-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U521Glk3XC8dHvVMNBmPfQVVmrVs23nh5Ej/C/6+XsE5SlbyHBW626sh4p++7b1D 93BXQ7tKDgOFlWDi1pfz1A== 0000950116-97-000727.txt : 19970416 0000950116-97-000727.hdr.sgml : 19970416 ACCESSION NUMBER: 0000950116-97-000727 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELLURIAN INC /NJ/ CENTRAL INDEX KEY: 0001018039 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 223451918 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21645 FILM NUMBER: 97581047 BUSINESS ADDRESS: STREET 1: 15 INDUSTRIAL AVENUE CITY: UPPER SADDLE RIVER STATE: NJ ZIP: 07458 BUSINESS PHONE: 2018186767 MAIL ADDRESS: STREET 1: 15 INDUSTRIAL AVENUE CITY: UPPER SADDLE RIVER STATE: NJ ZIP: 07458 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to ________ Commission File Number: 0-21645 - ------------------------------- TELLURIAN, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 22-3451918 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization (Identification No.) 300K Route 17 South Mahwah, New Jersey 07430 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 529-0939 -------------- Securities registered pursuant to Section 12(b) of the Act: None - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value - -------------------------------------------------------------------------------- (Title of Class) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) , and (2) has been subject to such filing requirements for the past 90 days. Yes __x__. No _____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-KSB or any amendment to this Form 10-KSB [ ]. As of March 31, 1997 at 4:00 P.M., the aggregate market value of the voting stock held by non-affiliates, approximately 2,140,000 Common Stock, $.01 par value, was approximately $12,840,000 based on the last sale price of $6.00 for one share of Common Stock on such date. The number of shares issued and outstanding of the Registrant's Common Stock, as of March 31, 1997 was 3,025,000. PART I. Item 1. Description of Business General Tellurian, Inc. ("Tellurian" or the "Company"), a Delaware corporation, is engaged in the design, development and marketing of virtual reality products which include image generators, related software and helmets. The term virtual reality refers to artificial environments of sight, sound and motion created with the use of specialized computers and audio-visual equipment. The Company 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 1996, the Company's principal product was its AT-200 image generator which was sold to customers who manufacture training and simulation equipment such as Hughes/Link Corporation, Aviation Simulation Technology, Inc., and Ship Analytics, Inc. In 1994, the Company began adapting its AT-200 Image Generator and has been selling this product and ancillary software for use in virtual reality entertainment devices to companies such as Fightertown Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight Corp. In 1994, the Company began designing and engineering a new image generation product known as the "EAGLE", a specialized computer which is specifically designed for the virtual reality entertainment market. In July 1996, Tellurian delivered its first units of the EAGLE pursuant to purchase orders. The Eagle, available in multiple resolution formats, 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 being 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, and Location Based Entertainment Centers ("LBE")and Tourist Entertainment Centers ("TEC"). Utilizing the "EAGLE" technology, Tellurian is currently designing helmets to complement the Eagle for the entertainment market. This new product is expected to be marketed and sold on two levels. The primary area of marketing will be for Tellurian to build its own complete game units and use these units to establish one or more joint ventures (typically a TEC), or revenue share agreements with owners and operators of either LBE's or TCE's. The second level will be as a component for other virtual reality game manufacturers. In January 1996, Tellurian signed a Technology Transfer Agreement with Voyager Graphics, Inc. ("Voyager") pursuant to which Tellurian granted Voyager an irrevocable, exclusive, assignable, fully paid license (the "License") to be the exclusive supplier of the EAGLE Image Generator in various Asian and Mid-East countries. In consideration of the License and technology transfer, Voyager agreed to pay Tellurian $1,500,000. Of such amount, Tellurian has agreed that Voyager will pay $650,000 to two parties unrelated to Tellurian for these services in connection with such contract, resulting in a net amount of $850,000 to Tellurian before payments of certain royalties. Management is concerned about Voyager's ability to meet its financial obligations under this program, since Voyager is currently more than three months late on a scheduled payment. Please see the Management Discussion and Analysis section of this filing for further information on this matter. 2 Recent Developments Since the completion of Company's initial public offering in November of 1996 it has actively pursued the creation of an LBE or a TEC that will be designed to showcase the Tellurian technology. During the first quarter of 1997, the Company began legal procedures to incorporate two subsidiaries, Cyberport International, Inc., a Delaware corporation, and Cyberport Niagara Inc., an Ontario, Canada company, each with a minority shareholder. The Niagara subsidiary is 87.5% owned by Tellurian and 12.5% owned by an unrelated party. It will develop and operate a Tourist Entertainment Center in Niagara Falls, Ontario, Canada (hereinafter referred to as "Cyberport"). This center will operate from a 40,000 sq. ft. building which the Niagara subsidiary leased during April 1997 in what is commonly referred to as the "Casino District" (also known as "Clifton Hill") of Niagara Falls. Cyberport, which is a TEC differs from the more common LBE in that the market of a TEC is intended to be the family vacationer rather than the local, repeat customer. The Company's plans and objectives for this subsidiary are discussed at greater length in "Item 6." The other newly planned subsidiary, Cyberport International, Inc., will be 97% owned by the Company with the remaining 3% owned by the same unrelated party as Cyperport Niagara, Inc. Cyberport International, Inc. will be the owner of the intellectual properties and intangible assets that, in the opinion of management, make the Cyberport TEC a concept capable of being franchised. Cyberport International intends to promote this concept to potential franchisees with the expectation of collecting franchise fees and royalties from franchise operators. Background The Company's AT-100 and AT-200 image generators were, in part, based upon developments by Ronald Swallow hereinafter referred to as the "Quantum flat-shaded technology" while he was a principal in Quantum Graphics Corporation ("Quantum"), a corporation which he had founded in 1987 and which became 80% owned by him, Richard Swallow and Charles Powers. The development activities of Quantum became adversely affected because of its inability to obtain adequate funding and disagreements among its shareholders, and it filed for protection under the Bankruptcy Act in 1988. During the course of bankruptcy proceedings, an adversarial proceeding was commenced by the trustee in bankruptcy concerning the ownership of the Quantum flat-shaded technology. As a result of such adversarial proceeding, an agreement was entered into on November 5, 1991 between the trustee of Quantum, TTY Graphics, Inc. ("TTY"), and Greg Gustin ("Gustin"), hereinafter referred to as the "Purchase Agreement", the latter two having been investors or principals in a predecessor of Quantum prior to its formation. The agreement acknowledged that Quantum, TTY and Gustin each owned an undivided one-third interest in the Quantum flat-shaded technology and provided for the sale of the interests owned by Quantum and Gustin to TTY for a cash consideration of $150,000 and royalties to be paid by TTY or Tellurian equal to two-thirds of four percent of revenues derived from the licensing of, or sales of products incorporating, the Quantum flat-shaded technology and one percent of revenues derived from the licensing of, or sales of products incorporating, computer graphics technology other than the Quantum flat-shaded technology. Payment of the royalties was secured by a security agreement granting the bankruptcy trustee of Quantum and Gustin a lien on the Quantum flat-shaded technology and all revenues, products, accounts receivable and contract rights arising from or related to the technology, and providing that TTY could not, except for non-exclusive licenses sell, contract to sell, encumber or otherwise dispose of the Quantum flat-shaded technology without the prior written consent of the trustee of Quantum. Except for the above mentioned payment of royalties of one percent, the foregoing provisions were not applicable to the EAGLE, which is not based upon the technology of the AT-100 and AT-200. 3 TTY assigned the Purchase Agreement to Tellurian in exchange for the forgiveness of certain financing provided by Tellurian to TTY and a royalty of one-third of four percent of all sales of Quantum flat-shaded technology up to a maximum of $500,000. In August 1996, TTY agreed to cancel its right to receive future royalties in exchange for Tellurian agreeing to pay accrued and unpaid royalties to it of $10,529.50 and an additional $70,000. Of such $80,529.50, $45,529.50 was paid in November, and the balance is due in November of 1997. Similarly, in August 1996, Gustin agreed to cancel his rights to receive future royalties under the Purchase Agreement in exchange for Tellurian agreeing to pay him accrued and unpaid royalties fixed at $5,000 and an additional $75,000. Such $80,000 has been paid. Virtual Reality Virtual Reality is an artificial environment of sight, sound and motion created with the use of computers. The earliest example of a rudimentary virtual reality device is the Link Trainer, which was used to train pilots for instrument flying. With the availability of modern computers, simulators have undergone rapid development, particularly in the presentation of visual scenes and sound effects. Present day simulators provide not only motion, but also visual pictures and sound effects, which are altered as the controls are manipulated. Simulators are used in training ship pilots and air traffic controllers. The hallmark of virtual reality entertainment is its ability to immerse the user in a fantasy experience. The four dimensions to present day VR are sight, sound, motion, and interactivity with other players. Tellurian's "ICE Falcon" is a prime example of virtual reality entertainment. The unit consists of a fiberglass cockpit similar to that of an F-16 fighter aircraft, and it is outfitted with a control stick, throttle, and all the gauges one would expect to find in the actual jet. Once seated, the player views what appears to be the outside world via three 27" video monitors. Game play begins when the player taxis down the runway and takes off. Using only the visual display, the player is able to see a view of the world which the computer is constantly creating and changing in response to the manipulation of the controls by the player. This continual interaction between player and computer maintains the virtual reality of the F-16's pitch and direction and allows the player to choose his own adventure. If the player heads off in the direction of the enemy's airport, for example, the computer will create and control a visual image of an attacking aircraft for the player to destroy. If the player moves in a direction away from an enemy airport, the player is free to practice his flying skills without being confronted by an enemy aircraft. 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 December 31, 1996, the Company has built and sold over 250 AT-200 systems. 4 The Company currently sells its AT-200 unit and ancillary software (including performing repairs and maintenance and providing related consulting services) to two types of customers: those engaged in the production of training devices, and those who specialize in entertainment devices. The first category of customers includes such companies as Hughes/Link Corporation, Ship Analytics Corp., and Grumman Aerospace Corporation (currently known as Northrop/Grumman Aerospace Corporation). During the years ended December 31, 1996 and 1995, revenues from this category amounted to 5.5% and 31%, respectively, of the Company's total revenues for each applicable period. The latter group includes MaxFlight Corp., Ride & Show Engineering, and the Fightertown Entertainment Centers. During the years ended December 31, 1996 and 1995, revenues from this group amounted to 0% and 69%, respectively, of the Company's total revenues for each applicable period. Tellurian's most recently developed image generation product is the "EAGLE," a system specifically designed for the VR entertainment market. The EAGLE, which is available in multiple resolution formats, is faster and less expensive to produce than the AT-200. Each unit is composed of proprietary hardware and software which combined with motion and sound to simulate a full-immersion experience. The EAGLE is intended for use at amusement/ theme parks, video arcades, TEC's and LBE's. In July 1996, the Company commenced delivery of its first production units pursuant to purchase orders. Using the EAGLE, the Company is currently developing a class of games in which a portion of the TEC is themed to a particular time and place. For example, the Company's "Battle of the Bulge" adventure will be based on the legendary P-51 Mustang fighter plane of WW II. The following describes this experience; however, the Company has already been contacted to design other adventures themed around NASCAR racing, ancient civilizations and undersea exploration. The Battle of the Bulge VR experience will be a theme area within a LBE or a TCE. Although the size of the area will be flexible, a minimum of 60' x 40' is recommended in order to gain the full impact of the experience. The entertainment area will include a Flight Shop where the guests register for the P-51 experience and can purchase items such as T-shirts, hats, jackets, models, dog tags, and coffee mugs bearing the P-51 logo. This area is intended to resemble a WW-II Officers Club with rustic wood tables and counters, and planked wood floors. The ceiling may be corrugated metal which has been curved to meet the area of Flight Shop and Briefing Room. Walls can be adorned with maps, squadron insignias, and pin-up girls with period music (such as Glen Miller) playing. Behind the Flight Shop will be a small "Briefing Area," consisting of wooden benches, a VCR-monitor, and chalk board. The purpose of this area will be to prepare guests their experience. In addition to receiving instructions on how to best use the P-51, each guest will be greeted by the "Flight Leader" (a uniformed employee). Basic introduction to the experience will be handled via video tape. The Flight Leader will be there to answer questions. The floor of the Briefing Area will contain planked wood and the walls will have military aeronautical maps, detailed maps of certain target areas, and silhouettes of various aircraft (both friendly and foe). A rough wooden door will be the exit into the "Hanger Area." Around the door can be sand bags, various warning signs, and a small chalk board with weather conditions over the target area. Sound in this room may be of muffled "mic chatter," engines starting, and the occasional signal siren. Since each flight experience will last between four and eight minutes, the amount of time a guest spends in the "Briefing Area" will be limited. The size of the "Briefing Area" will be determined by the number of VR units in the "Hanger Area." When the "Hanger Area" is ready for the guests, a bare red light bulb will flash above the exit door. 5 The "Squadron Leader" will meet the guests as they enter the "Hanger Area," and escort them to their P-51 aircraft. Each P-51 will be a scale model of the actual Mustang cockpit. The aircraft will be made of fiberglass and painted with authentic markings. Each aircraft will have up to two seats (the pilot's cockpit and a back seat "observer"). The interior of the P-51 will be equipped with simulated instruments, control stick and throttle. Each cockpit can be mounted on a two axis platform which provides both guests with motion cues if desired. The experience will be generally the same: the guests are to meet and escort B-17 bombers on a raid over enemy territory. Notwithstanding the recommended installation size and content described above, the Company believes that there is a large and growing market for the P-51 game product even in single, free-standing units. The Company expects to place 16 stations of P-51 flight simulators at the Cyberport facility. It is believed that the installation of this equipment in Niagara Falls, Ontario, Canada will incorporate many of the ancillary features described above. Because of the importance of the Tellurian experience in the overall presentation of the Cyberport program, it is currently planned to dedicate approximately 8,000 square feet of the Cyberport facility to Tellurian's products. Backlog At December 31, 1996 the Company had a backlog of 32 Eagle units with a sales value of $160,896. The backlog at the end of 1996 is entirely under the Fightertown purchase order which dates back before January 1, 1996 and under which Fightertown did not accept deliveries in 1996. At December 31, 1995, the Company had a backlog of 32 Eagle units at a sales value of $160,896. Other Products and Services Helmets. There are various manufacturers which produce helmets for virtual reality experiences. Tellurian believes that it is advantageous to utilize the unique technologies of the "Eagle" in developing its own line of proprietary products. The company has begun a development project to design and build a helmet mounted visual system to take maximum advantage of the EAGLE image generator. This device is expected to replace the cumbersome 27" and 35" monitors now being used on Tellurian's game units. When combined with the EAGLE, the helmet's special optics and ear phones will give the player stereo viewing, in full color, and surround sound. Management believes that the first working prototype of its custom designed helmet will be available for evaluation during the second quarter of 1997. 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. 