownership interest in Cyberport in the foreseeable
future.
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 for Tellurian's fiscal year ended December
31, 1997 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 from the proceeds of the
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Offering, receiving substantial revenues from operations and/or selling a
majority interest in its Cyberport facility. No assurances can be given that the
Company will be successful in its efforts to obtain the necessary cash to remain
a going concern. In the event that cash generated from the Company's plan of
operation as specified above are insufficient to meet its existing obligations
and on-going expenses (including those of Cyberport Niagara), the Company may
need to seek reorganization protection under applicable bankruptcy laws.
Management believes that the proceeds of the Offering are sufficient for the
Company to operate as a going concern on both a short-term and long-term basis.
PLAN OF OPERATIONS
The Company's plan of operation is as follows:
(1) Complete the Offering of Series 1 Preferred Stock which is essential to the
Company's future since it will provide the liquidity and capital resources
for the Company's operations for at least twelve months including, without
limitation, the cash needed to complete the introduction of the Company's
products to the marketplace.
(2) Redirect the Company's research efforts from the development of the
multi-player, customized game with linked VR image generators to
concentrating these research efforts on the development of new generic
games with widespread appeal to the mass entertainment market.
(3) Concentrate on the marketing and distribution of the Company's single
player units supported by the ability to enter into financing and/or
revenue sharing arrangements.
(4) Support the Company's existing Tellurian customers through its consulting
contract with Ronald Swallow. The Company has entered into an agreement
with Mr. Swallow which provides for him at a fixed cost to Tellurian to
service existing Tellurian customers while providing technical assistance
to any new custom projects the Company may choose to pursue. Pursuant to
this agreement, the Company granted Mr. Swallow a fifteen year
non-exclusive license to market the Company's virtual reality products.
(5) Several of the merger candidates evaluated by the Company during the past
few months were rejected but that the synergy of several of the candidates
was very promising. Upon completion of the Offering, Management intends to
reopen talks where appropriate if the acquisition of such a candidate could
reduce the elapsed time required to gain a large market share in the
arcade/entertainment marketplace. Management also expects to evaluate
acquisition candidates that have the potential to bring immediate and
substantial revenue to the Company if the product/services provided by
those candidates were supported by Tellurian.
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(6) An evaluation is to be made at the end of the tourist season (on or about
October 15, 1998) with regard to the need and desirability of continuing to
support the Cyberport facility in Niagara Falls. The Company will seek an
equity partner to purchase up to a majority interest in Cyberport.
(7) Relocate the Company's existing office facility to a smaller less costly
facility as part of an ongoing cost reduction effort.
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 August 6, 1998 at 4:00 P.M. Eastern Standard Time, the last sale price of the
Common Stock and Common Stock Purchase Warrants in the over-the-counter market
were $2 and $.625, respectively.
The following table reflects the high and low sales prices for the
Company's Common Stock and Common Stock Purchase Warrants on the NASDAQ Small
Cap Market 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
1996 ------ ----- ---- ----
<S> <C> <C> <C> <C>
November 5
(first day of trading)
through
December 31, 1996 7 1/2 5 3/4 4 1/4 2 1/2
1997
First Quarter 6 7/8 4 3/4 3 3/4 1 3/8
Second Quarter 6 3/8 3 1/2 1 7/8 3/4
Third Quarter 5 1/4 2 3/4 1 1/4 7/16
Fourth Quarter 5 7/8 2 1/4 2 1/2
1998
First Quarter 3 5/8 1 3/8 1/16 3/8
Second Quarter 3 1/4 1 1/2 1 7/16
</TABLE>
The over-the-counter market quotations reported above reflects
inter-dealer prices, without retail markup, markdown or commission.
34
<PAGE>
Management has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the number of record holders of the Company's
Common Stock, as of April 7, 1998, was approximately 31. However, the Company
has been advised by the Representative 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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of June 30, 1998 and as adjusted to give effect to the proceeds of the Offering
and application of the net proceeds thereof. This table should be read in
conjunction with the Company's financial statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Actual Proforma
---------- -----------
<S> <C> <C>
Current liabilities $1,132,086 $ 161,498
Long-term debt liabilities 116,912 116,912
---------- -----------
Total Liabilities 1,248,998 278,410
========== ===========
Stockholders' equity (1): Preferred stock $.01 ,
par value; authorized 5,000,000 shares,
zero shares issued, 1,200,000 shares of Series 1
pro forma (2) -0- 12,000
Common stock-$.01 par value:
authorized 25,000,000 shares (2),
issued 4,730,041 shares 47,300 47,300
Additional paid-in capital 9,307,795 14,195,795
---------- -----------
Accumulated deficit (7,131,391) (7,131,391)
Other comprehensive income 78,773 78,773
---------- -----------
Stockholders' equity 2,302,477 7,202,477
========== ===========
</TABLE>
-----------
(1) Does not include the following: (i) up to 5,127,500 shares of Common
Stock issuable upon exercise of outstanding Common Stock Purchase
Warrants; (ii) up to 185,000 shares of Common Stock issuable upon
exercise of the Warrants to purchase Common Stock at an exercise price
of $8.25 per share sold to the Underwriters of the Company's initial
public offering in November 1996; (iii) up to 185,000 Common Stock
Purchase Warrants issuable upon exercise of certain warrants at an
exercise price of $.4125 per Warrant (and the underlying 185,000
shares of Common Stock issuable upon exercise thereof at $9.90 per
share) which warrants were sold to the Underwriters of the Company's
initial public offering in November 1996; (iv) up to 1,500,000 shares
of Common Stock issuable under Tellurian's Stock Option Plan; and (v)
options to purchase 100,000 shares granted to the landlord of
Cyberport.
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<PAGE>
(2) The Company's Board of Directors has approved the authorization of
5,000,000 shares of Preferred Stock that may be issued in series by
the Board of Directors. This authorization is subject to stockholder
approval at the Company's up-coming meeting of stockholders scheduled
on August 31, 1998.
BUSINESS
General
The Company 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 makes available consulting services
via developing customized software and databases for customers who purchase its
image generators and need such services for specific application requirements.
Since 1988, the Company has been designing, building and selling a line
of specialized computers and ancillary software which are used to generate
visual images in realtime for use in flight trainers and other simulation
equipment. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and selling this product and ancillary
software for use in virtual reality entertainment devices to companies such as
Fightertown Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight
Corp.
In 1994, the Company began designing and engineering a new image
generation product known as the "EAGLE", a specialized computer, which is
specifically designed for the virtual reality entertainment market. In 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 intended 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 helmet has been ready for
introduction to the market since early 1998, but the Company needs
36
<PAGE>
at least $250,000 of financing to produce and market the Tellurian Helmet. The
Company has attempted to offer the helmet based experience for delivery within 4
months from the date of order, but that offer was subject to receipt of
sufficient deposit funds from the customer. Thus far, the market place has been
unwilling to accept these terms.
The Company has worked to create a line of virtual reality games that
can be sold to a broader market than its original line of virtual reality
experiences allowed. These games are based in part on the powerful capabilities
of the EAGLE and in part through the use of low cost, over-the-counter
technology. Management believes that these products are now ready to be
successfully marketed to the arcade industry. Financing for the manufacturing of
the game units and for financing support to the customers of these products will
come from the proceeds of the Offering. Management believes that this step is
the key to creating a significant on-going revenue stream from this marketplace.
In March 1997, Tellurian formed Cyberport Niagara Inc., an Ontario,
Canada company, as a subsidiary for the purpose of establishing a TEC in Niagara
Falls, Ontario. This 40,000 square foot facility known as "Cyberport", which
opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as other family oriented
entertainment exhibits. The Company was dependent upon Cyberport as a show place
for its new technology and as a source of revenue. While the use as a show place
has proven successful, there is a concern regarding the revenue generating
capability of Cyberport. Should the revenues generated during the third quarter
of 1998 prove insufficient to provide Cyberport with the funding necessary to
carry it through to the 1999 Spring/Summer tourism season, the Company may
choose to sell up to a majority interest in Cyberport or close it in order to
preserve working capital for other corporate purposes. Cyberport Niagara Inc.'s
Common Stock is currently owned 100% by the Company. The Company has no other
active subsidiaries.
In March 1998, the Company engaged the services of Carousel Consulting,
specialists in identifying merger and/or acquisition candidates, to assist it in
seeking out companies with complimentary products and services in the
entertainment and financing industries to merge with or be acquired by
Tellurian. The Company has investigated numerous complimentary business
opportunities which can be acquired with the use of limited amounts of cash and
securities. Said transactions would, in the opinion of Management, significantly
improve the Company's marketing position and would not likely require diversion
of significant amounts of cash except on a "profit sharing" (earn-out) basis. As
of the date of this Prospectus, the Company has no agreement, understanding or
arrangement to complete any such transaction and no assurances can be given that
any transaction will be successfully completed in the future.
As of June 30, 1998, the Company's total assets and stockholders'
equity were $3,551,475 and $2,302,477, respectively. The Company's net losses
for the six months ended June 30, 1998 and 1997 and year ended December 31, 1997
were $1,363,604, $1,060,049, $2,708,993 respectively. See "Risk Factors,"
Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Financial Statements."
37
<PAGE>
Recent Developments
For a discussion of certain recent developments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Virtual Reality
Virtual Reality is an artificial environment of sight, sound and motion
created with the use of computers. The earliest example of a rudimentary virtual
reality device is the Link Trainer, which was used to train pilots for
instrument flying. With the availability of modern computers, simulators have
undergone rapid development, particularly in the presentation of visual scenes
and sound effects. Present day simulators provide not only motion, but also
sight and sound effects, which are altered as the controls are manipulated.
Simulators are used in training ship pilots and air traffic controllers.
The hallmark of virtual reality entertainment is its ability to immerse
the user in a fantasy experience. The four dimensions to present day VR are
sight, sound, motion, and interactivity with other players. Tellurian's P-51
simulator at Cyberport is a prime example of virtual reality entertainment. The
unit consists of a fiberglass cockpit similar to that of a 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 be destroyed 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.
The Company has the ability to produce these entertainment units either
as free standing, single player units designed for arcade use or in multiple
player units linked in the same virtual world. While the majority of the
Company's research and development efforts have been expended in an effort to
complete the multi-player game and the audio-visual delivery system (the
helmet), the by-product of this effort is the single player unit.
Cyberport Niagara, Inc.
Cyberport opened a "pay-one-price" tourist entertainment center (TEC)
at the end of June 1997. 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
38
<PAGE>
it (such as DisneyWorld). The exposure to large numbers of walking tourists is
essential to marketing plans. These groups alone will not support a venture like
Cyberport. However, in addition to the walking tourist family, bus tour groups
are capable of providing large volumes of customers although at somewhat less of
a net price per person. Both the walking tourist and the bus tour groups are in
Niagara Falls in large numbers from late spring through late September.
Cyberport has 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 the slower fall to spring periods. This was done by (a)
contracting with third parties who have ready-made exhibits available for rent
or lease on a fixed price or revenue sharing basis and (b) purchasing exhibits
such as 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
Pharaoh Tutankhamen.
Cyberport was unable to do any significant marketing or advertising
prior to its opening in summer of 1997. As a consequence, very little revenue
was generated from the abbreviated time it was open. However, by opening the
facility Cyberport was able to develop marketing contacts and has assisted it in
booking student outings for the spring 1998 season. 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 who are not laid-off 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 of the 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 summer
months being the high season. Publicly available statistics from attractions
such as the Butterfly Museum demonstrate that tourists come to Niagara Falls in
sufficient number to possibly make Cyberport a profitable venture. However,
there can be no assurances that the Company will be successful in gaining the
necessary market share in order to make Cyberport successful with the limited
cash resources presently at its command.
Management believes that the revenues generated by Cyberport during the
third quarter must improve dramatically from the same quarter in 1997 in order
to justify any
39
<PAGE>
further investment in Cyberport. As of the date of this Prospectus, revenues at
Cyberport have been below levels considered acceptable to Management. At the
conclusion of the tourist season (generally considered to be the middle of
October), Management will evaluate the advisability of continuing its investment
in Cyberport.
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 existing and new entrants into the
tourism market in the Niagara Falls region. Most of the competitors have more
experience than the Company in opening and managing tourist facilities and most
have more financial resources than the Company. There can be no assurances that
this project will perform successfully.
