As filed with the Securities and Exchange Commission on June __, 1998.
File No. 333-
-------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
TELLURIAN, INC.
----------------------------------------------
(Name of small business issuer in its charter)
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
Tellurian, Inc.
300 K Route 17 South
Mahwah, N.J. 07430
(201) 529-0939
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
Stuart French
Tellurian, Inc.
300 K Route 17 South
Mahwah, N.J. 07458
(201) 529-0939
- --------------------------------------------------------------------------------
(Address and (Name, address and telephone number of agent for service)
Copies of all communications should be sent to:
Steven Morse, Esq. 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>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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 Convertible 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 Convertible
Preferred Stock (3) 1,380,000 $.25 345,000 101.78
Series 1 Convertible 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 Convertible
Preferred Stock 120,000 .001 120 .03
Representative's Warrants to
purchase Preferred Stock Warrants 120,000 .001 120 .03
Series 1 Convertible 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
================================== ========= ========= ========== ========
</TABLE>
(1) Total estimated solely for the purpose of determining the registration fee.
(2) Includes 180,000 shares of Series 1 Convertible 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.
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 Security Ownership of Certain
Beneficial Owners and Management 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 Not Applicable
Accountant n Accounting and Financial
Disclosure
<PAGE>
Subject to Completion June __, 1998
TELLURIAN, INC.
1,200,000 SHARES OF SERIES 1 CONVERTIBLE 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 Convertible 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. Each
Preferred Share is convertible into _________ shares of Common stock commencing
_________, 1999 and pays a cumulative annual dividend of $0.50 per share on
September 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. The Company's Common
Stock and Common Stock Purchase Warrants trade 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
==================== ====================== ========================== ==================================
(footnotes appear on next page)
</TABLE>
The Securities included in the underwritten offering 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 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 __________,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) a Warrant, purchasable at a nominal price, 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 120,000 Warrants to purchase Series 1 Preferred Stock at an
initial exercise price of $.4125 per Warrant (the "Underwriters'
Warrants"). The Underwriters' Stock Warrants and the Underwriters' Warrants
are collectively referred to as the "Underwriters' Securities". 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-______ (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-______. 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.
4
<PAGE>
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 $.70 U.S.
GLOSSARY
Database: The source data for the image generator. A visual database is
comprised of a library of objects formed from 3-D polygons. Once a field of view
and viewing angle is established, the image generator constructs the picture
using appropriate elements of the database.
EAGLE: The Company's virtual reality image generator. The EAGLE is capable of
rendering 30,000 polygons every 1/30 of a second. The EAGLE is considered a real
time image generator.
Field Sequential Video: A method of producing color images from a black and
white picture tube. The technique is to present a red, green, or blue image
field on the tube; while presenting a red, green, or blue filter at the same
time. To the viewer's eye, the colors are integrated together and presented to
the brain as complete and valid color images. Field sequential video is employed
when color CRT's (cathode ray tubes) are not available in miniature sizes.
Full Immersion: A term used to depict a complete isolation into the computer's
world of virtual reality. The term is most frequently used when describing a
virtual reality helmet when only the computers image is available to the user.
Head Tracker: A means of depicting head movement when wearing a virtual reality
helmet. With a head tracker, the view presented to the eyes of the viewer is
accurate to the world created by the computer. In most applications the head
tracker is either a magnetic sensing device or a mechanical link to the helmet.
IAAPA: The International Association of Amusement Parks and Attractions, an
industry association.
Location Based Entertainment: LBE's are venues for entertainment where the
guests can experience a wide selection of games, sports and rides all under one
roof. The LBE is usually located in large population centers and caters to
repeat customers (returning several times per month).
Real Time: A classification of speed when dealing with computer generated
images. A real time computer permits a smooth transition of motion within the
visual display. Flicker, or "stepping" of the image results from an update
slower than a new frame every 1/30th of a second.
5
<PAGE>
Resolution: One method of measuring picture quality. The higher the resolution,
the higher the detail of the image. A typical TV image has 525 lines of data
presented on the screen. A standard computer screen has 968 lines, and thus a
more detailed image. The EAGLE is capable of 2,000 lines of data.
Resolution Formats: Common resolution formats range from low quality in the case
of 250 line LED's ("Light Emitting Diode") to mid range of video monitors at 680
lines to high resolution formats at 1,200 lines. The Company's EAGLE is capable
of 2,000 lines.
Tourist Entertainment Centers: Like the LBE, the TEC is a destination venue for
games, sports, and virtual reality experiences. The TEC however caters to an
infrequent guest and therefore must be located in a high traffic area.
Trainers/Simulators: Devices use to teach the operation and methodology of
expensive machines. The military's use of trainers/simulators has been the
foundation of virtual reality entertainment.
Virtual Reality: An artificial environment of sight, sound, and motion created
by computers.
Virtual Reality Helmet: A device placed on the head to position a video display
to the eyes of a viewer. If the helmet completely seals the viewer from all
other light except that which is presented by the computer, then the experience
is said to be one of total immersion.
6
<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 provides consulting services via developing customized software
and databases for customers who purchase its image generators and need such
services for specific application requirements.
Since 1988, the Company has been designing, building and selling a line
of specialized computers and ancillary software which are used to generate
visual images in realtime for use in flight trainers and other simulation
equipment. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and selling this product and ancillary
software for use in virtual reality entertainment devices to companies such as
Fightertown Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight
Corp.
In 1994, the Company began designing and engineering a new image
generation product known as the "EAGLE", a specialized computer, which is
specifically designed for the virtual reality entertainment market. In 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").
7
<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 expected to be marketed and sold on two levels. The first level of marketing
will be for Tellurian to build its own complete game units either for sale or
use in establishing one or more joint ventures, or revenue share agreements with
owners and operators of TEC's or LBE's. The second level will be components for
other virtual reality game manufacturers.
In March 1997, Tellurian formed Cyberport Niagara Inc., an Ontario,
Canada company, as a subsidiary for the purpose of establishing a TEC in Niagara
Falls, Ontario. This 40,000 square foot facility known as "Cyberport", which
opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as an 8,000 square foot
interactive attraction leased from the Ontario Science Centre, various original
movie sets leased from Universal Studios and an Egyptian built replica of the
treasures from the tomb of King Tut. Cyberport Niagara Inc.'s Common Stock is
currently owned 100% by the Company.
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 in the entertainment industry to merge with or be acquired
by Tellurian. No assurances can be give that any transaction will be
successfully completed.
Tellurian, Inc. is located at 300K Route 17 South, Mahwah, NJ 07430 and its
telephone number is (201) 529-0939.
8
<PAGE>
THE OFFERING
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 3,959,763 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 toward
purchase a Cyberport facility in Ontario, Canada, completion
of food service and adding exhibits at Cyberport, 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 "__________"
9
<PAGE>
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 ."
- ----------------
(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 370,000 shares of Common Stock issuable upon exercise of the Warrants
sold to the Underwriters of the Company's initial public offering in
November 1996; (iii) up to _______ shares of Common Stock issuable under
Tellurian's Stock Option Plans; and (iv) Common Stock issuable upon
conversion of the Series 1 Preferred Stock.
(2) Does not include the Underwriters' Securities.
(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."
10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following selected information has been derived from the historical
financial statements of Tellurian included elsewhere in this Prospectus and
should be read in conjunction therewith, including the notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Year Year
Three Months Ended Ended Ended
March 31, March 31, Dec. 31 Dec. 31
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Revenues $34,908 $ 81,285 $521,045 $819,380
Gross Profit (83,023) 17,623 165,913 535,373
Net (Loss) (767,342) (636,760) (2,708,993) (962,420)
Net (Loss) per
Common Share (.24) (.21) (.90) (.53)
Weighted Average
Number of
Common Shares
Outstanding 3,195,885 3,025,000 3,025,000 1,817,708
</TABLE>
11
<PAGE>
Balance Sheet Data:
March 31, Pro Forma
1998
Working Capital
(deficit) $(393,274) $4,506,726
Total Assets 3,865,471 8,372,197
Long-Term Debt 122,635 122,635
Total Liabilities 1,641,558 1,641,558
Minority Interest 640,027 -0-
Stockholders'
Equity 1,583,886 6,483,886
- --------------
(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 See "Use of
Proceeds."
12
<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.
Going Concern. The audited financial statements have been prepared
by Management on a going concern basis. See "Note 1 in the Notes to Consolidated
Financial Statements." In the event that cash generated from the Company's plan
of operation as specified above are insufficient to meet its existing
obligations and on-going expenses (including those of Cyberport Niagara) or the
Company does not receive the proceeds of the Offering, the Company may need to
seek reorganization protection under applicable bankruptcy laws. See "Financial
Statements" and "Management's Discussion and Analysis and Results of
Operations."
Financial Condition: Losses. The Company sustained net losses of
$767,342, $674,557, $2,708,993, $962,410 and $699,665 for the three months ended
March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively, and continues to incur losses from operations. As of March 31,
1998, the Company has stockholders' equity of $1,583,886 and a working capital
deficit of $393,274. For the three months ended March 31, 1998 and 1997 and for
the years ended December 31, 1997, 1996 and 1995, the Company had sales of
$34,908, $81,285, $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 March 31, 1998, Tellurian has a deficit working capital of $393,274. The
Company is currently meeting its cash requirements from limited cash generated
from operations and recent loans made in April and May 1998. 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 Need for Additional Financing Beyond the Proceeds of the
Offering. After the completion of the Offering, the company may require
additional financing beyond the proceeds of the Offering to open one or more
TEC's or LEC's, 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.
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Tellurian's Dependence Upon Cyberport. Tellurian's principal
source of revenues is the TEC it has established through a subsidiary in Niagara
Falls, Ontario. This 40,000 square foot facility known as Cyberport has only
been in operation since late June 1997 and has had limited revenues. The success
of the Company is highly dependent upon Cyberport realizing significant revenues
from operations. Cyberport's operations are anticipated to be seasonal in nature
with the high season being the warm summer months and the low season being the
cold winter months when tourism is at a low. No assurances can be given that the
operations of Cyberport will result in either positive cash flow to the Company
or profitable operations.
Management's Lack of Experience in Running Tourist Entertainment
Centers (TEC's); Possible Failure of Cyberport to Promote Tellurian Products;
Possible Difficulty in Selling Off Majority Interest in Cyberport. The Cyberport
Niagara tourist entertainment center is believed by Management to represent a
new concept in family entertainment. While Management is encouraged by the
initial reception which the facility has gained, the lack of clear parallels to
compare the facility to makes it difficult for Management to properly evaluate
its progress against other facilities. The Company has no prior experience in
owning and operating a TEC. There can be no assurances that the Cyberport
facility in Niagara Falls, Ontario will operate profitably, nor can there be any
assurance that the facilities role in promoting the sale of Tellurian products
will be successful in the marketplace. Failure of the center to make progress in
its marketplace would materially affect Management's ability to sell up to a
majority share of this facility to an outside investor in accordance with its
stated desire as described herein. See "Business."
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 heavily depends upon the
acceptance of its new virtual reality. 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. 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 and the
successful operation of its Cyberport TEC. There can be no assurances that the
Company can implement its marketing and sales plan
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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 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."
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 technology underlying Tellurian's
products is subject to rapid change. The Company maintains an ongoing research
and development program and its success will depend in part upon its continuing
ability to respond quickly and successfully to technological advances by
developing and introducing new and improved products. There can be no assurance
that the Company will be able to foresee and respond to such advances or that
competitors, including those with greater financial and other resources, will
not succeed in developing technologies and products that are more effective than
the Company's. See "Business - Research and Development."
Competition. Competition in the virtual reality entertainment
market comes primarily from defense related manufacturers, many of which have
much greater financial, technical, manufacturing and sales and marketing
resources than the Company. In addition, as the virtual reality market develops
and continues to grow, many larger companies 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
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<PAGE>
than the Company, in addition to which many have significantly greater resources
than the Company. See "Business."
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 protections
methods to protect its proprietary rights. Although the Company believes that
its products are uncopyable, it may be possible in the future for unauthorized
third parties to pay to copy or reverse engineer certain portions of the
Company's products or obtain or use information that the Company regards as
proprietary. The Company currently has no patents. Although the Company's
competitive position may be adversely affected by unauthorized use of its
proprietary information, the Company believes that the ability to fully protect
its intellectual property is less significant to its success than are other
factors, such as the knowledge, ability and experience of its employees and its
ongoing product development and customer support activities. There can be no
assurance that third parties will not assert infringement or other claims
against the Company with respect to any existing or future products, or that
licenses would be available if any Tellurian technology were successfully
challenged by a third party , or if it became desirable to use any third party
technology to enhance Tellurian's products. Litigation to protect the Company's
proprietary information or to determine the validity of any third party claims
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
determined in favor of the Company. In addition, the Company entered into a
licensing agreement dated January 1, 1996 with Voyager Graphics, Inc., a
Republic of China corporation, ("Voyager") which granted Voyager certain
irrevocable, exclusive rights under an assignable license to be the exclusive
supplier of the EAGLE image generator within a restricted group of countries and
which allows Voyager to sell the product worldwide, subject to the payment of
certain royalties to Tellurian. Such agreement could impact the Company's
marketing efforts of the EAGLE should Voyager elect to sell the EAGLE in North
America. See "Licensing of Tellurian Technology."
Notes Due to Related Parties. The Company has a note payable to
Charles Powers, a founder of the Company, in the principal amount of $346,736
and against which the Company owes accrued interest of $364,129 as of May 31,
1998. This note is payable on demand. Should Mr. Powers demand payment in whole
or significant part, there can be no assurance that the Company will have the
cash resources to meet such demand. Management is presently negotiating with Mr.
Powers endeavoring to get the demand date converted into Common Stock. However,
there can be no assurance that the Company will be successful in this regard. In
the event such conversion into Common Stock is not obtained from Mr. Powers and
he demands payment of his note prior to the Offering at a time when the Company
is unable to pay such note, the Company may find it necessary to seek protection
from creditors by reorganizing under applicable bankruptcy laws. Also "Use of
Proceeds" and "Certain Transactions."
The Company is indebted to Celia Klimas, an aunt of Richard and
Ronald Swallow pursuant to a demand note in the principal amount of $150,000
plus accrued
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<PAGE>
interest. This loan will be paid with the proceeds of the Offering. See "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. Although the
Company does not intend to use more than an estimated $800,000 of the net
proceeds of this Offering toward repayment of debt, as describe herein, it is
possible that Management will be required to re-allocate up to an additional
$750,000 of the net proceeds of this Offering for said purposes if Management
believes that it is in the best interest of the Company. As a result of the
foregoing, the success of the Company will be substantially dependent upon the
discretion and judgment of the Management of the Company.
Agreement with Fightertown. The Company recently entered into a
mutual Release and Settlement Agreement with Fightertown Entertainment, Inc. to
settle certain disputes that resulted in Fightertown filing a law suit against
Tellurian in the United States District Court, Central District of California.
The Settlement Agreement calls for the release of all claims against each party
other than claims arising out of the parties' obligations under the Settlement
Agreement which obligations are discussed under "Business - Agreement with
Fightertown." In the event that Tellurian breaches its obligations under the
Settlement Agreement and such breach is not cured within 15 days of notice of
the breach, Fightertown may enter a $500,000 stipulated judgment in favor of
Fightertown for Tellurian's failure to comply with the terms of the agreement
and the damages caused to Fightertown's business. In the event that Tellurian
breaches the Settlement Agreement and fails to timely cure the breach, the
stipulated judgment may adversely impact Tellurian's operations. See "Business-
Agreement with Fightertown."
Dependence on Key Employees. The Company is particularly dependent
on the services of its key employees, Dr. Ronald Swallow and Mr. Stuart French,
the loss of one or more of whom could have a material adverse effect on the
Company's operations. The Company has entered into employment agreements with
each of Dr. Swallow and Mr. French and has obtained key man life insurance in
the amount of $1,000,000 on the lives of Dr. Swallow and Mr. French. No
assurances can be given that such insurance will adequately compensate Tellurian
in the event of the loss of such key personnel. The Company believes that its
success will depend in large part upon its ability to attract and retain
highly-skilled technical, managerial, sales and marketing personnel. The
business of the Company is highly technical in nature. The Company's future
growth is dependent upon its ability to attract and retain qualified technical
personnel. There can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to market its products.
Competition for such personnel in the computer technology industry is intense.
Failure to attract and retain such personnel could have an adverse effect on the
Company's business, operating results and financial condition. See "Management.
"
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Control by Principal Shareholders. Without giving effect to the
potential exercise of the Preferred Warrants and options, the current principal
shareholders and Management of the Company beneficially own approximately
1,200,000 shares of Common Stock, or approximately 30% of the then outstanding
shares of Common Stock of the Company. Accordingly, the current principal
shareholders and Management may be in a position to influence the election of
the Board of Directors of the Company. See "Security Ownership of Management and
Others."
No Cash Dividends on Common Stock and None Anticipated. The
payment by Tellurian of cash dividends on its Common Stock, if any, in the
future rests within the discretion of its Board of Directors and will depend,
among other things, upon the Company's earnings, its capital requirements and
its financial condition as well as other relevant factors. Tellurian has not
paid or declared any cash dividends upon its Common Stock since its inception
and, by reason of its present financial status and its contemplated future
financial requirements, does not contemplate or anticipate making any cash
distributions upon its Common Stock in the foreseeable future. See "Dividends
Policy."
Determination of Terms of the 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.
Shares Eligible for Future Sale. Sales of substantial amounts of
Common Stock or the perception that such sales could occur could adversely
effect the market price for the Common Stock. The Company has 3,959,763 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, 2,321,605 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. At the end of the aforesaid lock-up period (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 these 1,000,000 shares as soon as they are permitted to do
so. Ordinarily, under Rule 144, a person holding restricted securities for a
period of one year may, every three months thereafter, sell in ordinary
brokerage transactions or in transactions directly with a market maker, an
amount of shares equal to the greater of one percent of the Company's
then-outstanding Common Stock or the average weekly trading volume in the same
securities during the four calendar weeks prior to such sale. See "Shares
Eligible For Future Sale."
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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. As of June 10,
1998, the Company may be deemed to fail to meet the net tangible asset/market
capitalization/net income requirements for continued listing of its securities
on NASDAQ. The Company has requested a written hearing for an exception to be
granted and, if such written hearing is unsuccessful, the Company intends to
seek an oral hearing for an exception to be granted. There can be no assurance
that Tellurian will be able to obtain an exception from NASDAQ from 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 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 securities 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 Stock Market in the over-the-counter market on the
OTC Electronic Bulletin Board or in the "pink sheets."
"Penny Stock" Regulations. The Commission has adopted regulations
under the Exchange Act which generally define a "penny stock" to be any equity
security that has a market price (as defined in the Exchange Act) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. If the Company has less than $2,000,000 in net tangible
assets, the 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
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<PAGE>
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.
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
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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 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."
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<PAGE>
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
Purchase of Cyberport facility in
Ontario, Canada (1) $2,100,000
Capital outlay to produce and
market the Tellurian Helmet to be
used in conjunction with its
proprietary image generations 350,000
Completion of Food Service at
Cyberport 200,000
Adding Exhibits at Cyberport 205,000
Reduction of current liabilities (2) 630,000
Payment of debt owed to Celia Klimas (3) 170,000
Payment to Fightertown (4) 45,000
Working Capital (5) 1,200,000
---------
$4,900,000
- ------------------
(1) The Company has an option to purchase the Cyberport facility. In the
event that the Company elects not to purchase this facility, this money
is intended to be utilized to open an additional TEC or LBE similar to
Cyberport. See "Business."
(2) At March 31, 1998, the Company has current liabilities of $1,518,923
which were incurred in the general operation of the Company's business.
(3) $150,000 plus interest is owed to Celia Klimas, a relative of Ronald
and Richard Swallow, a director of the Company.
(4) See "Business - Fightertown."
(5) Amounts allocated to working capital may be used for all corporate
purposes, including, without limitation, establishing one or more
additional TEC's or LBE's. In the event that the Underwriters exercise
the Over-Allotment Option, amounts allocated to working capital would
increase by approximately $800,000. See "Underwriting."
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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
possible payment of amounts due to Charles Powers if such debt is not converted
into Common Stock pursuant to on-going negotiations, establishing other TEC's or
LBE's with other joint venture partners, the market demand for the Company's
virtual reality products, and the market success of Tellurian's products
(including its new helmet). The Company may, in the future, find it necessary or
desirable to change the specific uses of the net proceeds due to certain
exigencies of the business and, therefore, there could be significant variations
in the above use of proceeds. In the event one or more of such exigencies
occurs, the Company will reallocate the net proceeds of this Offering within the
above categories in response thereto.
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.
DIVIDEND POLICY
Tellurian has not paid any cash dividends on its Common Stock and
does not anticipate paying any dividends in the foreseeable future. Tellurian
intends to retain any future earnings to finance the growth and development of
its business. Any future determination as to the payment of dividends will be at
the discretion of the Board of Directors of Tellurian and will depend on the
Company's operating results, financial condition, capital requirements and such
other factors as the Board of Directors of Tellurian may deem relevant. See
"Risk Factors - No Dividends and None Anticipated" and "Description of
Securities."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
During 1997 the Company has been able to make progress towards meeting
its objectives which included:
* Development of its virtual reality helmet;
* Establishment of a virtual reality showplace for demonstrations of
Tellurian products; and
* Establishing a TEC for the purpose of operating and owning such a
facility in order to generate revenues.
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The market for free-standing image generators has proven to be
extremely limited. The development of the data-base to complete the experience
is a skill possessed by a limited number of companies in the industry, but the
majority of the potential customers for Tellurian products are arcades,
restaurants, and other entertainment facilities who rely on their supplier to
deliver a complete, ready to run experience. The Tellurian image generator has
the advantage of being able to display a 360 degree world in which all of the
players can be linked. The competitive edge that Tellurian has is that its world
can be changed by any of the players and the resulting world is changed for all
of the players. Game software for this type of world must be developed
specifically for that world. Without both the image generator and the database
software, Tellurian has in the past been trying to sell to an extremely limited
market. The Tellurian product which now exists is one which is a free-standing
experience. Further, the completion of the helmet as described herein allows the
experience to be delivered to the end-user requiring very little physical space.
The space issue is also critical to end-users who evaluate the performance of
their investments on a "revenue per square foot basis". This combination should
allow Tellurian to market its products to distributors and large end users of
arcade type games, a market in which it had no access before these developments.
The Virtual Reality Helmet
Tellurian's virtual reality helmet (with a disposal liner) 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 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 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.