6 Other 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. 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 believed to be a natural progression of the technology and products which the Company has been developing. The Company's marketing efforts prior to completion of the 1996 public offering had been concentrated on selling image generating systems to manufacturers of trainers and simulators. The sales and marketing efforts were conducted by officers of the Company. During 1995, three customers, namely, Ride & Show Engineering Corp. (a vendor to Six Flags), Virtual Images and Voyager Graphics accounted for 32%, 21% and 11%, respectively, of the Company's revenues. During 1996, two principal customers, namely, Voyager and Ship Analytics Corp. accounted for 76% and 16%, respectively, of the Company's revenues. Due to the specialized nature of sales, significant training is required before newly hired salespersons are likely to be effective. While the Company has added an experienced sales person in the Midwest, the Company intends to continue its primary sales efforts through the officers based in its New Jersey facility. Traditional trade magazine advertising will be done on a regional scale, while trade show participation will be done on a national level. The goal of the Company is to use its products 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. In addition, the Company has received numerous inquiries 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. These venues will be pursued as resources permit, but the Company does not consider these avenues to be its primary market direction. Licensing of Tellurian Technology Pursuant to an agreement dated as of January 1, 1996 by and between Tellurian and Voyager Graphics, Inc., a Republic of China corporation, ("Voyager") Tellurian granted Voyager an irrevocable, exclusive, assignable fully paid license (the "License") to be the exclusive supplier of the EAGLE image generator (the "Product") within a restricted group of countries (the "Licensed Territory") and to sell the Products worldwide. The Licensed Territory consists of Afghanistan, Australia, Bahrain, Bangladesh, Bhutan, Burma, China (including Taiwan, Hong Kong and Mainland China), Cyprus, India, Indonesia, Iran, Iraq, Japan, Jordan, Kampuchea (Cambodia), Korea (North), Korea (South), Kuwait, Laos, Lebanon, Malaysia, Maldives, Marshall, Mongolia, Nepal, New Zealand, Oman, Pakistan, Philippines, Qatar, Saudi Arabia, Singapore, Sri Lanka (Ceylon), Syria, Thailand, Turkey, United Arab Emirates, Vietnam, Yemen (Aden and Sana). The License includes all the know-how, patent rights and copyright matter, if any (hereinafter the know how, copyrights and patent rights are collectively referred to as the "Intellectual Property"), and the right to grant sub-licenses to third parties without the consent of Tellurian. Tellurian retains the right to grant licenses of the Intellectual Property to third parties outside of the Licensed Territory and to sell the Products and/or any derivative products (i.e. computer image generators that are manufactured based on and by utilizing partly the Intellectual Property of Tellurian, hereinafter referred to as the "Derivative Products") outside the Licensed Territory. As part of the License 7 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 Upper Saddle River, 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 has agreed that Voyager will pay $650,000 to two parties unrelated to Tellurian for their services in connection with such contract resulting in a net amount of $850,000 to Tellurian. As of September 30, 1996, Tellurian has recognized revenues totaling approximately $660,000 of the above referenced $850,000 from Voyager. In addition, Voyager purchased certain hardware items valued at approximately $60,000 in order to allow them to test their applications. Therefore, the total net amount due Tellurian under this contract is approximately $910,000. As of December 31, 1996, Tellurian received payments totaling $550,000 of $910,000. Manufacturing 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 from Analog Devices Corp. and does not anticipate any supply problems in either the short or long term. Once all the components are assembled at the Company, the products are forwarded to another vendor for soldering. After soldering, the completed boards are returned to the Company for final integration into units ready for shipment. Agreement with Fightertown In March 1994, Tellurian received a purchase order from Fightertown for 40 EAGLES at a price of $4,888 each. As of December 31, 1996, Tellurian has delivered eight EAGLES to Fightertown and has a backlog of 32 EAGLES. Tellurian has agreed with respect to future orders of EAGLE from Fightertown to deliver EAGLES at a maximum price of $7,500 per EAGLE ($10,000 per EAGLE where certain improvements to the EAGLE are made) and that Fightertown will receive the best pricing offered to any Tellurian customers regardless of volume. Further, Tellurian has agreed to give Fightertown a right of first refusal to participate with Tellurian in any LBE site or product in which Tellurian wishes to utilize conventional fighter jet simulation and to not copy Fightertown's method of operating LBE's. Research and Development The Company is engaged and intends to continue to engage in ongoing research and product development efforts to expand and enhance the technical capabilities, design features and range of uses of its products. The Company currently employs seven engineers 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. 8 Competition The market for the Company's revenue producing activities is highly competitive and rapidly changing, and the Company expects competition to continue to be intense in the foreseeable future. There are two major categories of competitors for the Company's products. The first are the "high end" (costly) real time image generators from companies such as Silicon Graphics, Inc., Evans & Sutherland, Inc. and Lockheed Martin Corp. These real-time image generators are generally used for military training and simulation applications; as engineering and graphics work stations; and as animation design tools. These costly systems provide photo realistic images by creating objects from polygons and laminating each surface with a texture pattern whereas the Company's products produce a non-textured polygon image. Although these competitive systems provide very desirable images, the Company's products are substantially less expensive than those of such competitors. The second type of competitors are the manufacturers of "low end" (less costly) video arcade devices. These electronic devices have no computers and are limited as to the quality and complexity of the images they produce. Management believes that both categories of competitors will continue to improve their products in either price or performance as developments permit. The Company believes that its products provide a balanced approach the proper mix of image quality with price. Many of the Company's current and prospective competitors have (or will likely have) significantly greater financial, technical, manufacturing and marketing resources and experience, and a larger installed base, than the Company. The Company believes that its ability to compete depends on elements both within and outside its control, including the success and timing of new product development by the Company and its competitors, product performance and price, distribution and customer support. Although the Company believes that it offers products with price and performance characteristics competitive with other manufacturers' products, there is no assurance that products can be developed, produced or marketed successfully in the future. In order to be successful in the future, the Company must continue to respond promptly and effectively to the challenges of technological change and its competitors' innovations. Performance in these areas will, in turn, depend on the Company's ability to attract and retain highly qualified technical personnel in a competitive market for experienced and talented computer hardware developers and managers. There is no assurance that the Company will be able to compete successfully in its chosen markets. The Company also intends to establish one or more additional TCE's and/or LBE's. The Company anticipates significant competition in attempting to gain entry to 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. 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. 9 Employees Currently, the Company has eighteen full-time employees, including three executive employees, eight technical and production persons and seven engineers. The Company believes that its relations with its employees is good. None of the Company's employees is represented by a union. Item 2. Description of Property. In January, 1997, the Company entered into a 10 year lease expiring January, 2007 for approximately 10,000 square feet of space at 300K Route 17 South, Mahwah, NJ 07430. Pursuant to the lease, the Company pays a monthly base rent of $6,250. The Company believes that suitable additional facilities can be found on terms satisfactory to the Company. The Company is presently evaluating opportunities to sublet the premises it previously occupied at 15 Industrial Avenue in Upper Saddle River, New Jersey. Approximately two-thirds of the space is currently sublet. Based on the projected volume of P-51's needed for the Cyberport Niagara project, management may choose to retain the remaining space at Industrial Avenue for warehouse use. Item 3. Legal Proceedings There are no material legal proceedings pending against the Company. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 10 PART II Item 5. Market Information The Company's Common Stock and Common Stock Purchase Warrants are each quoted as a Small Cap issue on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") under the symbols "TLRN" and "TLRNW." As of March 31, 1997 at 4:00 P.M. Eastern Standard Time, the last sale price of the Common Stock and Warrants in the over-the-counter market were $6.00 and $1.625, respectively. The following table reflects the high and low sales prices for the Company's Common Stock and Warrants for the periods indicated as reported by the National Association of Securities Dealers, Inc. ("NASD") from its NASDAQ system:
Common Stock Common Stock Purchase Warrants ------------ ----------------- High Low High Low ---- --- ---- --- 1996 - ---- Nov. 5, 1996 (first day of trading) through December 31, 1996 7 1/2 5 3/4 4 1/4 2 1/2
The over-the-counter market quotations reported above reflects inter-dealer prices, without retail markup, markdown or commission. Management has been advised by its transfer agent (Continental Stock Transfer & Trust Company) that the approximate number of record holders of the Company's Common Stock, as of March 7, 1997, the record date, was approximately 33. However, the Company has been advised by J.W. Barclay & Co., Inc., the Underwriter of its initial public offering, that it has in excess of 700 persons who beneficially own the Company's Common Stock as of the above referenced date. No cash dividends have been paid by the Company on its Common Stock and no such payment is anticipated in the foreseeable future. Item 6. Managements Discussion and Analysis of Financial or Plan of Operation. Plan of Operation The Company plans to focus its efforts on the following four areas: I) increasing revenues through marketing efforts of its new EAGLE product; II) developing its virtual reality helmet and motion system; III) establishing a virtual reality showplace for demonstrations of Tellurian's products; and IV) Establishing TEC's and/or entering into joint ventures or revenue sharing agreements with third parties for the purpose of owning, operating and/or having an interest in one or more LBE's or TCE's for the sale and/or use of its virtual reality game units. Marketing of the new EAGLE image generator will be accomplished by directing efforts towards three different customer groups: (I) the training and simulation market where Tellurian has been selling its AT-200 unit; (ii) pursuing the Virtual Reality ("VR") game developer market through trade show exhibits, advertisements and newsletters; and (iii) pursuing the inter-active thrill-ride market. The Company intends to expand its current customer list as several manufacturers move into this new type of themed adventure. Trade shows, marketing brochures, and personal contacts will be used to gain customers. 11 Entertainment Centers Tellurian intends to utilize the Eagle technology to build its own complete game units and use these units to establish one or more entertainment centers to be owned solely by Tellurian or jointly with others. Depending upon the cash requirements of the center, Tellurian may finance the project by utilizing its cash resources or Tellurian may enter into joint venture or revenue sharing agreements with third parties such as existing owners and operators of LBE's. In some cases, the Company may provide the equipment for the facility and assist in the designing, developing, construction and theming of the center. The Company had no experience in owning, financing and operating TEC's or LBE's prior to its involvement in the Cyberport TEC project, but it is likely to expand its' involvement in such areas. The Company has no other binding agreements with respect to any of these opportunities and there can be no assurances that Tellurian will be successful in establishing or entering into revenue sharing agreements for more LBE's or TEC's and deriving operating profits from such operations. In January 1997, Tellurian began its first efforts towards establishing Cyberport, a family entertainment center. The location is on the Canadian side of Niagra Falls. The Canadian government has granted licenses for casino gambling in the city, and the new center is in the casino/entertainment district. In addition to providing a portion of the equipment in the facility, Tellurian is controlling the design, development and construction of this 40,000 sq. ft. facility. The Company hopes to have this facility operating before the end of the second quarter of 1997. The Company has formed a subsidiary corporation, Cyberport International,Inc. for the express purposes of franchising, managing and controlling Cyberport and other similar locations presently under consideration. There can be no assurances that such other facilities will be created. To effectively market Tellurian's products, it is planning to have a complete virtual reality showplace ready for demonstrations at the Niagara facility late in the second quarter of 1997. The Company's range of VR devices which includes modern fighter cockpits, dune buggies, spacecraft and full immersion helmet experiences will eventually be displayed at the game room; but the centerpiece of the facility will be the sixteen cockpit "Battle of the Bulge" simulation. The Showplace will consist of approximately 8,000 square feet in the 40,000 square foot facility in the Casino district of Niagara Falls. The units will act as a marketing tool for sales, and also as a very controlled environment for the introduction of new experiences. Although this facility is expected to be geared to revenue generation, it will allow significant testing and market response evaluation. The Company has estimated the net proceeds from its recently completed offering together with revenues from operations will be sufficient to meet the Company's cash requirements for a period of between 12 and 15 months following the date hereof. However, there can be no assurance that unexpected future developments will not result in the Company requiring additional financing and that if required, additional financing will be available to the Company. 12 Concern Regarding Voyager Contract In January 1996, Tellurian signed a Technology Transfer Agreement with Voyager pursuant to which Tellurian granted Voyager an irrevocable, exclusive, assignable, fully paid license (the "License") to be the exclusive supplier of the EAGLE Image Generator in various Asian and Mid-East countries. In consideration of the License and technology transfer, Voyager agreed to pay Tellurian $1,500,000, of which Tellurian has agreed that Voyager will pay $650,000 to two parties unrelated to Tellurian for their services in connection with such contract resulting in a net amount of $850,000 to Tellurian. As of September 30, 1996, Tellurian has recognized revenues totaling approximately $660,000 of the above referenced $850,000 from Voyager. In addition, Voyager purchased certain hardware items valued at approximately $60,000 in order to allow them to test their applications. Therefore, the total net amount due Tellurian under this contract is approximately $910,000. As of December 31, 1996, Tellurian received payments totaling $550,000. Management is concerned about the continued viability of Voyager and is uncertain about the collection of the remaining $360,000 due under this agreement. Accordingly, no revenue has been recognized in the fourth quarter of 1996 with regard to this contract. Further, Management has elected to fully reserve the amounts which had been billed but not collected as of December 31, 1996. Should Voyager be unable to complete its financial obligations, its rights to manufacture and/or distribute under the agreement can be terminated after written notice of at least 28 days and an opportunity to cure such default. The Company has advised Voyager that it intends to give notice in the event Voyager does not make satisfactory payment arrangements in the near future. Under the contract, Tellurian is entitled to receive royalties of 2% of Voyager's net sales of the products and derivative products sold pursuant to the License. These royalties are contingent upon the satisfactory completion of the obligations under the initial contract and the ability of Voyager to bring products to market. There currently exists significant concern about the ability of Voyager to meet its financial obligations in order to retain these rights. Results of Operations Tellurian's net sales for the year ended December 31, 1996 were $819,380, an increase of $342,069 or approximately 72% over the comparable period of the prior year. Such increase was primarily derived from Tellurian's license agreement with Voyager. For the year ended December 31, 1996, the Company's gross profit was $535,373 as compared to $138,091 for the comparable period of the prior year. Such increase in gross profit is primarily due to revenues received from Voyager. Revenues derived from the sale of image generators and ancillary software decreased by $101,042 for the year ended December 31, 1996 as compared to the comparable period of the prior year. Such decrease was due to the delay in completing the production of the Company's EAGLE. As a result of this delay, Tellurian filled purchase orders for EAGLE with delivery of the AT-200 at prices which are substantially lower than the normally quoted sales prices for its AT-200. Tellurian's research and development activities for the year ended December 31, 1996 were $688,103, representing an increase of $264,333 over the comparable period of the prior year. The increase in research and development activities related to Tellurian's development of the "EAGLE," Tellurian's new image generator product specifically designed for the virtual reality entertainment market. Research and development activities include costs of the Company's product design, quality insurance, engineering support activities and microcode consulting. Also included in research and development are the costs of purchasing certain royalty rights for the "flat-shaded" technology. 