Products
Tellurian has been designing, building and selling low cost, high speed
image generators since 1988. The first generator, known as the AT-100 was used
exclusively for flight training applications. Since 1992, the Company has been
selling the AT-200 image generator which is a second generation unit and is
largely used in simulators for training aircraft pilots and ship captains. The
AT-200 is currently installed on Flight Trainer Devices ("FTD") simulators,
ships handling training devices, and air traffic control simulators. The AT-200
provides realtime image generation with high resolution, multi-channel operation
and full color using proprietary hardware and software. As of June 30, 1998, the
Company had built and sold over 250 AT-200 systems.
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 & Show
Engineering, 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 and other entertainment centers. The Company has worked
diligently to create a line of virtual reality games that can be sold to a
broader
40
<PAGE>
market than its original line of virtual reality experiences allowed. These
games are based in part on the powerful capabilities of the EAGLE and in part
through the use of low cost, over-the-counter technology. Management believes
that these products are now ready to be successfully marketed to the arcade
industry. Financing for the manufacturing of the game units and for financing
support to the customers of these products will come from the proceeds of the
Offering. Management believes that this step is the key to creating a
significant on-going revenue stream from this marketplace.
The Company's marketing efforts prior to completion of the 1996 public
offering had been concentrated on selling image generating systems to
manufacturers of trainers and simulators. The sales and marketing efforts were
conducted by officers of the Company. During 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.
Financing
Management believes that the marketing of the Company's products can be
dramatically enhanced by offering revenue sharing and leasing options to its
potential customers. Due to the uncertain amounts of revenue generated by this
equipment and the frequent seasonality of such revenue, obtaining financing from
third party sources is frequently difficult or impossible for potential
customers of Tellurian equipment. Selective use of the allocated $1,933,000 of
the proceeds of the Offering will allow Tellurian to place its equipment in
desirable market locations without demanding the full retail value of the
equipment in cash at the time of the sale. In addition, Tellurian may choose to
finance other needs of prospective customers if the confirmation of rate of
return and market benefit is adequate to compensate the Company for its risk.
The Company may also consider acquiring an existing finance company in
order to obtain access to funding sources and existing documentation packages to
assist in the rapid availability of this important marketing and
revenue-generating service. No assurance can be given that such an acquisition
can be found under terms and conditions acceptable to the Company.
Helmets.
Tellurian has utilized the unique technologies of the "EAGLE" in
developing its own line of proprietary products since this allows it to
emphasize all of the advantages of the Eagle without adding unnecessary cost.
Upon completion of the 1996 Public Offering, the Company began a
development project to finalize the design and building of a helmet mounted
visual system to take maximum advantage of the EAGLE image generator.
Tellurian's virtual reality helmet is critical to the broad market acceptance of
its products since it removes one of the major sources of market resistance to
the Company's virtual reality units--the amount of physical space required by
the viewing screens. The arcade market represents by far the largest
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grouping of potential buyers for the units and these potential buyers are
heavily influenced by the return per square foot of floor space occupied. The
helmet reduces the square footage needed by approximately 50% of the space
previously used by Tellurian visual delivery systems 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 believes that the quality of the experience gained through use of the
helmet coupled with the head motion tracker will be significantly superior to
the experience currently offered in the marketplace either by Tellurian or by
any of its competitors. 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. Based on
the initial performance and evaluations, Management decided to concentrate its
resources on incorporating the helmet into a game structure and showed that
prototype unit at the important industry trade show (IAAPA) 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 within
four months from the date of order, but its ability to deliver is subject to the
receipt of sufficient customer deposits which the market place has been
unwilling to do as of the date of this Prospectus. 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 the
completion of the Offering to be in full production and of single player and
helmet based units by the end of 1998 and to provide customers with financing as
described herein to purchase such products.
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. Revenues from consulting services in 1998 and 1997 were
minimal.
42
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Backlog
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."
Product Marketing Strategies
Tellurian's core product line is the computer image generator. These
units are special purpose computers designed and built by the Company to render
images in a variety of display devices, such as helmets, projection screens and
TV monitors. The market for these products is in both the training/ simulation
sector and the entertainment sector. The Company is seeking to market its
products to distributors and large users of arcade type games. Location based
entertainment operations which currently utilize the Company's devices are Six
Flags (Great Adventure - Jackson, NJ, Magic Mountain - Los Angeles, CA) and
Fightertown - Lake Forest, CA. Entering the entertainment market is a natural
progression of the technology and products which the Company has been
developing.
The Company has been concentrating 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 salespersons 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.
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Licensing of Tellurian Technology
Pursuant to an agreement expiring January 1, 2001 between Tellurian and
Voyager Graphics, Inc., a Republic of China corporation, ("Voyager") Tellurian
granted Voyager an irrevocable, exclusive, assignable fully paid license which
allows Voyager (the "License") to (1) be the exclusive supplier of the EAGLE
image generator (the "Product") within a restricted group of countries (the
"Licensed Territory") and (2) to sell the Products worldwide. The Licensed
Territory consists of Afghanistan, Australia, Bahrain, Bangladesh, Bhutan,
Burma, China (including Taiwan, Hong Kong and Mainland China), Cyprus, India,
Indonesia, Iran, Iraq, Japan, Jordan, Kampuchea (Cambodia), Korea (North), Korea
(South), Kuwait, Laos, Lebanon, Malaysia, Maldives, Marshall, Mongolia, Nepal,
New Zealand, Oman, Pakistan, Philippines, Qatar, Saudi Arabia, Singapore, Sri
Lanka (Ceylon), Syria, Thailand, Turkey, United Arab Emirates, Vietnam, Yemen
(Aden and Sana). The License includes all the know-how, patent rights and
copyright matter, if any (hereinafter the know how, copyrights and patent rights
are collectively referred to as the "Intellectual Property"), and the right to
grant sub-licenses to third parties without the consent of Tellurian. Tellurian
retains the right to grant licenses of the Intellectual Property to third
parties outside of the Licensed Territory and to sell the Products and/or any
derivative products (i.e. computer image generators that are manufactured based
on and by utilizing partly the Intellectual Property of Tellurian, hereinafter
referred to as the "Derivative Products") outside the Licensed Territory. As
part of the License Agreement, Tellurian was responsible to provide a classroom
training and production training program of a total of twelve weeks for up to
twelve engineers at Tellurian's facilities in New Jersey to provide each Voyager
engineer with a sound working knowledge of every aspect of the computer image
generator known as EAGLE and to build ten working units during the program.
In consideration of the License and technology transfer, Voyager
agreed to pay Tellurian $1,500,000, of which Tellurian agreed that Voyager would
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. Of the $650,00, $500,000 was payable to
Voyager Simulation, an affiliate of Voyager Graphics, Inc., for arranging the
transfer agreement and $150,000 was payable to TTY Graphics, Inc. for its
development assistance with the EAGLE. The Company has had discussions in the
recent past 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, if at all.
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
44
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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 of 100,000 from Fightertown in 1994. 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.
During the third quarter of 1997 and extending into November 1997,
the Company worked 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 had 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 has 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 for future consulting
services of Fightertown regarding the performance of Tellurian's EAGLES. (4) The
Company agreed to pay Fightertown $67,500 in three installments of $22,500 on
August 15, 1998, August 15, 1999 and August 15, 2000. The Company intends to pay
Fightertown the August 15, 1998 payment on or about August 30, 1998 or upon the
completion of the Offering, if agreed to by Fightertown. The Company has
allocated $45,000 of the proceeds of the Offering to make two payments to
Fightertown. See "Use of Proceeds." 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 agreed 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. (This does
not effect Tellurian's present product offerings which are based on propeller
driven aircraft.) (6) The Company agreed to offer its new virtual reality helmet
and new generation
45
<PAGE>
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 two engineers/technicians who are involved in research and
product development. In addition, the Company has entered into a licensing
agreement with Ronald Swallow, a former officer and board chairman of the
Company, which allows Mr. Swallow to continue development efforts on linked
virtual reality units and helmet audio visual options on a technology sharing
basis. By virtue of this agreement, Tellurian is able to significantly reduce
its current cost of research and development and focus its efforts on existing
products. Products developed by Mr. Swallow and his associates would be by
Tellurian, licensed to Mr. Swallow and available to Tellurian to market (if it
so chooses) in the future. Due to the increasing competition and rapid
technological change in the VR marketplace, the Company believes that it must
continue to improve and refine its products. Research and development costs for
the six months ended June 30, 1998 and for fiscal 1997 and fiscal 1996 were
$380,811, $862,031 and $688,103, respectively. See "Note 1 to the Notes to
Consolidated Financial Statements."
Competition
The market for the Company's revenue producing activities is highly
competitive and rapidly changing, and the Company expects competition to
continue to be intense in the foreseeable future. There are two major categories
of competitors for the Company's products. The first are the "high end" (costly)
real time image generators from companies such as Silicon Graphics, Inc., Evans
& Sutherland, Inc. and Lockheed Martin Corp. These real-time image generators
are generally used for military training and simulation applications; as
engineering and graphics work stations; and as animation design tools. These
costly systems provide photo realistic images by creating objects from polygons
and laminating each surface with a texture pattern whereas the Company's
products produce non-textured polygon images. 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 very little computers which restrict the quality and complexity of
the images they produce. To the viewer of these visual systems, the image
produced by the Company appears to be less complex than the photographic realism
of the high priced competitive units. However, the Company's image
46
<PAGE>
generator is significantly more complex and realistic than the cartoon-like
images of low cost competitors. 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 by it in the future. In order to be
successful in the future, the Company must 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 established Cyberport in order to assist in showcasing
its products. The Company anticipates significant competition in this market.
While the Company knows of no single dominant company in this marketplace, it is
aware that many companies are currently planning, developing and/or operating
similar businesses. Most of these companies have better financial resources than
the Company and have more experience in developing these facilities. No
assurances can be given that the Company will be able to compete successfully in
this market or that the Company will be successful in establishing or entering
into revenue sharing agreements or financing agreements for Cyberport or other
similar facilities. Further, there can be no assurances that, if the Company is
successful in obtaining such financing, the resulting businesses can be operated
at a profit.
Lack of Patent Protection
The Company does not currently hold any patents and the technology
embodied in the Company's current product line cannot easily be patented due to
the complicated mathematical structure supporting the image generator. The
Company relies on confidentiality agreements with its key employees to the
extent it deems such to be necessary.
Employees
As of August 14, 1998, Tellurian has six full-time employees,
including 2 executive employees and two engineers at its New Jersey facility and
two administrative and sales
47
<PAGE>
personnel at Cyberport. The Company believes that its relations with its
employees is good. None of the Company's employees are represented by a union.
Description of Property.
The Company entered into a 10 year lease expiring January, 2007 for
approximately 10,000 square feet of space at 300K Route 17 South, Mahwah, NJ
07430. Pursuant to the lease, the Company pays a monthly base rent of $6,250.
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 had an option to
purchase the facility for $2,160,000, which option has expired. Under the terms
of the recent restructuring of debt at Cyberport (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Developments"), Cyberport was granted a three month moratorium for the months of
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.
Legal Proceedings
In September 1997 both Tellurian and its subsidiary, Cyberport
Niagara, Inc. were named in legal actions in Ontario by eight construction firms
(namely, Newman Bros. Limited, Unistrut Canada Limited, Phoenix Wood Products,
Star Tile Centre Limited, Ecco Electric Limited, DBN Drywall & Acoustics
Limited, PRW Excavating Contractors Ltd. and Expoplex Incorporated) claiming
that services performed by them in the Niagara Falls site that houses Cyberport
have not been fully paid for. The amounts claimed was for an estimated
$1,400,000.
In March 1998, the Company reached an agreement with representatives
of the plaintiffs of such action and Cyberport's landlord which resulted in a
resolution of this matter. 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 Niagara's Series "B" Special Shares (preferred stock).
Cyberport Niagra had the right to redeem this preferred stock until October 10,
1998 at $1.10 Canadian ( approximately $.74 U.S.) per share. If Cyberport
Niagara chose not to redeem this stock, the holders of the stock had the right
to convert the preferred stock into restricted Tellurian common shares at the
rate of 2.28 shares of preferred for each share of common. This conversion right
was to expire on December 31, 1998. Pursuant to an agreement that in effect
amended the March 1998 agreement, Tellurian purchased, effective June 30, 1998,
the entire 912,634 shares in exchange for 325,278 shares of the Company's
restricted Common Stock and $121,500 ($180,000 Canadian) (including legal fees
of $21,500 ($30,000 Canadian)) due upon the
48
<PAGE>
completion of the Offering. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
MANAGEMENT
Executive Officers and Directors
The names of the executive officers and directors of the Company are
as follows:
Name Age Position
Stuart French (1) 53 President, Chief Executive
Officer and Director
Michael Hurd (1) 51 Vice President of Administration
and Finance and Chief Financial
and Accounting Officer
James G. H. Lin 47 Director
Peter Colgan 64 Director
- -----------
(1) Upon the completion of the Offering, Mr. Hurd will become a director,
President and Chief Executive Officer of the Company and Mr. French
will become Vice-President of Sales, Treasurer and Secretary of the
Company.