The helmet is now ready for introduction to the market, but the Company
needs approximately between $250,000 and $350,000 of financing to produce and
market the Tellurian Helmet. The Company plans to offer the helmet based
experience for delivery within four months from date of order, but its ability
to do that is subject to the receipt of sufficient financing. However, the
Company cannot be certain that the design principles it has decided upon will be
successful in the marketplace. Also, the Company cannot be sure that the
marketplace will accept the product and the pricing which the Company intends to
utilize. Management recognizes that many competitors are actively engaged in the
design and manufacture of products intended for this use. Many of these
competitors have more experience in helmet design and manufacturing than the
Company does, and many of these competitors have more financial resources to
draw upon than
24
<PAGE>
the Company. There can be no assurance that the Company's design will be
successful, nor that the Company will find a ready market and sufficient
financing for the helmet. The Company expects that, if the helmet design is
successful, this medium will replace the larger and more expensive means of
delivering the video and audio images to its customers. Management believes
that, if successful, the helmet may represent a significant portion of its
future revenue.
Cyberport
In late June 1997, the Company was able to begin conducting operations
in its subsidiary, Cyberport Niagara, Inc. Although the limited opening of
Cyberport was not done early enough to have an noticeable impact on revenue for
the season, Management believes that it was essential to open the facility in
close to final form in order to attract the various tour operators to view the
facility. While Management does not believe that the flow from the casual
tourists in Niagara Falls will provide enough revenue to ensure the viability of
Cyberport, Management believes that the exposure to the summer tourists and,
more importantly, to the tour groups that conduct summer business in Niagara
Falls, was critical to Management's plans to develop the group tour business for
the 1998 and subsequent seasons. The Company promoted the facility in general
and the Tellurian experience since the 1997 opening. Numerous "free-of-charge"
events were run in order to hasten the awareness of the facility to the tourism
industry in the Niagara region. Efforts concentrated on ensuring strong
relationships with group tour operators and guaranteeing prime exhibit spots in
the many tourist information booths in and around the Niagara area for the 1998
season. As a result, revenues for 1997 were minimal, but Management believes
that the marketing programs and overall direction of Cyberport is correct.
Management is particularly encouraged by the sales leads it has received for
Tellurian products as a result of the promotional efforts done by Cyberport
staff.
The Company believes that its ability to operate this facility
successfully depends on elements both within and outside of its control,
including the success of its own products incorporated into this venture. Also,
the Company faces competition from existing and new entrants into the tourism
market in the Niagara Falls region. Most of the competitors have more experience
than the Company in opening and managing tourist facilities and most have more
financial resources than the Company. There can be no assurances that this
project will perform successfully.
The Company is endeavoring to locate an investor desirous of owning an
interest or a controlling interest in Cyberport Niagara. There can be no
assurance that the Company will be successful in this effort or that, if
successful, that the terms and conditions of the sale will be satisfactory to
the Company. Nonetheless, the Company expects that a significant portion of its
future revenues are dependent upon the successful operation of Cyberport
facilities.
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<PAGE>
Voyager
In 1996, Tellurian entered into a Technology Transfer Agreement with
Voyager (a Republic of China corporation) pursuant to which Tellurian granted
Voyager certain rights in return for a net fee of $850,000 to Tellurian. The
Company has been contacted by Voyager to discuss an additional transfer
agreement dealing with the virtual reality helmet technology. Management is
evaluating the impact such an agreement would have upon its operations prior to
making an decision regarding its willingness to share this technology with
Voyager. Should Management decide to enter into negotiations with Voyager on
this matter, there can be no assurances that an agreement satisfactory to the
Company can be reached.
Results of Operations
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
Tellurian and its subsidiary had net sales for the three months ended
March 31, 1998 of $34,908, a decrease of $42,377 or 52% over the comparable
period of the prior year. For the three months ended March 31, 1998, the
Company's gross profit (loss) was ($83,023) as compared to $17,623 for the
comparable period of the prior year. Such decrease in gross profit is primarily
due to the costs related to the Cyberport Niagara facility during the period
where it was almost completely closed for business.
Tellurian's research and development activities for the three months
ended March 31, 1998 were $209,989, representing an increase of $5,902, or 2.5%,
over the comparable period for the prior year. The research and development
activities related to Tellurian's concentrated effort to complete the virtual
reality helmet and to develop software for use with that helmet and other
versions of virtual reality products.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $444,396, a decrease of $43,697, or 9%, over the comparable
period of the prior year. This decrease is principally due to the continued
cutting of any variable costs available for reduction by management action.
For the three months ended March 31, 1998 interest expense was $17,262,
an increase of 4,962, or 40%, over the comparable period of the prior year.
Tellurian's net loss for the three months ended March 31, 1998 was
$767,342 as compared to a loss of $636,760 for the comparable period of the
prior year because of the aforesaid decreases in sales and increases in costs.
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
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<PAGE>
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.
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 1,400,000 shares of its Common Stock
at an offering price of $5.00 per share and 2,127,500 Common Stock Purchase
Warrants at an offering price of $.25 per share. The Company received net
proceeds of approximately $6,200,000 from the offering.
For the year ended December 31, 1997, net cash of $1,107,900 was used
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.
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<PAGE>
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 March 31, 1998 and 1997 net cash of $622,712
and $1,085,031, respectively was used in operating activities. The net loss from
operations for the period ended March 31, 1998 was partially offset by an
increase in the Company's non-cash depreciation and amortization expense. The
increase in deferred costs was offset by a similar increase in accrued expenses
and accounts payable.
For the three months ended March 31, 1998 net cash of $16,088 was
generated from investing activities. For the three months ended March 31, 1997,
$157,007 was used in investing activities. Funds were generated from the sale of
certain of the Company's fixed assets while all non-essential expenditures were
stopped.
For the three months ended March 31, 1998 and March 31, 1997, $380,016
and $-0- was provided from financing activities. The primary sources of this
cash were the proceeds of the warrant conversion completed by the Company which
is described in the following paragraphs.
During March 1998, the Company completed a warrant exchange offer. The
offer was made on the following terms:
1. Warrant holders who tendered their Common Stock Purchase
Warrants at $1.875 per tendered warrant received one unit for
each warrant tendered.
2. Each unit consisted of one share of the Company's common stock
and one new Common Stock Purchase Warrant identical to the
tendered warrant.
The Company sold a total of 321,605 units in the warrant exchange
offering resulting in gross proceeds of $603,011 and net proceeds of $490,912
after offering costs of $112,099.
During 1997, the Company experienced delays in completing the virtual
reality helmet and has suffered from its inability to attract a major investor
to the Cyberport project as planned. These two events, coupled with the limited
revenues from sales of the Company's existing products and less than expected
receipts from Cyberport, have caused a continued drain of the Company's limited
capital . As a result, Management has been
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<PAGE>
forced to devote significant efforts to raising capital in support of the plan
of operations. While many potential investors have been approached about
Cyberport, the lack of a demonstrable financial track record has made it
difficult to complete the sale of any of the Company's Cyberport interest.
Management believes that the introductory marketing costs of the
virtual reality helmet and the working capital required to be able to meet
expected delivery needs will require the Company to utilize an estimated
$250,000 to $350,000 of the proceeds of the Offering. If the Company is not
successful in obtaining those funds from the proceeds of the Offering, the
introduction of the helmet will be negatively impacted and the Company's
operating results will be adversely impacted.
The Company recently negotiated a $250,000 short-term loan with a
non-affiliated party. The loan was made to the Company to assist it in operating
while the recently completed public offering was in process. That loan was
repaid from the proceeds of the offering as the Company's first priority in
disbursement of funds. The Company has negotiated a renewal of that loan in
anticipation of a cash need to complete the helmet and for working capital. As
of May 31, 1998, the Company has received $125,000 of such loan which bears
interest at the rate of 12% per annum and is not convertible into capital stock
of the Company.
At March 31, 1998, Tellurian had a working capital deficit of $393,274.
The Company is currently meeting its cash requirements from limited cash
generated from operations and funds received from a 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 proceeds of the Offering, the sale of up to a
majority interest in its Cyberport facility and/or private financing to meet its
obligations as a going concern.
The audited financial statements have been prepared by Management on a
going concern basis. See "Note 1 in the Notes to Consolidated Financial
Statements." In the event that cash generated from the Company's plan of
operation as specified above are insufficient to meet its existing obligations
and on-going expenses (including those of Cyberport Niagara) or the Company does
not receive the proceeds of the Offering, the Company may need to seek
reorganization protection under applicable bankruptcy laws. See "Financial
Statements" and "Management's Discussion and Analysis and Results of
Operations."
The Company has received signed letters of intent to merge with two
companies in the entertainment business as described under "Business-Recent
Developments." The Company believes that these mergers and the proposed
financing represent the best alternative available to the Company in order to
carry out its proposed business plan. As of June 10, 1998, no contracts have
been entered into with respect to such proposed acquisitions. No assurances can
be given that the proposed mergers will be successfully.
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<PAGE>
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 Offering, receiving
substantial revenues from operations and/or selling a majority interest in its
Cyberport facility. The Company's plan to continue as a going concern also
includes the possible completion of the two acquisitions pursuant to which the
Company has entered into letters of intent which are described below. Conditions
precedent to the completion of such transactions include, without limitation,
the completion of due diligence, the Company maintaining its NASDAQ listing and
the Company arranging for a public financing of its equity securities of
approximately $6,000,000 from the Offering. No assurances can be given that the
Company will be successful in its efforts to obtain the necessary cash to remain
as a going concern.
The Company has been notified by the NASDAQ Stock Market that it does
not meet the net tangible assets/market capitalization/net income requirement
and that the Company will require an exception to such requirement in order to
maintain its NASDAQ listing. In this regard, the Company has filed documents
with the NASDAQ Stock Market requesting a written hearing scheduled for the week
of April 6, 1998 and is awaiting the results of that hearing. If the Company is
not granted an exception, it has the right to request (and intends to request)
an oral hearing pursuant to which it will be given the opportunity to
demonstrate compliance with the net tangible asset test or reasons why an
exception should be granted by the Hearings Committee. No assurances can be
given that the Company will be successful in maintaining its NASDAQ listing and
if unsuccessful, the potential acquisitions described herein are unlikely to be
completed. Further, the loss of the Company's NASDAQ listing would make it very
difficult if not impossible for the Company to raise additional financing from
private financing or complete the Offering and would materially adversely effect
the liquidity and price of the Company's securities.
The Company has had discussions regarding the acquisition of two
companies engaged in the manufacture and sale of doll and souvenir products.
Pursuant to the terms of the letters of intent regarding such acquisitions, the
Company may, subject to completion of due diligence investigation, the execution
of definitive contracts and the fulfillment of certain other conditions
precedent, issue a total of 4,000,000 shares of the Company's Common Stock in
return for the assets of these companies. No assurances can be given that the
acquisitions will be completed or, if completed, that such acquisitions will be
successfully completed on terms satisfactory to the Company.
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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
, 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 $__ and $__, respectively.
The following table reflects the high and low sales prices for the
Company's Common Stock and Common Stock Purchase Warrants for the periods
indicated as reported by the National Association of Securities Dealers, Inc.
("NASD") from its NASDAQ system:
<TABLE>
<CAPTION>
Common Stock
Common Stock Purchase Warrants
High Low High Low
<S> <C> <C> <C> <C>
1996
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 ____ ____ ____ ____
</TABLE>
The over-the-counter market quotations reported above reflects
inter-dealer prices, without retail markup, markdown or commission.
Management has been advised by its transfer agent (Continental Stock
Transfer & Trust Company) that the approximate number of record holders of the
Company's Common Stock, as of April 7, 1998, the record date, was approximately
31. However, the Company has been advised by 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.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of March 31, 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.
Actual Proforma
Current liabilities $1,518,923 $ 718,923
========== =========
Long-term debt liabilities 122,635 122,635
---------- ---------
Minority interest 640,027 640,000
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 3,959,763 shares 39,598 39,598
Additional paid-in capital 7,997,964 12,885,964
--------- -----------
Accumulated deficit (6,535,119) (6,535,110)
Other comprehensive income 81,442 81,442
--------- -----------
Stockholders' equity 1,583,886 6,483,885
========= ===========
-----------
(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 370,000 shares of Common Stock issuable upon
exercise of the Warrants sold to the Underwriters of the Company's
initial public offering in November 1996; (iii) up to 1,500.000 shares
of Common Stock issuable under Tellurian's Stock Option Plans; and
(iv) Common Stock issuable upon conversion of the Series 1 Preferred
Stock.
(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
in July 1998.
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BUSINESS
General
Tellurian, Inc. ("Tellurian" or the "Company"), a Delaware corporation,
is engaged in the design, development and marketing of virtual reality products
which include image generators, related software, helmets and motion systems.
The Company also provides consulting services via developing customized software
and databases for customers who purchase its image generators and need such
services for specific application requirements.
Since 1988, the Company has been designing, building and selling a line
of specialized computers and ancillary software which are used to generate
visual images in realtime for use in flight trainers and other simulation
equipment. From 1992 through 1995, the Company's principal product was its
AT-200 image generator which it sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In June 1994, the Company began
adapting its AT-200 Image Generator and selling this product and ancillary
software for use in virtual reality entertainment devices to companies such as
Fightertown Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight
Corp.
In 1994, the Company began designing and engineering a new image
generation product known as the "EAGLE", a specialized computer, which is
specifically designed for the virtual reality entertainment market. In 1996,
Tellurian delivered its first production units of the EAGLE pursuant to purchase
orders. The Eagle is available in multiple resolution formats and is faster and
less expensive to produce than the Company's previous products, the AT-100 and
AT-200. It is also different from such previous products in that it is tailored
for entertainment use. Each unit is composed of proprietary hardware and
software which when combined with motion and sound simulate a full-immersion
experience. The "EAGLE" is intended for use at amusement/theme parks, video
arcades, Tourist Entertainment Centers ("TEC") and Location Based Entertainment
Centers ("LBE"). The TEC differs from the LBE in that the market of the TEC is
intended to be the family vacationer rather than the local, repeat customer.
Utilizing the "EAGLE" technology, Tellurian has developed a helmet
product to complement the Eagle for the entertainment market. This new product
is expected to be marketed and sold on two levels. The first level of marketing
will be for Tellurian to build its own complete game units either for sale or
use in establishing one or more joint ventures, or revenue share agreements with
owners and operators of TEC's or LBE's. The second level will be components for
other virtual reality game manufacturers. The Company is currently completing
the first game product to be sold for the helmet-based game. The helmet is now
being actively offered for sale and delivery within 120 days of order, assuming
a 25% deposit is received with the order.
In March 1997, Tellurian formed Cyberport Niagara, Inc. ("Cyberport
Niagara"), an Ontario, Canada company, as a subsidiary for the purpose of
establishing a TEC in
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<PAGE>
Niagara Falls, Ontario. This 40,000 square foot facility known as "Cyberport",
which opened in June 1997 in the casino district (also known as Clifton Hill),
features the latest in Tellurian technology as well as an 8,000 square foot
interactive attraction leased from the Ontario Science Centre, an Egyptian built
replica of the treasures from the tomb of King Tut and an arcade area. Tellurian
currently owns all of the outstanding common stock in Cyberport Niagara Inc.
However, as part of a recently completed refinancing of Cyberport, 912,634
shares of non-voting preferred stock (par value $1 Canadian) were issued by
Cyberport Niagara to various creditors in return for the forgiveness of payables
owed.
Recent Developments
In March 1998, the Company entered into an agreement with Interactive
Media Concepts, Inc. pursuant to which Interactive, a consultant of the Company
which was owed approximately $56,000 and to whom the Company had future
obligations for an additional $88,000 for services rendered, accepted
Interactive's offer to convert such indebtedness into 100,000 shares of the
Company's Common Stock.
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
entire debt into 350,000 restricted shares of the Company's Common Stock. The
Company also agreed to pay the landlord $36,111 U.S. ($52,000 Canadian) in rent
arrears and $33,333 U.S. ($48,000 Canadian) in additional security deposit. In
connection with such agreement, the Company granted the Landlord options to
purchase 100,000 additional shares of the Company's Common Stock at an exercise
price of $1.75 per share between April 1, 1998 and September 30, 1998. Tellurian
also granted the landlord security interests in certain simulators located at
the Company's Cyberport facility. The aforesaid agreements concluded various
creditor law suits that were initiated against the Company and its subsidiary
demanding payment of the aforementioned debt. As a result of the above
referenced settlement, the Company canceled $34,722 in over accruals.
Tellurian also formed Cyberport International, Inc., a Delaware
corporation, for the purpose of franchising the Cyberport concept to third
parties. This subsidiary, which is wholly-owned by Tellurian, is inactive.
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<PAGE>
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.
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<PAGE>
Cyberport Niagara, Inc.
Cyberport opened a "pay-one-price" tourist entertainment center (TEC)
at the end of June. Cyberport Niagara is designed for the vacationing family.
The various activity rooms contained within the facility have been carefully
chosen to ensure that the amount of time that a person of any tourist age group
spends is approximately the same as that of all other tourist age groups. By
having a balanced blend of attractions, Management believes that it can attract
large numbers of vacationers to the facility. The facility is not likely to
achieve a status capable of causing people to plan vacations around it (such as
DisneyWorld), exposure to large numbers of walking tourists is essential to
marketing plans. These groups alone will not support a venture like Cyberport.
However, in addition to the walking tourist family, bus tour groups are capable
of providing large volumes of customers although at 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
contracting with the Ontario Science Centre for exclusive use of the traveling
Science Circus, a display originally developed to promote science learning in
the lesser populated sectors of Ontario but which, due to budget cuts, was no
longer able to leave Toronto or to be properly staffed. In addition, the Company
was able to purchase exhibits of a space shuttle cockpit, Sputnik and a lunar
rover when the space exhibit closed at the Canadian National Expo. These
exhibits are interactive, and provide an interesting contrast of the old to the
new when placed immediately before the pyramid opening to the replicas of
artifacts found in the Tomb of 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.
36
<PAGE>
Management believes that it will take time and further financing for
the marketing efforts of Cyberport to translate into a volume of traffic
necessary to support Cyberport. Cyberport's business is seasonal with the spring
through summer months being the high seasons. Publicly available statistics from
attractions such as the Butterfly Museum demonstrate that tourists come to
Niagara Falls in sufficient number to make 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.
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 March 31, 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
37
<PAGE>
AT-200. Each unit is composed of proprietary hardware and software which
combined with motion and sound to simulate a full-immersion experience. The
EAGLE is intended for use at amusement/ theme parks, video arcades, TEC's and
LBE's.
The Company's marketing efforts prior to completion of the 1996 public
offering 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.
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."
Other Products and Services
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 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 has decided to
38
<PAGE>
concentrate its resources on incorporating the helmet into a game structure and
showed that prototype unit at the important industry trade show (IAPPA) in
November 1997.
The helmet mounted visual system was displayed and offered for sale at
the IAAPA trade show in November 1997. While the reaction to the visual system
was extremely positive, it was clear that game software had to be completed
before customers would commit to the purchase of these units. The Company has
recently begun offering the unit with its air battle theme for delivery within
four months from the date of order, but its ability to deliver is subject to the
receipt of sufficient financing. If a customer wishes to purchase the hardware
with a different VR experience, the time required to program the data base would
have to be added to that delivery cycle. Since several variations of the air
battle experience are nearing software completion, the Company expects, subject
to the availability of adequate financing, to be in full production and delivery
of helmet based units in the mid 1998.
Consulting Services. When a customer purchases the Company's image
generator, the Company provides the customer with a standard variety of
databases and software. However, from time to time a customer's application may
demand a unique database and software for specific application requirements.
Upon a customer's request, the Company will build a customized database and
software under a separate consulting agreement.
Product Marketing Strategies
Tellurian's core product line is the computer image generator. These
units are special purpose computers designed and built by the Company to render
images in a variety of display devices, such as helmets, projection screens and
TV monitors. The market for these products is in both the training/ simulation
sector and the entertainment sector. The Company is seeking to market its
products to distributors and large users of arcade type games. Location based
entertainment operations which currently utilize the Company's devices are Six
Flags (Great Adventure - Jackson, NJ, Magic Mountain - Los Angeles, CA) and
Fightertown - Lake Forest, CA. Entering the entertainment market is a natural
progression of the technology and products which the Company has been
developing.
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
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<PAGE>
personnel in the future, it intends for the moment to continue its primary sales
efforts through the officers based in its New Jersey facility. Traditional trade
magazine advertising will be done on a regional scale, while trade show
participation will be done on a national level.
One of the goals of the Company is to produce complete game units for
use in TCE's, LBE's, video arcades, and theme parks. The second market for the
Company's products consists of companies which develop virtual reality games.
Still another venue for sale of the Company's products is into the creation of
mobile entertainment facilities which would allow their operators to move the
games to the site of fairs, sporting events or association meetings. Each of
these venues will be pursued as resources permit, but the Company does not
currently have the resources to properly pursue these markets.
Licensing of Tellurian Technology
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. The Company is currently in discussion
with Voyager regarding a further technology transfer license with
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<PAGE>
certain aspects of the helmet product. No assurances can be given that such
discussions will result in an agreement satisfactory to the Company.
Manufacturing of Eagle Units
The Company designs and manufactures its products according to its
proprietary designs and engineering. The Company uses vendors to produce the
circuit boards used in its products. The Company also purchases integrated
circuits (IC) from a variety of sources and is not dependent upon any one
supplier with the exception of its central processing unit (CPU) for the EAGLE.
The Company purchases its CPU and does not anticipate any supply problems in
either the short or long term. Once all the components are assembled at the
Company, the products are forwarded to another vendor for soldering. After
soldering, the completed boards are returned to the Company for final
integration into units ready for shipment.
Agreement with Fightertown
In November 1997, the Company entered into a settlement agreement
with Fightertown Entertainment, Inc.("Fightertown"). Tellurian had an order and
cash deposit 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 diligently to complete installation of the first group of
EAGLES that were shipped to Fightertown and restore the confidence and working
relationship that had previously existed between the two companies. In November
1997, the Company signed a mutual release and settlement agreement (the
"Agreement") with Fightertown Entertainment, Inc. ("Fightertown") to release all
claims the parties 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
has allocated $45,000 of the proceeds of the Offering to make the next two
payments to Fightertown. See "Use of Proceeds." The Company has allocated
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<PAGE>
$45,000 of the proceeds of the offering 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 EAGLE which would employ textured images to Fightertown for
its own use at a price such that no other customer is paying a lower price
(except for a limited number of promotional units sold or placed to potentially
new users of these products); and (7) The Company executed a stipulated judgment
in the amount of $500,000 in favor of Fightertown to be entered against the
Company should the Company fail to comply with any term of this Agreement. In
the event of a breach of the Agreement, Fightertown must notify the Company of
the breach and give the Company 15 days to cure the default before filing the
stipulated judgment.
Research and Development
The Company is engaged and intends to continue to engage in ongoing
research and product development efforts to expand and enhance the technical
capabilities, design features and range of uses of its products. The Company
currently employs five engineers/technicians who are involved in research and
product development. Due to the increasing competition and rapid technological
change in the VR marketplace, the Company believes that it must continue to
improve and refine its products. Research and development costs for fiscal 1997
and fiscal 1996 were $862,031 and $688,103, respectively. See "Note 1 to the
Notes to Consolidated Financial Statements."