13 Selling, general and administrative expenses for the year ended December 31, 1996 were $585,121, an increase of $235,491 from the comparable period of the prior year. The increase in selling, general and administrative expenses was substantially due to increases in sales payroll and commissions and the establishment of the reserve for the potential failure to collect the open billing to Voyager. Selling, general and administrative expenses expressed as a percentage of sales was approximately 71% for the year ended December 31, 1996, a decrease of approximately 2% from the comparable period of the prior year. This decrease was due to the increase in sales derived from Voyager. For the year ended December 31, 1996, interest expense was $111,333 as compared to $64,356 for the comparable period of the prior year. This increase was due to the issuance of promissory notes in the amount of $895,000 issued in connection with the Company's private placement. Tellurian's net loss for the year ended December 31, 1996 was $962,410 as compared to $699,665 for the comparable period of the prior year. The increase in the net loss was primarily due to increased costs in development of the Eagle and the inability to recognize certain revenues due from Voyager. Liquidity and Capital Resources In December 1995 and January 1996, the Company raised approximately $675,000 from the sale of promissory notes and 3,000,000 warrants which are automatically convertible into 3,000,000 warrants identical to those sold in Tellurian's public offering. In June 1996, the Company received proceeds of approximately $149,000 from the sale of its promissory notes, $25,000 of which automatically converted into 25,000 shares of the Company's Common Stock upon the completion of its public offering in November 1996. In November 1996, the Company sold 1,400,000 shares of its Common Stock at an offering price of $5.00 per share and 2,127,500 Common Stock Purchase Warrants at an offering price of $.25 per share. The Warrants are exercisable over a period of five years expiring November 8, 2001 at an exercise price of $6.00 per share. The Company received net proceeds of approximately $6,200,000 from the offering. The Company believes that the proceeds of such offering combined with cash from operations will be sufficient to meet its cash and liquidity needs over the next twelve to fifteen months. For the year ended December 31, 1996, net cash of $1,851,540 was used in operating activities due to the Company's net loss and substantial decreases in the Company's payables and accrued expenses as well as increases in inventory. For the year ended December 31, 1996, $5,783,829 was provided from financing activities. The primary sources of this cash were the proceeds of the initial public offering completed in November of 1996 and certain loans completed prior to the public offering. These amounts were partially offset by the repayment of certain notes after the completion of the initial public offering. For the year ended December 31, 1996, net cash of $2,210,233 was used in investment activities. This is significantly related to the purchase of marketable securities with cash not required for short-term business operations. For the year ended December 31, 1995, net cash of $233,791 was used in operating activities due to the Company's net loss, reduced by substantial increases in the Company's payables and decreases in the Company's inventories. For the year ended December 31, 1995, $11,214 was used in investment activities. 14 Item 7. Financial Statements The information required by Item 7, and an index thereto commences on page F-1, which pages follow this page. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 15 TELLURIAN, INC. REPORT ON FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 INDEX TO FINANCIAL STATEMENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2 BALANCE SHEET F-3 STATEMENTS OF OPERATIONS F-4 STATEMENTS OF STOCKHOLDERS' EQUITY F-5 STATEMENTS OF CASH FLOWS F-6 NOTES TO FINANCIAL STATEMENTS F-7 - F-21 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-22 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders of Tellurian, Inc. We have audited the accompanying balance sheet of Tellurian, Inc. as at December 31, 1996, and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the management of Tellurian, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tellurian, Inc. as at December 31, 1996 and the results of its operations and cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. We have also audited Schedule II of Tellurian, Inc. for the years ended December 31, 1996 and 1995 included in the 1996 annual report of the Company on Form 10-K. In our opinion, the schedule presents fairly the information required to be set forth therein. MILLER, ELLIN & COMPANY CERTIFIED PUBLIC ACCOUNTANTS New York, New York March 3, 1997 F-2 TELLURIAN, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,761,186 Marketable securities 968,722 Accounts receivable, net of allowance for doubtful accounts of $115,000 (Note 10) 19,362 Inventories (Note 2) 287,851 Prepaid consulting fees (Note 10) 74,625 Prepaid expenses and other current assets 13,856 ------------ Total current assets 3,125,602 ------------ PROPERTY AND EQUIPMENT - at cost less accumulated depreciation (Note 3) 206,176 ------------ OTHER ASSETS: Deferred costs (Note 4) 50,000 Marketable securities 1,006,664 Security deposits 47,750 Prepaid consulting fees (Note 10) 62,187 ------------ Total other assets 1,166,601 ------------ $ 4,498,379 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 49,754 Accrued expenses (Note 6) 60,020 Payroll payable 98,399 Payroll taxes payable 34,494 Consulting fees payable 46,594 Notes payable - related parties (Note 5) 496,736 Interest payable - related parties (Note 5) 315,306 Deferred revenue 80,448 ------------ Total current liabilities 1,181,751 ------------ COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY: Common stock - $.01 par value (Note 12) Authorized - 10,000,000 shares Issued and outstanding - 3,025,000 shares 30,025 Additional paid-in capital 6,345,387 Accumulated deficit (3,058,784) ------------ Total stockholders' equity 3,316,628 ------------ $ 4,498,379 ============ The accompanying notes are an integral part of the financial statements F-3 TELLURIAN, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 1995 ----------- ----------- REVENUES (Note 11) $ 819,380 $ 477,311 COST OF GOODS SOLD 284,007 339,220 ----------- ----------- GROSS PROFIT 535,373 138,091 ----------- ----------- OPERATING EXPENSES: Research and development 688,103 423,770 Selling 189,429 92,505 General and administrative 395,692 257,125 ----------- ----------- 1,273,224 773,400 ----------- ----------- LOSS FROM OPERATIONS (737,851) (635,309) ----------- ----------- OTHER INCOME AND EXPENSES: Interest income 21,087 - Other income 18,085 - Interest expense (50,313) - Interest expense - related parties (Note 5) (61,020) (64,356) Deferred debt costs (152,398) - ----------- ----------- (224,559) (64,356) ----------- ----------- NET LOSS $ (962,410) $ (699,665) =========== =========== NET LOSS PER COMMON SHARE $(.53) $(.48) ===== ===== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,817,708 1,450,000 ========= ========= PRO FORMA INFORMATION (Note 15): Net loss as presented N/A $ (699,665) Provision for income tax benefits reflecting C corporation status N/A - ----------- ----------- Pro forma net loss N/A $ (699,665) =========== =========== The accompanying notes are an integral part of the financial statements F-4 TELLURIAN, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' ------------ PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY) ------ ------ ------- ------- ------------ BALANCE AT January 1, 1995 1,000,000 $ 10,000 $ 15,000 $ (1,396,709) $ (1,371,709) Issuance of common stock for cash (Note 12) 600,000 6,000 94,000 - 100,000 Costs relating to issuance of common stock for cash - - (9,735) - (9,735) Issuance of warrants in connection with private placement (Notes 7 and 12) - - 8,000 - 8,000 Net loss for the year ended December 31, 1995 - - - (699,665) (699,665) ---------- -------- ----------- ------------- ------------ BALANCE AT December 31, 1995 1,600,000 16,000 107,265 (2,096,374) (1,973,109) Issuance of common stock and warrants in connection with initial public offering (Notes 7 and 12) 1,400,000 14,000 7,517,875 - 7,531,875 Offering costs in connection with initial public offering (Note 12) - - (1,326,728) - (1,326,728) Conversion of promissory notes in connection with initial pubic offering (Note 12) 25,000 25 24,975 - 25,000 Issuance of warrants in connection with private placement (Notes 7 and 12) - - 22,000 - 22,000 Net loss for the year ended December 31, 1996 - - - (962,410) (962,410) ---------- -------- ----------- ------------- ------------ BALANCE AT December 31, 1996 3,025,000 $ 30,025 $ 6,345,387 $ (3,058,784) $ 3,316,628 ========== ======== =========== ============= ============
The accompanying notes are an integral part of the financial statements F-5 TELLURIAN, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 1995 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (962,410) $ (699,665) Adjustments to reconcile net loss to net cash used in operating activities: Accrued interest income on marketable securities (6,118) - Depreciation and amortization 17,500 41,611 Amortization of deferred debt costs 152,398 - Changes in assets and liabilities: Accounts receivable (129,362) (5,000) Allowance for doubtful accounts 115,000 - Inventories (200,633) 75,981 Prepaid consulting fees (136,812) - Prepaid expenses and other current assets (6,045) (7,811) Security deposits (46,825) (925) Accounts payable 20,433 (55,801) Accrued expenses (84,111) 99,898 Payroll payable (113,903) 79,864 Payroll taxes payable (207,255) 89,520 Consulting fees payable (209,099) 79,231 Interest payable - related parties 21,702 63,306 Deferred revenue (76,000) 6,000 ------------- ----------- NET CASH USED IN OPERATING ACTIVITIES (1,851,540) (233,791) ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (1,969,268) - Purchases of property and equipment (190,965) (11,214) Deferred costs (50,000) - ------------- ----------- NET CASH USED IN INVESTING ACTIVITIES (2,210,233) (11,214) ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 7,531,875 90,266 Payments of offering costs (1,326,728) - Proceeds from issuance of warrants in connection with private placement 22,000 8,000 Proceeds from notes payable - related parties 248,000 53,190 Repayments of notes payable - related parties (422,185) (8,635) Proceeds from notes payable - other - 7,000 Repayments of notes payable - other (500) (7,000) Proceeds from long-term debt 703,000 192,000 Repayment of long-term debt (870,000) - Payments of deferred debt costs (101,633) (50,765) ------------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,783,829 284,056 ------------- ----------- NET CHANGE IN CASH 1,722,056 39,051 CASH AND CASH EQUIVALENTS - beginning 39,130 79 ------------- ----------- CASH AND CASH EQUIVALENTS - ending $ 1,761,186 $ 39,130 ============= =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 89,631 $ - Cash paid for income taxes - -
The accompanying notes are an integral part of the financial statements F-6 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Line of Business Tellurian, Inc. ("Tellurian"), a South Carolina corporation, was incorporated on August 10, 1988 for the purpose of designing and manufacturing real time image generation equipment for training and simulation. Tellurian also provides consulting and parts/repair services related to computer image generator technology. These operations constitute a single business segment. Tellurian sells its image generators to two types of entities, those which are interested in training and simulation and those which specialize in entertainment devices and games. In January 1996, Tellurian formed a wholly-owned subsidiary in the State of Delaware (the "Company") and merged Tellurian into such corporation on July 2, 1996. Pursuant to the merger, the holders of all of the shares of common stock of Tellurian exchanged their 1,600,000 shares outstanding for 1,600,000 shares of the Company on a pro rata basis. Deferred Revenue Deferred revenue consists of customer advances which are reflected in current liabilities and is expected to be recognized as revenue when the finished product is shipped. Revenue Recognition Sales are recognized when the finished product is shipped. 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 has classified all of its marketable securities as held-to-maturity, and has accounted for these investments at amortized cost. Accordingly, no adjustment for unrealized holding gains or losses has been reflected in the Company's 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. F-7 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. F-8 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred Debt Costs Deferred debt costs represent costs incurred in connection with the Company's private placement agreement (see Note 7). The costs were to be amortized over the respective terms of the promissory notes issued. As the promissory notes were repaid from the proceeds of the public offering (see Note 12), all incurred costs were charged to operations. Deferred debt costs amounted to $152,398 and $-0- for 1996 and 1995, respectively. Research and Development Research and development costs are charged to expense in the period incurred. For the years ended December 31, 1996 and 1995, research and development costs amounted to $688,103 and $423,770, respectively. Income Taxes The Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. In 1995, Tellurian was an "S" corporation for federal and South Carolina purposes whereby net income or loss was recorded by the stockholders on their individual income tax returns. There were no corporate income taxes or deferred income taxes. Loss Per Common Share Net loss per common share is based on the weighted average number of common shares outstanding during the period. The weighted average number of shares outstanding has been adjusted to reflect the recapitalization in connection with the private placement as if it had occurred as of the beginning of the period for which loss per share is presented. F-9 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 2 - INVENTORIES Inventories at December 31, 1996 consist of the following: Raw materials $ 217,663 Work-in-process 43,942 Finished goods 26,246 ---------- $ 287,851 ========== NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 consists of: Equipment $ 135,279 Vehicles 84,039 Computer software 29,900 Office furniture 4,973 Leasehold improvements 21,220 ---------- 275,411 Less: Accumulated depreciation and amortization 69,235 ---------- $ 206,176 ========== Depreciation expense amounted to $17,500 and $10,448 for the years ended December 31, 1996 and 1995, respectively. NOTE 4 - DEFERRED COSTS Deferred costs represent expenditures made on behalf of Cyberpoint Niagara, a Canadian subsidiary, to be formed in March 1997. Deferred costs have been classified as a non-current asset as it is management's intention to capitalize these expenditures when the corporation is formed. F-10 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 5 - NOTES PAYABLE - RELATED PARTIES The Company has borrowed funds from officers and stockholders to finance its operations. The notes are due on demand (except as described below) and bear interest at the rate of 10% per annum. As at December 31, 1996, notes payable amounted to $496,736 and becomes payable on demand commencing November 1, 1997. Accrued interest payable at December 31, 1996 amounted to $315,306. Interest expense charged to operations amounted to $61,020 and $64,356 for the years ended December 31, 1996 and 1995, respectively. NOTE 6 - ACCRUED EXPENSES Accrued expenses at December 31, 1996 consist of: Royalties (Note 10) $ 35,000 Interest and penalties on unpaid payroll taxes 20,698 Others 4,322 ---------- $ 60,020 ========== F-11 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 7 - LONG-TERM DEBT Long-term debt consisted of 8% promissory notes totalling $895,000 issued in connection with the Company's private placement of securities. Subsequent to the completion of the public offering in November 1996, as provided by their terms, notes totalling $870,000 were repaid and one $25,000 note was converted into 25,000 shares of common stock. Interest amounted to $50,313 and $-0- for 1996 and 1995, respectively. NOTE 8 - FINANCIAL INSTRUMENTS The amounts at which cash and cash equivalents, accounts receivable, accounts payable, notes payable related parties and other current liabilities are presented in the balance sheet approximate their fair value due to their short maturities. NOTE 9 - INCOME TAXES All Company operations are located in the United States. As such, loss before provision for income taxes and the provision for income taxes are generated from domestic sources. 