All directors of the Company hold office until the next annual meeting
of shareholders of the Company or until their successors are elected and
qualified. Executive officers hold offices until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
Set forth below is a biographical description of each director and
executive officer of the Company based upon information supplied by them:
Stuart French has been President since October 1993, has served as a
member of the Board of Directors since March 1995 and prior thereto was the Vice
President of Operations and Marketing from August 1991 to October 1993 and Chief
Financial Officer from January 1996 to March 1997. Since July 1998, Mr. French
has assumed the responsibilities of Chief Executive Officer on a temporary
basis. See "Changes of Directors and Management." 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
49
<PAGE>
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.
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. See "Changes of Directors and Management." In
March 1998, Mr. Hurd resigned from his capacity as a director of the Company.
Mr. Hurd has a BBS degree in Accounting from New Hampshire College and has been
a Certified Public Accountant in New Jersey since 1973. From 1985 to 1996, 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.
Peter Colgan joined the Board of Directors in March 1998. He has served
as the Senior Vice President of Computer Horizons Corp., a software consulting
and development company since 1977. He is a graduate of City College of New York
with an accounting major and holds a Master of Business Administration from New
York University.
James G.H. Lin joined the Board of Directors in March 1998. Since 1992,
he has been the President of Asian International Management, a company organized
to assist North American Companies in conducting business transactions in
mainland China. He owns several food service establishments in the Albany, New
York area. Mr. Lin is a graduate of National Chuang Hsin University in Taiwain
and holds an MBA from North Texas State University with a major in Accounting.
In March 1998, the Company established an Audit Committee consisting of
Messrs. Colgan and Lin. The Audit Committee has the power to (i) select the
independent certified public accountant, (ii) satisfy itself on behalf of the
Board that the external and internal auditing procedures assure reliable and
informative accounting and financial reporting, (iii) have meetings with
management, or with the auditors, or with both management and auditors, to
review the scope of the auditor's examination, audit reports and the Company's
internal auditing procedures and reviews, (iv) monitor policies established to
prohibit unethical, questionable, or illegal activities by those associated with
the Company; and (v) review the compensation paid to the auditors through annual
audit and non-audit fees and the effect on the independence on the auditors in
relation thereto, and it may exercise the powers and authority of the Board of
Directors to implement changes in connection with the foregoing or, at its
option, may make recommendations to the entire Board of Directors for its
approval.
In connection with the Company's initial public offering completed in
November 1996, the Representative was granted the right, for a period of five
years expiring in November 2001 to designate one person to act as an advisor to
the Board of Directors. Such person, if designated, would be entitled to attend
all such meetings and to receive all notices and other correspondence and
communications sent by the Company to
50
<PAGE>
members of its Board of Directors. The Company would be required to reimburse
the designee of the Representative for his out-of-pocket expenses incurred in
connection with his attendance at such meetings. As of the date of this
Prospectus, the Representative has not designated any person.
Changes in Management
The Company has reached a verbal agreement with Michael Hurd, Vice
President, under which Mr. Hurd would agree to accept the position of President
and Chief Executive Officer of the Company effective with the completion of the
Offering. If this agreement is implemented, Stuart French, current President and
Chief Executive Officer, would voluntarily resign from these positions. Mr.
French would continue to serve on the Board and would assume the full-time
position of Vice President of Sales simultaneous with the implementation of the
agreement with Mr. Hurd.
Limitation of Directors' Liability; Indemnification
Pursuant to Tellurian's By-Laws, Tellurian must, to the fullest extent
permitted by the General Corporation Law of the State of Delaware (the "GCL"),
as amended from time to time, indemnify all persons (e.g., directors and
officers) whom it may indemnify pursuant thereto and to advance expenses
incurred in defending any proceeding for which such right to indemnification is
applicable, provided that, if the GCL so requires, the indemnitee must provide
Tellurian with an undertaking to repay all amounts advanced if so determined by
a final judicial decision. Tellurian's Certificate of Incorporation contains a
provision eliminating, to the full extent permitted by Delaware law, the
personal liability of Tellurian's directors for monetary damages for breach of a
fiduciary duty. By virtue of this provision, under current Delaware law, a
director of Tellurian will not be personally liable for monetary damages for
breach of his fiduciary duty as a director, except for liability for (I) any
breach of his duty of loyalty to Tellurian or to its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under Delaware law and (iv) any transaction from which he derives an
improper personal benefit. This provision of Tellurian's Certificate of
Incorporation pertains only to breaches of duty by directors as directors and
not in any other corporate capacity such as officers, and limits liability only
for breaches of fiduciary duties under Delaware corporate law and not for
violations of other laws such as the federal securities laws. As a result of the
inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in Tellurian's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action if successful, might otherwise have benefitted
Tellurian and its stockholders.
51
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by Tellurian
for services rendered during the years ended December 31, 1997, 1996 and 1995 to
Tellurian's then Chief Executive Officer, Dr. Ronald Swallow and Stuart French,
President and current Chief Executive Officer. 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, Former
Chief Executive 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436
Officer (3)
1995 108,000 -0- -0- -0- -0- -0- 4,200
- -----------------------------------------------------------------------------------------------------------------------------------
Stuart French 1997 84,000 -0- 12,000 -0- -0- -0- -0-
President and
Current Chief 1996 84,000 -0- 23,359 -0- (1) 150,000 -0- 14,200
Executive Officer
(4) 1995 84,000 -0- 13,814 -0- -0- -0- 4,200
</TABLE>
- ---------------
(1) Does not include shares issued in connection with the Company's
reincorporation in Delaware. See "Certain Transactions."
(2) Includes the value of car leases paid by the Company at a rate of
approximately $350 per month.
(3) During 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.
53
<PAGE>
Employment Agreements
As of November 8, 1996, the Company entered into an employment agreement
with Stuart French. The agreement provides for an annual salary of $84,000 and
for a sales commission of 5% of the Company's sales. The agreement is for a term
of four years and provides for increases based upon profitability of the
Company's operations to be determined at the discretion of disinterested board
members. The agreement provides that 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 agreement also provides for the board of directors to have the
sole discretion to allocate bonuses among the Company's officers. No bonus pool
was established in 1997 due to operating losses. Mr. French's agreement contains
covenants not to compete during the term of his agreement and for a period of
one year thereafter. The agreement also calls for continuation of half salary
during the post-employment one year period covered by the covenant not to
compete and indemnification against liabilities as an officer and director of
the Company to the fullest extent permitted by applicable law. No assurance can
be given that such non-compete clause will be enforceable under applicable State
laws. For a discussion of stock options granted to Mr. French, see "Stock Option
Plans".
On March 2, 1998, the Company agreed to amend Mr. French's employment
agreement. Such agreement provides that in consideration of Mr. French waiving
any prior events of default of the Company under his employment agreement and
agreeing to amend his contract to provide the Board with the authority to accrue
salary under his contract at such times as the Company does not have sufficient
capital to make timely payments to him, he shall be entitled to a monthly
accrual of an additional $4,000 beginning on March 1, 1998 and continuing until
the termination of his agreement. Such agreement provides that he shall be
entitled to receive payment of the monthly $4,000 accrual at such time as the
Company receives net proceeds from a public or private financing or other
financing program, which places at the disposal of the Company cash resources of
at least $3,000,000; the Company earns net income in excess of $250,000 in any
calendar quarter; or December 31, 1999, whichever event first occurs.
In November 1996, the Company entered into an employment agreement with
Dr. Ronald Swallow, then Chairman of the Board and Chief Executive Officer of
the Company. His agreement was identical to Mr. French's employment agreement
except that Dr. Swallow's annual salary was $108,000. In July 1998, Dr. Swallow
resigned from all positions with the Company and subsequently entered into a
consulting and licensing contract with the Company. Such contract provides that
for a term of five years Dr. Swallow will assist the Company in servicing its
customers who have purchased virtual reality products and will invoice such
customers for his services for his own personal benefit. Pursuant to the
agreement, Dr. Swallow is granted a non-exclusive license for a period of
fifteen years to sell Tellurian virtual reality products. However, any further
developments that he may discover in the field of virtual reality shall belong
to the Company and be licensed to Dr. Swallow.
54
<PAGE>
By accepting the resignation of Dr. Swallow, the Company has been able
to significantly reduce its ongoing costs of research and development while
maintaining its ability to manufacture and sell standardized units while
minimizing the likelihood that it will be unable to maintain its technological
advantages. The agreement with Dr. Swallow requires the Company to pay a total
of $27,000 in severance pay (in lieu of $54,000 set forth in his employment
agreement) upon the completion of the Offering and $175,000 for the consulting
services and to allow him to sell virtual reality products to companies not
specifically identified as Tellurian customers. The $175,000 is payable $70,000
upon the completion of the Offering and payments of $35,000 on each of March 31,
June 30 and September 30, 1999. In addition, the contract sets certain
obligations on both parties to make available products and/or parts at 10% above
cost in order to allow the other party to sell or service products made or
purchased by the first party. At the end of the fifteen year license agreement,
Mr. Swallow will be allowed to keep Tellurian equipment with a current fair
market value of approximately $50,000 that he is utilizing in his research and
development efforts.
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. All
employees of the Company 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
The Company has a 1998 Stock Option Plan, as amended, covering 1,500,000
shares of Common Stock (the "1998 Plan"), subject to adjustment to cover stock
splits, stock dividends, recapitalizations and other capital adjustments for
employees, including officers and directors and consultants of the Company. The
plan provides that options to be granted under the Plan will be designated as
incentive stock options or non-incentive stock options by the Board of Directors
or a committee thereof, which also will have discretion as to the persons to be
granted options, the number of shares subject to the options and the terms of
the options. Options designated as incentive stock options are intended to
receive incentive stock option tax treatment pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
The plan provides that all options granted thereunder shall be
exercisable during a period of no more than 10 years from the date of grant
(five years for incentive stock options granted to holders of 10% or more of the
outstanding shares of common stock), depending upon the specific stock option
agreement and that the option exercise price for incentive stock options shall
be at least equal to 100% of the fair market value of Common Stock on the date
of grant (110% for options granted to holders of 10% or more of the outstanding
shares of Common Stock). Pursuant to the provisions of the plan, the aggregate
fair market value (determined on the date of grant) of the shares of the
55
<PAGE>
Common Stock for which incentive stock options are first exercisable under the
terms of the Plan by an option holder during any one calendar year cannot exceed
$100,000.
Currently, the plan provides that if the employment of an optionee is
terminated other than by reason of death, disability or retirement at age 65,
any incentive stock options granted to the optionee will immediately terminate.
If employment is terminated by reason of disability or retirement at age 65, the
optionee may, within one year from the date of termination, in the event of
termination by reason of disability, or three months from the date of
termination, in the event of termination by reason of retirement at age 65,
exercise the incentive stock option (but not after the normal termination date
of the option). If employment is terminated by death, the person or persons to
whom the optionee's rights under the incentive stock option are transferred by
will or the laws of descent and distribution have similar rights of exercise
within three months after such death (but not after the normal termination date
of the option). Any termination provisions of non-statutory stock options will
be fixed by the board of directors or a committee thereof.
Options are not transferable otherwise than by will or the laws of
descent and distribution and during the optionee's lifetime are exercisable only
by the optionee. Shares subject to options which expire or terminate may be the
subject of future options. The plan provides that no new options may be granted
by the Board of Directors of the Company after ten years from the establishment
of the Plan by the Board of Directors. In 1996, the Company granted
non-qualified stock options under a 1996 Plan which was almost identical to the
1998 Plan to purchase 340,000 shares of its Common Stock at an exercise price of
$5.00 per share over a term of ten years to various officers, directors and
consultants of the Company. All options granted by the Company under the 1996
Plan were in connection with services rendered to the Company. The Company has
agreed with J.W. Barclay, the managing underwriter of the Company's initial
public offering, that it will not grant the remaining available options under
the 1996 Plan to 5% or greater shareholders for a period of three years, ending
November 8, 1999 without the consent of said firm. In March 1998, the 1996 plan
and all outstanding options granted under the 1996 Plan were terminated.