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 no computers and are limited as to the quality and complexity of
the images they produce. Management believes that
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<PAGE>
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 has established Cyberport and, if financial resources
become available, may establish one or more additional TCE's and/or LBE's. The
Company anticipates significant competition in this market. While the Company
knows of no single dominant company in this marketplace, it is aware that many
companies are currently planning, developing and/or operating similar
businesses. Most of these companies have better financial resources than the
Company and have more experience in developing these facilities. No assurances
can be given that the Company will be able to compete successfully in this
market or that the Company will be successful in establishing or entering into
revenue sharing agreements or financing agreements for Cyberport or other
similar facilities. Further, there can be no assurances that, if the Company is
successful in obtaining such financing, the resulting businesses can be operated
at a profit.
Lack of Patent Protection
The Company does not currently hold any patents and the technology
embodied in the Company's current product line cannot be patented. The Company
relies on confidentiality agreements with its key employees to the extent it
deems such to be necessary.
Employees
As of May 31, 1998, Tellurian has 11 full-time employees, including 2
executive employees, 1 technical and production persons and 5 engineers at its
New Jersey facility and 3 administrative and sales 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.
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<PAGE>
Description of Property.
In January, 1997, the Company commenced a 10 year lease expiring
January, 2007 for approximately 10,000 square feet of space at 300K Route 17
South, Mahwah, NJ 07430. Pursuant to the lease, the Company pays a monthly base
rent of $6,250.
In February 1997, Cyberport entered into a five year lease expiring
January 2002 with two five year renewal options for approximately 40,000 square
feet of space at 5781 Ellen Avenue in Niagara Falls, Ontario, Canada. Pursuant
to this lease, Cyberport pays an average annual rental over the life of the
lease of $247,298. The Company believes this space is adequate to house its
Cyberport operations for the foreseeable future. The Company has an option to
purchase the facility for $2,160,000 at any time beginning January 1, 1998 and
ending July 31, 1998. The Company has allocated $2,160,000 of the proceeds of
the Offering to purchase the land and the building. 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 has been granted a three month moratorium (March,
April and May) on its rent payments. This moratorium requires Cyberport to make
double payments in July, August and September in order to restore itself to a
current rental status.
Legal Proceedings
In September 1997 both Tellurian and its Niagara Falls, Ontario,
Canada controlled subsidiary, Cyberport Niagara, Inc. were named in legal
actions in Ontario by eight construction firms (namely, Newman Bros. Limited,
Unistrut Canada Limited, Phoenix Wood Products, Star Tile Centre Limited, Ecco
Electric Limited, DBN Drywall & Acoustics Limited, PRW Excavating Contractors
Ltd. and Expoplex Incorporated) claiming that services performed by them in the
Niagara Falls site that houses Cyberport have not been fully paid for. The
amounts claimed was for an estimated $1,400,000.
In March 31, 1998, the Company reached an agreement with
representatives of the creditor group 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 Niagra's Series "B" Special Shares (preferred stock) with a
$1 (Canadian) par value. Cyberport Niagra has the right to redeem this preferred
stock until October 10, 1998 at $1.10 Canadian ( approximately $.77 U.S.) per
share. Should Cyberport Niagra choose not redeem this stock, the holders of the
stock have 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 expires on December 31, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Developments"
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The names of the executive officers and directors of the Company are
as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dr. Ronald Swallow* 63 Chairman of the Board of
Directors and Chief
Executive Officer
Stuart French 52 President and Director
Dr. Richard Swallow* 59 Secretary and
Director
Michael Hurd 51 Vice President of Administration
and Finance and Chief Financial
and Accounting Officer
James G. H. Lin 46 Director
Peter Colgan 63 Director
</TABLE>
* May be deemed a founder of the Company. Dr. Ronald Swallow and Dr. Richard
Swallow are brothers.
All directors of the Company hold office until the next annual meeting
of shareholders of the Company or until their successors are elected and
qualified. Executive officers hold offices until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
Set forth below is a biographical description of each director and
executive officer of the Company based upon information supplied by them:
Dr. Ronald Swallow has been the Chief Executive Officer, Chairman of the
Board and Vice President-Engineering of Tellurian and its predecessor under the
same name since 1988. Dr. Swallow has a Bachelor of Science degree in
Engineering Physics, a Masters degree in Electrical Engineering and a Ph.D in
Biophysics, all from the University of Illinois.
Stuart French has been 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
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<PAGE>
from January 1996 to March 1997. Mr. French joined the Company after the sale of
Flightmatic Corp. which he owned and operated from 1987 through 1991.
Flightmatic was a flight simulation company manufacturing and selling low cost
general aviation training equipment. Previously, he spent ten years at Grumman
Aerospace as a Business Development Manager for US Air Force contracts. After
receiving a BS degree in Marketing from New England College, Mr. French was a
pilot in the US Navy.
Dr. Richard Swallow has been a director of Tellurian and its predecessor
under the same name since its inception in 1988. From 1988 to October 1993 and
to March, 1998, Dr. Swallow was an executive officer of Tellurian. Since 1973,
Dr. Swallow has been a member of the faculty and staff of Choker College in
Hartsville, South Carolina. Dr. Swallow received his Ph.D. degree in Zoology
from the University of Missouri in 1968, his Masters of Science degree from the
University of Missouri in June 1966 and Bachelor of Science degree from the
University of Illinois in June 1963.
Michael Hurd joined the Company in February 1997 and was elected a
director and Vice President of Administration and Finance and Chief Financial
and Accounting in March 1997. 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. Since 1985, he served in various officer capacities for Bobst Group Inc.,
a Swiss machinery manufacturing and sales company with revenues in excess of
$200 million. Previously, Mr. Hurd was a partner in a printing machinery
manufacturing and sales company in New Jersey. Prior to that, he served in
various positions with the consulting group of a then Big 8 public accounting
firm.
Peter Colgan joined the Board of Directors in March 1998. He has served
as the Senior Vice President of Computer Horizons Corp. since 1977. He is a
graduate of City College of New York with an accounting major and holds a Master
of Business Administration from New York University.
James G.H. Lin joined the Board of Directors in March 1998. He is has
been the President of Asian International Management since 1992. Mr. Lin is a
graduate of National Chuang Hsin University in Taiwain and holds 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
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<PAGE>
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 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.
Bankruptcy of Quantum Graphics Corporation
On March 16, 1987, Dr. Ronald Swallow founded and served as Chairman of
the Board and principal stockholder of Quantum Graphic Corporation, an image
generator research and development private company which owned certain rights to
a prototype of the AT-100. Dr. Richard Swallow was also a founder and a director
of Quantum. On April 12, 1988, Quantum, as a result of its inability to raise
sufficient funding and due to disagreements among Quantum stockholders, filed
for bankruptcy protection in the Western District of Texas, Austin Division
under Chapter 11, which was converted into a Chapter 7 filing on May 12, 1988.
On May 27, 1988, the Chapter 7 filing was dismissed and on May 31, 1988, a new
Chapter 7 filing was made with the Court and the case was closed by the
Bankruptcy Court on April 19, 1995. In November, 1991, the Bankruptcy Court
confirmed the sale of the technology relating to the AT-100 prototype to TTY
Graphics, Inc. ("TTY"). See "Business-Background."
Limitation of Directors' Liability; Indemnification
Pursuant to Tellurian's By-Laws, Tellurian must, to the fullest extent
permitted by the General Corporation Law of the State of Delaware (the "GCL"),
as amended from time to time, indemnify all persons (e.g., directors and
officers) whom it may indemnify pursuant thereto and to advance expenses
incurred in defending any proceeding for which such right to indemnification is
applicable, provided that, if the GCL so requires, the indemnitee must provide
Tellurian with an undertaking to repay all amounts advanced if so determined by
a final judicial decision. Tellurian's Certificate of Incorporation contains a
provision eliminating, to the full extent permitted by Delaware law, the
personal liability of Tellurian's directors for monetary damages for breach of a
fiduciary duty. By virtue of this provision, under current Delaware law, a
director of Tellurian will not be personally liable for monetary damages for
breach of his fiduciary duty as a director, except for liability for (I) any
breach of his duty of loyalty to Tellurian or to its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under Delaware law and (iv) any transaction from which he derives an
improper personal benefit. This provision of Tellurian's Certificate of
Incorporation pertains only to breaches of duty by directors as
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<PAGE>
directors and not in any other corporate capacity such as officers, and limits
liability only for breaches of fiduciary duties under Delaware corporate law and
not for violations of other laws such as the federal securities laws. As a
result of the inclusion of such provision, stockholders may be unable to recover
monetary damages against directors for actions taken by them that constitute
negligence or gross negligence or that are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. The inclusion of this provision in
Tellurian's Certificate of Incorporation may have the effect of reducing the
likelihood of derivative litigation against directors, and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action if successful, might
otherwise have benefitted Tellurian and its stockholders.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<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 Chief Executive Officer, Dr. Ronald Swallow and Stuart French,
President. No other executive officers earned $100,000 or more in salaries and
bonuses during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compen- Stock Number LTIP Compen-
Principal Bonus sation Award(s) of Payouts sation
Position Year Salary ($) ($) ($) ($) Options ($) ($)(2)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Ronald 1997 108,000 -0- -0- -0- -0- -0- -0-
Swallow,
Chief Executive
Officer (3)
Chief Executive
Officer(3) 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436
1995 108,000 -0- -0- -0- -0- -0- 4,200
Stuart French 1997 84,000 -0- 12,000 -0- -0- -0- -0-
President (4)
1996 84,000 -0- 23,359 -0- (1) 150,000 -0- 14,200
1995 84,000 -0- 13,814 -0- -0- -0- 4,200
</TABLE>
- ---------------
(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.
49
<PAGE>
Employment Agreements
As of November 8, 1996, the Company entered into employment agreements
with Dr. Ronald Swallow and Stuart French. The agreements provide for annual
salaries of $108,000 and $84,000, respectively, and for Mr. French to receive a
sales commission of five percent of the Company's sales. The agreements provide
for a term of four years and a continuation of their current compensation
arrangements with salary increases based upon profitability of the Company's
operations to be determined at the discretion of disinterested board members.
Commencing in 1997 and each year thereafter, the Company will after the
completion of its year end audit, establish a bonus pool for executive officers
and will make annual cash contributions to such pool of an amount equal to 10%
of pre-tax profits for the prior year. The board of directors will have the sole
discretion to allocate bonuses among such officers. The employment agreements
contain covenants not to compete during the term of the agreements and for a
period of one year thereafter. The agreement also calls for continuation of half
salary ($54,000 for Mr. Swallow and $42,000 for Mr. French) during the
post-employment one year period covered by the covenant not to compete and
indemnification against liabilities as an officer and director of the Company to
the fullest extent permitted by applicable law. No assurance can be given that
such non-compete clauses will be enforceable under applicable State laws. For a
discussion of stock options granted to Dr. Swallow and Mr.
French, see "Stock Option Plans".
During 1998, the Board of Directors approved a resolution to modify the
contract of Dr. Swallow by agreeing to allow him to continue to design and
manufacture image generation equipment if (a) the Company chose to terminate his
contract; and (b) he agreed to forfeit one-half of the salary continuation
benefit to which he would otherwise have been entitled. To date, the contract
itself has not been amended. On March 2, 1998, the Company agreed to amend Mr.
French's employment contract. Such agreement provides that in consideration of
Mr. French waiving any prior events of default of the Company under his
Employment Contract and agreeing to amend his Contract to provide the Board with
the authority to accrue salary under his Contract at such times as the
Corporation 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 Contract. Such
agreement provides that he shall be entitled to receive payment of the monthly
$4,000 accrual at such time as the Corporation 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 Corporation
earns net income in excess of $250,000 in any calendar quarter; or December 31,
1999, whichever event first occurs.
In 1997, the Board of Directors authorized the creation of a 401(K)
program in order to provide a retirement planning vehicle for its employees. As
employees of the Company, both Mr. Swallow and Mr. French would be eligible to
participate in this program. However, since the Board authorization for the
creation of the 401(K) program, the Company has taken no action to implement the
program (other than filing same with
50
<PAGE>
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 covering 750,000 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 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.
51
<PAGE>
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) , Steven Morse
(37,500), Lester Morse (37,500), David Turner (25,000) and Mat Adams (10,000).
These options are non-qualified, ten-year options and are immediately
exercisable at $2.625 per share.
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.
The total number of shares subject to options outstanding under the
1998 Plan and granted outside such Plan as of the date hereof is 710,000
exercisable at prices ranging from $1.75 to $2.625 per share.
52
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Table - The
following table provides information with respect to each exercise of stock
options during fiscal 1997 by each of the executive officers named in the
preceding summary compensation table and the fiscal year-end value of
unexercised options.
<TABLE>
<CAPTION>
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR -
END OPTION VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options
Shares FY-End (#) at FY-End ($)
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 is in excess of $3.00, 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.
In March 1997 Michael Hurd was elected to the Board of Directors and
received options to purchase 40,000 shares of Tellurian stock at $5.25 per
share. In June 1997, he received options to purchase 1,000 shares of Cyberport
Niagara stock at approximately $.72 per share and further options of 500 shares
vesting on July 1, 1998 and 500 shares vesting on July 1, 1999 under certain
restrictive conditions. The option price on these shares is also approximately
$.72 per share.
53
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth certain information as of June
1, 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 May 1, 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>
Dr. Ronald Swallow (3)(4) 370,908 11.0%
Dr. Richard Swallow(3)(5) 136,481 4.1%
Stuart French(3)(6) 249,261 6.0%
Michael Hurd (3)(7) 200,000 4.8%
All officers and directors
as a group (6 persons)(7)(8) 956,650 32.8%
1174757 Ontario Inc. (9) 450,000 11.1%
Mary Elizabeth
Huggins Trust (10) 430,049 10.9%
Alpha International Corp.
P.O. Box 671, The Valley
Anguilla, British West Indies(11) 2,200,000 35.8%
Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (11) (12) 800,000 16.9%
</TABLE>
- -------------
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) Based upon 3,959,763 shares outstanding without giving effect to the
issuance of shares under the Company's outstanding Warrants and Stock
Options.
54
<PAGE>
(3) The address for Dr. Ronald Swallow, Stuart French, Dr. Richard Swallow and
Michael Hurd is c/o Tellurian, Inc. at 300K Route 17 South, Mahwah, NJ
07430.
(4) Includes options to purchase 73,000 shares.
(5) Includes options to purchase 27,000 shares.
(6) Includes options to purchase 200,000 shares.
(7) Includes options to purchase 200,000 shares.
(8) Includes options to purchase 500,000 shares.
(9) Includes options to purchase 100,000 shares.
(10) Trust set up by Charles H. Powers, a founder and former shareholder,
officer 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.
(11) Represents Common Stock issuable upon exercise of Warrants.
(12) The beneficial owner and sole officer and director of Imafina S.A. is
Hubert Hendrickx.
(13) This information is derived from a Schedule 13(d) filing.
55
<PAGE>
CERTAIN TRANSACTIONS
Effective July 2, 1996, Tellurian, Inc., a South Carolina
corporation, reincorporated in Delaware under the same name by merging itself
into a wholly owned subsidiary formed for that purpose on January 25, 1996. All
references in Certain Transactions to the "Company" or "Tellurian" include
Tellurian, Inc., a South Carolina corporation, unless the context indicates
otherwise. The following discussion regarding the issuances of shares gives
retroactive effect to such merger.
In March 1995, Tellurian completed a private placement of 600,000
shares of its common stock for a purchase price of $100,000. Investors in the
private placement were Dennis Giunta (200,000 shares), Joseph Defalco (125,000
shares), Matthew Langden (125,000 shares), John Bruno (45,000 shares), 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 May 1, 1998, Mr. Powers was owed approximately $710,865, inclusive of
interest at a rate of 10% per annum. Such $710,865 includes $ $346,736 of
principal and $ $364,129 of accrued and unpaid interest . Previously, the
Company repaid Powers a total of $221,200. This loan is payable upon demand
after November 1, 1997. However, as of May 1, 1998, Mr. Powers has not demanded
payment. The Company is seeking the conversion of these obligations into
restricted common stock in the Company. However, no assurances can be given that
Mr. Powers will agree to this conversion, or that any conversion granted will be
on terms and conditions acceptable to the Company.
From inception through the completion of the initial public offering in
November 1996, Sophia Swallow, Richard Swallow, Celia Klimas (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. As of May 1,1998,
Tellurian owed Ms. Klimas the principal of her loan plus accrued interest
therein. See "Use of Proceeds."
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
56
<PAGE>
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 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. At December 31, 1997, the Company owed
Interactive Media $56,000. The Company's obligation for 1998 would have been an
additional $88,000.
Management believes that all transactions with officers, directors and
shareholders of the Company (and affiliated companies) were made on terms no
less favorable to the Company than those available from unaffiliated parties. It
is intended that any future transactions with officers, directors and affiliates
of the Company will be made on terms no less favorable to the Company than those
available from unaffiliated parties.
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
57
<PAGE>
50,000,000 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.
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
58
<PAGE>
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 Convertible 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 Convertible
Cumulative Preferred Stock" (the "Series 1 Preferred Stock" or "Preferred
Shares") with the following rights,
preferences and privileges:
Conversion. Unless previously redeemed by the Company, the holders of
the Series 1 Preferred Stock are entitled beginning one year after the date of
this Prospectus, to convert each Preferred Share into ( ) shares of Common Stock
subject to adjustment described below. In lieu of issuing fractional shares upon
conversion, the Company may pay an equivalent amount in cash. No adjustment for
dividends will be made on conversion of any Series 1 Preferred Stock.
Accordingly, accrued dividends will not be paid on a Preferred Share if it is
converted between a dividend payment date and the next record date for dividend
payments. If any holder surrenders a Preferred Share for conversion after the
close of business on the record date for the payment of a dividend and prior to
the opening of business on the next dividend payment date, then, notwithstanding
such conversion, the dividend payable on such dividend date will be paid to the
registered holder of such share on such record date. In such event, such share,
when surrendered for conversion, must be accompanied by payment of an amount
equal to the dividend payable on such dividend payment date on the share so
converted. In the case of Preferred Shares called for redemption, conversion
rights will expire at the close of business on the redemption date.
The conversion rate is subject to adjustment upon the occurrence of
certain events, including the issuance of stock of the Company as a dividend or
distribution on the Common Stock but not as dividends on the Preferred Shares;
sub-divisions and combinations of Common Stock; certain reclassifications,
consolidations, mergers and sales of property of the Company; the issuance to
all holders of Common Stock of certain rights or Preferred Warrants; and the
distribution to all holders of Common Stock of evidence of indebtedness of the
Company or of assets (excluding cash dividends or distributions from retained
earnings). Except as stated above, the Conversion Price will not be adjusted for
the issuance of Common Stock or any securities convertible into or
59
<PAGE>
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
Dividends. Each Preferred Share is entitled to cumulative annual
dividends of $.50 payable on September 30 of each year commencing September 30,
1999. 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 Common Stock, in lieu of cash. Shares used for such purpose will be
valued at the average closing sales price 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 Common Stock.
Redemption. The Preferred Shares are redeemable one year from the date
of this Prospectus at the option of the Company, on not less than 30 days'
written notice to registered holders at the redemption price of $ per share plus
accumulated dividends, provided the Company may not redeem the Preferred Shares
unless the closing price of the Common Stock equals or exceeds $ 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.
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 $____ 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,
or if none, the closing bid price of the Common 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.
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. No provision for
60
<PAGE>
adjustment exists for the issuance of shares of Series 1 Preferred Stock Common
Stock, among other circumstances, upon exercise of any of the Preferred Warrants
or options granted under any stock option plan. 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 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 issued 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.
61
<PAGE>
The Preferred Warrants are expected to be traded on the NASDAQ SmallCap
Market under the symbol " ."
Common Stock Purchase Warrants
The Common Stock Purchase Warrants for 5,127,500 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.
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
62
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock or the perception that
such sales could occur could adversely effect the market price for the Common
Stock. The Company has 3,959,763 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, 2,321,605 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
63
<PAGE>
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. At the end of the aforesaid lock-up
period (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 these 1,000,000 shares as
soon as they are permitted to do so. Ordinarily, under Rule 144, a person
holding restricted securities for a period of one year may, every three months
thereafter, sell in ordinary brokerage transactions or in transactions directly
with a market maker, an amount of shares equal to the greater of one percent of
the Company's then-outstanding Common Stock or the average weekly trading volume
in the same securities during the four calendar weeks prior to such sale. See
"Shares Eligible For Future Sale."
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.
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.
64
<PAGE>
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 offering,
the public 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 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.
65
<PAGE>
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.
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.
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.
66
<PAGE>
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 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.
67
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- ----------------
(Unaudited) (a)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 12,036 $ 187,189
Marketable Securities 109,992 108,912
Accounts Receivable, net of allowance for
doubtful accounts of $-0- and $-0-, respectively 24,141 9,029
Inventories 647,554 662,364
Prepaid Consulting Fees 310,654 62,187
Prepaid Expenses and Other Current Assets 21,272 23,206
---------------- ----------------
Total Current Assets 1,125,649 1,052,887
---------------- ----------------
PROPERTY AND EQUIPMENT- at cost
less accumulated depreciation 2,575,861 2,688,346
---------------- ----------------
OTHER ASSETS:
Security Deposits 63,778 70,070
Prepaid Consulting Fees 100,183 0
Deferred Costs 0 92,099
---------------- ----------------
Total Other Assets 163,961 162,169
---------------- ----------------
$ 3,865,471 $ 3,903,402
================ ================
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 518,825 $ 1,953,481
Current Maturities of Long-term debt 34,953 34,953
Notes Payable 100,000 100,000
Notes Payable- other 0 200,000
Notes Payable--Related Parties 496,736 496,736
Interest Payable--Related Parties 368,409 354,980
---------------- ----------------
Total Current Liabilities 1,518,923 3,140,150
---------------- ----------------
LONG-TERM DEBT - net of current maturities 122,635 125,630
---------------- ----------------
MINORITY INTEREST 640,027 0
STOCKHOLDERS' EQUITY:
Common Stock--$.01 par value
Authorized -25,000,000 and 10,000,000 shares, respectively
Issued and Outstanding - 3,959,763 and 3,025,000 shares, respectively 39,598 30,250
Additional Paid-in Capital 7,997,964 6,345,162
Accumulated Deficit (6,535,119) (5,767,777)
Other Comprehensive Income 81,442 29,987
---------------- ----------------
Total Stockholders' Equity 1,583,886 637,622
---------------- ----------------
$ 3,865,471 $ 3,903,402
================ ================
</TABLE>
(a) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that time.
The accompanying notes are an integral part of the financial statements.