1996 ----------- Loss before provision for income taxes $ (962,410) =========== The components of the provision for income taxes by taxing jurisdiction are as follows: Federal $ - States - ----------- $ - =========== F-12 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 9 - INCOME TAXES (CONTINUED) The major components of deferred tax asset at December 31, 1996 are as follows: Net operating loss carryforwards $ 338,964 Allowance for doubtful accounts 46,000 ----------- 384,964 Less: Valuation allowance (384,964) ----------- $ - =========== A 100% valuation allowance is being provided at December 31, 1996 as it is uncertain if the above items would be utilized. A reconciliation of the Company's income tax expense computed at the U.S. federal statutory tax rate of 35% and the provision for income taxes for 1996 are as follows: Income tax credit at statutory rate $ (336,844) State income tax credits (48,120) Net operating loss carryforwards 384,964 ----------- $ - =========== The above information is not presented for 1995 as Tellurian was an S corporation. At December 31, 1996, the Company had unused net operating loss carryforwards of approximately $847,000 expiring in 2011. F-13 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 10 - COMMITMENTS AND CONTINGENCIES Lease All of the Company's operations take place in leased facilities. In April 1995, the Company entered into a five year lease for its office and manufacturing facility. In May 1996, the Company terminated the lease and moved to a new facility (first facility) entering into a two year lease expiring in May 1998. The Company is also responsible for its share of operating expenses (as defined). In November 1996, the Company entered into a ten year lease for a second facility effective January 1, 1997 and moved to such new facility. The Company is also responsible for its share of operating expenses (as defined). In addition, the Company is still responsible for the rent and operating expenses for the first facility under the two year lease expiring in May 1998. The Company also sublets a portion of the first facility under the May 1998 lease and receives approximately $1,400 per month. Future minimum lease payments are as follows: Year Ending December 31, ------------ 1997 $ 141,625 1998 100,625 1999 75,000 2000 75,000 2001 75,000 Thereafter 375,000 ----------- $ 842,250 =========== Rent expense amounted to $62,574 and $70,018 net of rental income of $18,085 and $-0- for 1996 and 1995, respectively. F-14 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Employment Agreements In November 1996, the Company entered into employment agreements with two of its principal officers covering four year terms ending in November 2000. The agreements provide for annual salaries aggregating $192,000 which are payable as follows: 1996 $ 32,000 1997 192,000 1998 192,000 1999 192,000 2000 160,000 In addition, the agreements provide for bonuses to be paid at the discretion of the board of directors from a bonus pool equal to ten percent (10%) of pre-tax income beginning in the year ended December 31, 1997. Compensation under the agreements amounted to $32,000 in 1996. Consulting Agreements In connection with its initial public offering, the Company entered into a financial consulting agreement with its underwriter for the period November 6, 1996 to November 5, 1998 (see Note 12). Consulting fees of $149,250 were paid in November 1996 and the fees are being amortized over the two year period. Consulting expense amounted to $12,438 in 1996. F-15 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Technology Agreement In January 1996, the Company entered into an agreement with a Republic of China corporation ("ROC") which replaces an earlier agreement entered into in 1995 with a different Republic of China corporation. There have been no modifications to the old agreement other than the customer name. The purpose of this agreement is to provide training, advice and consultation in relation to computer image generator technology. The agreement provides for a fee of $1,500,000 payable as follows: 4% upon signing the agreement 16% upon the completion of the first prototype of the computer image generator 10% upon delivery of the design data package 40% upon completion of the training program 20% 90 days after completion of the training program 10% 180 days after completion of the training program Of the agreed fee of $1,500,000, the Company, pursuant to separate agreements, has agreed that ROC will pay $650,000 to two unrelated parties as follows: 1. $500,000 to ROC's parent company in consideration of the parent's services and expenses incurred in negotiating the agreement and establishing ROC. 2. $150,000 to an unrelated corporation in consideration of such corporation's contribution to the development of software for the computer image generator technology. As compensation for the license granted, the Company will receive royalty payments at the rate of 2% of the sales value of the products or derivative products sold by such corporation using the technology, payable annually for a period of five years from the date of the agreement. In return, the Company agrees not to market such products within a restricted group of countries as defined in the agreement. In October 1995, the Company assigned proceeds received under the agreement and granted a security interest to a stockholder (see Note 5). The contract was substantially completed in October 1996 at which time amounts were due to the Company. As of March 3, 1997, the Company has not received any additional payments and it is the opinion of management that the Company will 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. F-16 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Technology Agreement (Continued) In May 1995, the Company entered into an agreement to pay 15% of the amounts received from the technology agreement to an unrelated corporation. Such fee amounted to $10,650 for the year ended December 31, 1995. Consulting fee income amounted to $71,000 for the year ended December 31, 1995 under the old agreement. Royalties In connection with the acquisition of technology rights, the Company was obligated to pay royalties based upon revenues at a rate of 4% of image generator sales and 1% of other revenue, as defined. Such agreement stipulates that the royalties paid shall not exceed $1,500,000. Royalty expense amounted to $8,573 for the year ended December 31, 1995. In July and August 1996, the Company has entered into agreements to terminate two-thirds of all future royalty payments as of the respective dates of the agreements. These agreements call for total payments of $150,000 as well as a payment of $10,529 for unpaid royalties as follows: 1. $88,029 within ten business days from the closing of the Company's public offering (see Note 12) but no later than March 31, 1997. These amounts were paid in November 1996. 2. $72,500 will be due and payable one year after the initial payments. $37,500 of this amount was paid in 1996. NOTE 11 - REVENUES Revenues for the years ended December 31, consist of: 1996 1995 ------------- ------------ Real time image generators $ 166,386 $ 267,428 Consulting fees 598,245 169,558 Parts and repairs 54,749 40,325 ---------- ---------- $ 819,380 $ 477,311 ========== ========== F-17 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 11 - REVENUES (CONTINUED) As of December 31, the following is a summary of information by geographic area: 1996 1995 ---------- --------- Revenues United States $ 197,760 $ 379,311 Republic of China 621,620 71,000 Canada - 27,000 ---------- --------- $ 819,380 $ 477,311 ========== ========= As of December 31, revenues from major customers are as follows: 1996 1995 ---------- ---------- Customer A 75.9% 31.8% Customer B 16.0% 20.5% Customer C - % 10.7% NOTE 12 - STOCKHOLDERS' EQUITY Initial Public Offering In November 1996, the Company completed its initial public offering by filing a registration statement on Form SB-2 under the Securities Act of 1933, as amended. The Company offered 1,400,000 shares of $.01 par value common stock and 2,127,500 five-year warrants (including the underwriter's over-allotment option) to purchase 2,127,500 shares of its common stock at $6.00 per share. The Company raised $6,205,147, which was net of offering costs of $1,326,728. In addition, 450,000 shares were sold by certain existing stockholders for $2,250,000 before offering costs. The Company did not receive any proceeds from the sale of these shares. F-18 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED) Common Stock On March 24, 1995, in connection with its private placement, the Company increased its authorized common stock from 10,150 shares to 10,000,000 shares and changed the par value from $1.00 per share to $.01 per share. In addition, the Company issued 1,000,000 shares of $.01 par value common stock to replace the 10,150 shares of $1.00 par value common stock that were previously outstanding. All share data and per share amounts have been adjusted to reflect this transaction. In March 1995, the Company completed a private placement of 600,000 shares of its $.01 par value common stock for $100,000, including 150,000 shares sold to principals and an employee of the underwriter. Warrants On December 27, 1995 and January 22, 1996, the Company issued a total of 3,000,000 warrants to purchase 3,000,000 shares of its common stock at an exercise price of $6.00 per share. The warrants were issued in connection with the subordinated promissory notes and were valued at $.01 per warrant amounting to $30,000. Such amount was credited to additional paid-in capital. In addition, the Company issued 300,000 warrants to purchase 300,000 shares of its common stock at $6.00 per share for $6,000. On June 27, 1996, an agreement was signed cancelling 300,000 of the warrants. In addition, upon the completion of the initial public offering, the balance of the warrants (3,000,000) automatically converted to warrants identical to those sold to the public. Outstanding warrants at December 31, 1996 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. F-19 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 13 - STOCK OPTION PLAN On June 1, 1996, the Company adopted a Stock Option Plan (the "Plan") covering 400,000 shares of common stock (subject to adjustment to cover stock splits, stock dividends, recapitalizations and other capital adjustments) for employees, including officers and directors and consultants of the Company. The Plan provides that options to be granted under the Plan will be designated as incentive stock options or non-incentive stock options by the board of directors or a committee thereof, which also will have discretion as to the persons to be granted options, the number of shares subject to the options and the terms of the options. Options designated as incentive stock options are intended to receive incentive stock option tax treatment pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. The Plan provides that all options granted thereunder shall be exercisable during a period of no more than 10 years from the date of grant (five years for options granted to holders of 10% or more of the outstanding shares of common stock), depending upon the specific stock option agreement and that the option exercise price for incentive stock options shall be at least equal to 100% of the fair market value of common stock on the date of grant (110% for options granted to holders of 10% or more of the outstanding shares of common stock), but in no event less than the initial public offering price of the Company's proposed public offering. Pursuant to the provisions of the Plan, the aggregate fair market value (determined on the date of grant) of the shares of the common stock for which incentive stock options are first exercisable under the terms of the Plan by an option holder during any one calendar year cannot exceed $100,000. 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. On June 1, 1996, the Company granted non-qualified stock options to purchase 300,000 shares of its common stock at an exercise price of $5.00 per share at any time on or after July 1, 1997 until June 1, 2006, the expiration date of such options. F-20 TELLURIAN, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 NOTE 14 - RETIREMENT BENEFITS On January 1, 1996, the Company established a simplified employee pension plan covering substantially all employees who meet eligibility requirements. Retirement costs amounted to $33,691 in 1996. NOTE 15 - PRO FORMA INFORMATION Pro forma net loss has been presented to show results of operations assuming the Company filed its income tax returns as a C corporation. If the Company was a C corporation, there would be no current income taxes and deferred income taxes would consist solely of an asset for net operating loss carryforwards offset by a 100% valuation allowance. NOTE 16 - ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the stock options granted. No expense was recognized in 1996. If the Company had elected to recognize expense in 1996 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: As Reported Pro forma ----------- --------- Net loss $ (962,410) $ (1,228,660) Loss per share (.53) (.68) 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%; a risk free interest rate of 6.5%; and an expected holding period of three years. F-21 TELLURIAN, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------- ------------------ ------------------ ----------------- ------------ BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED TO END OF OF YEAR OPERATIONS DEDUCTIONS YEAR ------- ---------- ---------- ---- Description ----------- Allowance for doubtful accounts Year ended December 31, 1995 $ - $ - $ - $ - Year ended December 31, 1996 - 115,000 - 115,000
F-22 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. (a) Identification of Directors The names, ages and principal occupations of the Company's present directors, and the date on which their term of office commenced and expires, are as follows:
First Term of Became Principal Name Age Office Director(2) Occupation ---- --- ------ ----------- ---------- Dr. Ronald Swallow 62 (1) 1988 Chairman of the Board and Chief Executive Officer of the Company. Stuart French 51 (1) 1995 President of the Company Dr. Richard Swallow 57 (1) 1988 Vice President of the Company and Professor at Coker College Michael Hurd 50 (1) 1997 Vice President and Chief Financial and Accounting Officer of the Company
- ---------- (1) Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting. (b) Identification of Executive Officers. Dr. Ronald Swallow is Chairman of the Board and Chief Executive Officer of the Company. Stuart French is President of the Company. Richard Swallow is Vice President of Program Management and the Secretary of the Company. Michael Hurd is Vice President of Finance and Administration and Chief Financial and Accounting Officer of the Company. The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Subject to their contract rights to compensation, if any, officers may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors. (c) Business Experience Dr. Ronald Swallow has been the Chief Executive Officer and Chairman of the Board of Tellurian and its predecessor under the same name since 1988. Dr. Swallow has a Bachelor of Science degree in Engineering Physics, a Masters degree in Electrical Engineering and a Ph.D in Biophysics, all from the University of Illinois. Stuart French has served as a member of the Board of Directors of the Company and its predecessor under the same name since March 1995 and President of the Company since October 1993. From January of 1996 until March of 1997 he served as the Chief Financial Officer and Tellurian and as Vice President of Operations and Marketing from August 1991. Mr. French joined the Company after the sale of Flightmatic Corp. which he owned and operated from 1987 through 1991. Flightmatic was a flight simulation company manufacturing and selling low cost general aviation training equipment. Previously, he spent ten years at Grumman Aerospace as a Business Development Manager for US Air Force contracts. After receiving a BS degree in Marketing from New England College, Mr. French was a pilot in the US Navy. 16 Dr. Richard Swallow has been a director of Tellurian and its predecessor under the same name since its inception in 1988. He was elected Vice President of Program Management in March of 1997. From 1988 to October 1993 Dr. Swallow also held the position of President. Since 1973, Dr. Swallow has been a member of the faculty and staff of Coker College in Hartsville, South Carolina, where he is currently on leave from his position as the Director of Information Services. Dr. Swallow received his Ph.D. degree in Zoology from the University of Missouri in 1968, his Masters of Science degree from the University of Missouri in June 1966 and Bachelor of Science degree from the University of Illinois in June 1963. Michael Hurd joined the Company in February 1997 and was elected a director and Vice President of Administration and Finance and Chief Financial and Accounting Officer in March 1997. Mr. Hurd has a BBS degree in Accounting from New Hampshire College and has been a Certified Public Accountant in New Jersey since 1973. Since 1985 he served in various officer capacities for Bobst Group Inc., a Swiss machinery manufacturing and sales company with revenues in excess of $200 million. Previously, Mr. Hurd was a partner in a printing machinery manufacturing and sales company in New Jersey. Prior to that, he served in various positions with the consulting group of a Big 8 public accounting firm. The Company does not currently have any audit or compensation committees of the Board of Directors. Pursuant to an underwriting agreement dated November 5, 1996, J.W. Barclay & Co., Inc. ("Barclay"), the representative of the Company's initial public offering, has the right to designate one person to attend Board of Directors meetings. Such person shall be entitled to attend all such meetings and to receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors. The Company shall reimburse the designee of Barclay for his out-of-pocket expenses incurred in connection with his attendance at such meetings. As of the filing date of this Form 10-KSB, Barclay has not designated any director. Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting. The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Subject to their contract rights to compensation, if any, officers may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time. 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 "Item 1." 17 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than ten percent stockholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they file. Dennis Giunta filed late a Form 4 for the month of November 1996. Jericho Limited and Imafina S.A., formerly principal security holders of the Company, filed late a Form 3 in November 1996. 18 Item 10. Executive Compensation The following table sets forth the amount of all compensation paid by Tellurian for services rendered during the years ended December 31, 1996, 1995 and 1994 to Tellurian's Chief Executive Officer, Dr. Ronald Swallow and Stuart French, President.