In March 1998, the board of directors granted non-statutory stock
options to purchase 610,000 shares to the following persons: Michael Hurd
(200,000), Richard Swallow (27,000), Ronald Swallow (73,000), Stuart French
(200,000), Steven Morse (37,500), Lester Morse (37,500), David Turner (25,000)
and Mat Adams (10,000). These options were non-qualified, ten-year options and
were immediately exercisable at $2.625 per share. On July 20, 1998, these
options were all terminated. On the same date, the Board of Directors re-granted
non-statutory stock options to purchase 510,000 shares to the following persons:
Michael Hurd (200,000 shares), Stuart French (200,000 shares), Steven Morse
(37,500 shares), Lester Morse (37,500 shares), David Turner (25,000 shares) and
Mat Adams (10,000 shares). These options are non-qualified, ten-year options and
are immediately exercisable at $2.00 per share.
56
<PAGE>
Options Granted outside 1998 Plan
In April 1998, as part of an agreement to defer rent due on the
Cyberport facility for three months, the Board agreed to issue options to
purchase 100,000 shares at a price of $1.75 to the landlord in Niagara Falls.
This option expires on September 30, 1998.
The total number of shares subject to options outstanding under the
1998 Plan and granted outside such Plan as of the date hereof is 610,000
exercisable at prices ranging from $1.75 to $2.00 per share.
Aggregated Option Exercises and Fiscal Year-End Option Table - The
following table provides information with respect to each exercise of stock
options during fiscal 1997 by each of the executive officers named in the
preceding summary compensation table and the fiscal year-end value of
unexercised options.
<TABLE>
<CAPTION>
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR -
END OPTION VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options
Shares FY-End (#) at FY-End ($)
Acquired on Value
Exercise Realized (1) Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(1) (1)
- ------------------------------ ---------------------- -------------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Dr. Ronald Swallow -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 at December 31, 1997 was $5.00 per share, which
price is in excess of $3.00 per share, the value of the options is zero.
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 compensate its directors in their capacity as
directors in the future.
57
<PAGE>
In March 1997 Michael Hurd was elected to the Board of Directors and
received options to purchase 40,000 shares of Tellurian stock at $5.25 per
share. In June 1997, he received options to purchase 1,000 shares of Cyberport
Niagara stock at approximately $.68 per share and further options of 500 shares
vesting on July 1, 1998 and 500 shares vesting on July 1, 1999 under certain
restrictive conditions. The option price on these shares is also approximately
$.72 per share. With the Company's consent, Mr. Hurd transferred his right for
the purchase of 800 of the 1000 shares vested as of June 30, 1998 to David
Turner as part of an agreement under which Mr. Turner assumed the title of
General Manager of Cyberport Niagra, Inc. The option price on these shares is
also approximately $.67 per share.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth certain information as of
August 14, 1998 regarding the beneficial ownership of the Company's Common Stock
by all persons known by the Company to be beneficial owners of more than 5% of
its Common Stock and all executive officers and directors, both individually and
as a group. For purposes of calculating the amount of beneficial ownership and
the respective percentages, the number of shares of Common Stock which may be
acquired by a person within sixty days of August 14, 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.
<TABLE>
<CAPTION>
Amount
and Nature Approximate
Name and Address of of Beneficial Percent
Beneficial Owner (1) Ownership (1) of Class (2)
- ------------------------------------- -------------- ------------
<S> <C> <C>
Peter Colgan(3)(4) 50,000 1.1%
James G.H. Lin(3) -0- 0%
Stuart French(3)(6) 249,261 5.0%
Michael Hurd (3)(5)(6) 250,000 5.1%
All officers and directors
as a group (4 persons)(7) 549,261 10.7%
Dr. Ronald Swallow (3) 370,908 7.4%
Dr. Richard Swallow(3) 136,481 4.1%
1174757 Ontario Inc.(3) (8) 450,000 9.3%
Charles H. Powers
P.O. Box 6525
Florence, SC 29502 345,000 7.3%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mary Elizabeth
Huggins Trust (9) 430,049 9.1%
Jericho Limited
c/o InterTrust Management
S.A. P.O. Box 3292
126 rue de la
Pelisserie 1211 Geneva 3
Switzerland (10)(11) 2,200,000 31.7%
Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (10) (12) 800,000 14.0%
</TABLE>
- -------------
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) Based upon 4,730,041 shares outstanding without giving effect to the
issuance of shares under the Company's outstanding Warrants and Stock
Options.
(3) The addresses for Peter Colgan, James G. H. Lin, Stuart French and Michael
Hurd is c/o Tellurian, Inc. at 300K Route 17 South, Mahwah, NJ 07430. The
address for Richard Swallow is 316 West College Avenue, Heartsville, South
Carolina 29550 and the address for Ronald Swallow is 64 Manor Drive,
Ramsey, New Jersey 07446. The address for 1174757 Ontario, Inc. is 5400
Robinson Street, Niagra Falls, Ontario L2G2A6..
(4) Includes options to purchase 50,000 shares from Ronald Swallow.
(5) Includes options to purchase 50,000 shares from Richard Swallow.
(6) Includes options to purchase 200,000 shares from the Company.
(7) Includes options to purchase 400,000 shares from the Company and options to
purchase 100,000 shares from two former officers and directors of the
Company.
(8) Includes options to purchase 100,000 shares.
(9) Trust set up by Charles H. Powers, a founder and former shareholder,
officer and director of the Company, for the benefit of his granddaughter,
with Jane Powers Huggins as Trustee. The Trustee's address is 2419 West
Sumter, Florence, SC 29572.
(10) Represents Common Stock issuable upon exercise of Warrants.
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<PAGE>
(11) The beneficial owner of Jericho Limited is Louis Carlos SantaMaria. The
directors of Jericho Limited are Louis Carlos SantaMaria and Jane
Borgognon. In May 1998, a Schedule 13-D was filed with the SEC by Alpha
International Corp., a corporation organized under Anguilla, British West
Indies. Such Schedule 13-D disclosed the purchase of 2,200,000 Warrants in
a private transaction at a purchase price of $1.00 per warrant. Pursuant to
verbal conversations with counsel to Alpha International Corp., these
warrants were to be purchased from Jericho Limited, but that the
transaction was not completed and has been terminated. According to the
SEC's records, an amended Schedule 13-D has not been filed as of August 18,
1998. The Schedule 13-D that was filed by Alpha International does not
indicate who beneficially owns this enterprise.
(12) The beneficial owner and sole officer and director of Imafina S.A. is
Hubert Hendrickx.
CERTAIN TRANSACTIONS
Effective July 2, 1996, Tellurian, Inc., a South Carolina
corporation, reincorporated in Delaware under the same name by merging itself
into a wholly owned subsidiary formed for that purpose on January 25, 1996. All
references in Certain Transactions to the "Company" or "Tellurian" include
Tellurian, Inc., a South Carolina corporation, unless the context indicates
otherwise. The following discussion regarding the issuances of shares gives
retroactive effect to such merger.
In March 1995, Tellurian completed a private placement of 600,000
shares of its common stock for a purchase price of $100,000. Investors in the
private placement were Dennis Giunta (200,000 shares), Joseph Defalco (125,000
shares), Matthew Langden (125,000 shares), John Bruno (45,000 shares), a
principal of the Representative, John Cioffoletti (45,000 shares), a former
principal of the Representative, Michael Wills (45,000 shares), a principal of
the Representative and Douglas Spinosa (15,000 shares), a former employee of the
Representative.
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 June 30, 1998, Mr. Powers was owed approximately $714,000, including
principal of $346,736 and accrued interest of $367,018 with interest calculated
at a rate of 10% per annum. Previously, the Company repaid Powers a total of
$221,200. This loan was payable upon demand after November 1, 1997. Effective
June 30, 1998, Mr. Powers converted the loan into 345,000 shares of the
Company's Common Stock and a $100,000 Promissory Note due at the earlier of the
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<PAGE>
completion of this Offering or December 31, 1998 in full payment of all debt
owed to him.
From inception through the completion of the initial public offering in
November 1996, Sophia Swallow, Richard Swallow, Celia Klimas (an aunt of Richard
and Ronald Swallow), Stuart French and Sandra Swallow made various cash loans to
Tellurian and were repaid from the proceeds of the initial public offering
$25,000, $72,600, $28,000, $8,160 and $18,000, respectively, inclusive of
accrued interest. Subsequent to the completion of the public offering in
November 1996, Celia Klimas loaned $150,000 to the Company and the Company
agreed to pay her interest at the rate of 10% per annum. Ronald Swallow and
Richard Swallow subsequently purchased the Note from Celia Klimas, and effective
June 30, 1998, they converted the Note into 100,000 shares of the Company's
Common Stock in full payment of such Note.
Tellurian completed a Private Placement of securities for an aggregate sum
of $750,000 between December 1995 and January 1996, consisting of (i) $192,000
in principal amount of unsecured and subordinated 8% Promissory Notes due
December 27, 1997 and $528,000 in principal amount of unsecured and subordinated
8% Promissory Notes due January 22, 1998, with such Notes providing for
accelerated payment upon the completion of the Offering, and (ii) 3,000,000
Common Stock Purchase warrants sold at a price of $.01 per warrant. 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 repay $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 1998 the Company entered into a consulting contract with
Carousel Consulting which agreement expires on December 31, 1999. 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. Such services consist of Carousel actively searching for
merger/acquisition candidates on behalf of Tellurian and to provide general
consulting to the Company on an "as-needed" basis.
In March 1998, the Company entered into an agreement with Interactive
Media pursuant to which Interactive Media received 100,000 shares of the
Company's Common Stock in payment for outstanding amounts owed for public
relation services provided by Interactive and public relations services to be
provided during the year 1998 totalling $144,000.
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<PAGE>
Reference is made to "Management-Employment Agreements" for a
discussion of certain related party transactions involving the Company and
Ronald Swallow, a former officer and director of the Company.
Between April and July 1998, the Company borrowed $250,000 from Joseph
Radcliffe ($125,000) and Peter Colgan ($125,000), a director of the Company. The
Company is currently negotiating an additional loan of up to $200,000 from them.
Such borrowings are to be repaid from the proceeds of the Offering together with
interest due at the rate of 12% per annum.
Management believes that all transactions with officers, directors and
shareholders of the Company (and affiliated companies) were made on terms no
less favorable to the Company than those available from unaffiliated parties. It
is intended that any future transactions with officers, directors and affiliates
of the Company will be made on terms no less favorable to the Company than those
available from unaffiliated parties.
DESCRIPTION OF SECURITIES
Tellurian's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of 25,000,000 shares of Common Stock,
$.01 par value, and the Board of Directors has approved, subject to stockholder
approval the authorization of 5,000,000 shares of Preferred stock which may be
issued in series by the Board of Directors. The following are brief descriptions
of Tellurian's securities. The rights of the stockholders of Tellurian are
established by Tellurian's Certificate of Incorporation, the Bylaws, and law of
the State of Delaware. The descriptions set forth below are intended as
summaries only and are qualified in their entirety by reference to the
Certificate of Incorporation, the Bylaws, and the relevant Delaware law.
Common Stock
The holders of Common Stock are entitled to one vote per share on
all matters to be voted upon by stockholders. The holders of shares of Common
Stock are entitled to dividends when and as declared by the Board of Directors
from funds legally available therefor, and, upon liquidation, are entitled to
share pro rata in any distribution to stockholders after payments to creditors
and after paying or providing for any liquidation preferences to the Preferred
Stock. There are no conversion or redemption privileges, nor sinking fund
provisions with respect to the Common Stock, and stockholders have no preemptive
rights to acquire shares of Common Stock issued by the Company in the future.
All of the outstanding shares of Common Stock are validly issued, fully paid and
non-assessable.
The Common Stock is traded on the NASDAQ SmallCap Market under the
symbol TLRN.
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<PAGE>
Preferred Stock
The Preferred Stock may be issued in one or more series, to be
determined and to bear such title or designation as may be fixed by resolution
of the Board of Directors prior to the issuance of any shares thereof. Each
series of Preferred Stock will have such voting powers, if any, preferences, and
other rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board of
Directors adopted prior to the issuance of any shares of such series of
Preferred Stock.