Page 3
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
(unaudited) (unaudited)
REVENUES $ 34,908 $ 81,285
COST OF GOODS SOLD 117,930 63,662
--------- ----------
GROSS PROFIT (LOSS) (83,023) 17,623
--------- ----------
OPERATING EXPENSES:
Research and Development 209,989 204,087
Selling 101,270 115,256
General and Administrative 343,126 372,837
--------- ----------
654,385 692,180
--------- ----------
LOSS FROM OPERATIONS (737,408) (674,557)
--------- ----------
OTHER INCOME AND EXPENSES:
Other Income 1,899 50,097
Loss on Sale of Fixed Asset (14,571) 0
Interest Expense (3,833) 0
Interest Expense--Related Parties (13,429) (12,300)
--------- ----------
(29,934) 37,797
--------- ----------
NET LOSS $(767,342) $(636,760)
======== =========
NET LOSS PER COMMON SHARE $ (0.24) $ (0.21)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,195,885 3,025,000
========= =========
The accompanying notes are an integral part of the financial statements.
Page 4
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (767,342) $ (636,760)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 81,827 13,674
Reclassification of Marketable Securities 0 4,136
Accrued Interest on Marketable Securities (1,080) 0
Loss on Sale of Fixed Asset 14,571 0
Changes in Assets and Liabilities
Accounts Receivable (15,112) (48,443)
Inventories 14,810 (270,000)
Prepaid Expenses and Other Current Assets 41,284 (9,282)
Deferred Costs 92,099 50,000
Security Deposits 6,292 (37,822)
Prepaid Consulting Fees (8,000) 18,656
Accounts Payable and Accrued Expenses (95,490) (14,553)
Payroll Payable 0 (98,399)
Payroll Taxes Payable 0 (26,398)
Consulting Fees Payable 0 (13,950)
Interest Payable--Related Parties 13,429 8,550
Deferred Revenue 0 (24,440)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (622,712) (1,085,031)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Fixed Assets 18,000 0
Purchases of Property and Equipment (1,912) (157,007)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,088 (157,007)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES:
Repayments of notes payable--other (250,000) 0
Repayment of Long-term Debt (2,995) 0
Proceeds of notes payable - other 50,000 0
Proceeds from Issuance of Stock 603,011 0
Payments of deferred offering costs (20,000) 0
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 380,016 0
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES 51,455 0
------------ ------------
NET CHANGE IN CASH (175,153) (1,242,038)
CASH-- Beginning 187,189 1,761,186
------------ ------------
CASH-- Ending $ 12,036 $ 519,148
============ ============
</TABLE>
Page 5
<PAGE>
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 3,833 $ 3,750
Cash Paid for Income Taxes $ 200 $ 150
SCHEDULE OF NON-CASH ACTIVITIES:
Reduction of Trade Payables through issuance of common
stock $ 699,056 $ -
Reduction of Trade Payables through issuance of subisdiary
Series B special shares $ 640,027
Issuance of Common Stock for Consulting Fees $ 380,000
--------- ---------
$ 1,719,083 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of the financial
statements.
Page 6
<PAGE>
TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
NOTE 1--Presentation Basis
The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1997 which were included in its Form 10-K filing dated April 15,
1998. Such statements should be read in conjunction with the data herein.
NOTE 2--Interim Consolidated Financial Statements
The consolidated balance sheet of the Company at March 31, 1998 and the
consolidated statements of operations and cash flows for the three months ended
March 31, 1998 and 1997 are unaudited but include all adjustments which, in the
opinion of management, are necessary for the fair presentation of the Company's
financial position and results of operations for the periods then ended. All
such adjustments are of a normal recurring nature. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for a full fiscal year.
NOTE 3--Minority Interest in Subsidiaries
In March 1998, Cyberport and certain of its vendors agreed to
restructure approximately $1,349,000 of accounts payable as follows:
1. The vendors transferred Canadian $1,000,000 of payables to Cyberport's
landlord. The landlord was given the right to convert the payables into
restricted shares of the Company's common stock. In March 1998, the
landlord converted the payables into 350,000 shares of common stock.
2. Cyberport issued 915,559 Series B Special Shares at Canadian $1.00 per
share for balance of the monies owed. At March 31, 1998, the value of the
shares issued by Cyberport is shown as a minority interest on the Company's
consolidated balance sheet.
In March 1997 the Company formed a subsidiary, Cyberport Niagara, Inc.,
in the Province of Ontario, Canada, in which the Company holds an 87.5 percent
interest In the fourth quarter of 1997, the Company acquired the balance of the
interest in Cyberport.
On March 24,1997 the Company formed a subsidiary, Cyberport
International, Inc. ("CII") in the state of Delaware in which the Company held a
96 percent interest. In the fourth quarter of 1997, the Company acquired the
balance of the interest in CII.
NOTE 4---Stock Options
In June of 1997 the Company authorized stock options to two
individuals, Michael Hurd and David Turner, President and General Manager of
Cyberport Niagara, Inc, respectively. These options allow Mr. Turner to purchase
500 shares of Cyberport stock for $1.00 (Canadian) per share and allow Mr. Hurd
to purchase 2,000 shares of Cyberport stock at $1.00 (Canadian) per share. Mr.
Turners options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options. The
remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares on
July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors or
in the employ of Tellurian on those dates. The options expire on June 30, 2007.
No options have been exercised as at March 31, 1998.
Page 7
<PAGE>
NOTE 5--Translation of Foreign Currency
The foreign currency financial statements of subsidiaries operating outside the
United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities at current exchange
rates; and stockholders equity at historical rates. Translation adjustments were
accumulated and have been included as a separate component of equity at March
31, 1998.
NOTE 6--Inventories
Inventories consist of the following:
March 31 , December 31,
1998 1997
---- ----
(Unaudited)
Raw materials $217,164 $221,575
Work-in-process 196,500 206,899
Finished Goods 233,890 233,890
--------- ---------
$647,554 $662,364
========= =========
NOTE 7--Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included as their effect would be anti-dilutive.
Page 8
<PAGE>
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 187,189
Marketable securities 108,912
Accounts receivable, net of allowance for
doubtful accounts of $-0- 9,029
Inventories 662,364
Prepaid consulting fees 62,187
Prepaid expenses and other current assets 23,206
------------
Total current assets 1,052,887
------------
PROPERTY AND EQUIPMENT - at cost
less accumulated depreciation 2,688,346
------------
OTHER ASSETS:
Security deposits 70,070
Deferred offering costs 92,099
------------
Total other assets 162,169
$ 3,903,402
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 34,953
Note payable - bank 100,000
Notes payable - other 200,000
Accounts payable and accrued expenses 1,953,481
Notes payable - related parties 496,736
Interest payable - related parties 354,980
------------
Total current liabilities 3,140,150
------------
LONG-TERM DEBT - net of current maturities 125,630
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value
Authorized - 25,000,000 shares
Issued and outstanding - 3,025,000 shares 30,250
Additional paid-in capital 6,345,162
Accumulated deficit (5,767,777)
Other comprehensive income 29,987
------------
Total stockholders' equity 637,622
$ 3,903,402
============
The accompanying notes are an integral part of the consolidated financial
statements
F-3
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
REVENUES $ 521,045 $ 819,380
COST OF SALES 355,132 284,007
------------- ------------
GROSS PROFIT 165,913 535,373
------------- ------------
OPERATING EXPENSES:
Research and development 862,031 688,103
Selling 300,662 189,429
General and administrative 1,630,637 395,692
------------- ------------
2,793,330 1,273,224
LOSS FROM OPERATIONS (2,627,417) (737,851)
------------- ------------
OTHER INCOME AND EXPENSES:
Interest expense (71,512) (50,313)
Interest expense - related parties (49,674) (61,020)
Interest income 68,339 21,087
Deferred debt costs - (152,398)
Other income (expenses) (28,729) 18,085
------------- ------------
(81,576) (224,559)
NET LOSS $ (2,708,993) $ (962,410)
============= ============
NET LOSS PER COMMON SHARE $(.90) $(.53)
===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,025,000 1,817,708
========= =========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
YEARS ENDED
DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Net loss $ (2,708,993) $ (962,410)
Other comprehensive income:
Foreign currency translation adjustment 29,987 -
------------- ------------
Comprehensive loss $ (2,679,006) $ (962,410)
============= ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
ADDITIONAL OTHER STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT January 1, 1996 .................. 1,600,000 $ 16,000 $ 107,265 $(2,096,374) $ -- $(1,973,109)
Issuance of common stock and warrants in
connection with initial public offering ... 1,400,000 14,000 7,517,875 -- -- 7,531,875
Offering costs in connection with
initial public offering ................... -- -- (1,326,728) -- -- (1,326,728)
Conversion of promissory notes in
connection with initial public offering ... 25,000 250 24,750 -- -- 25,000
Issuance of warrants in connection with
private placement ......................... -- -- 22,000 -- -- 22,000
Net loss for the year ended December 31, 1996 -- -- -- (962,410) -- (962,410)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT December 31, 1996 ................ 3,025,000 30,250 6,345,162 (3,058,784) -- 3,316,628
Foreign currency translation adjustment ..... -- -- -- -- 29,987 29,987
Net loss for the year ended December 31, 1997 -- -- -- (2,708,993) -- (2,708,993)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT December 31, 1997 ................ 3,025,000 $ 30,025 $ 6,345,162 $(5,767,777) $ 29,987 $ 637,622
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996
- -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,708,993) $ (962,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred costs 50,000 -
Accrued interest income on marketable securities (3,912) (6,118)
Depreciation and amortization 231,442 17,500
Amortization of deferred debt costs - 152,398
Loss on sale of property and equipment 8,954 -
Loss on sale of marketable securities 12,388 -
Changes in assets and liabilities:
Accounts receivable 125,333 (129,362)
Allowance for doubtful accounts (115,000) 115,000
Inventories (374,513) (200,633)
Prepaid consulting fees 74,625 (136,812)
Prepaid expenses and other current assets (9,350) (6,045)
Security deposits (22,320) (46,825)
Accounts payable 1,710,814 (384,836)
Consulting fees payable (46,594) (209,099)
Interest payable - related parties 39,674 21,702
Deferred revenue (80,448) (76,000)
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,107,900) (1,851,540)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 48,000 -
Purchases of property and equipment (2,770,566) (190,965)
Sale of marketable securities 2,062,998 -
Purchases of marketable securities (205,000) (1,969,268)
Deferred costs - (50,000)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (864,568) (2,210,233)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - bank 100,000 -
Proceeds from notes payable - other 200,000 -
Proceeds from long-term debt 264,764 703,000
Repayment of long-term debt (104,181) (870,000)
Payments of deferred offering costs (92,099) -
Payments of offering costs - (1,326,728)
Proceeds from issuance of warrants in connection with private placement - 22,000
Proceeds from notes payable - related parties - 248,000
Repayments of notes payable - related parties - (422,185)
Proceeds from issuance of common stock - 7,531,875
Repayments of notes payable - other - (500)
Payments of deferred debt costs - (101,633)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 368,484 5,783,829
------------- ------------
EFFECT OF EXCHANGE RATE CHANGES 29,987 -
------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,573,997) 1,722,056
CASH AND CASH EQUIVALENTS - beginning 1,761,186 39,130
------------- ------------
CASH AND CASH EQUIVALENTS - ending $ 187,189 $ 1,761,186
============= ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
- -------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
SCHEDULE OF NON-CASH ACTIVITIES:
Conversion of long-term debt into common stock $ - $ 25,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 81,517 $ 89,631
Cash paid for income taxes - -
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-8
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company
experienced a net loss for the year ended December 31, 1997 of
approximately $2,709,000 and at December 31, 1997 has a deficit in working
capital of approximately $2,106,000. These matters, among others, raise
substantial doubt about the Company's ability to continue as a going
concern.
Management's plan includes the raising of additional capital through the
public sale of common stock and warrants (Note 18) and the formulation of a
restructuring plan with a majority of its trade creditors of its Canadian
subsidiary (Note 19). The unaudited pro forma effect of these items are
presented in Note 20.
During March 1998 the restructuring plan was accepted and additional funds
were raised as contemplated by the public offering. However, continuation
of the business thereafter is dependent on the Company's ability to achieve
sufficient cash flow to achieve profitable operations and to meet its
restructured debt obligation as well as its current operations.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Tellurian, Inc. ("Tellurian"), a South Carolina corporation, was
incorporated on August 10, 1988 for the purpose of designing and
manufacturing real time image generation equipment for training and
simulation. Tellurian also provides consulting and parts/repair services
related to computer image generator technology. These operations constitute
a single business segment. Tellurian sells its image generators to two
types of entities, those which are interested in training and simulation
and those which specialize in entertainment devices and games.
In January 1996, Tellurian formed a wholly-owned subsidiary in the State of
Delaware (the "Company") and merged Tellurian into such corporation on July
2, 1996. Pursuant to the merger, the holders of all of the shares of common
stock of Tellurian exchanged their 1,600,000 shares outstanding for
1,600,000 shares of the Company on a pro rata basis.
In March 1997, the Company formed a wholly-owned subsidiary, Cyberport
Niagara, Inc. ("Cyberport") in the province of Ontario, Canada. Cyberport
operates a tourist entertainment center in Niagara Falls, Ontario, Canada
which opened in late June 1997. In addition the Company formed a second
wholly-owned subsidiary, Cyberport International, Inc., a Delaware
corporation. This corporation is inactive and has no assets.
F-9
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Consolidation
----------------------
The consolidated financial statements for the year ended December 31, 1997
include the accounts of the Company and its subsidiary. All significant
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
Sales are recognized when the finished product is shipped or when services
are performed.
Cash Equivalents
----------------
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
Marketable Securities
---------------------
The Company classified all of its marketable securities as
held-to-maturity, and accounted for these investments at amortized cost.
Accordingly, no adjustment for unrealized holding gains or losses was
reflected in the Company's consolidated financial statements. At December
31, 1996, the Company's held-to-maturity securities consisted of treasury
bills with contractual maturities from six months to two years and the
carrying amount of these investments approximated market value. The
treasury bills were sold in 1997. At December 31, 1997, the Company's
held-to-maturity securities consisted of a certificate of deposit with an
original maturity of one year. The certificate matures in April 1998.
Concentrations of Credit Risk
-----------------------------
Accounts Receivable
-------------------
The Company sells primarily to aviation training and entertainment
entities throughout the United States. It is the Company's policy to
require a substantial deposit prior to commencement of production for
specific orders with the balance due upon completion.
Cash
----
The Company maintains cash balances in its banks which, at times, may
exceed the limits of the Federal Deposit Insurance Corp.
F-10
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the life of the lease.
Expenditures for repairs and maintenance are charged to expense as
incurred.
Deferred Offering Costs
-----------------------
Deferred offering costs represent costs incurred in the filing of a
registration statement on Form SB-2 for the purpose of registering
securities for sale to the holders of its warrants. Such costs are charged
to additional paid-in capital when the registration is complete.
Deferred Debt Costs
-------------------
Deferred debt costs represented costs incurred in connection with the
Company's 1996 private placement agreement. The costs were amortized over
the respective terms of the promissory notes issued. All the promissory
notes were repaid from the proceeds of the public offering.
Deferred debt costs amounted to $-0- and $152,398 for 1997 and 1996,
respectively.
Research and Development
------------------------
Research and development costs, related to present and future products, are
charged to expense in the period incurred. Research and development costs
amounted to $862,031 and $688,103 for 1997 and 1996, respectively.
Advertising Costs
-----------------
Advertising costs are charged to operations when incurred. Advertising
costs amounted to $73,399 and $-0- for 1997 and 1996, respectively.
F-11
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation of Foreign Currency
-------------------------------
The foreign currency financial statements of divisions operating outside
the United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities, at current
exchange rates; and stockholders' equity at historical exchange rates.
Income Taxes
------------
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they occur.
Loss Per Common Share
---------------------
The Company adopted SFAS No. 128, "Earnings Per Share" which establishes
new standards for computing and presenting earnings per share. The
statement also requires restatement of all prior period earnings per share
data presented.
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. The weighted average number of shares
outstanding has been adjusted to reflect the recapitalization in connection
with the private placement as if it had occurred as of the beginning of the
period for which loss per share is presented. Common stock equivalents have
not been included as their effect would be antidilutive.
Recently Issued Pronouncements
------------------------------
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components in a full set of financial
statements and is effective for fiscal years beginning after December 15,
1997. Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The Company has elected to adopt SFAS No. 130 in 1997.
American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities," establishes specific
criteria for the recognition and measurement of environmental remediation
liabilities. The adoption of the statement in 1997 did not have a
significant effect on the Company's financial condition or results of
operations.
F-12
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 3 - INVENTORIES
Inventories at December 31, 1997, consist of the following:
Raw materials $ 221,575
Work-in-process 206,899
Finished goods 233,890
----------
$ 662,364
==========
NOTE 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at December 31, 1997, consists of:
Estimated
Useful Lives
<S> <C> <C>
Display and entertainment units $ 661,275 7 Years
Equipment 234,444 7 Years
Vehicles 44,415 5 Years
Computer software 62,863 5 Years
Office furniture 67,010 7 Years
Leasehold improvements 1,901,686 5 to 10 years
-------------
2,971,693
Less: Accumulated depreciation and amortization 283,347
-------------
$ 2,688,346
=============
</TABLE>
Depreciation expense amounted to $231,442 and $17,500 for 1997 and 1996,
respectively.
NOTE 5 - NOTE PAYABLE - BANK
In March 1997, the Company entered into an agreement with a bank to borrow
up to a maximum of $100,000. The note is due on March 25, 1998 with
interest charged at 8.38% per annum and is collateralized by a certificate
of deposit in the amount of $105,000 maturing on April 1, 1998.
Interest on the note amounted to $1,080 for 1997.
F-13
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 6 - NOTE PAYABLE - OTHER
The note bears interest at the rate of 12% per annum compounded monthly
and is due on demand. The Company borrowed an additional $50,000 in January
1998 and the note was repaid in March 1998.
The note is secured by the Company's accounts receivable, inventory and
proceeds from the sale or offering of securities.
Interest on the note was not accrued as the funds were received on December
31, 1997 and such amount was deemed to be immaterial.
NOTE 7 - LONG-TERM DEBT
Long-term debt at December 31, 1997, consists of the following:
Promissory note payable to a Canadian bank in irregular principal
installments totalling $50,000 Canadian per year through December
2001 and $29,714 Canadian in 2002 plus interest at three percent (3%)
above the prime rate as charged by the Bank Of Canada. The note is
secured by all of the tangible assets of
Cyberport. $ 160,583
Less: Current maturities 34,953
----------
$ 125,630
==========
Interest on long-term debt amounted to $9,363 and $-0- for 1997 and 1996,
respectively.
Maturities at December 31, 1997 are payable as follows:
Year Ended
December 31, Amount
1998 $ 34,953
1999 34,953
2000 34,953
2001 34,953
2002 20,771
----------
$ 160,583
==========
F-14
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
The Company has borrowed funds from officers and stockholders to finance
its operations. The notes are due on demand commencing November 1, 1997 and
bear interest at the rate of 10% per annum.
Notes payable amounted to $496,736 and accrued interest payable amounted to
$354,980 at December 31, 1997.
Interest expense charged to operations amounted to $49,674 and $61,020 for
1997 and 1996, respectively.
NOTE 9 - FINANCIAL INSTRUMENTS
The amounts at which cash, accounts receivable, accounts payable, advances
on line of credit, notes payable - related parties and notes payable -
other are presented in the balance sheet approximate their fair value due
to their short maturities.
The amount at which long-term debt is presented approximates its fair value
as its interest rate is comparable to other similar types of debt.
NOTE 10 - INCOME TAXES
Company operations are located in the United States and Canada (in 1997).
As such, loss before provision for income taxes and the provision for
income taxes are generated from domestic and foreign sources.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
- ------------------------------------------------------------------------------------- -------------
<S> <C> <C>
Loss before provision for income taxes $ (2,708,993) $ (962,410)
============= ===========
The components of the provision for income taxes by taxing
jurisdiction are as follows:
Federal $ - $ -
State - -
Foreign - -
------------- -----------
$ - $ -
============= ===========
</TABLE>
F-15
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 10 - INCOME TAXES (CONTINUED)
The major component of the deferred tax asset at December 31, 1997, is as
follows:
Net operating loss carryforwards $ 1,468,561
Less: Valuation allowance (1,468,561)
------------
$ -
============
A 100% valuation allowance is being provided at December 31, 1997 as it is
uncertain if the above items would be utilized.
A reconciliation of the Company's income tax expense computed at the U.S.
federal statutory tax rate of 35% and the provision for income taxes are as
follows:
YEARS ENDED
DECEMBER 31,
1997 1996
- ------------------------------------------------ ----------- ----------
Income tax credit at statutory rate $ (887,701) $ (336,844)
State income tax credits (126,815) (48,120)
Foreign income taxes (454,045) -
Net operating loss carryforwards 1,468,561 384,964
---------- ----------
$ - $ -
=========== ==========
At December 31, 1997, the Company had unused net operating loss
carryforwards of approximately $3,671,400 expiring in 2011 and 2012.
F-16
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease
-----
All of the Company's operations take place in leased facilities.
In April 1995, the Company entered into a five year lease for its office
and manufacturing facility. In May 1996, the Company terminated the lease
and moved to a new facility (first facility) entering into a two year lease
expiring in May 1998. The Company is also responsible for its share of
operating expenses (as defined). In November 1996, the Company entered into
a ten year lease for a second facility effective January 1, 1997, and moved
to such new facility. The Company is also responsible for its share of
operating expenses (as defined). In addition, the Company is still
responsible for the rent and operating expenses for the first facility
under the two year lease expiring in May 1998.
The Company also sublets a portion of the first facility under the May 1998
lease and receives approximately $1,400 per month.
In February 1997, Cyberport entered into a five year lease for its tourist
entertainment center in Niagara Falls, Ontario, Canada. The lease expires
in January 2002 and the average annual rental over the life of the lease is
approximately $263,000. Cyberport, at its sole option, may purchase this
facility for $3,000,000 Canadian at any time from January 1, 1998 to July
31, 1998.
Future minimum lease payments are as follows:
Year Ending
December 31,
1998 $ 325,022
1999 340,537
2000 344,276
2001 344,276
2002 97,440
Thereafter 300,000
$ 1,751,551
Rent expense amounted to $298,689 and $62,574 net of rental income of
$31,124 and $18,085 for 1997 and 1996, respectively.
F-17
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements
---------------------
In November 1996, the Company entered into employment agreements with two
of its principal officers covering four year terms ending in November 2000.
The agreements provide for annual salaries aggregating $192,000 which are
payable as follows:
1998 $ 192,000
1999 192,000
2000 160,000
In addition, the agreements provide for bonuses to be paid at the
discretion of the board of directors from a bonus pool equal to ten percent
(10%) of pre-tax income beginning in the year ended December 31, 1997.
Compensation under the agreements amounted to $192,000 and $32,000 for 1997
and 1996, respectively.