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 Salary Bonus sation Award(s) of Payouts sation Position Year ($) ($) ($) ($) Options(1) ($) ($)(2)(5) - ---------------------------------------------------------------------------------------------------------------------------------- Dr. Ronald Swallow, 1996 108,000 -0- -0- -0- (1) 73,000 -0- 19,436 Chief Executive Officer (3) --------------------------------------------------------------------------------------------------------------- 1995 108,000 -0- -0- -0- -0- -0- 4,200 --------------------------------------------------------------------------------------------------------------- 1994 108,000 -0- -0- -0- -0- -0- 4,200 - ---------------------------------------------------------------------------------------------------------------------------------- Stuart French 1996 84,000 -0- 23,359 -0- (1) 150,000 -0- 14,200 President (4) --------------------------------------------------------------------------------------------------------------- 1995 84,000 -0- 13,814 -0- -0- -0- 4,200 --------------------------------------------------------------------------------------------------------------- 1994 84,000 -0- 13,420 -0- -0- -0- 4,200 - ----------------------------------------------------------------------------------------------------------------------------------
(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. 19 (3) During 1994 and 1995, the Company accrued salaries for Dr. Swallow of $22,000 and $43,143, respectively. As of December 31, 1996, Dr. Swallow is owed accrued salary and expense reimbursement totaling $17,400. (4) Stuart French earns other annual compensation in the form of a sales commission which is reflected in column (e). During 1994, 1995 and 1996, the Company accrued salaries and commissions of $1,420, $9,614 and $23,359 respectively. During 1994, Mr. French also received payment of $2,000 toward prior years accrued salaries. As of December 31, 1996, Mr. French is owed accrued salary and expense reimbursement totaling $45,098. (5) During 1996 the Company created a SEP program for employees who had been with the Company for at least three years prior to the end of 1996. The cost of this program in 1996 was $33,691, of which Ronald Swallow was credited with $15,236 and Stuart French was credited with $10,000. Since inception, the Company has not granted stock appreciation rights. Employment Agreements As of November 8, 1996, the Company entered into employment agreements with Dr. Ronald Swallow and Stuart French. The ageements provide for annual salaries of $108,000 and $84,000, respectively, and for Mr. French to receive a sales commission of five percent. The agreements provide for a term of four years and a continuation of their current compensation arrangements with salary increases based upon profitability of the Company's operations to be determined at the discretion of disinterested board members. Commencing in 1997 and each year thereafter, the Company will after the completion of its year end audit, establish a bonus pool for executive officers and will make annual cash contributions to such pool of an amount equal to 10% of pre-tax profits for the prior year. The board of directors will have the sole discretion to allocate bonuses among such officers. The employment agreements contain covenants not to compete during the term of the agreements and for a period of one year thereafter (including continuation of half salary 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. In June 1996, the Board of Directors granted Dr. Ronald Swallow and Stuart French options to purchase 73,000 shares and 150,000 shares, respectively, of the Company's Common Stock. See "Stock Option Plan". The Board of Directors has authorized the creation of a 401(K) program to begin in 1997 in order to provide a retirement planning vehicle for its employees. As employees of the Company, both Mr. Swallow and Mr. French will be eligible to participate in this program once created. This program is intended to replace the SEP program discussed in Note (5) above. Stock Option Plan The Company has adopted a Stock Option Plan covering 400,000 shares of Common Stock (subject to adjustment to cover stock splits, stock dividends, recapitalizations and other capital adjustments) for employees, including officers and directors and consultants of the Company. The Plan provides that options to be granted under the Plan will be designated as incentive stock options or non-incentive stock options by the Board of Directors or a committee thereof, which also will have discretion as to the persons to be granted options, the number of shares subject to the options and the terms of the options. Options designated as incentive stock options are intended to 20 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), but in no event less than the initial public offering price of the Company's proposed public offering. Pursuant to the provisions of the Plan, the aggregate fair market value (determined on the date of grant) of the shares of the Common Stock for which incentive stock options are first exercisable under the terms of the Plan by an option holder during any one calendar year cannot exceed $100,000. Currently, the Plan provides that if the employment of an optionee is terminated other than by reason of death, disability or retirement at age 65, any incentive stock options granted to the optionee will immediately terminate. If employment is terminated by reason of disability or retirement at age 65, the optionee may, within one year from the date of termination, in the event of termination by reason of disability, or three months from the date of termination, in the event of termination by reason of retirement at age 65, exercise the incentive stock option (but not after the normal termination date of the option). If employment is terminated by death, the person or persons to whom the optionee's rights under the incentive stock option are transferred by will or the laws of descent and distribution have similar rights of exercise within three months after such death (but not after the normal termination date of the option). Any termination provisions of non-statutory stock options will be fixed by the board of directors or a committee thereof. Options are not transferable otherwise than by will or the laws of descent and distribution and during the optionee's lifetime are exercisable only by the optionee. Shares subject to options which expire or terminate may be the subject of future options. The Plan provides that no new options may be granted by the Board of Directors of the Company after June 1, 2006. In 1996, the Company granted non-qualified stock options to purchase 300,000 shares of its Common Stock at an exercise price of $5.00 per share over a term of ten years. Dr. Ronald Swallow, Stuart French and Dr. Richard Swallow received options to purchase 73,000 shares, 150,000 shares, 27,000 shares, respectively. Two other persons (not employees) received options to purchase 25,000 shares each. As of February 28, 1997, the Company has also granted options to purchase 45,000 shares to current employees at prices ranging from $5.25 to $6.50. Including in these options is an option to Michael Hurd allowing him to purchase 40,000 shares at $5.25. These options vest on July 1, 1997 but are not exercisable until July 1, 1998. The Company has agreed with J.W. Barclay, the managing underwriter of the Company's Initial Public Offering, that it will not grant the remaining available options to purchase 55,000 shares to 5% or greater shareholders for a period of three years, ending November 8, 1999 without the consent of said firm. 21 Options Grants Table - The following table provides information with respect to individual grants of stock options by Tellurian during fiscal 1996 to each of the executive officers named in the preceding summary compensation table. OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------------------- Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term Individual Grants (2) - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) % of Number of Total Securities Options Underlying Granted to Options Employees Exercise Granted in Fiscal Price Expiration Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($) - -------------------------------------------------------------------------------------------------------------------------- Dr. Ronald 73,000 32.7 5.00 6/1/06 229,220 581,810 Swallow - -------------------------------------------------------------------------------------------------------------------------- Stuart French 150,000 67.3 5.00 6/1/06 471,000 1,195,500 - --------------------------------------------------------------------------------------------------------------------------
N/A - not applicable (1) The % of Total Options Granted to Employees in Fiscal Year' is based upon options granted to Tellurian employees only and excludes options granted to non-employees. (2) The potential realizable value of each grant of options assumes that the market price of Tellurian's Common Stock appreciates in value from the date of grant to the end of the option term at annualized rates of 5% and 10%, respectively, after subtracting out the applicable exercise price. 22 Aggregated Option Exercises and Fiscal Year-End Option Table - The following table provides information with respect to each exercise of stock options during fiscal 1996 by each of the executive officers named in the preceding summary compensation table and the fiscal year-end value of unexercised options.
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR - END OPTION VALUES - -------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options Shares FY-End (#) at FY-End ($) Acquired on Value Exercise Realized (1) Exercisable/ Exercisable/ Name (#) ($) Unexercisable (1) Unexercisable (1) - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Dr. Ronald Swallow -0- -0- 73,000 / 0 82,125 / -0- - -------------------------------------------------------------------------------------------------------------------------- Stuart French -0- -0- 150,000 / 0 168,750 / -0- - --------------------------------------------------------------------------------------------------------------------------
(1) The aggregate dollar values in column (c) and (e) are calculated by determining the difference between the fair market value of the Common Stock underlying the options and the exercise price of the options at exercise or fiscal year end, respectively. Tellurian's last sale price at the close of business on December 31, 1996 was $6.125. 23 Director Compensation It should be noted that Directors of the Company do not currently receive cash compensation for their services as directors, although each director has been granted stock options under the Company's Stock Option Plan and are receiving compensation as employees of the Company. See "Stock Option Plan." The Board of Directors has the right to compensate its directors in their capacity as directors in the future. The following table provides information in tabular form with respect to compensation of directors during fiscal 1996:
- ------------------------------------------------------------------------------------------------------------------- Cash Compensation Security Grants - ------------------------------------------------------------------------------------------------------------------- Number of Annual Consulting Securities Ret. Meeting Fees/Other Number of Underlying Name Fees ($) Fees ($) Fees ($) Shares (#) Options/SARs (a) (b) (c) (1) (d) (2) (e) (3) (f) - ------------------------------------------------------------------------------------------------------------------- Dr. Ronald Swallow -0- -0- -0- -0- 73,000 - ------------------------------------------------------------------------------------------------------------------- Stuart French -0- -0- -0- -0- 150,000 - ------------------------------------------------------------------------------------------------------------------- Dr. Richard Swallow -0- -0- -0- -0- 27,000 - -------------------------------------------------------------------------------------------------------------------
(1) Does not include compensation paid as employees of the Company. See "Summary Compensation Table" for a description of Dr. Ronald Swallow and Stuart French compensation programs. (2) Does not include shares issued in connection with the reincorporation of the Company in Delaware. See "Item 2." (3) These options were granted as part of their total compensation as officers, employees, and directors of the Company. The Board made no specific designation as the individual amount allocations with regard to these services. 24 Limitation of Directors' Liability; Indemnification Pursuant to Tellurian's By-Laws, Tellurian must, to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "GCL"), as amended from time to time, indemnify all persons (e.g., directors and officers) whom it may indemnify pursuant thereto and to advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the GCL so requires, the indemnitee must provide Tellurian with an undertaking to repay all amounts advanced if so determined by a final judicial decision. Tellurian's Certificate of Incorporation contains a provision eliminating, to the full extent permitted by Delaware law, the personal liability of Tellurian's directors for monetary damages for breach of a fiduciary duty. By virtue of this provision, under current Delaware law, a director of Tellurian will not be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of his duty of loyalty to Tellurian or to its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under Delaware law and (iv) any transaction from which he derives an improper personal benefit. This provision of Tellurian's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under Delaware corporate law and not for violations of other laws such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in Tellurian's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action if successful, might otherwise have benefited 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. 25 Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 31, 1997 (except as otherwise noted below) regarding the beneficial ownership of the Company's Common Stock by all persons known by the Company to be beneficial owners of more than 5% of its Common Stock and all executive officers and directors, both individually and as a group. For purposes of calculating the amount of beneficial ownership and the respective percentages, the number of shares of Common Stock which may be acquired by a person within sixty days of March 31, 1997 are considered outstanding, but shall not be deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other person. Amount and Nature Approximate Name and Address of of Beneficial Percent Beneficial Owner (1) Ownership (1) of Class (2) - -------------------- ------------- ------------ Dr. Ronald Swallow (3)(4) 297,908 9.8 Dr. Richard Swallow(3)(5) 109,481 3.6 Stuart French(3)(6) 49,261 1.6 Michael Hurd (3)(7) 0 0 All officers and directors as a group (4 persons)(7)(8) 456,650 15.0 Mary Elizabeth Huggins Trust (9) 430,049 14.2 John A. Bruno (10) 265,000 8.3 - ------------- (1) Unless otherwise indicated below, all shares are owned beneficially and of record. (2) Based upon 3,025,000 shares outstanding without giving effect to the issuance of shares under the Company's outstanding Warrants and Stock Options. (3) The address for Dr. Ronald Swallow, Stuart French, Dr. Richard Swallow and Michael Hurd is c/o Tellurian, Inc. at 300K Route 17 South, Mahwah, NJ 07430. (4) Does not include options to purchase 73,000 shares, which options become exercisable at $5.00 per share commencing July 1, 1997. 