The Preferred Shares being offered hereby are the first series of
Preferred Stock designated by the Board of Directors. The Company may not,
without the affirmative vote of the holders of at least a majority of the
outstanding Preferred Shares offered hereby, amend, alter or repeal any of the
provisions of the Certificate of Incorporation or the Certificate of Designation
for the Preferred Shares, or authorize any reclassification of the Preferred
Shares so as to adversely affect the preferences, special rights or privileges
or voting power of the Preferred Shares or authorize or create any class of
stock ranking prior to the Preferred Shares as to dividends or distribution of
assets, or create or issue any shares of any series of the Company's authorized
preferred stock ranking prior to the Preferred Shares as to dividends or
distribution on liquidation. The Board has no present plans to issue any other
series of Preferred Stock. However, purchasers of the Series 1 Preferred Stock
offered hereby should be aware that subject to the foregoing restrictions, the
holders of any series of the Series 1 Preferred Stock which may be issued in the
future could have voting rights, rights to receive dividends or rights to
distribution in liquidation superior to those of holders of the Preferred Shares
or Common Stock, thereby adversely affecting rights of the holders of the
Preferred Shares or Common Stock.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of directors without shareholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed takeover of the
Company, or to make the removal of the Company's management more difficult.
Under certain circumstances, this could have the effect of decreasing the market
price of the Preferred Shares, the publicly held Preferred Warrants, and the
Common Stock. Management of the Company is not aware of any such threatened
transaction to obtain control of the Company.
Series A Cumulative Preferred Stock
\
The Board of Directors intends to file a Certificate of Designation
designating 3,000,000 shares of Preferred Stock as "Series 1 Cumulative
Preferred Stock" (the "Series 1 Preferred Stock" or "Preferred Shares") with the
following rights, preferences and privileges:
Dividends. Each Preferred Share is entitled to cumulative annual dividends
of $.50 payable on April 30 of each year commencing April 30, 1999. The first
dividend payment shall be pro rated for the period from the date of issuance
until December 31, 1998. The
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<PAGE>
first dividend payment shall be pro rated Unpaid dividends will accumulate and
be payable prior to the payment of dividends on the Common Stock. The Company
may, at its option, pay dividends in shares of Series 1 Preferred Stock, in lieu
of cash. Shares used for such purpose will be valued at the average closing
sales price of the Series 1 Preferred Stock on the NASDAQ Stock Market during
the ten trading days ending on the tenth day before the dividend payment date,
subject to certain conditions. For the foreseeable future, the Company expects
to make dividend payments on the Preferred Shares in shares of Series 1
Preferred Stock. Holders of Series 1 Preferred Stock will also participate in
dividends to the same extent as the holders of the Company's Common Stock.
Redemption. Commencing January 1, 2000, the Preferred Shares are
redeemable at the option of the Company, on not less than 30 days' written
notice to registered holders at the redemption price per share specified below
plus accumulated dividends, provided the Company may not redeem the Preferred
Shares unless the closing sales price of the Series 1 Preferred Stock on the
NASDAQ Stock Market equals or exceeds at least $8.00 per share for at least 20
of the 30 consecutive trading days ending within five trading days prior to the
date the redemption notice is mailed. For the year 2000, 2001, 2002, 2003, 2004
and thereafter, the redemption price shall be equal to 140%, 135%, 130%, 125%
and 120%, respectively, of the average closing sales price of the Series 1
Preferred Stock on the NASDAQ Stock Market for at least 20 out of the last 30
consecutive trading days ending within ten business days prior to the date the
redemption notice is mailed.
Voting Rights. Preferred Shares are entitled to one vote per share
voting together with the Common Stock as one class, except as otherwise provided
by the Delaware Corporation Law.
Preference on Liquidation. Preferred Shares will be entitled to a
preference on liquidation equal to the greater of $5.00 per share plus
accumulated unpaid dividends.
No Sinking Fund. The Company is not required to provide for the retirement
or redemption of the Preferred Shares through the operation of a sinking fund.
Preferred Stock Purchase Warrants
Each Preferred Stock Purchase Warrant (the "Preferred Warrant")
entitles the holder to purchase until the close of business on , 2002 one share
of Series 1 Preferred Stock at an exercise price of $6.00. The Preferred
Warrants are subject to redemption by the Company at any time after , 1999 on 30
days notice at $.30 per Preferred Warrant provided that the closing sale price
of the Series 1 Preferred Stock is at least $9.00 per share on not less than 20
days of the 30 trading days ending within 15 days of the date on which the
notice of redemption is mailed. Holders of Preferred Warrants shall have
exercise rights until the close of the business day preceding the date fixed for
redemption.
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<PAGE>
The Preferred Warrants contain provisions that protect the holders
thereof against dilution by adjustment of the exercise price in certain events,
such as stock dividends and distributions, stock splits, recapitalizations,
mergers and consolidations. The Company is not required to issue fractional
shares. The holder of a Preferred Warrant does not possess any rights as a
stockholder of the Company unless he exercises his Preferred Warrant and obtains
the Series 1 Preferred Stock. The Preferred Warrants have been issued in
registered form under a Preferred Warrant Agreement dated as of
, 1998 between the Company and Continental Stock Transfer & Trust Company
as Preferred Warrant Agent. The shares of Series 1 Preferred Stock issuable upon
exercise of a Preferred Warrant, will be fully paid and non-assessable.
A Preferred Warrant may be exercised upon the surrender of a duly
completed Preferred Warrant certificate on or prior to its expiration,
accompanied by cash or certified bank check for the exercise price.
The Preferred Warrants are expected to be traded on the NASDAQ SmallCap
Market under the symbol " ."
Common Stock Purchase Warrants
The Company has outstanding 5,127,500 Common Stock Purchase Warrants
which were issued pursuant to a Warrant Agreement (the "Warrant Agreement")
between Tellurian, and Continental Stock Transfer & Trust Company, as Warrant
Agent (the "Warrant Agent") and are in registered form. For a Common Stock
Purchase Warrant Holder to exercise his warrants, there must be a current
registration statement on file with the Commission and the relevant state
securities commissions. The following summary of the provisions of the Common
Stock Purchase Warrants is qualified in its entirety by reference to the Warrant
Agreement, as amended in December 1997, a copy of which is filed as an exhibit
to the Registration Statement, of which this Prospectus is a part.
Each Common Stock Purchase Warrant is separately transferable and
entitles the registered holder thereof to purchase one share of Common Stock at
$6.00 per share (subject to adjustment as described below) at any time during
the period expiring on November 5, 2001. Unless exercised or extended by the
board of directors, the Common Stock Purchase Warrants will expire on November
5, 2001. A Warrant Holder may exercise his Warrants by surrendering the
certificate evidencing such Warrants to the Warrant Agent, together with the
form of election to purchase on the reverse side of such certificate attached
thereto, properly completed and executed, and the payment of the exercise price
and any transfer tax. If less than all of the Common Stock Purchase Warrants
evidenced by a certificate are exercised, a new certificate will be issued for
the remaining number of Common Stock Purchase Warrants.
The exercise price and the number of shares of Common Stock issuable
upon the exercise of each Common Stock Purchase Warrant are subject to
adjustment in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events.
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Any or all of the Common Stock Purchase Warrants may be redeemed by
Tellurian at a price of $.30 per Warrant, upon the giving of 30 days prior
written notice to the Warrant Holders, and provided that the trading price of
the Common Stock for 20 consecutive trading days ending within 10 days prior to
such notice of redemption delivered by Tellurian to the Warrant Holders has
equaled or exceeded $9.25.
Anti-Takeover Statute
Section 203 of the Delaware General Corporation Law provides that if a
person acquires 15% or more of the stock of a Delaware corporation, he becomes
an "interested stockholder" and may not engage in a "business combination" with
that corporation for a period of three years. The term "business combination"
includes a merger, a sale of assets, or a transfer of stock. The three year
moratorium may be terminated if any of the following conditions are met: (1) the
Board of Directors approved the acquisition of stock or the business combination
before the person became an interested stockholder, (2) the interested
stockholder acquired 85% of the outstanding voting stock in such transaction,
excluding in the determination of outstanding stock is any stock owned by
individuals who are officers and directors of the corporation and any stock
owned by certain employee stock plans, or (3) the business combination is
approved after the person became an interested stockholder by 2/3 of the voting
stock which is not owned by the interested stockholder.
Other Warrants
In connection with the Company's initial public offering, the Company
issued to the Underwriters (and their officers) of such offering a total of
185,000 warrants (the "1996 Underwriters' Stock Warrants") to purchase a like
number of shares of Common Stock of the Company and 185,000 warrants (the "1996
Underwriters' Warrants") to purchase a like number of Common Stock Purchase
Warrants. The 1996 Underwriters' Stock Warrants are exercisable at a price of
$8.25 per share and the 1996 Underwriters' Warrants are exercisable at a price
of $.4125 per Common Stock Purchase Warrant for a period of four years expiring
November 5, 2001. The underlying Common Stock Purchase Warrants are exercisable
at $9.90 per share. The Company has agreed to register (or file a post-effective
amendment with respect to any registration statement registering) the
Underwriters' Stock Warrants and the Underwriters' Warrants and their underlying
securities under the Securities Act at its expense on one occasion, and at the
expense of the holders thereof on another occasion, upon the request of a
majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the 1996 Underwriters' Stock
Warrants and the 1996 Underwriters' Warrants and their underlying securities.
Transfer Agent and Warrant Agent
Continental Stock Transfer & Trust Company, 2 Broadway, 19th floor, New
York, New York 10004, is the Company's transfer agent and warrant agent for the
Company's securities.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock or the perception that
such sales could occur could adversely effect the market price for the Common
Stock. The Company has 4,730,041 shares of Common Stock and 5,127,500 Common
Stock Purchase Warrants outstanding as of the date of this Prospectus. Of these
shares of Common Stock, 2,331,605 shares of Common Stock are freely tradeable in
the public market without restriction under the Securities Act, except for
securities owned by an "affiliate" of the Company (as that term is defined under
the rules and regulations of the Securities Act), which are subject to the
resale limitations of Rule 144 under the Securities Act ("Rule 144"). The
remaining shares of Common Stock outstanding are "restricted securities" as that
term is defined in the Securities Act and have not been registered under the
Securities Act. The holders of 1,000,000 such shares of Common Stock have agreed
with the Representative not to sell or otherwise transfer any of their shares of
Common Stock until November 5, 1998, without the prior written consent of the
Representative. The holders of 1,182,438 shares of the Company's Common Stock
(including 886,699 shares included in the aforementioned lock-up agreement until
November 5, 1998) have agreed with the Representative not to sell or otherwise
transfer any of their shares of Common Stock until at least July 31, 2000,
without the prior written consent of the Representative. At the end of the
aforesaid lock-up periods (or earlier with the consent of the Representative)
these shares will be eligible for sale, subject to the restrictions imposed by
Rule 144. Some of these stockholders may elect to sell some or all of their
shares as soon as they are permitted to do so. Ordinarily, under Rule 144, a
person holding restricted securities for a one year may, every three months
thereafter, sell in ordinary brokerage transactions or in transactions directly
with a market maker, an amount of shares equal to the greater of one percent of
the Company's then-outstanding Common Stock or the average weekly trading volume
in the same securities during the four calendar weeks prior to such sale.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriters named below, for which J. W.
Barclay & Co., Inc. is acting as Representative, (the "Underwriting Agreement",
a copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase, the number of shares of Series 1 Preferred Stock and number of
Preferred Warrants (collectively the "Securities") set forth opposite its name.
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Number of
Underwriter Number of Shares Preferred Warrants
- ----------- ---------------- ------------------
J.W. Barclay & Co., Inc.
TOTAL 1,200,000 1,200,000
========== ==========
The Underwriters are committed, subject to certain conditions
precedent, to purchase all of the Securities offered hereby if any such
Securities are purchased. The Securities are being offered by the Underwriter
subject to prior sale, when, as and if delivered to, and accepted by, the
Underwriters and subject to the approval of certain conditions.
The Representative has advised the Company that the Underwriters
propose to offer the Securities to the public at the offering prices set forth
on the cover page of this Prospectus and that the Underwriters may allow certain
dealers who are members in good standing of the National Association of
Securities Dealers, Inc. ("NASD") concessions of $ per share of Series 1
Preferred Stock and $ per Preferred Warrant. After the initial public
distribution is completed, the offering price and concessions may be changed by
the Representative.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Company's Securities in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the securities originally sold by such syndicate
member are purchased in a syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Securities to be higher than they
would otherwise be in the absence of such transactions. These transactions may
be effected on the NASDAQ System assuming the Company is successful in listing
its Securities on such system. See "Risk Factors."
The Company has granted the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 180,000 shares of
Series 1 Preferred Stock and 180,000 Preferred Warrants at the public offering
prices less the underwriting discounts set forth on the cover page of this
Prospectus. The Underwriters may exercise
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this option solely to cover over-allotments in the sale of the shares of Series
1 Preferred Stock and Preferred Warrants.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 3% of the gross proceeds of the Securities sold in the
offering (including the Over-Allotment Option).