Consulting Agreements
---------------------
In connection with its initial public offering, the Company entered into a
financial consulting agreement with its underwriter for the period November
6, 1996 to November 5, 1998 (see Note 13). Consulting fees of $149,250 were
paid in November 1996 and the fees are being amortized over the two year
period. Consulting expense amounted to $74,625 and $12,438 for 1997 and
1996, respectively.
In January 1998, the Company entered into a consulting agreement with a
corporation whereby such corporation would provide various consulting
services for an eighteen (18) month period. Terms of the agreement include
the following:
1. A monthly fee of $5,000.
2. The issuance of 150,000 shares of common stock. Such shares were
issued in March 1998.
Settlement Agreement
--------------------
In November 1997, the Company signed a mutual release and settlement
agreement (the "Agreement") with Fightertown Entertainment, Inc.
("Fightertown"), a customer. The terms of the Agreement include the
following:
1. The Company must deliver to Fightertown twenty-five (25) Eagle units
based on a delivery schedule in the Agreement.
2. Fightertown will have the right to purchase up to thirty (30)additional
Eagle units at any time on or before June 30, 1999 at a price
and delivery terms as specified in the Agreement.
F-18
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Settlement Agreement (Continued)
--------------------
3. The Company agrees to pay Fightertown $20,000 no later than January
31, 1998 for future consulting services as defined in the Agreement.
Such amount was paid on January 30, 1998.
4. The Company agrees to pay Fightertown $67,500 in three installments of
$22,500 on August 15, 1998, August 15, 1999 and August 15, 2000. The
payments are for the use and display of the Fightertown name at the
Cyberport facility and for Fightertown's expertise in the theming and
running of air battle games.
5. The Company is executing a stipulated judgment in the amount of
$500,000 in favor of Fightertown to be entered against the Company
should the Company fail to comply with any term of this Agreement.
Technology Agreement
--------------------
In January 1996, the Company entered into an agreement with a Republic of
China corporation ("ROC") which replaces an earlier agreement entered into
in 1995 with a different Republic of China corporation. There have been no
modifications to the old agreement other than the customer name. The
purpose of this agreement is to provide training, advice and consultation
in relation to computer image generator technology. The agreement provides
for a fee of $1,500,000 payable as follows:
4% upon signing the agreement
16% upon the completion of the first prototype of the computer image
generator
10% upon delivery of the design data package
40% upon completion of the training program
20% 90 days after completion of the training program
10% 180 days after completion of the training program
Of the agreed fee of $1,500,000, the Company, pursuant to separate
agreements, has agreed that ROC will pay $650,000 to two unrelated parties as
follows:
1. $500,000 to ROC's parent company in consideration of the parent's
services and expenses incurred in negotiating the agreement and
establishing ROC.
2. $150,000 to an unrelated corporation in consideration of such
corporation's contribution to the development of software for the
computer image generator technology.
As compensation for the license granted, the Company will receive royalty
payments at the rate of 2% of the sales value of the products or derivative
products sold by such corporation using the technology, payable annually
for a period of five years from the date of the agreement. In return, the
Company agrees not to market such products within a restricted group of
countries as defined in the agreement.
F-19
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Technology Agreement (Continued)
--------------------
In October 1995, the Company assigned proceeds received under the agreement
and granted a security interest to a stockholder (see Note 6).
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 (see Note 13) but no later than March 31, 1997.
These amounts were paid in November 1996.
2. $72,500 will be due and payable one year after the initial payments.
$37,500 of this amount was paid in 1996.
NOTE 12 - MAJOR CUSTOMERS
As of December 31, revenues from major customers are as follows:
1997 1996
- ---------------------------------------------- ------ --------
Customer A 38.0% 75.9%
Customer B 26.7% 16.0%
Customer C 15.4% -
F-20
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 13 - BUSINESS SEGMENT DATA
The Company's operations are conducted through two business segments, Image
Corporation Equipment and the Entertainment Center.
<TABLE>
<CAPTION>
Net sales of each segment are as follows:
Years Ended
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Image generation equipment:
United States $ 271,324 $ 197,760
Republic of China 198,000 621,620
----------- -----------
469,324 819,380
Entertainment center - Canada 51,721 -
----------- -----------
$ 521,045 $ 819,380
=========== ===========
Operating loss of each segment is as follows:
Years Ended
December 31,
--------------------------
1997 1996
------------- -----------
Image generation equipment $ (1,562,269) $ (737,851)
Entertainment center (1,068,168) -
------------- -----------
Operating loss of segments (2,630,437) (737,851)
Other expenses (25,709) (134,313)
Interest expense - net of interest income (52,847) (90,246)
------------- -----------
$ (2,708,993) $ (962,410)
============= ===========
</TABLE>
F-21
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 13 - BUSINESS SEGMENT DATA (CONTINUED)
Identifiable assets of each segment at December 31, 1997 are as follows:
Image generation equipment $ 1,558,587
Entertainment center 2,081,616
-------------
Identifiable assets 3,640,203
General corporate assets 263,199
-------------
$ 3,903,402
=============
Identifiable assets by segment are those assets that are used in the
operation of each segment. General corporate assets consist of marketable
securities, prepaid consulting fees and deferred offering costs.
NOTE 14 - STOCKHOLDERS' EQUITY
Initial Public Offering
-----------------------
In November 1996, the Company completed its initial public offering by
filing a registration statement on Form SB-2 under the Securities Act of
1933, as amended. The Company offered 1,400,000 shares of $.01 par value
common stock and 2,127,500 five-year warrants (including the underwriter's
over-allotment option) to purchase 2,127,500 shares of its common stock at
$6.00 per share. The Company raised $6,205,147, which was net of offering
costs of $1,326,728. In addition, 450,000 shares were sold by certain
existing stockholders for $2,250,000 before offering costs. The Company did
not receive any proceeds from the sale of these shares.
Common Stock
------------
On November 17, 1997, the Company increased its authorized common stock to
25,000,000 shares at a par value of $.01 per share.
Warrants
--------
On December 27, 1995 and January 22, 1996, the Company issued a total of
3,000,000 warrants to purchase 3,000,000 shares of its common stock at an
exercise price of $6.00 per share. The warrants were issued in connection
with the subordinated promissory notes and were valued at $.01 per warrant
amounting to $30,000. Such amount was credited to additional paid-in
capital. In addition, the Company issued 300,000 warrants to purchase
300,000 shares of its common stock at $6.00 per share for $6,000.
F-22
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
Warrants (Continued)
On June 27, 1996, an agreement was signed cancelling 300,000 of the
warrants. In addition, upon the completion of the initial public offering,
the balance of the warrants (3,000,000) automatically converted to warrants
identical to those sold to the public.
Outstanding warrants at December 31, 1997, are as follows:
Outstanding Exercise Exercise
Warrants Price Period
------------ --------- -------------------
5,127,500 $6.00 November 6, 1996 -
November 5, 2001
No warrants were exercised during 1996 nor 1997.
NOTE 15 - STOCK OPTION PLAN
On June 1, 1996, the Company adopted a Stock Option Plan (the "Plan")
covering 400,000 shares of common stock (subject to adjustment to cover
stock splits, stock dividends, recapitalizations and other capital
adjustments) for employees, including officers and directors and
consultants of the Company. The Plan provides that options to be granted
under the Plan will be designated as incentive stock options or
non-incentive stock options by the board of directors or a committee
thereof, which also will have discretion as to the persons to be granted
options, the number of shares subject to the options and the terms of the
options. Options designated as incentive stock options are intended to
receive incentive stock option tax treatment pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
The Plan provides that all options granted thereunder shall be exercisable
during a period of no more than 10 years from the date of grant (five years
for options granted to holders of 10% or more of the outstanding shares of
common stock), depending upon the specific stock option agreement and that
the option exercise price for incentive stock options shall be at least
equal to 100% of the fair market value of common stock on the date of grant
(110% for options granted to holders of 10% or more of the outstanding
shares of common stock), but in no event less than the initial public
offering price of the Company's proposed public offering. Pursuant to the
provisions of the Plan, the aggregate fair market value (determined on the
date of grant) of the shares of the common stock for which incentive stock
options are first exercisable under the terms of the Plan by an option
holder during any one calendar year cannot exceed $100,000.
F-23
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 15 - STOCK OPTION PLAN (CONTINUED)
Currently, the Plan provides that if the employment of an optionee is
terminated other than by reason of death, disability or retirement at age
65, any options granted to the optionee will immediately terminate. If
employment is terminated by reason of disability or retirement at age 65,
the optionee may, within one year from the date of termination in the event
of termination by reason of disability, or three months from the date of
termination in the event of termination by reason of retirement at age 65,
exercise the option (but not after the normal termination date of the
option). If employment is terminated by death, the person or persons to
whom the optionee's rights under the option are transferred by will or the
laws of descent and distribution have similar rights of exercise within
three months after such death (but not after the normal termination date of
the option).
Options are not transferable otherwise than by will or the laws of descent
and distribution and during the optionee's lifetime are exercisable only by
the optionee. Shares subject to options which expire or terminate may be
the subject of future options. The Plan will terminate in 2006.
Outstanding stock options are as follows:
<TABLE>
<CAPTION>
Outstanding Exercise
Options Price Exercise Period
---------- --------- -----------------------------
<S> <C> <C> <C>
December 31, 1997
300,000 $ 5.00 July 1, 1997 - June 1, 2006
40,000 $ 5.25 January 1, 1998 - June 1, 2006
December 31, 1996
300,000 $ 5.00 July 1, 1997 - June 1, 2006
</TABLE>
No options were exercised during 1996 nor 1997.
The Plan was cancelled on March 2, 1998 and concurrently, the 1998
Incentive and Non-Statutory Stock Plan ("New Plan") was created (subject to
stockholder approval). The New Plan has substantially the same terms and
conditions as the Plan and no options can be exercised until the
stockholders approve the New Plan.
NOTE 16 - RETIREMENT BENEFITS
On January 1, 1996, the Company established a simplified employee pension
plan covering substantially all employees who meet eligibility
requirements. Retirement costs amounted to $-0- and $33,691 for 1997 and
1996, respectively.
F-24
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 17 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for the stock options granted. No expense was recognized. If the Company
had elected to recognize expense for the stock options granted based on the
fair value at the date of grant consistent with the method prescribed by
SFAS No. 123, net loss and loss per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net loss $ (2,708,993) $ (2,779,685) $ (962,410) $ (1,228,660)
Loss per share (.90) (.92) (.53) (.68)
</TABLE>
The fair value of the stock options used to compute pro forma net loss and
loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted
average assumptions: expected volatility of 5% to 19%; risk free interest
rates of 6% to 6.5%; and an expected holding period of three years.
NOTE 18 - PROPOSED PUBLIC OFFERING (UNAUDITED)
In December 1997, the Company filed a registration statement on Form SB-2
under the Securities Act of 1933, as amended, for the purpose of
registering securities for sale to the holders of its warrants (see Note
14).
Pursuant to the registration statement, the Company's tender offer is on
the following terms:
1. Warrant holders who tender their warrants at $1.875 per tendered warrant
will receive one unit for each warrant tendered.
2. Each unit consists of one share of the Company's common stock and one
new warrant identical to the tendered warrant.
The offering was completed in March 1998. The Company sold a total of
321,605 units for $490,912, net of offering costs of $112,099.
F-25
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 19 - RESTRUCTURING OF CYBERPORT ACCOUNTS PAYABLE
In March 1998, Cyberport and certain of its vendors agreed to restructure
approximately $1,349,000 ($1,314,000 at December 31, 1997 of accounts
payable as follows:
1. The vendors transferred Canadian $1,000,000 of the payables to
Cyberport's landlord. The landlord was given the right to convert the
payables into restricted shares of the Company's common stock. In March
1998, the landlord converted the payables into 350,000 shares of common
stock.
2. Cyberport issued 912,634 Series B Special Shares ("Series B") at
Canadian $1.00 per share for the balance of the monies owed. Additional
shares will be issued for any goods and services tax found owing on
closing.
The Series B shares have certain rights and conditions including the
following:
1. The shares are non-voting
2. A preferred 12% annual cumulative cash dividend, payable quarterly,
with the first payment due on June 30, 1998
3. Cyberport has the right to redeem any and all of the shares at any time
prior to October 10, 1998 at a price of Canadian $1.10 per share.
The payment will include any accrued and unpaid dividend payments that
are outstanding at such time.
For the period October 11, 1998 to December 31, 1998, the vendors have a
right to convert all unredeemed Series B shares into common stock of the
Company at a conversion rate of 2.28 to 1.
F-26
<PAGE>
TELLURIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 20 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma, condensed, consolidated balance sheet assumes
the consummation of a proposed public offering on December 31, 1997 of the
Company's tender offer of 321,605 units consisting of common stock and warrants
(Note 18) 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. (Note 19).
The financial information presented herein does not purport to be indicative of
what would have occurred had both transactions actually been made as of such
date or of results which may occur in the future.
The unaudited pro forma condensed consolidated balance sheet of the Company
at December 31, 1997 assume the following:
<TABLE>
<CAPTION>
1. The consummation of the public offering occurred on December 31, 1997
2. The restructuring of certain accounts payable of Cyberport, the Company's wholly-owned Canadian subsidiary,
occurred on December 31, 1997
Company,
As Pro Forma
Reported Adjustments Pro Forma
<S> <C> <C> <C>
Current assets $ 1,052,888 (3) $ 490,910 $ 1,543,798
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>
No underwriter, dealer, salesman or other person has been authorized to
give any information or to make any representation, other than those contained
in this Prospectus, in connection with the Offering, and, if given or made, such
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
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
Page
Additional Informoation.............................................
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............................................................
Management..........................................................
Executive Compensation
Security Ownership of Management
and Others........................................................
Certain Transactions
Description of Securities...........................................
Shares Eligible for Future Sale.....................................
Underwriting........................................................
Legal Matters.......................................................
Experts.............................................................
Index to Financial Statements.......................................
Until , 1998, (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus with
respect to their solicitations to purchase the securities offered hereby.
<PAGE>
TELLURIAN, INC.
1,200,000 Shares of
Series 1 Preferred Stock and 1,200,000
Preferred Stock Purchase Warrants
TELLURIAN, INC.
PROSPECTUS
J.W. BARCLAY & CO., INC.
________, 1998
<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
<TABLE>
<S> <C> <C>
Securities and Exchange Commission
Filing Fee $ 5,237.06
NASDAQ Filing Fee **
Legal Fees **
Accounting Fees **
Blue Sky Fees and Disbursements **
Printing **
Miscellaneous --------------
Total $ 455,000.00
</TABLE>
* Estimated
** To be supplied by Amendment
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). 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 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.
II-4
<PAGE>
(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.
Exemption is claimed on such securities in the three 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
II-5
<PAGE>
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 *
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 Common 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 Form of Underwriter's Preferred Stock Warrants**
4.5 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)
II-6
<PAGE>
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
thereto dated July 17, 1996.
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 **
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)
II-7
<PAGE>
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.
10.22 Agreement dated March 26, 1998 by and among Cyberport,
Tellurian and Cyberport creditors
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 sub-
sidiary 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
II-8
<PAGE>
for its quarter ended March 31, 1998.
Item 28. Undertakings
The undersigned Registrant hereby further undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment of the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as 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
II-9
<PAGE>
in such names as required by the Representative to permit prompt delivery to
each purchaser.
For determining any liability under the Securities Act, the Registrant
will treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
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.
II-10
<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 12th day of June, 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:
Signatures Titles Date
Chairman of the
/s/ Dr. Ronald Swallow Board, Chief
- ----------------------- Executive Officer June 12, 1998
Dr. Ronald Swallow
/s/ Stuart French President and a Director
- ----------------------- of the Company June 12, 1998
Stuart French
/s/ Richard Swallow Secretary and a Director
- ----------------------- of the Company June 12, 1998
Dr. Richard Swallow
/s/ Michael Hurd Vice President of
- ----------------------- Administration and
Michael Hurd Finance and Chief
Financial and Accounting
Officer June 12, 1998
Peter Colgan Director
James G. H. Lin Director
II-11
EXHIBIT 1.0
1,200,000 Shares of Series 1 Convertible Preferred Stock
and
1,200,000 Redeemable Series 1 Preferred Stock Purchase Warrants
TELLURIAN, INC.
UNDERWRITING AGREEMENT
Dated: July , 1998
J.W. Barclay & Co., Inc.
as Representative of the Several Underwriters
One Battery Park Plaza
New York, New York 10004
Dear Sirs:
The undersigned, Tellurian, Inc., a Delaware corporation (the "Company"),
hereby confirms its agreement with J.W. Barclay & Co., Inc. (sometimes the
"Representative" or "you") and the several Underwriters named in Schedule A
hereto (the "Underwriters") as follows:
1. Description of Securities. The Company has authorized by appropriate
corporate action, and proposes to issue and sell to the Underwriters, 1,200,000
shares of Series 1 Convertible Preferred Stock ("Shares") and 1,200,000 Series 1
Convertible Preferred Stock Purchase Warrants ("Warrants"). Each Warrant shall
be exercisable for one share of Preferred Stock. An additional 180,000 Shares
and 180,000 Warrants, have been authorized to cover over-allotments as provided
in Section 3 below. The Shares and Warrants shall hereinafter sometimes be
collectively referred to as the "Securities". The Shares and Warrants are more
fully described in the Registration Statement and Prospectus referred to
hereinafter.
2. Representations and Warranties.
The Company represents and warrants to, and agrees with, you and the
Underwriters that:
(a) A registration statement on Form SB-2 with respect to the
Securities, including a preliminary prospectus, copies of which have heretofore
been delivered by the Company to you, has been carefully prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as amended,
(hereinafter called the "Act") and the Rules and Regulations of the Securities
and Exchange Commission (hereinafter called the
1
<PAGE>
"Commission") under such Act, and has been filed with the Commission (File No.
________). On or prior to the effective date of such registration statement, one
or more amendments to such registration statement (including a final
prospectus), copies of which have heretofore been or will be delivered to you,
will have been so prepared and filed in the form delivered to you. Such
registration statement (including all exhibits thereto) as amended as of the
effective date thereof and each related preliminary prospectus are herein
respectively referred to as the "Registration Statement", the "Preliminary
Prospectus" and the "Prospectus".
(b) When the Registration Statement becomes effective (the "Effective
Date") and at all times subsequent thereto up to and at the Closing Date (as
defined in Section 3 hereof) and the Additional Closing Date (as defined in
Section 3 hereof), (i) the Registration Statement and the Prospectus and any
amendments or supplements thereto will contain all statements which are required
to be stated therein by the Act and the Rules and Regulations of the Commission
thereunder and will in all respects conform to the requirements of the Act and
such Rules and Regulations, (ii) neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(iii) all documents which are required to be filed as exhibits to the
Registration Statement will have been so filed; provided however, that the
Company makes no representations or warranties as to information contained in or
omitted from the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by you or any Underwriter expressly for use in the
preparation thereof.
(c) The Company an its subsidiaries have been duly incorporated and are
validly existing as corporations in good standing under the laws of the
jurisdictions of their incorporation with all corporate and other powers and
authority necessary to carry on their businesses, and they are qualified in such
jurisdictions in which the nature of their business requires such qualification.
(d) The consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is bound, or of its Certificate of Incorporation, or By-laws, or
any order, rule or regulation applicable to the Company or any of its
properties, of any court or other governmental body.
(e) The Company has full power and lawful authority to authorize, issue
and sell the Shares, Warrants, Underwriters' Stock
2
<PAGE>
Warrants (as defined hereinafter) and Underwriters' Warrants (as defined
hereinafter) on the terms and conditions herein set forth, and has taken all
corporate action necessary therefor; no consent, approval, authorization or
other order of any regulatory authority is required for such authorization,
issue or sale, except as may be required under the Act or state securities or
blue sky laws. This Agreement has been duly authorized, executed and delivered
by the Company and is a valid and legally binding agreement of the Company
enforceable in accordance with its terms. The Warrant Agreement between the
Company and Continental Stock Transfer & Trust Company, to be dated the Closing
Date, pursuant to which the Warrants will be issued (the "Warrant Agreement")
has been duly authorized by the Company and, when executed and delivered by the
Company and Continental Stock Transfer & Trust Company, will be a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms.
(f) The Securities and the authorized capitalization of the Company
conform to the descriptions thereof contained in the Registration Statement and
Prospectus. The holders of the Warrants will, upon their exercise, be entitled
to purchase shares in accordance with the terms and conditions set forth in the
Warrant Agreement and the form of Warrant filed as exhibits to the Registration
Statement. The outstanding shares of capital stock are, and the shares issuable
pursuant to the public offering contemplated hereby and upon exercise of any of
the warrants referred to herein will upon such issuance be, duly authorized,
validly issued and fully paid and nonassessable, and the Company has duly
authorized and reserved for issuance upon exercise of warrants such number of
shares as are initially issuable upon such exercise. The Warrants, the
Underwriters' Stock Warrants, the Underwriters' Warrants and the warrants
underlying the Underwriters' Warrants will, when issued and delivered in
accordance with the provisions of the Warrant Agreement, in the case of the
Warrants and the warrants underlying the Underwriters' Warrants, and this
Agreement, in the case of the Underwriters' Stock Warrants, be valid and legally
binding obligations of the Company enforceable in accordance with their
respective terms. There are no options, warrants, rights of conversion,
indebtedness or calls on equity of the Company other than as disclosed in the
Prospectus and Registration Statement.
(g) Except as set forth or contemplated in the Registration Statement
and Prospectus, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions, not in the ordinary course of business,
and there has not been any material change in the capital stock or funded debt
of the Company, or any material adverse change in the condition (financial or
other) or results of operations of the Company.
3
<PAGE>
(h) The financial statements (audited and unaudited) set forth in the
Registration Statement and Prospectus fairly present the financial condition of
the Company and the results of its operations as of the dates and for the
periods therein specified; and said financial statements (including the related
notes and schedules) have been prepared in accordance with generally accepted
accounting principles which have been consistently applied throughout the
periods covered thereby. Such financial statements and the summaries thereof
included in the Registration Statement and the Prospectus conform in all
material respects to the requirements of the Rules and Regulations of the
Commission.
(i) The accountants whose opinion or opinions is or are included in the
Registration Statement are independent public accountants within the meaning of
the Act and the Rules and Regulations of the Commission thereunder.
(j) Except as set forth in the Prospectus, there is not pending any
action, suit or other proceeding to which the Company is a party or of which any
property of the Company is the subject, before or by any court or other
governmental body, which might result in any material adverse change in the
condition, business or prospects of the Company, or might materially adversely
affect the assets of the Company; and except as indicated in the Prospectus, no
such proceeding is known by the Company to be threatened or contemplated.
(k) The Company knows of no claim for services, either in the nature of
a finder's fee, brokerage fee or otherwise, with respect to the financing
contemplated hereby, whether or not heretofore satisfied, for which it or the
Underwriters, or any of them, may be responsible, other than as expressly
disclosed in the Prospectus.