26 (5) Does not include options to purchase 27,000 shares, which options become exercisable at $5.00 per share commencing July 1, 1997. (6) Does not include options to purchase 150,000 shares, which options become exercisable at $5.00 per share commencing July 1, 1997. (7) Does not include options to purchase 40,000 shares, which options become exercisable at $5.25 per share commencing July 1, 1998. (8) Does not include options to purchase 290,000 shares, which options become exercisable at $5.00 per share commencing July 1, 1997. (9) Trust set up by Charles H. Powers, a founder and former shareholder, officer and director of the Company, for the benefit of his granddaughter, with Jane Powers Huggins as Trustee. The Trustee's address is 2419 West Sumter, Florence, SC 29572. (10) The address for Mr. Bruno is c/o J.W. Barclay & Co., Inc., One Battery Park Plaza, 3rd Floor, New York, NY 10004. John A. Bruno, is a principal of Barclay, a registered broker-dealer, which beneficially owns 85,065 shares of Common Stock of the Company as of December 31, 1996. Michael J. Wills and John C. Cioffeletti, who are also principals of Barclay, beneficially own 125,000 and 105,000 shares of the Company's Common Stock, respectively, as of December 1996. Mr. Bruno does not affirm the existence of a group and none of the shares owned by Barclay or Messrs. Wills or Cioffeletti are included in the table above as beneficially owned by Mr. Bruno. The information contained in this Form 10-KSB with respect to Mr. Bruno is derived from a Schedule 13-G filed by Mr. Bruno on February 14, 1997. Item 12. Certain Relationships and Related Transactions. Effective July 2, 1996, Tellurian, Inc., a South Carolina corporation, reincorporated in Delaware under the same name by merging itself into a wholly owned subsidiary formed for that purpose on January 25, 1996. All references in this Form 10-KSB to the "Company" or "Tellurian" include Tellurian, Inc., a South Carolina corporation, unless the context indicates otherwise. The following discussion regarding the issuances of shares gives retroactive effect to such merger. In March 1995, Tellurian completed a private placement of 600,000 shares of its common stock for a purchase price of $100,000. Investors in the private placement were Dennis Giunta (200,000 shares), Joseph Defalco (125,000 shares), Matthew Langden (125,000 shares), John Bruno (45,000 shares), John Cioffoletti (45,000 shares), Michael Wills (45,000 shares) and Douglas Spinosa (15,000 shares). Messrs. Bruno, Cioffoletti and Wills are principals, and Mr. Spinosa is an employee of J.W. Barclay & Co., Inc. In March 1995, Dr. Ronald Swallow and Dr. Richard Swallow transferred from their holdings, without payment therefore, an aggregate of 152,710 shares of Tellurian to nine non-affiliated persons including 49,261 shares to Stuart French, and subsequently, they transferred 100,000 shares to Charles Power, a founder of the Company. Since the inception of Tellurian, Charles Powers has advanced monies to Tellurian for working capital purposes and the acquisition of certain technological licensing rights from TTY relating to Tellurian's image generator. As of May 31, 1996, Mr. Powers was owed approximately $752,000, inclusive of interest at a rate of 10% per annum. Such $752,000 includes $470,505 of principal and $281,693, of accrued and unpaid interest (including $127,460 of interest accumulated between January 1, 1994 and May 31, 1996). 27 From January 1, 1994 until May 31, 1996, the Company has repaid Powers a total of $100,000, which payment was made in January 1996. In June 1996, Tellurian entered into agreements with Mr. Powers which provided that upon his receipt from Tellurian of $121,200 in reduction of outstanding indebtedness, Tellurian's remaining indebtedness owing to him will not be payable until November 1, 1997. To help secure repayment of such $121,200, Tellurian granted to Mr. Powers a security interest in its contract with Voyager (such security interest being limited to receive all payments from the income stream under the contract up to $121,100) and assigned to him Tellurian's right to receive $121,200 of payments required to be made under Tellurian's agreement with Voyager. As of December 31, 1996, Tellurian has paid Mr. Powers $121,200. As of December 31, 1996, the Company owes Mr. Powers approximately $660,000. Since inception, Ronald Swallow, Richard Swallow, their family members and Stuart French have made various cash loans to Tellurian that are repayable upon demand together with interest at the rate of 10% per annum. As of December 31, 1996, Tellurian owed $152,544 (inclusive of interest) to family members of Doctors Ronald and Richard Swallow. Tellurian completed a Private Placement of securities for an aggregate sum of $750,000 between December 1995 and January 1996, consisting of (i) $192,000 in principal amount of unsecured and subordinated 8% Promissory Notes due December 27, 1997 and $528,000 in principal amount of unsecured and subordinated 8% Promissory Notes due January 22, 1998, with such Notes providing for accelerated payment upon the completion of the Offering, and (ii) 3,000,000 Common Stock Purchase warrants sold at a price of $.01 per warrant. Each warrant entitles the holder thereof to purchase one share of Common Stock at a price of $6.00 per share, subject to adjustment, at any time for a period of five years from the date of issuance. The Warrants provided that in the event that the Company completes an initial public offering, the warrants shall be automatically exchanged for Warrants identical to those sold to the public. This exchange became effective on November 8, 1996, the completion date of the Company's public offering. As compensation for its services as placement agent of such private placement. J. W. Barclay & Co., Inc. was paid a commission of $75,000 and an expense allowance of $22,500 and was issued 300,000 Common Stock Purchase Warrants for a cash consideration of $6,000. On June 27, 1996, J. W. Barclay & Co., Inc. returned the 300,000 Warrants to the Company and the Company agreed to pay $6,000 to J. W. Barclay & Co., Inc. upon the completion of the Company's Public Offering. 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 deduction of certain compensation to the Placement Agent of such offering, J.W. Barclay & Co., Inc., of $26,250. Of the $175,000 of Notes, (i) $150,000 was repaid on November 8, 1996, and (ii) $25,000 was converted into 25,000 shares of the Company's Common Stock on November 8, 1996. 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. Item 13. Exhibits and Reports on Form 8-K. 28 (a)(1)(2) Financial Statements/Schedules. A list of the Financial Statements and Financial Statement Schedules filed as a part of this Report is set forth in Item 7, and appears at Page F-1 of this Report; which list is incorporated herein by reference and follows Item 8. (a)(3) Exhibits All exhibits have been previously filed and are incorporated by reference from the Registrant's Form SB-2 Registration Statement (File no. 333-9741) unless otherwise noted below. 2 Agreement and Plan of Merger; Certificate of Ownership and Merger Delaware); Articles of Merger (South Carolina) 3(a) Articles of Incorporation of Registrant 3(b) By-Laws of Registrant 4(a) Specimen of Common Stock 4(b) Form of Warrant Agreement (including form of Warrant) 4(c) Form of Underwriter's Warrant 10(a) Indemnification Agreement dated October 10, 1995 between Charles Powers and the Registrant and an amendment thereto dated June 17, 1996 10(b) Assignment of Contract Rights dated October 9, 1995 between Charles Powers and the Registrant and an amendment thereto dated June 17, 1996 10(c) Employment Agreement dated November 8, 1996 between Dr. Ronald Swallow and the Registrant * 10(d) Employment Agreement dated November 8, 1996 between Stuart French and the Registrant * 10(e) Lease for Facilities in Mahwah, New Jersey * 10(f) Transfer Technology Agreement dated January 1, 1996 between Voyager Graphics, Inc. and the Registrant 10(g) Agreement dated November 14, 1994 between TTY Graphics, Inc., Voyager Simulation Ltd. and the Registrant. 10(h) Letter Agreement dated May 26, 1995 between the Registrant and TTY Graphics, Inc. and amendment thereto dated July 17, 1996. 10(i) Agreement dated November 5, 1991 by and among Greg Gustin, Pat Lowe as Trustee for the Estate of Quantum Graphics, Inc. and TTY Graphics, Inc. 10(j) Assignment Agreement dated as of November 5, 1991 between TTY Graphics, Inc. and the Registrant 10(k) Letter Agreement dated August 1, 1996 and August 2, 1995 between Greg Gustin and the Registrant 10(l) Agreement dated July 23, 1996 between TTY Graphics, Inc. and the Registrant 29 10(m) 1996 Incentive and Non-Statutory Stock Option Plan 10(n) Promissory Note dated December 27, 1995, issued to Imafina S.A. 10(o) Promissory Note dated January 22, 1996 issued to Jericho Limited 10(p) Form of Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta, Karen Bulavinetz and Alec McDonald 10(q) Form of Non-Convertible Promissory Note dated June 27, 1996 issued to Andrew Nicoletta, Karen Bulavinetz and Alec McDonald 10(r) Common Stock Purchase Warrants dated December 27, 1995 issued to Imafina S.A. 10(s) Common Stock Purchase Warrants dated January 22, 1996 issued to Jericho Limited. 10(t) Letter dated March 19, 1996 between Eye Wonder Studios and the Registrant 10(u) Consulting Agreement dated November 5, 1996 with J.W. Barclay & Co., Inc. 10(v) Merger and Acquisition Agreement dated November 5, 1996 with J.W. Barclay & Co., Inc. 10(w) Letter Agreement between the Registrant and Charles Powers 10(x) Letter Agreement between the Registrant and Fightertown 10(y) Letter Agreement between the Registrant, Voyager Graphics Inc., Voyager Simulation Company, Ltd. and TTY Graphics, Inc. 11 Earnings per share - See notes to financial statements 21 Subsidiaries of Registrant - None during 1996 27 Selected Financial Data* - ---------- * Filed herewith. (b) Reports on Form 8-K During the three months ended December 31, 1996, a Form 8-K was not filed or required to be filed. 30 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TELLURIAN, INC. By: /s/ Stuart French ----------------------------- Stuart French, President Dated: Mahwah, New Jersey April 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signatures Titles Date ---------- ---------------------- -------------- /s/ Dr. Ronald Swallow Chairman of the Board, - -------------------------- Chief Executive Officer April 14, 1997 Dr. Ronald Swallow /s/ Stuart French President and Director April 14, 1997 - -------------------------- Stuart French /s/ Dr. Richard Swallow Vice President April 14, 1997 - -------------------------- and Director Dr. Richard Swallow /s/ Michael Hurd Vice President of - -------------------------- Administration and Michael Hurd Finance and Chief Accounting Officer and Director April 14, 1997 31 EX-10 2 EXHIBIT 10(C) EMPLOYMENT AGREEMENT AGREEMENT made as of November 8, 1996, by and between DR. RONALD SWALLOW residing at 64 Manor Drive, Ramsey, New Jersey 07446 (hereinafter referred to as the "Executive") and TELLURIAN, INC., a Delaware corporation, with principal executive offices located at 15 Industrial Avenue, Upper Saddle River, New Jersey, 07458 (hereinafter referred to as the "Company"). W I T N E S S E T H: WHEREAS, the Company is engaged inter alia in the business of design, development and marketing of virtual reality products; and WHEREAS, the Company desires to retain and employ the Executive for the purpose of securing to the Company the experience, ability and services of the Executive. NOW, THEREFORE, it is mutually agreed by and between the parties hereto as follows: ARTICLE I EMPLOYMENT The Company hereby employs the Executive as its President and the Executive hereby accepts such employment and agrees to serve as an executive officer of the Company subject to and upon the terms and conditions set forth in this Agreement. ARTICLE II DUTIES (A) The Executive shall, during the term of his employment with the Company and subject to the direction and control of the Company's Board of Directors, perform such executive duties and functions as he may be called upon to perform consistent with his employment hereunder as Chairman of the Board. As Chairman, he shall be responsible for making all final decisions as to technical and engineering matters. (B) The Executive agrees to devote his full time and best efforts to the performance of his duties for the Company; render such executive services for any subsidiary or affiliated business of the Company; participate in the direction of the Company's business and financial operations; and promote the Company's relationships with its employees, customers and others in the business community. 1 ARTICLE III COMPENSATION (A) The Company shall pay to the Executive for all services to be rendered pursuant to the terms of this agreement, a base salary at the rate of One Hundred Eight Thousand ($108,000) Dollars per year, or $9,000 per month, during each year of the term of this agreement, payable in accordance with the Company's normal payroll procedures. However, such payments shall not be made less frequently than on a monthly basis. In the event the Company's operations are profitable, the disinterested board members may approve salary increases in their sole discretion. (B) At the end of each fiscal year covered by the term of this agreement, commencing with the year ending December 31, 1997, the Company's independent auditors will audit its financial statements and determine whether the Company has achieved any income before taxes under generally accepted accounting principles. In such event, the Company will pay into an executive officer bonus pool an amount equal to 10% of pre-tax profits and the board of directors will determine the amount of bonuses that will be paid from such pool to each executive officer. ARTICLE IV WORKING CONDITIONS AND BENEFITS (A) Executive shall be entitled to a paid minimum three (3) week vacation during each year of his employment with the Company. (B) The Executive is authorized to incur reasonable and necessary expenses for promoting the business of the Company, including authorized expenses for entertainment, travel and similar items. The Company shall reimburse the Executive on a bi-monthly basis for all such expenses, upon presentation by the Executive of an itemized account of such authorized expenditures. (C) The Executive shall be employed by the Company at executive offices maintained by the Company in the New Jersey area and at no other location. The Executive shall travel on the Company's behalf to the extent reasonably necessary. (D) The Company shall provide to the Executive during the term of this agreement a motor vehicle for business use and shall pay for all costs, expenses (including insurance, maintenance and like charges) in connection with such use. (E) The Company shall provide the Executive during the term of this agreement (and thereafter as provided for under ArticleVII(A)), with hospitalization and major medical health and dental insurance providing coverage for the Executive and his dependents as per the Company's standard plan(s). The Executive shall permit the Company to have key man life insurance on his life in the amount determined by the Board of Directors, with the Company as the beneficiary of such life insurance. 2 (F) The Company shall provide to the Executive to the full extent provided for under the laws of the Company's state of incorporation and the Company's By-Laws, indemnification for any claim or lawsuit which may be asserted against the Executive when acting in such capacity for the Company, provided that said indemnification is not in violation of any Federal or state law, rule or regulation. ARTICLE V OTHER BENEFITS (A) During the term hereof, the Executive shall be entitled to receive such of the following other benefits of employment available to other members of the Company's management: health and life insurance benefits, pension, profit sharing and income protection or disability plans, in each instance, consistent with his position. (B) The Company shall use its best efforts to cause the Executive to be nominated for election to the Company's Board of Directors each year during the term of this agreement. ARTICLE VI TERM The term of this agreement shall commence as of the date hereof and continue until November 8, 2000 (four years after the completion of the Company's public offering) unless this agreement is otherwise terminated pursuant to the terms hereof. ARTICLEVII TERMINATION (A) The Company may terminate this agreement subject to the provisions of paragraph (C) upon written notice to the Executive if the Executive becomes disabled and as a result of such disability is substantially unable to perform his duties hereunder for a period of six (6) consecutive months; such notice shall be forwarded to the Executive by the Company upon and after a resolution of the Company's Board of Directors authorizing such notification. Such notification shall provide that Executive and his dependents will continue to be covered for life, dental and health insurance, at the Company's sole expense, pursuant to the provisions of Article IV(E) until such time as Executive is employed elsewhere with similar benefits. Such health and dental insurance shall be the same insurance coverage provided or offered to the other senior executives of the Company. 