In connection with the Company's Initial Public Offering which was
completed in November 1996 with J. W. Barclay & Co., Inc. as Managing
Underwriter, the Company entered into an agreement with the Representative to
retain it as a financial consultant for a period of two years expiring in
November of 1998. At the closing of the Offering, the Company has agreed to
enter into a one year extension to the financial consulting agreement with the
Representative and to compensate the Representative with a fee payable in full
in advance at the closing of the Offering in an amount equal to 2% of the gross
proceeds of the Offering (including the Over-Allotment Option).
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933.
The Company has agreed to sell to the Representative or its designees,
at a price of $.001 per warrant, a total of 120,000 warrants (the "Underwriters'
Stock Warrants") to purchase a like number of shares of Series 1 Preferred Stock
of the Company and 120,000 warrants (the "Underwriters' Warrants") to purchase a
like number of Preferred Warrants (identical to those sold to the public in the
Offering except that the exercise price of the Preferred Warrants issuable upon
exercise of the Underwriters' Warrants is at $9.90 per share). The Underwriters'
Stock Warrants will be exercisable at a price of $8.25 per share and the
Underwriters' Warrants will be exercisable at a price of $.4125 per Preferred
Warrant for a maximum period of four years commencing one year after the date
hereof, and they will not be transferable for one year after the date hereof
except to Underwriters, selected dealers and officers and partners thereof. Any
profit realized upon any resale of the Underwriters' Stock Warrants or the
Underwriters' Warrants underlying same may be deemed to be additional
underwriter's compensation. The Company has agreed to register (or file a
post-effective amendment with respect to any registration statement registering)
the Underwriters' Stock Warrants and the Underwriters' Warrants and their
underlying securities under the Securities Act at its expense on one occasion,
and at the expense of the holders thereof on another occasion, upon the request
of a majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the Underwriters' Stock
Warrants and the Underwriters' Warrants and their underlying securities.
The Underwriters have informed the Company that they do not expect
sales of the Securities to be made to discretionary accounts to exceed 2% of the
Securities offered hereby.
69
<PAGE>
In connection with the Company's Initial Public Offering, the holders
of 1,000,000 shares of the Company's Common Stock (including, without
limitation, securities held by officers and directors of the Company) entered
into an agreement with the Representative not to sell or otherwise transfer
their securities until November 1998 without the consent of the Representative.
As of the date of this Prospectus, none of the foregoing shares have been sold.
The holders of 1,182,438 shares of the Company's Common Stock (including 886,699
shares included in the aforementioned lock-up agreement until November 5, 1998)
have agreed with the Representative not to sell or otherwise transfer any of
their shares of Common Stock until at least July 31, 2000, without the prior
written consent of the Representative.
In connection with the Company's Initial Public Offering, the
Representative was also granted the right, for a period of five years expiring
in November 2001, to designate one person to attend Board of Directors meetings.
Such person, if designated, would 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 would be required to
reimburse the designee of the Representative for his out-of-pocket expenses
incurred in connection with his attendance at such meetings. As of the date of
this Prospectus, the Representative has not designated any person.
In connection with the Company's Initial Public Offering, the Company
agreed that for a period of three years, it would not issue any Preferred Stock
without the prior written consent of the Representative, which consent has been
obtained for the purposes of the Offering.
John A. Bruno and Michael J. Wills beneficially own 85,000 and 40,000,
respectively, of each of 1996 the Underwriters' Stock Warrants and 1996
Underwriters' Warrants described under "Description of Securities-Other
Warrants."
Pricing of the Offering
The public offering of the Securities have been determined by
negotiations between the Company and the Representative. Among the factors
considered in determining the offering prices were the Company's financial
condition and prospects, the industry in which the Company is engaged, certain
financial and operating information of companies engaged in activities similar
to those of the Company and the general market condition of the securities
markets. Such prices do not necessarily bear any relationship to any established
standard or criteria of value based upon assets, earnings, book value or other
objective measures.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by the law firm of Lester Morse P.C. Members of the
firm, Lester Morse and Steven Morse own options to purchase 75,000 shares of the
Company's Common
70
<PAGE>
Stock which were granted to them for services rendered. See "Executive
Compensation- Stock Option Plan." Henry C. Malon, Esq., New York, New York, has
acted as counsel to the Underwriters in connection with the Offering.
EXPERTS
The Company's financial statements, included in this Prospectus, have
been audited by Miller Ellin & Co., Inc., independent certified public
accountants, to the extent and for the periods set forth in their report (which
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern) appearing elsewhere herein, which are included in reliance upon
the authority of said firm as experts in auditing and accounting.
71
<PAGE>
TELLURIAN, INC. AND 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
<TABLE>
<CAPTION>
<S> <C>
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
============
</TABLE>
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)
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL OTHER STOCK-
COMMON STOCK PAID-IN ACCUMULATED COMPREHEN- HOLDERS
SIVE 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 $ 30,025 $ 6,345,162 $(5,767,777) $ 29,987 $ 637,622
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-7
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
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 - -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
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. (ATellurian@), 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 ACompany@) 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. (ACyberport@) 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, AAccounting 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, AEarnings 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, AReporting 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, AEnvironmental 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> <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:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
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
----------- -----------
$ - $ -
=========== ===========
</TABLE>
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 AAgreement@) with Fightertown Entertainment, Inc.
(AFightertown@), 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 (AROC@) 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.
Net sales of each segment are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1997 1996
----------- -----------
<S> <C> <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 APlan@)
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 (ANew 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,
AAccounting 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> <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
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
ew 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 (ASeries 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:
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
<TABLE>
<CAPTION>
Company,
As Pro Forma
Reported Adjustments Pro Forma
-------------- ------------ -------------
<S> <C> <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>
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . S-2
June 30, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . S-3
Six and Three Months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited)
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . S-4
Six Months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) . . . . . . S-6--S-7
S-1
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
ASSETS ------------- ------------
<S> <C> <C>
(Unaudited) (a)
CURRENT ASSETS:
Cash $ 6,296 $ 187,189
Marketable Securities - 0 - 108,912
Accounts Receivable 3,581 9,029
Inventories 575,448 662,364
Prepaid Consulting Fees 274,331 62,187
, Prepaid Expenses and Other Current Assets 9,854 23,206
----------- -----------
Total Current Assets 869,510 1,052,887
----------- -----------
PROPERTY AND EQUIPMENT- at cost 2,553,556 2,688,346
less accumulated depreciation -- --
OTHER ASSETS:
Security Deposits 52,229 70,070
Prepaid Consulting Fees 73,905 0
Deferred Costs 2,275 92,099
----------- -----------
Total Other Assets 128,409 162,169
----------- -----------
$ 3,551,475 $ 3,903,402
=========== ===========
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 573,859 $ 1,953,481
Current Maturities of Long-term debt 34,953 34,953
Payroll Payable 117,514 0
Payroll Taxes Payable 18,260 0
Notes Payable 0 100,000
Notes Payable- other 187,500 200,000
Notes Payable--Related Parties 200,000 496,736
Interest Payable--Related Parties 0 354,980
----------- -----------
Total Current Liabilities 1,132,086 3,140,150
----------- -----------
LONG-TERM DEBT - net of current maturities 116,912 125,630
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock--$.01 par value
Authorized -25,000,000 and 10,000,000 shares, respectively
Issued and Outstanding - 4,730,041 and 3,025,000 shares, respectively 47,300 30,250
Additional Paid-in Capital 9,307,795 6,345,162
Accumulated Deficit (7,131,391) (5,767,777)
Other Comprehensive Income 78,773 29,987
----------- -----------
Total Stockholders' Equity $ 2,302,477 $ 637,622
----------- -----------
$ 3,551,475 $ 3,903,402
=========== ===========
</TABLE>
(a) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that time. The accompanying notes are an integral part
of the financial statements.
Page S-2
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 154,982 $ 299,616 $ 120,074 $ 218,331
COST OF GOODS SOLD 380,950 162,080 263,020 98,418
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (225,968) 137,536 (142,946) 119,913
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and Development 380,811 397,843 170,822 193,756
Selling 156,651 161,157 55,381 45,901
General and Administrative 555,645 661,210 212,519 288,373
----------- ----------- ----------- -----------
1,093,107 1,220,210 438,722 528,030
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,319,075) (1,082,674) (581,668) (408,117)
----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSES:
Other Income 1,080 50,917 (819) 820
Loss on Sale of Fixed Asset (14,571) 0 0 0
Interest Expense (5,175) (3,694) (1,427) (3,694)
Interest Expense--Related Parties (25,873) (24,598) (12,359) (12,298)
----------- ----------- ----------- -----------
(44,539) 22,625 (14,605) (15,172)
----------- ----------- ----------- -----------
NET LOSS $(1,363,604) ($1,060,049) (596,273) (423,289)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (0.38) $ (0.35) $ (.15) $ (.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,577,824 3,025,000 3,959,763 3,025,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page S-3
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1997
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,363,604) $(1,060,049)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 157,915 28,986
Accrued Interest on Marketable Securities 0 0
Loss on Sale of Fixed Asset 14,571 0
Changes in Assets and Liabilities
Accounts Receivable 5,448 (234,899)
Inventories 86,916 (91,488)
Prepaid Expenses and Other Current Assets 13,352 (125,099)
Deferred Costs 89,916 50,000
Security Deposits 17,841 (184,990)
Prepaid Consulting Fees 93,951 (38,312)
Accounts Payable and Accrued Expenses (40,539) 965,755
Payroll Payable 117,516 (98,399)
Payroll Taxes Payable 18,260 (28,003)
Consulting Fees Payable 0 (21,594)
Interest Payable--Related Parties 25,788 17,099
Deferred Revenue 0 (24,440)
----------- -----------
NET CASH PROVIDED BY( USED IN) OPERATING ACTIVITIES (762,758) (768,809)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Fixed Assets 18,000 0
Purchases of Property and Equipment (55,696) (2,485,240)
Sale of Marketable Securities 108,912 1,975,386
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 71,216 (509,854)
------------ -----------
NET CASH FROM FINANCING ACTIVITIES:
Repayments of notes payable--other (300,000) 0
Repayment of Long-term Debt (8,718) 0
Proceeds from Issuance of Stock 513,187 0
Proceeds of notes payable 187,500 90,000
Payments of deferred offering costs (19,930) 0
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 461,863 90,000
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES 48,786 0
----------- -----------
</TABLE>
Page S-4
<PAGE>
<TABLE>
<S> <C> <C>
NET CHANGE IN CASH (180,893) (1,188,663)
----------- -----------
CASH-- Beginning 187,189 1,761,186
----------- -----------
CASH-- Ending $ 6,296 $ 572,523
========= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 5,175 $ 11,193
Cash Paid for Income Taxes $ 200 $ 150
SCHEDULE OF NON-CASH ACTIVITIES:
Reduction of Trade Payables through issuance of common
stock $699,056
Reduction of Trade Payables through issuance of subsidiary
Series B special shares $640,027
Issuance of Common Stock for Consulting Fees $380,000
Conversion of C. Powers note an accrued interest for stock $613,754
Purchase of Property and Equipment through issuance
of Note Payable $ 72,464
</TABLE>
The accompanying notes are an integral part of the financial
statements.
Page S-5
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)
NOTE 1--Presentation Basis
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1997 which were included in its Form 10-K filing dated April 15,
1998. Such statements should be read in conjunction with the data herein.
NOTE 2--Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at June 30, 1998 and the
consolidated statements of operations and cash flows for the three and six
months ended June 30, 1998 and 1997 are unaudited but include all adjustments
which, in the opinion of management, are necessary for the fair presentation of
the Company's financial position and results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for a full fiscal year.
NOTE 3--Minority Interest in Subsidiaries
In March 1998, Cyberport and certain of its vendors agreed to
restructure approximately $1,349,000 of accounts payable as follows:
1. The vendors transferred Canadian $1,000,000 of payables to Cyberport's
landlord. The landlord was given the right to convert the payables into
restricted shares of the Company's common stock. In March 1998, the
landlord converted the payables into 350,000 shares of common stock.
2. Cyberport issued 915,559 Series B Special Shares at Canadian $1.00 per
share for balance of the monies owed. At June 30, 1998, the value of the
shares issued by Cyberport is shown as a minority interest on the Company's
consolidated balance sheet.
In March 1997 the Company formed a subsidiary, Cyberport Niagara, Inc.,
in the Province of Ontario, Canada, in which the Company holds an 87.5 percent
interest In the fourth quarter of 1997, the Company acquired the balance of the
interest in Cyberport.