(l) The business and operations of the Company and the ownership
thereof, except as may be disclosed in the Prospectus, comply with all statutes,
ordinances, laws, rules and regulations applicable thereto, the non-compliance
with which could reasonably be expected to have a material, adverse effect on
the Company or its condition (financial or other), business, prospects, net
worth or results of operations; the Company possesses, and is operating in
compliance with the terms, provisions and conditions of, all certificates,
licenses, permits, consents, waivers, approvals, franchises and concessions
required to conduct its business as now conducted, the non-compliance with which
could reasonably be expected to have a material adverse effect on the Company or
its condition (financial or other), business, prospects, net worth or results of
operations; each such certificate, license, permit, consent, waiver, approval,
franchise and concession is valid and in full force and effect and there is no
proceeding pending or threatened (or to the best of the knowledge of the
Company, any basis therefor) which may lead to the revocation, termination,
4
<PAGE>
suspension or nonrenewal of any such certificate, license, permit, consent,
waiver, approval, franchise or concession.
(m) On the Effective Date of the Registration Statement and immediately
prior to the sale of the Securities, the outstanding capital stock of the
Company will be as set forth in the Prospectus, and there shall be no warrants
or options to purchase shares of Stock of the Company except as set forth in the
Prospectus.
3. Purchase, Sale and Delivery of Shares. Subject to the terms and
conditions of this Agreement, and on the basis of the representations,
warranties and agreements herein contained, the Company hereby agrees to sell to
the Underwriters, and the Underwriters agree to purchase from the Company, at
purchase prices of $4.50 per Share and $0.225 per Warrant.
The Company will deliver the Securities to you at your office, or such
other place as you may designate, against payment to the Company for the
Securities by wire transfer or by certified or official bank check or checks
payable in New York Clearing House funds to the order of the Company. The
Securities so to be delivered will be in definitive, fully registered form in
such authorized denominations and registered in such names as you request by
notice to the Company given not later than 5:00 P.M., New York City time, on the
second business day next preceding the Closing Date. The date and the time of
such delivery and payment shall be 11:00 A.M., New York City time, on
________________ (or such other time and date as you and the Company may agree
upon). The time and date of such payment and delivery is herein sometimes
referred to as the "Closing Date".
The Company agrees to make the Securities available to you for the purpose
of expediting the checking and packaging of the Securities, at the office at
which they are to be delivered, not later than 2:00 P.M., New York City time, on
the business day next preceding the Closing Date.
The Company hereby grants to you the right, exercisable within 45 days from
the date hereof, to purchase from the Company up to 180,000 additional Shares of
Preferred Stock and 180,000 additional Warrants (the "Additional Securities") at
a purchase price of $4.50 per Share and $0.225 per Warrant, for the purpose of
covering over-allotments in the sale by any of the Underwriters of the
Securities. You may exercise your right to purchase Additional Securities by
giving written notice of such exercise to the Company.
Such notice shall set forth the aggregate number of Additional Securities
as to which such right is being exercised, the names in which Additional
Securities are to be registered, the denominations in which Additional
Securities are to be issued and the date and
5
<PAGE>
time, as determined by you, when the Additional Securities are to be delivered
(such date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date. The Additional Closing Date may be on the Closing
Date; if not, it shall be no earlier than the third business day after the date
on which the right shall have been exercised nor later than the twelfth business
day after the date on which the right shall have been exercised.
The Company will deliver the Additional Securities to you at your office,
or such other place as you may designate, against payment to the Company for the
Additional Securities by wire transfer or by certified or official bank check or
checks payable in New York Clearing House funds to the order of the Company. The
Additional Securities so to be delivered will be in definitive, fully registered
form in such authorized denominations and registered in such names as you
request by notice to the Company given not later than 5:00 P.M., New York City
time, on the second business day next preceding the Additional Closing Date.
The Company agrees to make the Additional Securities available to you for
the purpose of expediting the checking and packaging of the Securities, at the
office at which they are to be delivered, not later than 2:00 P.M., New York
City time, on the business day next preceding the Additional Closing Date.
It is understood that the Underwriters propose to offer the Securities for
sale to the public upon the terms and conditions set forth in the Registration
Statement, after the Registration Statement becomes effective.
4. Covenants of the Company.
The Company further covenants and agrees with you that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Act, or the Rules and
Regulations of the Commission thereunder.
(b) The Company will notify you immediately and confirm in writing (A)
when the Registration Statement and any post-effective amendment thereto becomes
effective, (B) of the issuance of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus or of the Prospectus or of the initiation of any
proceedings for such purposes, and (C) of the
6
<PAGE>
receipt of any comments (in writing or orally) from the Commission in respect of
the Registration Statement or requesting the amendment, post-effective amendment
or supplementation of the Registration Statement or Prospectus or for additional
information. If the Commission shall enter a stop order or any order preventing
or suspending the use of any Preliminary Prospectus or of the Prospectus at any
time, or shall initiate any proceedings for such purposes, the Company will make
every reasonable effort to prevent the issuance of such order and, if issued, to
obtain the withdrawal thereof. The Company will provide you with copies of all
written communications received by it from the Commission and any other
regulatory agency with respect to the Registration Statement, and every
amendment and post-effective amendment thereto and copies of all replies thereto
by the Company, its counsel and its accountants.
(c) Within the time during which a prospectus relating to the Shares
and Warrants (or the exercise of any Warrants) is required to be delivered under
the Act, the Company will comply so far as it is able with all requirements
imposed upon it by the Act, as now and hereafter amended, and by the Rules and
Regulations of the Commission thereunder, from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Shares and
Warrants (or the shares of stock to be acquired upon the exercise of the
Warrants) as contemplated by the provisions hereof and the Prospectus; and if
during such period any event occurs as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in the
light of the circumstances then existing, not misleading, or if during such
period it is necessary to amend or supplement the Prospectus to comply with the
Act, the Company will promptly notify you and will amend or supplement the
Prospectus (in form reasonably satisfactory to your counsel and at the expense
of the Company) so as to correct such statement or omission or effect such
compliance.
(d) The Company will cooperate with you and will take all
necessary action, and furnish to whomever you may direct such proper
information, as may be lawfully required in qualifying the Securities for
offering and sale under the securities or blue sky laws of such states as you
may designate, and in continuing such qualifications in effect so long as
required for the distribution of Securities by you; provided that the Company
shall not be obligated to qualify as a foreign corporation to do business under
the laws of any such state, consent to general service of process in such state
or otherwise to submit to any requirements which it reasonably deems unduly
burdensome.
(e) The Company will pay any and all fees, taxes and expenses incident
to the performance of its obligations under this Underwriting Agreement,
including expenses and taxes incident to the issuance and delivery to you of the
Securities and Additional
7
<PAGE>
Securities, if any, to be sold to the Underwriters pursuant to Section 3 hereof;
all fees and disbursements of counsel and accountants for the Company; expenses
and filing fees incident to the preparation, printing, delivery, shipment and
filing with the Commission, the National Association of Securities Dealers,
Inc., and state blue sky authorities of the Registration Statement and all
exhibits thereto and the Prospectus, and any amendments or supplements thereto,
including fees of blue sky counsel (to be designated by the Representative and
who may be counsel to the Underwriters) incident to the qualification for sale
of the Securities and Additional Securities, if any, under blue sky laws. The
Company will further pay you as Representative of the Underwriters for your
expenses incurred in connection with this offering, on a non-accountable basis,
an amount equal to 3% of the public offering price of the Securities sold on
behalf of the Company hereunder, including any Securities sold pursuant to the
overallotment option, such reimbursement and payment to be made to you on
closing, and may be deducted by you from the amount due to the Company for
purchase of the Securities pursuant to Section 3 hereof. In the event that the
offering is not consummated, the Representative will be reimbursed only for its
actual, accountable, out-of-pocket expenses.
(f) The Company will apply the net proceeds from the sale of the
Securities substantially as set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will deliver to you as promptly as practicable three
signed copies of the Registration Statement and all amendments thereto,
including all exhibits therewith or incorporated therein by reference, and
signed consents, certificates and opinions of accountants and of any other
persons named in the Registration Statement as having prepared, certified or
reviewed any part thereof, and will deliver to you such number of unsigned
copies of the Registration Statement and exhibits, and of all amendments
thereto, as you may reasonably request. The Company will deliver to you or upon
your order, from time to time until the effective date of the Registration
Statement, as many copies of the Preliminary Prospectus as you may reasonably
request. The Company will deliver to you or upon your order, on the effective
date of the Registration Statement and thereafter, subject to the provisions of
Section 4(c) hereof, from time to time, as many copies of the Prospectus in
final form or as there after amended or supplemented, as you may reasonably
request. The Company will deliver to you, promptly after closing, three (3)
bound volumes of all of the documents, papers, exhibits, correspondence and
records forming the materials involved in this public offering.
(h) The Company will make generally available to its security holders,
as soon as it is practicable to do so (but in no event later than fifteen months
after the effective date of the
8
<PAGE>
Registration Statement), an earnings statement of the Company (which need not be
audited) covering a period of at least twelve months beginning not later than
the first day of the fiscal quarter next succeeding such effective date which
shall satisfy the provisions of Section 11(a) of the Act.
(i) For a period of at least five years from the date hereof, the
Company will supply to the Representative, (A) as soon as practicable after the
end of each fiscal year, a balance sheet and statement of operations of the
Company and its consolidated subsidiaries (if any) as at the end of and for each
such year, all in reasonable detail and certified by independent certified
public accountants, (B) as soon as practicable after the end of each of the
first three quarters of each fiscal year, an unaudited statement of operations
of the Company and its consolidated subsidiaries (if any) for such period, (C)
copies of such financial statements and reports as the Company may, from time to
time, furnish generally to holders of any class of its stock, (D) copies of each
form, document and report which it shall be required to file with the
Commission, any blue sky authority or any securities exchange at the same time
as they are filed and (E) copies of the daily stock transfer sheets of the
Company.
(j) Simultaneously with the purchase and payment by the Underwriters
for the Securities on the Closing Date, the Company shall sell, at a price of
$0.001 per warrant, and issue and deliver to the Representative and, at its
request, to any of the several Underwriters or to dealers in the selling group,
or to officers or partners of the Representative, the several Underwriters or
dealers in the selling group, 120,000 warrants, in form and substance
satisfactory to your counsel, to purchase 120,000 shares of Series 1 Convertible
Preferred Stock of the Company at an exercise price of $9.90 per share
("Underwriters' Stock Warrants") and 120,000 warrants, in form and substance
satisfactory to your counsel, to purchase 120,000 Series 1 Preferred Stock
Purchase Warrants (similar to those being sold to the public), at a price of
$0.4125 per 120,000 Series 1 Preferred Stock Purchase Warrant ("Underwriters'
Warrants"). The Underwriters' Stock Warrants and Underwriters' Warrants will be
exercisable for a period of five years commencing on the Effective Date, and
will not be transferable for a period of one year from the Effective Date except
to Underwriters and Selected Dealers and officers and partners thereof. In the
event that the Company at any time reduces the exercise price of the Warrants
sold to the public hereunder, the exercise price of the Underwriters' Stock
Warrants, Underwriters' Warrants and underlying Common Stock Purchase Warrants
shall be proportionately reduced. The Underwriters' Stock Warrants and
Underwriters' Warrants shall have been registered under the Registration
Statement and the holders of a majority of such Underwriters' Stock Warrants and
Underwriters' Warrants or the securities which may have been issued thereunder
shall have the right, at any one time, to require the Company to prepare and
file
9
<PAGE>
a post-effective amendment to the Registration Statement (or a new registration
statement, if then required under the Act) covering all or any portion of the
Underwriters' Stock Warrants and Underwriters' Warrants and their underlying
securities to permit the public sale thereof after twelve months from the
Effective Date. In connection therewith, the Company shall be obligated to
prepare and file such post-effective amendment (or such new registration
statement) under the Act promptly upon the receipt of the request of the holders
of a majority of the Underwriters' Stock Warrants and Underwriters' Warrants or
securities issued thereunder, and the Company shall be further obligated to use
its best efforts to have such post-effective amendment (or such new registration
statement) rendered effective under the Act, as it may from time to time be
amended hereafter, and Rules and Regulations promulgated thereunder, as soon as
practicable after the filing date of any such post-effective amendment or such
new registration statement, and the Company shall also be required to take such
action as may be necessary to maintain such post-effective amendment or such new
registration statement effective under the Act for the period, not in excess of
nine months, required to sell such Underwriters' Stock Warrants and
Underwriters' Warrants and their underlying securities in compliance with the
Act and Rules and Regulations promulgated thereunder, and the Company shall be
required to provide the accounting necessary for the filing of any such
post-effective amendment or such new registration statement, plus any amendments
or supplements thereto. In addition to, and not in lieu of, the obligations of
the Company hereinabove recited in this subsection, the Company hereby further
covenants and agrees that if, the Company shall prepare and file a
post-effective amendment to the Registration Statement or a new registration
statement under the Act or notification pursuant to Regulation A under the Act
either of which is to become effective at any time after the expiration of
twelve months from the Effective Date with respect to the public offering of any
equity or debt securities of the Company now or hereafter authorized, the
Company will include in such post-effective amendment or new registration
statement or such notification such number of the Underwriters' Stock Warrants
and Underwriters' Warrants and their underlying securities as requested by the
holders of the Underwriters' Stock Warrants and Underwriters' Warrants or
securities issued thereunder, and neither you nor such holders shall be under no
obligation to bear any of the expenses or professional fees and disbursements to
be incurred by the Company in connection with the preparation and filing of such
post-effective amendment, or new registration statement or such notification.
With respect to any post-effective amendment, or new registration statement, or
notification filed by the Company pursuant to this subsection, the selling
securityholders offering any Underwriters' Stock Warrants, Underwriters'
Warrants and their underlying securities thereunder shall be entitled to the
benefits of indemnification by the Company in like manner and to the same extent
as the Company indemnifies the Underwriters pursuant to Section 6(a) hereof.
10
<PAGE>
(k) The Company will not, without the prior written consent of the
Representative, for a period of six months after the effective date of the
Registration Statement, sell any securities of the Company or sell or grant
options, warrants or rights with respect to any securities of the Company, or
permit or cause a public offering of any securities of the Company except in
accordance with the provisions of the Registration Statement.
(l) At the Closing, the Company shall enter into an agreement extending
its present consulting agreement for a period of one year for a fee of
$________________, the total amount of which shall be paid at the Closing. The
Company and the Representative shall also enter into an agreement which will
provide for a finder's fee, ranging from 7% of the first $1,000,000 down to
2-1/2% of the excess over $9,000,000 of the consideration involved in any
transaction (including mergers and acquisitions) consummated by the Company in
which the Representative introduced the other party to the Company during the
five-year period commencing on the Closing Date, which agreement shall supersede
its current similar agreement between the Company and the Representative.
(m) The Company shall cooperate with the Underwriters in making
available to their representatives such information as they may request in
making an investigation of the Company and its affairs.
(n) Until such time as the securities of the Company are listed on the
New York Stock Exchange, the American Stock Exchange or the National Market
System of NASDAQ, but in no event more than three years from the Effective Date,
the Company shall retain Compliance Management Company or a similar company, to
prepare a post registration blue sky market survey for the Representative for
distribution to market makers. Such survey shall be provided to the
Representative annually with the first survey delivered to it promptly after the
completion of the public
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offering hereunder. The cost of the first year's survey will not exceed $5,000.
In lieu of the foregoing, the Company may cause its legal counsel to provide the
Representative with a survey to be updated at least annually.
(o) At all times, so long as any of the warrants referred to herein are
outstanding, the Company will have reserved authorized but unissued shares of
stock and underlying warrants, available for immediate issuance in amounts
necessary for the exercise of all warrants then outstanding. The Company agrees
to qualify its Shares for listing on the NASDAQ System Small-Cap Issues on the
Effective Date and will take all necessary and appropriate action so that the
Shares continue to be listed for trading in the NASDAQ System Small-Cap Issues
for at least five years from the Effective Date provided the Company otherwise
complies with the prevailing maintenance requirements of NASDAQ System
Small-Cap. In addition, at such time as the Company qualifies for listing its
securities on the National Market System of NASDAQ, the Company will take all
steps necessary to have the Company's Shares thereof listed on the National
Market System of NASDAQ in lieu of listing as Small-Cap Issues. The Company
shall comply with all periodic reporting and proxy solicitation requirements
imposed by the Commission pursuant to the 1934 Act, and shall promptly furnish
you with copies of all material filed with the Commission pursuant to the 1934
Act or otherwise furnished to shareholders of the Company.
(p) The Company will register its Series 1 Preferred Stock pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended, not later than
the Effective Date.
(q) The Company will pay the fees and expenses (but not transfer taxes,
if any) of the Company's stock transfer agents, warrant agents, and registrars
(if any), without charge to stockholders and warrantholders, for not less than
five years after the effective date of the Registration Statement.
(r) The Representative shall receive a fee of 10% of the proceeds as
and when received by the Company from time to time upon the exercise of any
Warrants after one year from the Effective Date, provided that such fee shall be
paid only in accordance with the rules of the NASD and any applicable securities
laws and rules and regulations. The Representative will not be eligible to
receive the aforementioned warrant exercise fee as a result of transactions of
the following nature: (i) the exercise of Warrants when the market price of the
Company's Common Stock is lower than the exercise price; (ii) the exercise of
Warrants held in any discretionary account; (iii) the exercise of Warrants where
documents disclosing the compensation arrangements (e.g., the Prospectus) have
not been provided to the warrantholder; (iv) the exercise of Warrants in
unsolicited transactions; and (v) the exercise of any warrants during the one
year period commencing on
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the Effective Date, and further provided that no broker shall be paid a fee
unless such broker is designated in writing by the customer as the soliciting
broker. In addition, it will be a condition to the receipt by the Representative
of such fee that it shall not, in the ten days immediately preceding the
solicitation of the exercise or the date of such exercise, have bid for or
purchased the Common Stock of the Company (or any securities of the Company
convertible into or exchangeable for such Common Stock, including the Warrants)
or otherwise have engaged in any activity that would be prohibited by Rule 10b-6
under the Securities Exchange Act of 1934, as amended, by one participating in a
distribution of the Company's securities whether as underwriter or otherwise.
The Company will not solicit warrant exercises except through the
Representative.
5. Conditions of Underwriters' Obligations. The Underwriters' obligations
to purchase and pay for the Securities, as provided herein, shall be subject to
the accuracy, as of the date hereof and as of the Closing Date (as if made on
the Closing Date), of the representations and warranties of the Company herein,
to the accuracy of statements made in each certificate delivered pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
5:00 P.M., New York City time, on the day following the date of this Agreement,
unless a later time and date be agreed to by you; and no stop order suspending
the effectiveness of the Registration Statement, or order preventing or
suspending the use of any Preliminary Prospectus or of the Prospectus, shall
have been issued and no proceedings for such purpose shall have been instituted
or be pending or, to the knowledge of the Company or you, shall be contemplated
by the Commission; and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the satisfaction of the Underwriters' Counsel.
(b) On the Closing Date the Underwriters shall have received an opinion of
Lester Morse, P.C., counsel for the Company, dated the Closing Date, to the
effect that:
(i) The Company has full corporate power and
authority to enter into this Agreement and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding obligation of the Company enforceable in accordance with its terms,
subject to bankruptcy, insolvency or similar laws governing the rights of
creditors generally and to the discretion of courts in granting equitable
remedies, except insofar as rights to indemnity or contribution hereunder may be
limited by Federal securities laws.
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(ii) The Warrant Agreement, the Consulting Agreement and the Mergers
and Acquisitions Agreement have been duly authorized, executed and delivered by
the Company and constitute the legal, valid and binding obligations of the
Company enforceable in accordance with their terms (except insofar as
enforcement of the indemnification provisions thereof may be limited by
applicable federal securities laws or principles of public policy and subject to
bankruptcy, insolvency, moratorium, reorganization and similar laws affecting
creditors' rights generally and to general principles of equity). The Company
has full corporate power and authority to enter into the Warrant Agreement and
the Consulting Agreement and to sell, issue and deliver the Shares, Warrants,
Underwriters' Stock Warrants, Underwriters' Warrants and the securities
underlying all warrants;
(iii) The Company has authorized and outstanding capital stock as set
forth under "Capitalization" in the Prospectus; all of the Company's outstanding
shares have been duly authorized and validly issued, and are fully paid and
nonassessable; all of the Shares, Warrants, Underwriters' Stock Warrants and
Underwriters' Warrants sold pursuant to this Agreement have been duly
authorized, validly issued and delivered and are fully paid and nonassessable,
and conform to the descriptions thereof in the Prospectus and such descriptions
conform to the rights duly set forth in the Certificate of Incorporation of the
Company, the Warrant Agreement, the Underwriters' Stock Warrants, the
Underwriters' Warrants and this Agreement; the Warrants, the Underwriters' Stock
Warrants, and the Underwriters' Warrants are, and the warrants underlying the
Underwriters' Warrants will, when issued in accordance with the provisions of
the Warrant Agreement, the Underwriters' Stock Warrants, the Underwriters'
Warrants and this Agreement be, valid and legally binding obligations of the
Company in accordance with their respective terms (subject to bankruptcy,
insolvency, moratorium, fraudulent conveyance, reorganization and similar laws
affecting creditors' rights generally and to general principles of equity); the
securities underlying the Warrants and the Underwriters' Stock Warrants and the
Underwriters' Warrants have been validly authorized and reserved for issuance,
and any shares when issued in accordance with the terms of the Warrants or
Underwriters' Stock Warrants, as the case may be, will be validly issued and
will be fully paid and non-assessable; the holders of the Shares, Warrants and
Underwriters' Stock Warrants, the Underwriters' Warrants, and the securities
underlying the Warrants, the Underwriters' Stock Warrants, and the Underwriters'
Warrants are not, and will not be, subject to any personal liability for
liabilities of the Company by reason of being holders thereof; and none of such
securities which have been issued, have been issued in violation of the
preemptive rights or any other rights of any stockholder of the Company and no
stockholder of the Company has any preemptive right to subscribe for or to
purchase any of such Shares, Warrants, Underwriters' Stock Warrants,
Underwriters'
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Warrants or securities underlying the Warrants, Underwriters' Stock
Warrants and the Underwriters' Warrants;
(iv) The Company has been duly incorporated and is validly existing and
in good standing under the laws of the State of Delaware, has full corporate
power and authority to conduct its business as presently conducted and as
described in the Prospectus and to own its properties and is duly qualified to
do business and is in good standing in each jurisdiction wherein the property
owned or leased, or the conduct of business, by it makes such qualification
necessary (except where failure to so qualify would not have a material adverse
effect on the Company);
(v) The Registration Statement has become effective under the
Securities Act and, to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or is pending or contemplated
by the Commission;
(vi) The Registration Statement and the Prospectus, and any amendment or
supplement thereto, comply as to form in all material respects with the
requirements of the Securities Act and the Rules (except that such counsel need
express no opinion as to the financial statements and schedules and financial
data included therein or omitted therefrom);
(vii) Such counsel has assisted in the preparation of the Registration
Statement and the Prospectus and no fact has come to the attention of such
counsel which leads such counsel to believe that, either as of the Effective
Date or the date of the opinion, (A) either the Registration Statement or the
Prospectus or any amendment or supplement thereto (except for the financial
statements and schedules and financial data included therein or omitted
therefrom, as to which such counsel need express no opinion) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
(B) there is any material legal, governmental or administrative proceeding
pending, threatened or contemplated to which the Company is or may become a
party or to which any of its property is or may become subject, or any basis for
any legal, governmental or administrative proceeding, required to be described
in the Prospectus under the Act which is not described as required, or (C) there
is any contract or document of a character required to be described in the
Registration Statement or the Prospectus, or to be filed as an exhibit to the
Registration Statement, under the Act which is not described or filed as
required.