3 (B) The Company may terminate this agreement upon written notice from the Company to the Executive if the Executive has willfully committed acts of misconduct materially adversely detrimental to the Company. Such notice shall be forwarded to the Executive by the Company upon and after a resolution of the Company's Board of Directors authorizing such notification. ARTICLE VIII CONFIDENTIALITY AND NON-COMPETITION (A) All information concerning the Company's products, advertising, sales, marketing and other materials or articles of information, including without limitation customer and supplier lists, data processing reports, customer sales analyses, invoices, price lists or information, samples, or any other materials or data of any kind furnished to Executive by Company or developed by Executive on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Executive's employment hereunder, are and shall remain the sole and confidential property of Company; if Company requests the return of such materials at any time during or at or after the termination of Executive's employment, Executive shall immediately deliver the same to Company. (B) During the term of this agreement and one (1) year after the termination of his employment with Company for any reason whatsoever, Executive shall not directly or indirectly induce or attempt to influence any employee of Company to terminate his employment with Company and shall not engage in (as a principal, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating in the continental United States which is involved in any product or service which is part of Company's activities on the date of termination of his employment or is definitely planned by Company on the date of termination of his employment. This restriction on competition by Executive shall run for a period of one year from the date of termination of his employment with respect to any product or service which is part of Company's activities on the date of termination of his employment and with respect to any product or service which is being definitely planned by Company on the date of termination of his employment. However, nothing contained in this paragraph shall prevent Executive from holding for investment no more than five (5%) percent of any class of equity securities of a company whose securities are traded on a national securities exchange. Within ten business days of the termination of this Agreement by either party, notwithstanding the reason for termination, Executive shall receive a payment equal to one-half of his then salary in consideration of the Executive's covenant not to compete for a period of one year after the termination of employment contained in this paragraph (B). In the event that the Company elects not to make the first payment to the Executive in accordance with aforesaid terms, then the provisions contained in this paragraph (B) of Article VIII shall be void and of no further force and effect at the close of business on the tenth day following the termination of this Agreement. 4 (C) During the term of this agreement and at all times thereafter while the covenant not to compete is in effect in accordance with paragraph (B) of this ARTICLE VIII, without the consent of the Board of Directors, Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than the Company, any material referred to in paragraph (A) above or any information regarding the business methods, business policies, procedures, techniques, research or development projects or results, trade secrets, or other knowledge or processes used or developed by the Company or any names and addresses of customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Executive or learned or acquired by Executive while in the employ of Company. ARTICLE IX SEVERABILITY If any provision of this agreement shall be held invalid or unenforceable, the remainder of this agreement shall remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall remain in full force and effect in all other circumstances. ARTICLE X ARBITRATION Any controversy, claim or dispute arising out of the terms of this agreement, or the breach thereof, shall be settled by arbitration in New York County under the rules of the American Arbitration Association and the award rendered thereon shall be final, binding and conclusive as to all parties and may be entered in any court of competent jurisdiction. In the event Executive or the Company submits a claim, controversy or dispute for arbitration, the Company shall continue to pay Executive his full compensation (including salary and bonuses) until the matter has been settled by arbitration in accordance with this Article X, but in no event shall such Compensation exceed the amount payable to Executive under Article III and VII(C) hereof. The arbitration panel shall not have the right to modify the terms of this Agreement. The arbitration panel shall consist of three senior executives of companies with sales in excess of $50,000,000 per year. ARTICLE XI NOTICE All notices required to be given under the terms of this agreement shall be in writing and shall be deemed to have been duly given if delivered to the addressee in person or 5 mailed by certified mail, return receipt requested, as follows: If to the Company, addressed to: Tellurian, Inc. 15 Industrial Avenue Upper Saddle River, NJ 07458 With a copy to: Lester Morse P.C. 111 Great Neck Road, Suite 420 Great Neck, NY 11021 If to the Executive, addressed to: Dr. Ronald Swallow 64 Manor Drive Ramsey, NJ 07446 or to any such other address as the party to receive the notice shall advise by due notice given in accordance with this paragraph. ARTICLE XII BENEFIT This agreement shall inure to and shall be binding upon the parties hereto, the successors and assigns of the Company and the heirs and personal representatives of the Executive. ARTICLE XIII WAIVER The waiver by either party of any breach or violation of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach. ARTICLE XIV GOVERNING LAW This agreement has been negotiated and executed in the State of New Jersey and New Jersey law shall govern its construction and validity. 6 ARTICLE XV ENTIRE AGREEMENT This agreement contains the entire agreement between the parties hereto; no change, addition or amendment shall be made hereto except by written agreement signed by the parties hereto. This agreement supersedes all prior agreements and understandings. IN WITNESS WHEREOF, the parties hereto have executed this agreement and affixed their hands and seal the day and year first above written. /s/ Dr. Ronald Swallow ----------------------------- Dr. Ronald Swallow, Executive TELLURIAN, INC. By /s/ Stuart French --------------------------- Stuart French, President 7 EX-10 3 EXHIBIT 10(D) EMPLOYMENT AGREEMENT AGREEMENT made as of November 8, 1996, by and between STUART FRENCH residing at 565 Poplar Court, Wyckoff, New Jersey 07481 (hereinafter referred to as the "Executive") and TELLURIAN, INC., a Delaware corporation, with principal executive offices located at 15 Industrial Avenue, Upper Saddle River, New Jersey, 07458 (hereinafter referred to as the "Company"). W I T N E S S E T H: WHEREAS, the Company is engaged inter alia in the business of design, development and marketing of virtual reality products; and WHEREAS, the Company desires to retain and employ the Executive for the purpose of securing to the Company the experience, ability and services of the Executive. NOW, THEREFORE, it is mutually agreed by and between the parties hereto as follows: ARTICLE I EMPLOYMENT The Company hereby employs the Executive as its President and the Executive hereby accepts such employment and agrees to serve as an executive officer of the Company subject to and upon the terms and conditions set forth in this Agreement. ARTICLE II DUTIES (A) The Executive shall, during the term of his employment with the Company and subject to the direction and control of the Company's Board of Directors and Chairman of the Board, perform such executive duties and functions as he may be called upon to perform consistent with his employment hereunder as President. (B) The Executive agrees to devote his full time and best efforts to the performance of his duties for the Company; render such executive services for any subsidiary or affiliated business of the Company; participate in the direction of the Company's business and financial operations; and promote the Company's relationships with its employees, customers and others in the business community. 1 ARTICLE III COMPENSATION (A) The Company shall pay to the Executive for all services to be rendered pursuant to the terms of this agreement, a base salary at the rate of Eighty Four Thousand ($84,000) Dollars per year, or $7,000 per month, during each year of the term of this agreement, payable in accordance with the Company's normal payroll procedures. However, such payments shall not be made less frequently than on a monthly basis. In the event the Company's operations are profitable, the disinterested board members may approve salary increases in their sole discretion. The Executive shall also receive a sales commission of 5% based on the gross sales value. Such commission shall be accrued at the time the order is booked by the Company; however, such commission will be paid proportionately within 30 days of the Company's receipt of any revenue generated from the sale. (B) At the end of each fiscal year covered by the term of this agreement, commencing with the year ending December 31, 1997, the Company's independent auditors will audit its financial statements and determine whether the Company has achieved any income before taxes under generally accepted accounting principles. In such event, the Company will pay into an executive officer bonus pool an amount equal to 10% of pre-tax profits and the board of directors will determine the amount of bonuses that will be paid from such pool to each executive officer. ARTICLE IV WORKING CONDITIONS AND BENEFITS (A) Executive shall be entitled to a paid minimum three (3) week vacation during each year of his employment with the Company. (B) The Executive is authorized to incur reasonable and necessary expenses for promoting the business of the Company, including authorized expenses for entertainment, travel and similar items. The Company shall reimburse the Executive on a bi-monthly basis for all such expenses, upon presentation by the Executive of an itemized account of such authorized expenditures. (C) The Executive shall be employed by the Company at executive offices maintained by the Company in the New Jersey area and at no other location. The Executive shall travel on the Company's behalf to the extent reasonably necessary. (D) The Company shall provide to the Executive during the term of this agreement a motor vehicle for business use and shall pay for all costs, expenses (including insurance, maintenance and like charges) in connection with such use. (E) The Company shall provide the Executive during the term of this agreement (and thereafter as provided for under Article VII(A)), with hospitalization and major medical health and dental insurance providing coverage for the Executive and his dependents as 2 per the Company's standard plan(s). The Executive shall permit the Company to have key man life insurance on his life in the amount determined by the Board of Directors, with the Company as the beneficiary of such life insurance. (F) The Company shall provide to the Executive to the full extent provided for under the laws of the Company's state of incorporation and the Company's By-Laws, indemnification for any claim or lawsuit which may be asserted against the Executive when acting in such capacity for the Company, provided that said indemnification is not in violation of any Federal or state law, rule or regulation. ARTICLE V OTHER BENEFITS During the term hereof, the Executive shall be entitled to receive such of the following other benefits of employment available to other members of the Company's management: health and life insurance benefits, pension, profit sharing and income protection or disability plans, in each instance, consistent with his position. The Company shall use its best efforts to cause the Executive to be nominated for election to the Company's Board of Directors each year during the term of this agreement. ARTICLE VI TERM The term of this agreement shall commence as of the date hereof and continue until November 8, 2000 (four years after the completion of the Company's public offering) unless this agreement is otherwise terminated pursuant to the terms hereof. ARTICLE VII TERMINATION (A) The Company may terminate this agreement subject to the provisions of paragraph (C) upon written notice to the Executive if the Executive becomes disabled and as a result of such disability is substantially unable to perform his duties hereunder for a period of six (6) consecutive months; such notice shall be forwarded to the Executive by the Company upon and after a resolution of the Company's Board of Directors authorizing such notification. Such notification shall provide that Executive and his dependents will continue to be covered for life, dental and health insurance, at the Company's sole expense, pursuant to the provisions of Article IV(E) until such time as Executive is employed elsewhere with similar benefits. Such health and dental insurance shall be the same insurance coverage provided or offered to the other senior executives of the Company. (B) The Company may terminate this agreement upon written notice from the Company to the Executive if the Executive has willfully committed acts of misconduct 3 materially adversely detrimental to the Company. Such notice shall be forwarded to the Executive by the Company upon and after a resolution of the Company's Board of Directors authorizing such notification. ARTICLE VIII CONFIDENTIALITY AND NON-COMPETITION (A) All information concerning the Company's products, advertising, sales, marketing and other materials or articles of information, including without limitation customer and supplier lists, data processing reports, customer sales analyses, invoices, price lists or information, samples, or any other materials or data of any kind furnished to Executive by Company or developed by Executive on behalf of Company or at Company's direction or for Company's use or otherwise in connection with Executive's employment hereunder, are and shall remain the sole and confidential property of Company; if Company requests the return of such materials at any time during or at or after the termination of Executive's employment, Executive shall immediately deliver the same to Company. (B) During the term of this agreement and one (1) year after the termination of his employment with Company for any reason whatsoever, Executive shall not directly or indirectly induce or attempt to influence any employee of Company to terminate his employment with Company and shall not engage in (as a principal, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating in the continental United States which is involved in any product or service which is part of Company's activities on the date of termination of his employment or is definitely planned by Company on the date of termination of his employment. This restriction on competition by Executive shall run for a period of one year from the date of termination of his employment with respect to any product or service which is part of Company's activities on the date of termination of his employment and with respect to any product or service which is being definitely planned by Company on the date of termination of his employment. However, nothing contained in this paragraph shall prevent Executive from holding for investment no more than five (5%) percent of any class of equity securities of a company whose securities are traded on a national securities exchange. Within ten business days of the termination of this Agreement by either party, notwithstanding the reason for termination, Executive shall receive a payment equal to one-half of his then salary in consideration of the Executive's covenant not to compete for a period of one year after the termination of employment contained in this paragraph (B). In the event that the Company elects not to make the payment to the Executive in accordance with aforesaid terms, then the provisions contained in this paragraph (B) of Article VIII shall be void and of no further force and effect at the close of business on the tenth day following the termination of this Agreement. (C) During the term of this agreement and at all times thereafter while the covenant not to compete is in effect in accordance with paragraph (B) of this ARTICLE VIII, without the consent of the Board of Directors, Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than the Company, any material referred 4 to in paragraph (A) above or any information regarding the business methods, business policies, procedures, techniques, research or development projects or results, trade secrets, or other knowledge or processes used or developed by the Company or any names and addresses of customers or clients or any other confidential information relating to or dealing with the business operations or activities of Company, made known to Executive or learned or acquired by Executive while in the employ of Company. ARTICLE IX SEVERABILITY If any provision of this agreement shall be held invalid or unenforceable, the remainder of this agreement shall remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall remain in full force and effect in all other circumstances. ARTICLE X ARBITRATION Any controversy, claim or dispute arising out of the terms of this agreement, or the breach thereof, shall be settled by arbitration in New York County under the rules of the American Arbitration Association and the award rendered thereon shall be final, binding and conclusive as to all parties and may be entered in any court of competent jurisdiction. In the event Executive or the Company submits a claim, controversy or dispute for arbitration, the Company shall continue to pay Executive his full compensation (including salary and bonuses) until the matter has been settled by arbitration in accordance with this Article X, but in no event shall such Compensation exceed the amount payable to Executive under Article III and VII(C) hereof. The arbitration panel shall not have the right to modify the terms of this Agreement. The arbitration panel shall consist of three senior executives of companies with sales in excess of $50,000,000 per year. ARTICLE XI NOTICE All notices required to be given under the terms of this agreement shall be in writing and shall be deemed to have been duly given if delivered to the addressee in person or mailed by certified mail, return receipt requested, as follows: If to the Company, addressed to: Tellurian, Inc. 15 Industrial Avenue Upper Saddle River, NJ 07458 5 With a copy to: Lester Morse P.C. 111 Great Neck Road, Suite 420 Great Neck, NY 11021 If to the Executive, addressed to: Stuart French 565 Poplar Court Wyckoff, NJ 07481 or to any such other address as the party to receive the notice shall advise by due notice given in accordance with this paragraph. ARTICLE XII BENEFIT This agreement shall inure to and shall be binding upon the parties hereto, the successors and assigns of the Company and the heirs and personal representatives of the Executive. ARTICLE XIII WAIVER The waiver by either party of any breach or violation of any provision of this agreement shall not operate or be construed as a waiver of any subsequent breach. ARTICLE XIV GOVERNING LAW This agreement has been negotiated and executed in the State of New Jersey and New Jersey law shall govern its construction and validity. 