On March 24,1997 the Company formed a subsidiary, Cyberport
International, Inc. ("CII") in the state of Delaware in which the Company held a
96 percent interest. In the fourth quarter of 1997, the Company acquired the
balance of the interest in CII.
Page S-6
<PAGE>
NOTE 4---Stock Options
In June of 1997 the Company authorized stock options to two
individuals, Michael Hurd and David Turner, President and General Manager of
Cyberport Niagara, Inc, respectively. These options allow Mr. Turner to purchase
500 shares of Cyberport stock for $1.00 (Canadian) per share and allow Mr. Hurd
to purchase 2,000 shares of Cyberport stock at $1.00 (Canadian) per share. Mr.
Turners options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options. The
remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares on
July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors or
in the employ of Tellurian on those dates. The options expire on June 30, 2007.
No options have been exercised as at June 30, 1998
NOTE 5--Translation of Foreign Currency
The foreign currency financial statements of subsidiaries operating outside the
United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities at current exchange
rates; and stockholders equity at historical rates. Translation adjustments were
accumulated and have been included as a separate component of equity at June 30,
1998.
NOTE 6--Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ----------
(Unaudited)
<S> <C> <C>
Raw materials $234,758 $221,575
Work-in-process 106,800 206,899
Finished Goods 233,890 233,890
-------- --------
$575,448 $662,364
======== ========
</TABLE>
NOTE 7--Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included as their effect would be anti-dilutive.
Page S-6
<PAGE>
<TABLE>
<S> <C>
No underwriter, dealer, salesman or other person has been authorized to 1,200,000 Shares of
give any information or to make any representation, other than those contained Series 1 Preferred Stock and 1,200,000
in this Prospectus, in connection with the Offering, and, if given or made, such Preferred Stock Purchase Warrants
information or representation must not be relied upon as having been authorized
by the Company. The delivery of this Prospectus at any time does not imply that
there has not been any change in the information set forth herein or in the
affairs of the Company since the date hereof. This Prospectus does not TELLURIAN, INC
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered hereby, or an offer to sell or solicitation of
an offer to buy such securities in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom such offer or
solicitation would be unlawful.
TABLE OF CONTENTS PROSPECTUS
Page
Additional Information.......................................................
Exchange Ratio...............................................................
Glossary.....................................................................
Prospectus Summary...........................................................
Summary Financial Information
Risk Factors.................................................................
Use of Proceeds
Dividend Policy..............................................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operation...............................................................
Market Information
Capitalization
Business..................................................................... J.W. BARKLAY & CO., INC.
Management...................................................................
Executive Compensation
Security Ownership of Management
and Others.................................................................
Certain Transactions
Description of Securities....................................................
Shares Eligible for Future Sale.............................................. ___________, 1998
Underwriting.................................................................
Legal Matters................................................................
Experts......................................................................
Index to Financial Statements................................................
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Tellurian's Certificate of Incorporation contains a provision which, in
substance, eliminates the personal liability of the directors of Tellurian and
its stockholders for monetary damages for breaches of their fiduciary duties as
directors to the fullest extent permitted by Delaware law. By virtue of this
provision, under current Delaware law a director of Tellurian will not be
personally liable for monetary damages for breach of his fiduciary duty, except
for liability for (a) breach of his duty of loyalty to Tellurian or to its
stockholders, (b) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) dividends or stock
repurchases or redemptions that are unlawful under Delaware laws and (d) any
transaction from which he receives an improper personal benefit. This provision
pertains only to breaches of duty by directors as directors and not in any other
corporate capacity, such as officers, and limits liability only for breaches of
fiduciary duties under Delaware corporate law and not for violations of other
laws such as the federal securities laws. As a result of the inclusion of such
provision, stockholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. The inclusion of this provision in Tellurian's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
Management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
Tellurian and its stockholders.
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature
to procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, in a proceeding not by or in
the right of the corporation, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such suit or
proceeding, if he acted in good faith and in a manner believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reason to believe his conduct was
unlawful. Delaware law further provides that a corporation will not indemnify
any person against expenses incurred in connection with an action by or in the
right of the corporation if such person shall have been adjudged to be liable
for negligence or misconduct in the
II-1
<PAGE>
performance of his duty to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for the expenses
which such court shall deem proper.
The indemnification and advancement of expenses provided by, or granted
pursuant to Delaware Corporation Law is not be deemed exclusive of any other
rights to which those seeking indemnification or advance of expenses may be
entitled under any bylaw, agreement, vote of stockholders of disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Article IX of Tellurian's By-Laws provides that the officers and
directors of Tellurian shall be entitled to indemnification to the maximum
extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission"), such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment of the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
Securities and Exchange Commission
Filing Fee $ 5,237.06
NASDAQ Filing Fee 15,000.00 *
NASD Filing Fee 2,275.27 *
Legal Fees 120,000.00 *
Accounting Fees 30,000.00 *
Blue Sky Fees and Disbursements 60,000.00 *
Printing 135,000.00 *
Miscellaneous 87,487.67 *
--------------
Total $ 455,000.00
* Estimated
Item 26. Recent Sales of Unregistered Securities
(i) On December 27, 1995, the Issuer received $200,000 from
the sale of promissory notes in the principal amount of $192,000 and 800,000
warrants from Imafina S.A. On January 22, 1996, the Issuer received $550,000
from the sale of promissory notes in the principal amount of $528,000 and
2,200,000 warrants from Jericho Limited. Exemption is claimed on such securities
since the transactions did not involve a public offering under Section 4(2) of
the Act. J.W. Barclay & Co., Inc. acted as Placement Agent in connection with
this Offering and as compensation for its services as placement agent, it 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. Each of the
recipients agreed to take the securities for investment and without a view to
the distribution or resale thereof and to have an appropriate restrictive legend
placed on their securities. Further, these investors agreed to lock-up their
Warrants and not resell same until November 8, 1997. Also, the Company did not
engage in general advertising or general solicitation with respect to the
aforementioned transactions; the investors who acquired securities were provided
with all information requested by them and were afforded continuing access to
information and such investors had such knowledge and experience in financial
and business matters that they were capable of evaluation of the merits and
risks of such investment and were able to bear the economic risk thereof.
(ii) On June 27, 1996, the Issuer received $175,000 from the
sale of promissory notes in the principal amount of $175,000. $150,000 of the
notes are not convertible and $25,000 of the notes are convertible at $1.00 per
share into 25,000 shares of the Issuer's Common Stock automatically upon the
completion of the Issuer's initial
II-3
<PAGE>
public offering. Of such notes, Andrew F. Nicoletta, Karen Bulavimetz and Alec
McDonald paid $70,000, $70,000 and $35,000, respectively. The Company issued to
each of Andrew F. Nicoletta and Karen Bulavimetz non-convertible notes in the
principal amount of $60,000 and convertible notes in the principal amount of
$10,000. The Company also issued to Alec McDonald a non-convertible note in the
principal amount of $30,000 and a convertible note in the principal amount of
$5,000. Exemption is claimed under Section 4(6) Regulation 505 and /or 506 of
the Act inasmuch as all sales were made to accredited investors, there was no
general advertising or public solicitation in connection with the transaction
and the Company filed a Form D with the Commission on July 1, 1996. Exemption is
claimed on such securities since the transactions did not involve a public
offering under Section 4(2) of the Act. J.W. Barclay & Co., Inc. acted as
Placement Agent in connection with this Offering and as compensation for its
services as placement agent, it was paid a commission of $26,250. Each of the
recipients agreed to take the securities for investment and without a view to
the distribution or resale thereof and to have an appropriate restrictive legend
placed on their securities. Further, these investors agreed to lock-up their
shares and not resell same until May 5, 1997. Also, the Company did not engage
in general advertising or general solicitation with respect to the
aforementioned transactions; the investors who acquired securities were provided
with all information requested by them and were afforded continuing access to
information and such investors had such knowledge and experience in financial
and business matters that they were capable of evaluation of the merits and
risks of such investment and were able to bear the economic risk thereof.
(iii) In March 1998, the Company granted non-qualified stock
options to purchase 610,000 shares of its Common Stock at an exercise price of
$2.625 per share over a term of ten years as follows: Ronald Shallow (73,000),
Richard Shallow (27,000), David Turner (25,000), Mat Adams (10,000), Michael
Hurd (200,000), Stuart French (200,000), Steven Morse (37,500) and Lester Morse
(37,500). On July 20, 1998, these options were all terminated. On the same date,
the Board of Directors re-granted non-statutory stock options to purchase
510,000 shares to the following persons: Michael Hurd (200,000 shares), Stuart
French (200,000 shares), Steven Morse (37,500 shares), Lester Morse (37,500
shares), David Turner (25,000 shares) and Mat Adams (10,000 shares). These
options are non-qualified, ten-year options and are immediately exercisable at
$2.00 per share. Exemption is claimed on such securities since the transactions
did not involve a public offering under Section 4(2) of the Act. Further, no
underwriter was involved in such sales, there were no underwriting discounts or
commissions and each of the recipients agreed to take the securities for
investment and without a view to distribution or resale thereof and to have an
appropriate restrictive legend placed on their securities. Also, the Company did
not engage in general advertising or general solicitation with respect to the
aforementioned transactions; the investors who acquired securities were provided
with all information requested by them and were afforded continuing access to
information and such investors had such knowledge and experience in financial
and business matters that they were capable of evaluation of the merits and
risks of such investment and were able to bear the economic risk thereof. The
Company intends to
II-4
<PAGE>
register the Stock Option Plan under which the aforementioned options were
granted on Form S-8 Registration Statement.
(iv) On March 15, 1995, Tellurian, Inc. (a South Carolina
corporation) declared a 98.52216749-for-1 stock split.
(v) On July 2, 1996, Tellurian, Inc. (a South Carolina
corporation) reincorporated in the State of Delaware through a merger into and
with Tellurian, Inc. (a Delaware corporation) with the Delaware corporation as
the surviving corporation. As a result of the merger, the Company issued 430,049
shares to Charles Powers, 297,908 shares to Ronald Swallow, 109,481 shares to
Richard Swallow, 9,852 shares to Sergei Doroshov, 16,748 shares to Albert Donald
Wangerin, 49,261 shares to Stuart French, 49,261 shares to Ching-yuan Tung,
9,852 shares to Hitesh Amin, 9,852 shares to Lawson Nichols, 4,926 shares to
Jerry Plotczyk, 4,926 shares to Karyssa Plotczyk, 4,926 shares to Richard
Mathiesen, 2,958 shares to Mat Adams, 45,000 shares to John A. Bruno, 15,000
shares to Douglas Spinosa, 200,000 shares to Dennis Giunta, 45,000 shares to
Michael Wills, 125,000 shares to Joseph DeFalco, 45,000 shares to John C.
Cioffoletti and 125,000 shares to Matthew Langdon.
The transactions described in sub-paragraphs (iv) and (v)
above are not considered sales within the meaning of Rule 145 of the Securities
Act of 1933, as amended.
(vi) In March 1998 the Company entered into a consulting
contract with Carousel Consulting which agreement expires on December 31, 1999.
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. Such services consist of Carousel actively searching for
merger/acquisition candidates on behalf of Tellurian and to provide general
consulting to the Company on an "as-needed" basis.
In March 1998, the Company reached an agreement with
Interactive Media under which Interactive Media agreed to accept 100,000 shares
of the Company's common stock in return for outstanding amounts owed for public
relation services provided by Interactive and for payment on public relations
services to be provided during the year 1998 totalling $146,000.
In March 1998, 1174757 Ontario, Inc., the Company's Canadian
landlord, agreed to convert $694,444 of indebtedness into 350,000 shares of the
Company's Common Stock and options to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $1.75 per share between April 1, 1998 and
September 30, 1998. In connection with this transaction, 13,158 shares of the
Company's Common Stock were issued to Newman Bros. Limited to defray their costs
as project general manager.
II-5
<PAGE>
Effective June 30, 1998, the Company reached an agreement with
the holders of the Cyberport Niagara Preferred Stock which resulted in
conversion of that preferred stock into 325,278 shares of Tellurian restricted
Common Stock and $100,000 (US dollars) plus $21,500 legal fees payable on or
before September 15, 1998. The completion of this transaction resulted in the
elimination of the minority interest of $640,027 previously shown on the Company
balance sheet.
Effective June 30, 1998, the Company has an agreement with Mr.