(viii) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated therein do not and
will not conflict with or result in
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a breach or violation of any of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or By-Laws of the Company or any
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument known to such counsel to which the Company is a party or by which it
is bound or to which any of its property is subject, or any Federal, state or
other statute, law, rule or regulation, or any judgment, order or decree of any
court or governmental agency or body known to such counsel having jurisdiction
over the Company or any of its property;
(ix) No consent, approval, authorization or order of, or declaration or
filing with, any government, governmental instrumentality or court, is required
for the valid consummation by the Company the transactions contemplated by this
Agreement, except such as may be required under the Securities Act or any state
securities or "blue sky" laws in connection with the purchase, sale and
distribution of the Shares; and
(x) To the best of such counsel's knowledge, the Company and its
subsidiaries possesses all material permits, certificates of compliance,
approvals, licenses, waivers, consents and other rights from governmental
authorities which are requisite for the material conduct of its business as
presently conducted and as des cribed in the Prospectus (except such as in the
aggregate would not materially affect the business or operations of the
Company), for the consummation of the transactions contemplated in this
Agreement and for the offering contemplated by the Prospectus, and each such
permit, certificate of compliance, approval, license, waiver, consent and right
is valid and in full force and effect.
(xi) Such opinion shall be to such further effect with respect to
other legal matters relating to this Agreement and the sale of the Shares
hereunder as counsel for the Underwriters may reasonably request. In rendering
the opinions set forth above, such counsel may rely upon certificates of
officers of the Company and public officials as to matters of fact, and may rely
as to all matters of law other than the laws of the United States or the
corporate laws of the State of Delaware upon opinions of counsel satisfactory to
you, in which case the opinion shall state that they have no reason to believe
that you and they are not entitled to so rely. Additionally, in rendering such
opinion, counsel shall not be required to opine upon the availability of
equitable remedies, including but not limited to, the remedies of specific
performance and injunctive relief.
(c) At the time this Agreement is executed by the parties hereto and on the
Closing Date (and on the Additional Closing Date, if any), the Underwriters
shall have received from Miller Ellin & Co., Inc., a letter dated as of each
such date, to the effect that:
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(i) They are independent accountants with respect to the Company within
the meaning of the Act and the applicable published Rules and Regulations
thereunder;
(ii) In their opinion, the financial statements (inclu ding the
schedules, if any) in the Registration Statement examined by such firm, comply
as to form in all material respects with the applicable accounting requirements
of the Act and the published Rules and Regulations thereunder with respect to
registration statements on Form SB-2;
(iii) On the basis of procedures (but not an examination in accordance
with generally accepted auditing standards) consisting of reading the minutes of
meetings of the stockholders and the Board of Directors of the Company since the
date of the latest audited balance sheet as set forth in the minute books
through a specified date not more than five business days prior to the date of
the letter, reading the unaudited interim financial statements (if any),
including the schedules (if any), of the Company included in the Registration
Statement and making inquiries of certain officials of the Company who have
responsibility for financial and accounting matters regarding the specific items
for which representations are requested below, nothing has come to their
attention as a result of the foregoing procedures that caused them to believe
that (A) the unaudited financial statements (if any), including the schedules
(if any), of the Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting requirements of
the Act and the published Rules and Regulations thereunder; (B) said financial
statements, including the schedules (if any), are not presented fairly, in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements; (C)
during the period from the date of the latest balance sheet covered by their
report(s) included in the Registration Statement to a specific date not more
than five business days prior to the date of the letter, there has been any
change in the capital stock or long-term debt of the Company as compared with
the amounts shown in the balance sheet included in the Registration Statement,
except as set forth in or contemplated by the Registration Statement; or (D) for
the period from the date of the last balance sheet contained in the Prospectus
to a speci fied date not more than five days prior to the date of such letter,
there has been any decrease, except as described in such letter and previously
discussed with you, in consolidated gross revenues, net income, consolidated
assets or total stockholders' equity as compared with the amounts shown on such
balance sheet, except for such changes or decreases which the Registration
Statement discloses have occurred or may occur; and
(iv) In addition to the examination referred to in their report
included in the Registration Statement and the limited procedures referred to in
clause (iii) above, they have carried out
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certain specified procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information which are included in the Registration
Statement and Prospectus and which are specified by you, and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting and financial records of the Company and its subsidiaries
identified in such letter.
(d) The Representative shall have received a certificate or certificates,
dated the Closing Date and the Additional Closing Date, executed by at least two
officers of the Company, including the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, to the effect
that:
(i) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act;
(ii) Neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; and since the effective date of
the Registration Statement, there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been so set forth;
(iii) Except as contemplated in the Prospectus, subse quent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, the Company has not incurred any material liabilities or
obligations, direct or contingent, or entered into any material transaction, not
in the ordinary course of business, and there has not been any material change
in the capital stock or funded debt of the Company, or any material adverse
change in the condition (financial or other) or results of operations of the
Company;
(iv) There are no legal proceedings pending or threatened against the
Company of a character affecting the validity of this Agreement or required to
be disclosed in the Prospectus which are not disclosed therein; there are no
transactions or contracts which are required to be summarized therein which are
not so summarized; and there are no material contracts or documents required to
be filed as exhibits to the Registration Statement which are not so filed;
(v) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, the Company has not sustained
any material loss or damage to its properties, whether or not insured; and
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(vi) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the date of the letter;
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the date of
the letter.
(e) The Company shall have furnished to you such certificates, in
addition to those specifically mentioned herein, as you may have reasonably
required in a timely manner as to the accuracy and completeness, at the Closing
Date, of any statement in the Registration Statement or the Prospectus; as to
the accuracy, at the Closing Date, of the representations and warranties of the
Company herein and in each certificate and document contemplated under this
Agreement to be delivered to you; as to the performance by the Company of its
respective obligations hereunder and under each such certificate and document;
or as to the fulfillment of the conditions concurrent and precedent to your
obligations hereunder.
(f) All corporate proceedings and related matters in connection with
the organization of the Company and the qualification, authorization, issuance,
sale and delivery of the Securities shall be satisfactory to Henry C. Malon,
Esq., counsel for the Underwriters, and such counsel shall have been furnished
with such papers and information as he may reasonably have requested in this
connection.
(g) All such opinions, letters, certificates and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to the Underwriters and to their counsel.
(j) If any condition to the Underwriters' obligations hereunder to be
satisfied at or prior to the Closing Date is not so satisfied, the Underwriters
may terminate this Agreement without liability on their part or on the part of
the Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Section 4(e) of this Agreement and except for any liability under
Sections 6 and 7 of this Agreement.
6. Indemnification. (a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls each Underwriter within
the meaning of the Act against any losses, claims, damages or liabilities, joint
or several, to which it or such controlling person may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or in any blue sky application or other document executed by
the Company or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify any or all of the Securities
under the securities laws thereof, or arise
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out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse it and each such controlling person
for any legal or other expenses reasonably incurred by it or such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus, the Prospectus or such amendment or supplement, or
in such blue sky application or such other document, in reliance upon and in
conformity with written information furnished to the Company by an Underwriter
specifically for use in the preparation thereof; and provided, further, that the
Company will not be liable under this indemnity agreement, insofar as it relates
to any Preliminary Prospectus, to the extent that any such loss, claim, damage,
liability or action results from the fact that an Underwriter sold Securities to
a person to whom there was not sent or given, at or prior to the written
confirmation of such sales, a copy of the Prospectus (or of the Prospectus as
then amended or supplemented if the Company had previously furnished copies
thereof to you). This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of the Act,
to the same extent as the foregoing indemnity from the Company to such
Underwriter, against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director, officer or controlling
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any blue sky
application or other document executed by the Company specifically for that
purpose filed in any state or other jurisdiction in order to qualify any or all
of the Securities under the securities laws thereof, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, such Preliminary Prospectus, the Prospectus or
such amendment or supplement, or in such blue sky application or such other
document, in reliance upon and in conformity with written information furnished
to the Company by such Underwriter
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specifically for use in the preparation thereof; and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action. This indemnity agreement will be in
addition to any liability which an Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 6, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 6. In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party, similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall be liable for any settlement of any action effected without its
written consent.
7. Contribution. (a) In order to provide for just and equitable
contribution under the Act in any case in which (i) an Underwriter (or any
person who controls the Underwriter within the meaning of the Act) makes claim
for indemnification pursuant to Paragraph 6(a) hereof but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that Paragraph 6(a) provides for indemnification in
such case or (ii) contribution under the Act may be required on the part of an
Underwriter or any such controlling person in circumstances for which
indemnification is provided under Paragraph 6(b), then, and in each case, the
Company and the Underwriters shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that the Underwriters are responsible for an
aggregate of 10% (being the amount of the Underwriter's commission) and the
Company are responsible for the remaining portion; provided, however, that, in
any such case, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
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(b) Promptly after receipt by any party to this Agreement of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party (the
"contributing party"), notify the contributing party of the commencement
thereof; but the omission so to notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution under the Act. In case any such action, suit or proceeding is
brought against any party, and such party notifies a contributing party of the
commencement thereof, the contributing party will be entitled to participate
therein with the notifying party and any other contributing party will be
entitled to participate therein with the notifying party and any other
contributing party similarly notified.
8. Substitution of Underwriters. (a) If one or more Underwriters shall
default in its or their obligations to purchase and pay for the Securities
hereunder and if the aggregate number of such Securities which all Underwriters
so defaulting shall have agreed to purchase does not exceed 10% of the aggregate
number of Securities to be purchased by the Underwriters, each non-defaulting
Underwriter shall have the right and is obligated, severally, to purchase and
pay for (in addition to the Securities set forth opposite its name in Schedule
A) that portion of the Securities agreed to be purchased by all such defaulting
Underwriters which the Securities set forth opposite its name in Schedule A
bears to the aggregate Securities so set forth opposite the names of all such
non-defaulting Underwriters. In such event, you as Representative, for the
accounts of the several non-defaulting Underwriters, shall take up and pay for
all or any part of such additional Securities to be purchased by each such
Underwriter under this Section 8(a), and may postpone the Closing Date to a time
not exceeding three full business days after the Closing Date determined as
provided in Section 3 hereof during which time the Company will prepare and file
any amendments to the Registration Statement and take any other action which the
Representative or its counsel shall deem necessary or appropriate to reflect
such event; or
(b) If one or more Underwriters default in its or their obligations to
purchase and pay for Securities hereunder and if the aggregate number of such
Securities which all Underwriters so defaulting shall have agreed to purchase
shall exceed 10% of the aggregate number of Securities to be purchased by the
Underwriters, or if one or more Underwriters for any reason permitted hereunder
cancel its or their obligations to purchase and pay for Securities hereunder,
the non-canceling and non-defaulting Underwriters (hereinafter called the
"remaining Underwriters") shall have the right to purchase such Securities in
such proportion as may be agreed among them, at the Closing Date determined as
provided in Section 3 hereof. If the remaining Underwriters do not purchase and
pay for such Securities at such Closing Date, the Closing Date
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shall be postponed for twenty-four hours and the remaining Underwriters shall
have the right to purchase such Securities or to substitute another person or
persons, to purchase the same, or both, at such postponed Closing Date. If by
such postponed Closing Date the remaining Underwriters have not exercised such
right to purchase or obtained a substitute purchaser or purchasers, the Closing
Date shall be postponed for a further twenty-four hours and the Company shall
have the right to substitute another person or persons, satisfactory to the
Representative, to purchase such Securities at such second postponed Closing
Date. If the Company shall not have found such purchasers for such Securities by
such second postponed Closing Date, then this Agreement shall automa tically
terminate and neither the Company nor the remaining Underwriters shall be under
any obligation under this Agreement except that the Company shall remain liable
for the full amount of expenses incurred as provided in Section 4(a)(v) and to
the extent provided in Sections 6(a) and 7 hereof and the Underwriters shall
remain liable to the extent provided in Sections 6(b) and 7 hereof. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default or obligate any Underwriter to
purchase or find purchasers for any Securities in excess of those agreed to be
purchased by such Underwriter under the terms of Sections 3 and 8(a) hereof.
9. Representations and Indemnities to Survive Delivery. All representations
and warranties of the Company contained herein and in the certificate or
certificates delivered pursuant to Section 5(d) hereof, and the indemnity and
contribution agreements contained in Sections 6 and 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person, or by or on behalf of
the Company or any officer, director or controlling person, or of any
termination of this Agreement, and shall survive delivery of and payment for the
Shares.
10. Effective Date of this Agreement and Termination Thereof. (a) This
Agreement shall become effective at 9:00 A.M., New York City time, on the first
full business day after the Registration Statement has become effective, or at
such earlier time after the Registration Statement has become effective as you
in your discretion shall first release the Securities for sale to the public.
For the purposes of this Section 10, the Securities shall be deemed to have been
released for sale to the public upon release by you of the publication of a
newspaper advertisement relating to the Securities or upon release by you of
telegrams or facsimile transmissions offering the Securities for sale, whichever
shall first occur. You or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except as noted
below, by giving the notice hereinafter specified at or before the time this
Agreement becomes effective;
23
<PAGE>
provided however, that the provisions of this Section, Section 4(a)(v), Section
6 and Section 7 shall at all times be effective.
(b) You shall have the right to terminate this Agreement by giving the
notice hereinafter specified at any time at or prior to the Closing Date if (i)
the Company shall have failed, refused or been unable, at or prior to the
Closing Date, to perform any agreement on its part to be performed hereunder, or
because any other condition precedent to the Underwriters' obligations hereunder
required to be fulfilled by the Company has not been fulfilled, or if (ii)
trading on the New York Stock Exchange shall have been generally suspended, or
minimum or maximum prices for trading shall have been generally fixed, or
maximum ranges for prices for securities shall have been generally required, on
the New York Stock Exchange, by the New York Stock Exchange or by order of the
Commission or any other governmental authority having jurisdiction, or if there
has been a substantial adverse change in general market or economic conditions,
or if a banking moratorium shall have been declared by Federal or New York
authorities, or if an outbreak of hostilities or other national or international
calamity of such nature as to disorganize the securities markets in the United
States shall have occurred since the execution hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10, you shall notify the
Company promptly by telephone or telegram, confirmed by letter. If the Company
elects to prevent this Agreement from becoming effective, the Company shall
notify you promptly by telephone or telegram, confirmed by letter.
11. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to the Underwriters shall
be mailed, delivered or telegraphed and confirmed to you as Representative at 1
Battery Park Plaza, New York, New York 10004, or if sent to the Company, shall
be mailed, delivered or telegraphed and confirmed to it at 300K Route 17 South,
Mahwah, New Jersey 07430 marked to the attention of the President.
12. Parties. This Agreement shall inure to the benefit of and be binding
upon you and the Company and the several Underwriters and their respective
successors and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person or corporation, other than the
parties hereto and their respective successors and assigns, the selling
securityholders referred to in Section 4(j) hereof, and the controlling persons
and the officers and directors referred to in Section 6 hereof, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective successors and assigns,
24
<PAGE>
and said selling securityholders and said controlling persons and said officers
and directors, and for the benefit of no other person or corporation. No
purchaser of any of the Securities from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
13. Information Furnished by Underwriters. The statements set forth in the
last paragraph on the cover page, in the stabi lization legend, under the
caption "Underwriting" and the state ments regarding counsel for the
Underwriters under the caption "Legal Matters" in any Preliminary Prospectus and
in the Prospectus and in blue sky reports of sales, if any, constitute the
written information furnished by or on behalf of any Underwriter referred to in
Sections 2(b), 6(a) and 6(b) hereof.
14. Miscellaneous. In all dealings hereunder, you shall act on behalf of
each of the Underwriters, and the Company shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriters made
by you as the Representative. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York, and
the Company hereby consents and will submit to the jurisdiction of the courts of
the State of New York and of any federal court sitting in the City of New York
with respect to controversies arising under this Agreement.
If the foregoing correctly sets forth the understanding between the Company
and the several Underwriters, please so indicate on behalf of the Underwriters
in the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between the Company and each of the Underwriters.
Very truly yours,
TELLURIAN, INC.
By:_________________________________
Accepted as of the date first above written:
J.W. BARCLAY & CO., INC.
Acting on behalf of the several
Underwriters named in Schedule A hereto.
By:_____________________________
25
<PAGE>
1,200,000 Shares of Series 1 Convertible Conferred Stock
and
1,200,000 Redeemable Preferred Stock Purchase Warrants
TELLURIAN, INC.
AGREEMENT AMONG UNDERWRITERS
Dated: July , 1998
J.W. Barclay & Co., Inc.
as Representative of the Several Underwriters
1 Battery Park Plaza
New York, New York 10004
Dear Sirs:
We confirm our agreement with you as follows for the purchase by you and
the other several Underwriters hereinafter referred to, including ourselves, of
1,200,000 shares of Series 1 Convertible Preferred Stock and 1,200,000
Redeemable Preferred Stock Purchase Warrants plus the option to purchase up to
an aggregate of 180,000 additional shares of Series 1 Convertible Preferred
Stock and 180,000 additional Redeemable Preferred Stock Purchase Warrants
(hereinafter together referred to as the "Securities"), of Tellurian, Inc., a
Delaware corporation, (the "Company"). The Securities are to be purchased from
the Company pursuant to an underwriting agreement, the form of which is annexed
hereto (the "Underwriting Agreement"), the number of Securities to be purchased
by us severally being indicated on Schedule A to the Underwriting Agreement. The
Securities are to be offered to the public, and such offering will be made under
a registration statement and prospectus relating thereto filed by the Company
with the Securities and Exchange Commission, under the Securities Act of 1933,
as amended (the "Act") copies of which, together with amendments thereto, we
have received. The registration statement in the form in which it becomes
effective and the prospectus, as then amended, are hereinafter respectively
referred to as the "Registration Statement" and the "Prospectus".
1. Authority of Managing Underwriter. We hereby authorize you, on our
behalf, and as our agent and representative (in that capacity sometimes herein
called the "Managing Underwriter" or "Representative"), to execute and deliver
the Underwriting Agreement substantially in the form attached hereto, to act in
our behalf in carrying it out and to take such action and make such
determinations as you may deem advisable under and with respect thereto,
including agreement to any non-material modification thereto (but not
modifications as to price and number of Securities to be purchased by us).
<PAGE>
2. Payment and Delivery. The purchase price of the Securities to be
purchased by us shall be $4.50 per share of Preferred Stock and $0.225 per
Redeemable Preferred Stock Purchase Warrant, and on the Closing Date we will pay
you the amount so due plus an additional amount equal to $_____ per share of
Preferred Stock and $____ per Warrant for Securities purchased by us, as
compensation for your services as Managing Underwriter. You shall give us at
least 24 hours' notice of the Closing Date and the place thereof pursuant to the
Underwriting Agreement. We will deliver, at or before 9:00 A.M., New York City
time, on the day fixed as such Closing Date, to you at the office of the
Representative, or at such other place or time as instructed by you, certified
or bank cashier's checks, payable to the order of the Representative, in New
York Clearing House funds, for the price of the Securities which we have agreed
to purchase and for the aforesaid fee. Upon receipt of such payment, you will
make payment to the order of the Company, for our account, of the purchase price
of such Securities against delivery thereof to you for our account. You shall
thereupon deliver to us the Securities purchased by us, less such amounts
thereof as shall have been reserved for offering to Selected Dealers if a
selling group is formed. In the event we do not pay you the purchase price in
the amount and at the time stated above, you may either treat our failure to do
so as a default on our part or, at your election, pay the purchase price to the
Company on our behalf and charge us with the amount thereof, with interest,
withholding delivery of the Securities for our account until such purchase price
and interest are received by you.
3. Expenses. You shall charge our account with: (i) all transfer taxes, if
any, and other charges on purchases, sales or transfers for our account; and
(ii) our proportionate share (based upon the number of Securities we agree to
purchase) of all other expenses which are not paid by the Company, including,
but not limited to, advertising costs and legal fees and disbursements of
counsel for the Underwriters, incurred by you under the terms of this Agreement
or in connection with the purchase, carrying and sale of the Securities,
including the expenses chargeable to and caused by any defaulting Underwriter
hereunder. Funds of the Underwriters in your hands, as Managing Underwriter, may
be held in your general funds without accountability for interest.
4. Public Offering. The initial public offering of the Securities, which
shall be made as set forth in the Prospectus, may be made on the date on which
the Registration Statement becomes effective or as soon thereafter as in your
judgment shall be practicable. The initial public offering prices for the
Securities shall be as shown on the cover page of the Prospectus. We authorize
you to determine the form of any advertisement of the Securities and the form of
agreements, if any, with dealers. We also authorize you to manage any such
public offering and to act as manager under agreements with dealers.
We authorize you to reserve for sale, sell and deliver, on
our behalf and for our account, to dealers (who may include any
<PAGE>
Underwriter) selected by you (herein sometimes referred to as the "Selected
Dealers"), who are members of the National Association of Securities Dealers,
Inc. (the "NASD") or to foreign banks, dealers and institutions not registered
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
which agree to make no sales within the United States, its territories or
possessions or to persons who are citizens thereof or residents therein, and in
making sales to comply with the NASD's Interpretation With Respect to Free
Riding and Withholding, and to such persons other than dealers as you shall
select, such number of Securities purchased by us from the Company as you shall
determine. Such reservations and sales to Selected Dealers and other persons for
the respective accounts of the several Underwriters shall be made as you may
determine. The concessions to be allowed to Selected Dealers and by them to be
reallowed to others are specified in the form of Selected Dealer Agreement
annexed hereto. If no Selected Dealer Agreement is entered into, we hereby
authorize you to allow concessions not exceeding $_____ per share of Preferred
Stock and $____ per Warrant (no part of which may be reallowed) to any other
dealer who is a member of the National Association of Securities Dealers, Inc.
or is a foreign dealer. The concessions and reallowances may be allowed only to
dealers who are members in good standing of said Association, or foreign banks,
dealers or institutions not eligible for membership in said Association who
agree to make no sales within the United States, its territories or possessions
or to persons who are citizens thereof or residents therein, and in making other
sales, to comply with said Associations' Interpretation With Respect to
Free-Riding and Withholding. Sales to others than such members or such foreign
banks, dealers or institutions will be made at the public offering prices.
You shall advise us promptly on the public offering date of the number of
Securities purchased by us which you have not reserved for sale to dealers or
other persons. We will retain for direct sale all of such Securities and, at any
time prior to the termination of this Agreement, you may reserve for sale to
dealers and other persons additional Securities retained by us and remaining
unsold.
We agree that whether or not any Selected Dealer Agreement with Selected
Dealers is entered into we shall be governed by the provisions of the attached
form of Selected Dealer Agreement (except as otherwise expressly provided
herein) during the term hereof, whether or not we are a Selected Dealer.
Upon our request you may from time to time, in your discretion, release to
us for direct sale any Securities reserved by you for sale to Selected Dealers
and other persons on our behalf and not then sold, and any Securities so
released shall not thereafter be deemed reserved.
3
<PAGE>
If prior to, or within seven days after, the termination of this Agreement
any Securities sold by us (other than Securities sold by you as Managing
Underwriter for the account of an Underwriter pursuant to this Agreement or any
Selected Dealer Agreement) shall be purchased by the Managing Underwriter or by
any Underwriter through the Managing Underwriter in the open market, then any of
such Securities shall be repurchased by us at a price equal to the total cost
thereof including commissions and transfer taxes, if any, on redelivery. The
Securities delivered on such repurchase need not be the identical Securities
originally so purchased. In lieu of the repurchase of such Securities you may,
at your option (a) charge us an amount equal to the difference between the
public offering prices and the cost prices to Selected Dealers of the Securities
so purchased, and any broker's commissions paid in connection with such
purchase, or (b) sell for our account the Securities so purchased, publicly or
privately without notice at such prices and upon such terms and to such
purchasers, including any of the several Underwriters, as you may determine,
charging us the amount of any loss and expense or crediting to us the amount of
any profit, less any expense, resulting from such sale.
5. Sale of Securities by Underwriters to Managing Underwriter. We will
advise you, from time to time upon request, of the number of Securities retained
by or released to us for direct sale which then remain unsold and until the
termination of this Agreement we will, upon your request, sell to you, in order
to enable you to consummate sales or cover over-allotments, such number of such
unsold Securities as you may specify, at such price as you may designate, but
not less than the purchase prices paid to the Company therefor.
6. Transactions in Securities by Underwriters. We agree that until
termination of this Agreement and the Selected Dealer Agreements, we will not
buy or sell for our account any of the Securities or outstanding shares of
Common Stock or warrants of the Company except as permitted in this Agreement
and the Selected Dealer Agreement or as a broker pursuant to unsolicited orders,
provided, however, that, subject to the approval of the Managing Underwriter,
any Underwriter may buy Securities from, or sell Securities to, any other
Underwriter at the public offering prices, less all or any part of a concession
of $_____ per share of Preferred Stock and $_____ per Warrant, and may buy from,
and sell the same to, any Selected Dealer at the public offering price less all
or any part of any concession to Selected Dealers in the amount specified in the
form of Selected Dealer Agreement.
7. Loans and Advances. We authorize you to arrange such loans for our
account, or to make such advances of your funds on our behalf, as you may deem
necessary or advisable in connection with the purchase, delivery or carrying of
any of the Securities (and as may be permitted by law), and to pledge or hold as
security
4
<PAGE>
therefor all or any part of the Securities which we shall have purchased or
agreed to purchase from the Company. We shall be paid or credited with the
proceeds of all loans made for our account.
You may, and at our request will, deliver to us from time to time on or
after the Closing Date and prior to the termination of this Agreement, for
carrying purposes only, any Securities purchased by us which have been reserved
for sale for our account but not sold and paid for. We will redeliver to you any
Securities so delivered to us for carrying purposes at such time or times prior
to such termination as you may demand.
8. Stabilization. We authorize you, in your discretion, during the term of
this Agreement, and for our account (a) to buy and sell Securities in the open
market or otherwise, for long or short account, in such amounts and on such
terms and at such prices as you may determine, provided that, during the term of
this Agreement and the Selected Dealer Agreement, any such sales of Securities
shall be made at the public offering prices or, in the case of sales of
Securities to a Selected Dealer or one of the Underwriters, at the public
offering prices less the concessions applicable thereto under Section 6 above,
or any part of such concessions, and (b) in arranging for sales of Securities to
Selected Dealers, to over-allot and to cover such over-allotments; it being
understood that such purchases and sales and over-allotments shall be as nearly
as practicable in the proportions in which the respective Underwriters have
agreed to purchase the Securities, and that at no time shall our net position,
for either long or short account including such over-allotments, exceed 15% of
the Securities which we have agreed to purchase under the Underwriting
Agreement. Upon your demand, we will pay you the cost of any Securities
purchased for our account and will deliver to you any Securities sold or
over-allotted for our account.
We authorize you to file on our behalf with the Securities and Exchange
Commission any reports required in connection with any transaction pursuant to
this Section 8. You shall notify us promptly if you effect such transactions.
9. Termination and Settlement. Unless earlier terminated by you, this
Agreement shall terminate at the close of business on the 30th day after the
initial public offering unless extended by you for an additional period or
periods not exceeding an aggregate of 30 additional days. You may extend this
Agreement for such period or periods and may terminate this Agreement at any
time without prior notice.
As soon as practicable after any such termination, any Securities held by
you for our account or reserved by you for sale to dealers and other persons but
not sold and paid for, shall be delivered to us and our net credit or debit
balance, taking into
5
<PAGE>
account our share of known expenses and charges and any necessary reserve for
additional expenses, shall be received from or paid to you.
Notwithstanding any settlement under this Agreement, we agree to pay our
proportion (based on the number of Securities we agree to purchase from the
Company) of the amount of any claim, demand or liability which may be asserted
against and discharged by the Underwriters, or any of them, based on the claim
that the Underwriters constitute an association, unincorporated business or
other separate entity, and also to pay a like proportion of any transfer taxes
which may be assessed after such settlement and a like proportion of the
expenses incurred by the Underwriters, or any of them, and approved by you in
contesting any such claim, demand, liability or tax.
10. Defaulting Underwriters. In the event of failure of any Underwriter to
perform its obligation to take up and pay for the Securities which it has agreed
to purchase, you shall have the right to arrange for other persons, who may
include yourselves, to take up and pay for such Securities. In the event that
such arrangements are made, the proportions of the Securities then to be
purchased by the other Underwriters and by such other person or persons, if any,
shall be taken as the basis for all rights and obligations hereunder; but this
shall not in any way affect the liability of any defaulting Underwriters to the
other Underwriters for damages resulting from such default, nor shall default in
any way relieve any other Underwriter of any of its obligations hereunder or
under the Underwriting Agreement, except as therein provided.
11. Position of Managing Underwriter. Except as herein otherwise expressly
provided, you shall have full authority to take such action as you may deem
necessary or advisable in respect of all matters pertaining to the Underwriting
Agreement and this Agreement, and the purchase, sale and distribution of the
Securities, but you shall be under no liability to us except for want of good
faith and for obligations assumed by you hereunder and except for any
liabilities under the Act. No obligation not expressly assumed by you in this
Agreement shall be implied herefrom.
12. Indemnity. (a) We agree, and each of the several Underwriters
(including yourselves) shall agree, to indemnify, defend and hold harmless each
other Underwriter and each person who controls any other Underwriter within the
meaning of Section 15 of the Act, to the extent and upon the terms that each
Underwriter agrees to indemnify and hold harmless the Company as set forth in
Section 6 of the Underwriting Agreement.
6
<PAGE>
(b) We will pay, upon your request, our proportionate share, based upon our
underwriting obligation, of any losses, damages, liabilities or expenses, joint
or several, paid or incurred by any Underwriter to any person other than an
Underwriter, arising out of or based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, the
Prospectus, any amendments or supplements thereto or any preliminary prospectus
or any selling or advertising material approved by you for use by the
Underwriters in connection with the sale of the Securities, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading (other than an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by an Underwriter specifically for use therein) and such proportionate
share of any legal or other expenses reasonably incurred by you or with your
consent in connection with investigating or defending any claim or action in
respect of such loss, damage, liability or expense. In determining the amount of
our obligation under this Section 12(b), appropriate adjustment may be made by
you to reflect any amounts received from the Company by any one or more
Underwriters in respect of such claim pursuant to Section 6 or Section 7 of the
Underwriting Agreement or otherwise. There shall be credited against any amount
paid or payable by us pursuant to this Section 12(b) any loss, damage, liability
or expense which is incurred by us as a result of any such claim asserted
against us, and if such loss, damage, liability or expense is incurred by us
subsequent to any payment by us pursuant to this Section 12(b), appropriate
provision shall be made to effect such credit, by refund or otherwise. If any
such claim is asserted, you may take such action in connection therewith as you
deem necessary or desirable, including retention of counsel for the Underwriters
and in your discretion separate counsel for any particular Underwriter or groups
of Underwriters. In determining amounts payable pursuant to this Section 12(b)
any loss, damage, liability or expense incurred by any person controlling any
Underwriter within the meaning of Section 15 of the Act which has been incurred
by reason of such control relationship shall be deemed to have been incurred by
such Underwriter. Any Underwriter may elect to retain at its own expense its own
counsel. You may settle or consent to the settlement of any such claim with the
approval of a majority in interest of the Underwriters on advice of counsel
retained by you. Whenever you receive notice of the assertion of any claim to
which the provisions of this Section 12(b) would be applicable, you will give
prompt notice thereof to each Underwriter. You will also furnish each
Underwriter with periodic reports, at such times as you deem appropriate, as to
the status of such claim and the action taken by you in connection therewith. If
any Underwriter or Underwriters default in their obligation to make any payments
under this Section 12(b), each non-defaulting Underwriter shall be obligated to
pay its proportionate share of all defaulted payments,
7
<PAGE>
based upon such Underwriter's underwriting obligation as related to the
underwriting obligations of all non-defaulting Underwriters. Nothing herein
shall relieve a defaulting Underwriter from liability for its default.
(c) The indemnity agreement in this Section shall survive the termination
of this Agreement.
13. Confirmation of Underwriters. We confirm that we have examined the
Registration Statement and the amendments thereto referred to in the
Underwriting Agreement, that we are familiar with the proposed final amendment
thereto (including the proposed final form of prospectus), that we are willing
to accept the responsibilities of an underwriter under the Act in respect of the
Registration Statement and are willing to proceed with the public offering of
the Securities in the manner contemplated, and that the form of the Selected
Dealer Agreement employed by you in connection with this offering is
satisfactory to us. We further confirm that the information relating to us in
such proposed final form of prospectus and the statements therein as to the
terms of the offering of the Securities under the heading "Underwriting" of the
Registration Statement insofar as they relate to us are correct, and we
authorize you, as our Managing Underwriter, so to advise the Company. We further
confirm that (a) we are members in good standing of the NASD, or (b) we are a
foreign bank, dealer or institution not registered under the Exchange Act and we
agree (i) that in making sales of the Securities outside the United States we
will comply with the requirements of the NASD's Interpretation With Respect to
Free Riding and Withholding and (ii) that we will not offer or sell any of the
Securities within the United States, its territories or possessions or to
persons who are citizens thereof or residents therein and, (c) we have the ratio
of net capital to aggregate indebtedness, including the indebtedness represented
by our obligation under this Agreement and under the Underwriting Agreement,
required by Rule 15c3-1 promulgated by the Commission pursuant to the provisions
of Section 15(c)(3) of the Exchange Act. We know of no engineering, management
or similar report or memorandum relating to the Company prepared within the last
year in connection with the offering by or for the Company, a controlling person
of the Company or any Underwriter which has not been filed with the Commission.
We also confirm that copies of the latest preliminary prospectus with respect to
the Securities have been mailed, at least two days prior to the date hereof, to
all persons to whom it is presently expected we will sell Securities and that,
if we expect to mail a confirmation of any such sale to any person by air mail,
said preliminary prospectus has been sent to such person by air mail. In
response to Securities Act Release No. 5398, we agree that we will not sell more
than five (5%) percent of the Securities purchased by us hereunder to accounts
over which we exercise discretionary authority. We, and any affiliate of ours
engaged in the retail distribution of securities which is used by us in
connection with the offering of the Securities, will comply
8
<PAGE>
with the applicable provisions of the Selected Dealer Agreement. We will not
sell any Securities at prices less than the Offering Prices except to persons
who have entered into, or agreed to enter into, the Selected Dealer Agreement.
For a period of twenty-five (25) days after the effectiveness of the
Registration Statement, or until completion of the public offering of the
Securities, whichever is later, we will provide a copy of the Prospectus to any
person making a written request therefor.
14. Miscellaneous. Nothing herein contained shall constitute the several
Underwriters an association, or any Underwriters partners with you or us, or
with each other, or render any Underwriter liable for the obligations of any
other Underwriter; and the rights and liabilities of ourselves and of each of
the Underwriters shall be several and not joint.
The Securities purchased by us pursuant to the Underwriting Agreement shall
remain our property until sold, and no title to any such Securities shall pass
to you by virtue of any of the provisions of this Agreement.
Default by any one or more Underwriters in respect of their several
obligations shall not release us or any other Underwriter from any obligations
hereunder.
You shall not have any responsibility with respect to the right of any
Underwriter or other person to sell the Securities in any jurisdiction,
notwithstanding any information you may furnish in that connection. We authorize
you to file with the New York authorities, as syndicate manager, a Further State
Notice relating to the Securities if required.
The section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.
This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of New York, and we hereby
consent and shall submit to the jurisdiction of the courts of the State of New
York and of any federal court sitting in the City of New York with respect to
controversies arising under this Agreement.
15. Notices. Any notice from you to us shall be deemed to have been duly
given if mailed, telephoned, telegraphed or deli vered to us at our address set
forth after on Schedule A to the attached Underwriting Agreement.
16. Execution of Agreement. This Agreement has been executed by us and is
delivered to you in duplicate. Your confirmation hereof shall constitute this
Agreement a valid and binding contract between you and us and each party to a
similarly confirmed
9
<PAGE>
agreement substantially identical herewith, and this and such other agreements
shall constitute the Agreement Among Underwriters.
Very truly yours,
By:_________________________________
Attorney-in-fact for each of the
Several Underwriters named in
Schedule A of the attached
Underwriting Agreement
Confirmed as of the date first above written:
J.W. BARCLAY & CO., INC.
By:___________________________
10
<PAGE>
SCHEDULE A
TELLURIAN, INC.
Underwriting Agreement dated July , 1998
This Schedule sets forth the name and address of each Underwriter and the
number of Shares to be purchased by each Underwriter from the Company.
Number of Number of
Name Address Shares Warrants
- ------------ --------------------- --------- ---------
J.W. Barclay 1 Battery Park Plaza
& Co., Inc. New York, NY 10004
--------- ---------
Total...................1,200,000 1,200,000
--------- ---------
26
<PAGE>
1,200,000 Shares of Series 1 Convertible Preferred Stock
and
1,200,000 Redeemable Preferred Stock Purchase Warrants
TELLURIAN, INC.
SELECTED DEALER AGREEMENT
Dated: July , 1998
Dear Sirs:
The Underwriters named in the prospectus mentioned below (the
"Underwriters") have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from
Tellurian, Inc. (the "Company") at the prices set forth on the cover of said
prospectus, an aggregate of 1,200,000 shares of Series 1 Convertible Preferred
Stock (the "Shares") and 1,200,000 Redeemable Preferred Stock Purchase Warrants
(the "Warrants"). The Securities are more particularly described in the enclosed
prospectus (the "Prospectus"), additional copies of which will be supplied in
reasonable quantities upon request.
Some or all of the Underwriters are severally offering a part of the
Securities for sale to selected dealers (the "Selected Dealers"), among whom
they are pleased to include you, at the public offering prices, less concessions
in the amounts set forth in the Prospectus under "Underwriting". This offering
is made subject to delivery of the Securities and their acceptance by the
Underwriters, to the approval of all legal matters by counsel, and to the terms
and conditions herein set forth and may be made on the basis of the reservation
of Securities or an allotment against subscription.
We have advised you by telegram of the method and terms of the offering.
Acceptances should be sent to J.W. Barclay & Co., Inc., 1 Battery Park Plaza,
New York, New York 10004. We reserve the right to reject any acceptances in
whole or in part.
Any of the Securities purchased by you hereunder are to be offered by you
to the public at the public offering prices, except as herein otherwise provided
and except that a reallowance from
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such public offering prices of not in excess of the amount set forth in the
Prospectus under "Underwriting" may be allowed to dealers who are members in
good standing of the National Association of Securities Dealers, Inc., or
foreign banks, dealers or institutions not eligible for membership in said
Association who represent to you that they will promptly reoffer such Securities
to unrelated persons at the public offering prices and will abide by the
conditions with respect to foreign banks, dealers and institutions set forth in
the confirmation below.
We, acting as Representative, and, with our consent, any Underwriter may
buy Securities from, or sell Securities to, any Selected Dealer or any other
Underwriter, and any Selected Dealer may buy Securities from, or sell Securities
to, any other Selected Dealer or any Underwriter at the public offering prices
less all or any part of the concessions.
You agree to pay us on demand for the accounts of the several Underwriters
an amount equal to the concessions on any Securities purchased by you hereunder
which, prior to the termination of this Agreement, we may purchase or contract
to purchase for the account of any Underwriter or which may be delivered against
purchase contracts made prior to the termination of this Agreement.
Securities purchased by you hereunder shall be paid for on such date as we
shall determine, on one day's notice to you, by certified or official bank check
payable in New York Clearing House funds to the order of J.W. Barclay & Co.,
Inc., 1 Battery Park Plaza, New York, New York 10004, or at such other place as
instructed. Delivery to you of certificates for Securities will be made as soon
as is practicable thereafter. Unless specifically authorized by us, payment by
you may not be deferred until delivery of certificates to you.
The Underwriters have been advised by the Company that a Registration
Statement for the Securities, filed under the Securities Act of 1933, has become
effective. You agree that in selling Securities purchased pursuant hereto (which
agreement shall also be for the benefit of the Company) you will comply with the
applicable requirements of the Securities Act of 1933 and of the Securities
Exchange Act of 1934. No person is authorized by the Company or by the
Underwriters to give any information or make any representations not contained
in the Prospectus in connection with the sale of Securities. You are not
authorized to act as agent for the Company or any of the Underwriters in
offering Securities to the public or otherwise. Nothing contained herein shall
constitute the Selected Dealers partners with any of the Underwriters or with
one another.
Upon application to us, we will inform you as to the advice we have
received from counsel concerning the jurisdictions in which Securities have been
qualified for sale or are exempt under the
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respective securities or blue sky laws of such jurisdictions, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell Securities in any such jurisdiction.
As Representative, we shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. Neither we, acting as Representative, nor any of the
Underwriters shall be under any obligation to you except for obligations
expressly assumed by us in this Agreement.
Each of the Underwriters has authorized us to overallot in arranging for
sales of the Securities to the Selected Dealers and to purchase and sell
Securities for long or short account and has also authorized us to stabilize or
maintain the market prices of the Preferred Stock and the Warrants of the
Company.
You agree, upon our request, at any time or times prior to the termination
of this Agreement, to report to us the number of Securities purchased by you
pursuant to the provisions hereof which then remain unsold.
Selected Dealers will be governed by the conditions herein set forth until
this Agreement is terminated. This Agreement will terminate at the close of
business on the 30th day after the date hereof but, in our discretion, may be
extended by us for a further period not exceeding 30 days and in our discretion,
whether or not extended, may be terminated at any earlier time. Notwithstanding
the termination of this Agreement, you shall remain liable for your
proportionate amount of any claim, demand or liability which may be asserted
against you alone, against you together with other dealers purchasing Securities
upon the terms hereof, or against us, based upon the claim that the Selected
Dealers, or any of them, constitute an association, an unincorporated business
or other entity.
This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York, and you consent and
will submit to the jurisdiction of the courts of the State of New York and of
any federal court sitting in the City of New York with respect to controversies
arising under this Agreement.
In the event that you agree to purchase Securities in accordance with the
terms hereof, kindly confirm such agreement by completing and signing the form
provided for that purpose on the enclosed duplicate hereof and returning it to
us promptly, even though you may have previously advised us of your acceptance
by telephone or telegraph.
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All communications from you should be addressed to J.W. Barclay & Co.,
Inc., 1 Battery Park Plaza, New York, New York 10004. Any notice from us to you
shall be deemed to have been fully authorized by the Underwriters and to have
been duly given if mailed or telegraphed to you at the address to which this
letter is mailed.
Very truly yours,
J.W. BARCLAY & CO., INC.
As Representative of the several
Underwriters
By ________________________________
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J.W. Barclay & Co., Inc.
As Representative of the several Underwriters
1 Battery Park Plaza
New York, New York 10004
Dear Sirs:
We hereby confirm our agreement to purchase ___________ Shares and
_____________ Warrants of Tellurian, Inc. allotted to us subject to the terms
and conditions of the foregoing agreement and your telegram to us referred to
therein. We hereby acknowledge receipt of the Prospectus relating to the
Securities, and we confirm that in purchasing Securities we have relied upon no
statements whatsoever, written or oral, other than the statements in such
Prospectus. We have made a record of our distribution of preliminary
prospectuses and, when furnished with copies of any revised preliminary
prospectus, we have promptly forwarded copies thereof to each person to whom we
had theretofore distributed preliminary prospectuses. We hereby represent that
we are a member in good standing of the National Association of Securities
Dealers, Inc. and agree to comply with the Rules of Fair Practice of said
Association, and in particular, Sections 8, 24, 25 and 36 of Article III
thereof, or, if we are not such a member, we are a foreign bank, dealer or
institution not eligible for membership in said Association and agree to make no
sales within the United States, its territories or possessions or to persons who
are citizens thereof or residents therein, and in making any sales to comply
with said Association's Rules and Interpretations to the extent applicable to
us.
................................
Name of Selected Dealer
By .............................
(Authorized Signature)
................................
(Print name and title)
Address:
.................................
.................................
Dated as of the date first above written.
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form SB-2 of Tellurian, Inc.
of our report dated March 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".
By: /s/ Miller Ellin &Company
-----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
June 12, 1998
<PAGE>
June 11, 1998
Securities & Exchange Commission
450 Fifth Street NW
Washington, DC 20549
Re: Tellurian, Inc.
Form SB-2 Registration Statement
Gentlemen:
Enclosed please find a Form SB-2 Registration Statement. The offering
registered thereunder is to be underwritten by J.W. Barclay & Co., Inc.
Very truly yours,
LESTER MORSE P.C.
Steven Morse
SM:ag
Enclosures