Charles Powers, holder of a demand note which, together with accrued interest,
represented $713,754 of debt. By the terms of this agreement, Mr. Powers
received 345,000 shares of restricted Tellurian Common Stock and a promissory
note in the amount of $100,000 (payable on or before December 31, 1998) in
return for the conversion of the aforesaid note and accrued interest.
Effective June 30, 1998, the Company has an agreement with
Ronald Swallow and Richard Swallow, the holders of a note previously issued to
Celia Klimas, representing $163,750 which resulted in the conversion of that
note and accrued interest into 100,000 shares of restricted Tellurian Common
Stock.
Exemption is claimed on such securities in the six preceding
paragraphs since the transactions did not involve a public offering under
Section 4(2) of the Act. Further, no underwriter was involved in such sales,
there were no underwriting discounts or commissions and each of the recipients
agreed to take the securities for investment and without a view to distribution
or resale thereof and to have an appropriate restrictive legend placed on their
securities. Also, the Company did not engage in general advertising or general
solicitation with respect to the aforementioned transactions; the investors who
acquired securities were provided with all information requested by them and
were afforded continuing access to information and such investors had such
knowledge and experience in financial and business matters that they were
capable of evaluation of the merits and risks of such investment and were able
to bear the economic risk thereof.
Item 27. Exhibits
(a) Exhibits. The following exhibits have been previously filed unless
otherwise noted. All previously filed exhibits are incorporated by reference
unless otherwise indicated to Form SB-2 Registration Statement, File # 333-9741
and File # 333-36871.
Exhibit No. Description
1.0 Underwriting Agreement, Agreement Among
Underwriters and Selected Dealer Agreement
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<PAGE>
3.0 Articles of Incorporation of Registrant
3.1 By-Laws of Registrant
3.2 Amendment to Articles of Incorporation
3.3 Further Amendment to Articles of Incorporation **
4.0 Specimen of Preferred Stock **
4.1 Form of Warrant Agreement including Form of Warrant
4.2 Form of Amendment to Warrant Agreement
4.3 Form of Preferred Stock Warrant Agreement **
4.4 Specimen fo Preferred Warrant **
4.5 Form of Underwriter's Preferred Stock Warrants**
4.6 Form of Underwriter's Preferred Warrants**
5.0 Opinion re: legality **
10.1 Employment Agreement dated November 8, 1996 to be
entered into between Dr. Ronald Swallow and the
Registrant (1)
10.2 Employment Agreement dated November 8, 1996
between Stuart French and the Registrant (1)
10.3 Lease for Facilities in Mahwah, New Jersey (1)
10.4 Transfer Technology Agreement dated January 1, 1996
between Voyager Graphics, Inc. and the Registrant
10.5 Agreement dated November 14, 1994 between TTY
Graphics, Inc., Voyager Simulation Ltd. and the
Registrant.
10.6 Letter Agreement dated May 26, 1995 between the
Registrant and TTY Graphics, Inc. and amendment there
to dated July 17, 1996.
II-7
<PAGE>
10.7 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.
10.8 Assignment Agreement dated as of November 5, 1991
between TTY Graphics, Inc. and the Registrant
10.9 Letter Agreement dated August 1, 1996 and August 2,
1995 between Greg Gustin and the Registrant
10.10 Agreement dated July 23, 1996 between TTY Graphics,
Inc. and the Registrant
10.11 1998 Incentive and Non-Statutory Stock Option Plan
and amendments thereto
10.12 Letter Agreement between the Registrant, Voyager
Graphics Inc., Voyager Simulation Company Ltd. and
TTY Graphics Inc.
10.13 Consulting Agreement with J.W. Barclay& Co., Inc.
10.14 Amendment to Consulting Agreement with J.W. Barclay
& Co., Inc.**
10.15 Merger and Acquisition Agreement with J.W. Barclay &
Co., Inc.
10.16 Purchase Agreement Option with 1174757 Ontario Inc.
formerly Niacan Ltd., (2)
10.17 Intellectual Property Agreement with Eye Wonder (2)
10.18 Lease with 1174757 Ontario Inc. formerly Niacam Ltd.,
(3)
10.19 Mutual Release and Settlement Agreement between
Fightertown Entertainment, Inc. and the Registrant
10.20 Agreement between Robert Winterford, Eye Wonder
Studios, Inc., the Registrant, Cyberport Niagara,
Inc. and Cyberport International, Inc. dated
October 28, 1997.
10.21 Agreement dated March 25, 1998 by and among
Cyberport Niagra, Inc., Tellurian Inc. and
1174757 Ontario, Inc.
II-8
<PAGE>
10.22 Agreement dated March 26, 1998 by and among Cyberport
Tellurian and Cyberport creditors
10.23 Agreement between Charles H. Power and the Registrant
(5)
10.24 Agreement by and among Richard Swallow, Ronald Swallow
and the Registrant (5)
10.25 Agreement by and among the Registrant, Phoenix Wood
Products Corporation and Newman Bros. Limited (5)
11.0 Earnings per share - See notes to financial statements
21.0 Subsidiaries of Registrant (4)
23.0 Consent of Miller, Ellin & Co.*
27.0 Selected Financial Data (5)
---------------
* Filed herewith.
** To be filed by amendment.
(1) Incorporated by reference to the Registrant's Form 10-KSB
for its fiscal year ended December 31, 1996.
(2) Incorporated by reference to the Registrant's Form 10-QSB
for its quarter ended March 31, 1997.
(3) Incorporated by reference to the Registrant's Form 10-QSB
for its quarter ended June 30, 1997.
(4) Cyberport Niagra, Inc., a 100% owned subsidiary of
Tellurian, incorporated in Ontario, Canada, and does
business under the name Cyberport.
(5) Incorporated by reference into the Registrant's Form 10-KSB
for its fiscal year ended December 31, 1997 and Form 10-QSB
for its quarter ended June 30, 1998.
Item 28. Undertakings
The undersigned Registrant hereby further undertakes:
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<PAGE>
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii)Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment of the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company will provide to the Representative of the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Representative to
permit prompt delivery to each purchaser.
For determining any liability under the Securities Act, the Registrant
will treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant
II-10
<PAGE>
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this Registration Statement as of the time the Commission declared it effective.
For determining any liability under the Securities Act, the Registrant
will treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
The Registrant hereby undertakes to file a sticker amendment to this
Registration Statement in the event that between 5% and 10% of the shares held
by current stockholders are freed from lock-up agreements with the Underwriter
and a post-effective amendment if over 10% is waived.
II-11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Mahwah,
State of New Jersey on the 20th day of August, 1998.
TELLURIAN, INC.
By: /s/ Stuart French
--------------------------
Stuart French, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signatures Titles Date
<S> <C> <C>
/s/ Stuart French President, Chief Executive
- ----------------- Officer and a Director
Stuart French of the Company August 20, 1998
/s/ Michael Hurd Vice President of
- ----------------- Administration and
Michael Hurd Finance and Chief
Financial and Accounting
Officer August 20, 1998
/s/ Peter Colgan Director August 20, 1998
- -------------------
Peter Colgan
/s/ James G. H. Lin Director August 20, 1998
- -----------------------
James G. H. Lin
</TABLE>
II-12
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Amendment #1 Form SB-2 of
Tellurian, Inc. of our report dated March 10, 1998, except for Notes 18 and 19
which is March 31, 1998, relating to the financial statements of the Company for
the years ended December 31, 1997 and 1996.
We also consent to the reference to us under the heading "Experts."
/s/ MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
August 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,296
<SECURITIES> 0
<RECEIVABLES> 3,581
<ALLOWANCES> 0
<INVENTORY> 575,448
<CURRENT-ASSETS> 869,510
<PP&E> 2,927,579
<DEPRECIATION> 374,023
<TOTAL-ASSETS> 3,551,475
<CURRENT-LIABILITIES> 1,132,086
<BONDS> 0
<COMMON> 47,300
0
0
<OTHER-SE> 2,255,177
<TOTAL-LIABILITY-AND-EQUITY> 3,551,475
<SALES> 154,982
<TOTAL-REVENUES> 154,982
<CGS> 380,950
<TOTAL-COSTS> 1,093,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,048
<INCOME-PRETAX> (1,363,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,363,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,363,604)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
Securities and Exchange Commission
Page 1
Lester Morse P.C.
111 Great Neck Road
Great Neck, NY 11021
(516) 487-1446
Fax No. (516) 487-1452
August 20, 1998
Securities & Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: Tellurian, Inc.
File No. 333-56793
Form SB-2 Registration Statement
Gentlemen:
Enclosed please find Amendment No. 1 to the above captioned
corporation's Form SB-2 Registration Statement. Under separate cover letter, two
marked copies of the Registration Statement will be sent to the examiners as
courtesy copies.
This letter is in response to the staff's letter of comments dated July
17, 1998. All page numbers refer to pages in the marked courtesy copies rather
than the Edgar page numbers for ease of reference. The paragraph numbers below
correspond to the paragraph numbers in the staff's letter or comments.
1. Comment complied with on the cover page of the Prospectus.
2. Cyberport Niagra, Inc. which owns the Cyberport entertainment facility
is the only active subsidiary of Tellurian. This subsidiary is
disclosed in the Prospectus Summary on page 7.
3. The helmet has been ready for sale subject to receipt of customer
deposits. This is disclosed on page 7.
4&5. Comments complied with on pages 7 and 8.
6. Comment complied with on page 10.
7. Comment complied with on pages 12 and 13.
<PAGE>
Securities and Exchange Commission
Page 2
8. Comment complied with on page 13.
9. Comment complied with on page 12.
10. Comment complied with on page 23.
11. The purchase option on the Cyberport facility has expired and the "Use
of Proceeds" has been revised. Please note Exhibit 10.16 on Page II-8.
12. Comment complied with on page 29.
13. Comment complied with on page 18-19.
14. Comments complied with on page 34.
15. Due to preferred stock conversion effective June 30, 1998 described in
the MD&A on page 31, the minority interest has been eliminated.
16. This information has been disclosed on page 44.
17. The Company is in compliance with its agreement with Fightertown and
intends to make the payment due August 15, 1998 within the next couple
of weeks unless an extension is granted by Fightertown. Please note
that the Company is not in default if such payment is made within 15
days of receiving a notice that the payment has not been made and
Tellurian will be requesting an approximate one month extension.
Comment complied with on page 45.
18. John Bruno, a principal of J.W. Barclay & Co., Inc., the
representative of this offering, has never been a founder, officer or
director or otherwise related to Tellurian except as a security
holder. We have been advised by Mr. Bruno that shortly after this
filing, he intends to file any missing schedule 13-D/G's.
19. Imafina and 1174757 have been advised by our office in writing of
their obligations to file Schedule 13-D/G. While these are principal
security holders of Tellurian, we cannot force them to comply with the
Securities Exchange Act of 1934, as amended. None of the principals of
Imafina or 1174757 are in any way an officer, director, founder or
otherwise related to the Issuer and its officers and/or directors.
20. The table and footnotes have been revised on pages 58 - 60.
21. Comment complied with on page 68.
<PAGE>
Securities and Exchange Commission
Page 3
22. Comment complied with on page II-11.
23. The acquisitions covered by the letters of intent referred to in the
original filing have been terminated. While the Company has been
searching for acquisitions of complimentary products and services, the
Company has no oral or written understandings, arrangements or
agreements to consummate any transaction as of the filing date of this
Amendment 1 and none will be entered into between now and the
completion of the Offering.
24. Comment complied with on pages 24-34.
25. Management believes that all stock issuances have been at the
Company's then current fair market value for its Common Stock after
giving effect in some cases to exchange rate changes between the
Canadian dollar and US dollar and fluctuations in the market price of
the Company's Common Stock during the period of negotiations.
26. Training would be an extra charge and repairs and maintenance after
the one year warranty is extra. Sales for the past 12 months have been
minimal so any maintenance has been charged to current operations.
27. Comment complied with. See F-2.
28. At the time of the preparation and issuance of Company's financial
statements, the Company fully intended to hold the marketable
securities until their maturity. Subsequent to the issuance of the
report, the Company had the opportunity to acquire the controlling
interest in the Cyberport development (in which it originally was a
minority partner), and the Board of Directors chose to accept that
opportunity. As a result, the Company became the primary developer of
that facility, a change which dramatically altered its cash flow
projections and needs. Accordingly, the securities were sold prior to
maturity as planned.
29. Comment complied with with 6/30/98 financial statements.
30. Comment complied with. See Exhibit 23.
Very truly yours,
LESTER MORSE P.C.
Steven Morse
SM:ag
Enclosures