6 ARTICLE XV ENTIRE AGREEMENT This agreement contains the entire agreement between the parties hereto; no change, addition or amendment shall be made hereto except by written agreement signed by the parties hereto. This agreement supersedes all prior agreements and understandings. IN WITNESS WHEREOF, the parties hereto have executed this agreement and affixed their hands and seal the day and year first above written. /s/ Stuart French ---------------------------------- Stuart French, Executive TELLURIAN, INC. By /s/ Ronald Swallow ------------------------------ Dr. Ronald Swallow Chairman of the Board and Chief Executive Officer 7 EX-10 4 EXHIBIT 10(E) LEASE AGREEMENT between JOLIN REALTY, LANDLORD and TELLURIAN, INC., Tenant Dated: November 12, 1996 INDEX PARAGRAPH 1 DEFINITIONS 1 PARAGRAPH 2 DESCRIPTION OF DEMISED PREMISES 3 PARAGRAPH 3 COMMENCEMENT OF TERM 3 PARAGRAPH 4 TERM 3 PARAGRAPH 5 RENT AND OTHER CHARGES 4 PARAGRAPH 6 USE OF DEMISED PREMISES 6 PARAGRAPH 7 RIGHT TO INSPECT AND REPAIR 7 PARAGRAPH 8 REPAIRS 7 PARAGRAPH 9 UTILITIES 8 PARAGRAPH 10 ALTERATIONS 8 PARAGRAPH 11 SIGNS 9 PARAGRAPH 12 ASSIGNMENT 9 PARAGRAPH 13 COMPLIANCE AND ISRA AND OTHER ENVIRONMENTAL LAWS 11 PARAGRAPH 14 DAMAGE BY FIRE OR OTHER CASUALTY 13 PARAGRAPH 15 EMINENT DOMAIN 14 PARAGRAPH 16 WAIVER OF LANDLORD'S LIABILITY 15 PARAGRAPH 17 INSURANCE TO BE PROVIDED BY TENANT 15 PARAGRAPH 18 WAIVER OF SUBROGATION 16 PARAGRAPH 19 INDEMNITY 16 PARAGRAPH 20 DEFAULT OF TENANT 17 PARAGRAPH 21 LANDLORD'S REMEDIES ON DEFAULT OF TENANT 18 PARAGRAPH 22 SUBORDINATION OF LEASE 20 PARAGRAPH 23 EASEMENTS 20 PARAGRAPH 24 LANDLORD'S INABILITY TO PERFORM 20 PARAGRAPH 25 NO PERSONAL LIABILITY OF LANDLORD 20 PARAGRAPH 26 SUBMISSION NOT AN OFFER TO LEASE 21 PARAGRAPH 27 TENANT'S ESTOPPEL 21 PARAGRAPH 28 FINANCIAL AND OTHER INFORMATION 21 PARAGRAPH 29 LANDLORD'S RIGHT TO SHOW PREMISES 21 PARAGRAPH 30 QUIET ENJOYMENT 21 PARAGRAPH 31 NO ABATEMENT OF RENT 22 PARAGRAPH 32 ACCORD AND SATISFACTION 22 PARAGRAPH 33 EFFECT OF WAIVERS 22 PARAGRAPH 34 LEASE CONDITION 22 PARAGRAPH 35 MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE 22 PARAGRAPH 36 LANDLORD'S RESERVED RIGHT 23 PARAGRAPH 37 CORPORATE/PARTNERSHIP AUTHORITY 23 PARAGRAPH 38 RECORDING 23 PARAGRAPH 39 NUMBER AND GENDER 23 PARAGRAPH 40 COMPLIANCE WITH RULES AND REGULATIONS 23 PARAGRAPH 41 SECURITY DEPOSIT 23 PARAGRAPH 42 RIGHT TO CURE TENANT'S BREACH 24 PARAGRAPH 43 MECHANIC'S LIENS 24 PARAGRAPH 44 EXTENSION OF TERM 25 PARAGRAPH 45 PARKING SPACES 25 PARAGRAPH 46 LANDLORD'S LIABILITY FOR LOSS OF PROPERTY 25 PARAGRAPH 47 PARTIAL INVALIDITY/GOVERNING LAW 25 PARAGRAPH 48 BROKER 25 PARAGRAPH 49 COMPLETE AGREEMENT 26 PARAGRAPH 50 PARAGRAPH HEADINGS 26 PARAGRAPH 51 LANDLORD'S LIEN 26 PARAGRAPH 52 NOTICE 26 PARAGRAPH 53 WAIVER OF TRIAL BY JURY 26 PARAGRAPH 54 APPLICABILITY TO HEIRS AND ASSIGNS 26 PARAGRAPH 55 EXPIRATION OF TERM - RETURN OF DEMISED PREMISES IN GOOD CONDITION 27 PARAGRAPH 56 HOLDOVER TENANCY 27 PARAGRAPH 57 ADDITIONAL COVENANTS 27 PARAGRAPH 58 MISCELLANEOUS 29 EXHIBIT A FLOOR PLAN EXHIBIT B COMMENCEMENT DATE CERTIFICATE EXHIBIT C RULES AND REGULATIONS LEASE AGREEMENT LEASE AGREEMENT, dated as of the 12th day of November 1996, between JOLIN REALTY, whose address is 75 Portland Avenue, P.O. Box 39, Bergenfield, New Jersey 07621 ("Landlord") and TELLURIAN, INC., a Delaware corporation whose address is 15 Industrial Avenue, Upper Saddle River, New Jersey 07458 ("Tenant"). WITNESSETH: For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Landlord and Tenant agree as follows: 1. DEFINITIONS. The following terms whenever used in this Lease shall have only the meanings set forth in this Paragraph 1, unless such meanings are expressly modified, limited or expanded elsewhere herein. Other terms are defined elsewhere in this Lease. (1) Building shall mean 300 Route 17 South, Mahwah, New Jersey. (2) Broker shall mean: Burns Commercial Realty, Inc. and Provest, Inc. (3) Commencement Date shall mean: the "Date of Completion" as defined in Article 3 hereof (4) Demised Premises shall mean: A portion of the building located at 300K Route 17 South, Mahwah, New Jersey, known as 300K Route 17 South, consisting of approximately 10,312 square feet, as more particularly shown on the attached plan designated as Exhibit "A." The Demised Premises are also known as the "Premises". (5) Exhibits: The following Exhibits attached to this Lease are incorporated herein and made a part hereof. Exhibit A Floor Plan Exhibit B Commencement Date Certificate Exhibit C Rules and Regulations (6) Basic Rent shall mean: SEVEN HUNDRED FIFTY THOUSAND AND 00/100 ($750,000.00) DOLLARS for the Term, payable as follows: 1 (A) Basic Rent: SEVENTY FIVE THOUSAND AND 00/100 ($75,000.00) DOLLARS. (B) Monthly Basic Rent: SIX THOUSAND TWO HUNDRED FIFTY AND 00/100 ($6,250.00) DOLLARS. (7) Force Majeure shall mean and include: Situations beyond Landlord's control, including by way of example and not by way of limitation, acts of God, accidents, repairs, strikes, shortages of labor, supplies or materials (provided that Landlord will make a good faith effort to find substitute materials and supplies in the event of shortages), inclement weather or, where applicable, the passage of time while waiting for an adjustment of insurance proceeds. (8) Landlord shall mean: JOLIN REALTY, a New Jersey Partnership with offices at 75 Portland Avenue, P.O. Box 39, Bergenfield, New Jersey 07621 (9) Parking Spaces shall mean: A total of thirty (30) parking spaces. (10) Property shall mean: the entire parcel of land and improvements consisting of Block 137, lot 1 of which the Demised Premises are a part. (11) Permitted Use shall mean: Office and Light Electronic Assembly. (12) Rent shall mean: Basic Rent and Additional Rent. (13) Security Deposit shall mean: Six (6) months' Basic Rent. (14) Standard Industrial Classification ("SIC") Number of Tenant is 3570. The SIC Numbers are described in the Standard Industrial Classification Manual (1987) of the Office of Management and Budget, Executive Office of the President of the United States. (15) Tenant shall mean: TELLURIAN, INC. (16) Tenant's Property Expense Rent Share shall mean: 12.9% of operating expenses of the Property to be paid by Tenant during the term of the Lease, as more fully set forth in Paragraph 5(B). (17) Term shall mean: Ten (10) years from the Commencement Date. (18) Termination Date shall mean: The day before the tenth anniversary of the Commencement Date. 2 2. DESCRIPTION OF DEMISED PREMISES. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Demised Premises, as shown on the plan initiated by the parties hereto marked Exhibit A annexed hereto and made part hereof in the Building which is situated on the Property. 3. COMMENCEMENT OF TERM. (A) Landlord agrees that, Landlord's expense, prior to Commencement Date, it will construct and improve the Demised Premises substantially in accordance with the plans and specifications attached hereto as Exhibit A (hereinafter "Landlords Work"). Landlord shall have no obligations to perform any other work in the Demised Premises, and Tenant specifically agrees that it will accept the Demised Premises in "AS IS" condition, as modified by the performance of Landlord's Work. (B) Lease Commencement shall occur upon the earliest of (a) when Landlord has substantially completed all the work to be done by Landlord in accordance with Exhibit A, subject to "punchlist" items which do not materially interfere with Tenant's use and enjoyment of the Demised Premises, and Landlord has delivered to Tenant a temporary or final Certificate of Occupancy, or (b) upon occupancy of the Demised Premises by Tenant (hereinafter "Date of Completion"). Tenant will execute the Commencement Date Certificate attached hereto as Exhibit B, within 15 days after Landlord's request for the purpose of establishing the Commencement Date of the Lease. (C) Landlord's Work shall be completed in a timely manner from the date Landlord obtains a building permit, provided, however, that said time of completion shall be extended by and delay occasioned by scarcity of materials, installation of improvements requested by Tenant, approval of plans by Tenant, strikes, labor disputes, weather conditions which inhibit construction, fire or other casualties, governmental restrictions and regulations, delays in transportation and any other construction delays beyond the reasonable control of the Landlord. In the event the time for completion of Landlord's Work is extended by reason of any of the foregoing, then the time for completion will be extended by the period of delay caused by any of the foregoing. If Landlord shall be unable to give possession because a Certificate of Occupancy or any other required certificate, permit or variance has not been procured, or because of the holding over or retention of possession of any tenant or occupant, or because construction, repairs, improvements or decorations of the Demised Premises or Building required to be performed by Landlord are not completed in the manner set forth in this Lease or for any other reason, Landlord shall not be subject to any liability for the failure to give possession. No such failure to give possession shall in any other respect affect the validity of this Lease or the obligations of Tenant hereunder. 4. TERM The Demised Premises are leased for the Term to commence at 12:01 a.m. on the Commencement Date and to end at 11:59 p.m. on the Termination Date, or on such other date as the Term may expire or be terminated pursuant to the revisions of the Lease or pursuant 3 to law, at which time Tenant shall deliver up the Demised Premises in accordance with all of the terms hereof. 5. RENT AND OTHER CHARGES. (A) Basic Rent. Tenant shall pay to Landlord during the Term, the Basic Rent as defined in Paragraph 1 (hereinafter called "Basic Rent"), payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Basic Rent shall accrue at the Yearly Rent as defined in Paragraph 1 and shall be the Term as Monthly Basic Rent as defined in Paragraph 1 and shall be payable in advance on the first day of each calendar month during the Term as Monthly Basic Rent as defined in Paragraph 1, in accordance with the provisions of this Lease herein set forth, except that if the Commencement Date is not the first (1st) day of the month, Rent for the month in which the Commencement Date occurs shall be prorated to the end of the month, the first (1st) full monthly installment of Rent shall be due on the first day of the next month and after the expiration of the number of years in the Term of this Lease, the Term shall expire on the last day of the same month in which the Commencement Date of the Term occurred, it being the intention of the parties that the Term expire on the last day of the month. Landlord acknowledges receipt from Tenant of the first installment of Monthly Basic Rent by check, subject to collection, for Basic Rent for the first month of the Term. (B) Property Expense Rent. It is expressly agreed that Tenant will pay, in addition to the Basic Rent, an Additional Rent to cover Tenant's share of the operating expenses of the Property as defined in Paragraph 1, for each Calendar Year (or proportionate part thereof if the Lease was not in effect during the entire Calendar Year), during the Term of the Lease (hereinafter "Tenant's Property Expense Rent Share"). The term "Property Expense Rent" or "Property Expense" shall mean all costs incurred by Landlord in connection with the operation and maintenance of the Property, including but not limited to each of the categories of expense enumerated as follows: (i) Real Estate Taxes shall include but not be limited to any tax or assessment levied, assessed or imposed anytime upon or against the Property, or any part thereof, Landlord, or upon the Rent including but not limited to, Real Estate, City, County, Borough, Township, school and transfer taxes, or taxes, assessments or charges levied, imposed or assessed against the Property by any other taxing authority, whether general or specific, ordinary or extraordinary; foreseen or unforeseen. If, due to a future change in the method of taxation, any franchise, income or profit tax shall be levied against Landlord in substitution for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax shall be deemed to be a Real Estate Tax for the purposes hereof. (ii) Common Area Expenses shall include but not be limited to all costs and expenses incurred by Landlord for operating, maintaining, repairing, and/or replacing any and all, or any part of the common area of the Property (or installation therein, thereon, thereunder or 4 thereover) including but not limited to parking area, sidewalks, curbs, grounds, water lines, electric lines, gas lines, sanitary sewer line, and storm water lines, and all costs and expenses incurred by Landlord for landscaping and the removal of snow, ice and debris. (iii) Common Utility Expenses shall include but not be limited to, all costs and expenses incurred by Landlord for water, including standby sprinkler charges, sewer, gas and electricity and any other utility charges for utilities servicing the common area of the Property. (iv) Repair and Maintenance Expenses shall include but not be limited to, all costs and expenses incurred by Landlord for repair and maintenance of all or any part of the Property, including any expense attributed to costs incurred by Landlord for any capital improvements or structural repairs to the common area of Property required by any changes in laws, ordinances, rules or regulations that were not in effect when the Property was constructed, but shall specifically exclude all or any part of the Property which is the obligation of any Tenant to repair and maintain. (v) Insurance Expense shall include but not be limited to, all costs and expense for insurance, including fire and extended coverage and public liability and any rental insurance, all risk insurance or any other insurance which Landlord may from time to time carry for Landlord's benefit. In the event Tenant's use of the Demised Premises results in an insurance rate higher than normally applicable rates, Tenant shall be fully responsible for the expense differential caused by Tenant's use. (C) Calendar Year. As used herein, Calendar Year shall mean the twelve (12) month period commencing January 1 and ending December 31, provided, however, Landlord may, in its sole discretion, upon ten (10) days notice to Tenant, change the Calendar Year period. (D) Payment of Property Expense Rent. Landlord shall upon final determination of Property Expenses at the end of each Calendar Year, provide tenant written notice of such final determination. Tenant shall pay its Property Expense Rent in full no later than thirty (30) days after notice by Landlord of the amount thereof. If requested by Landlord, Tenant shall pay its Property Expense Rent in twelve (12) monthly installments on the first day of each month on an estimated basis as determined by Landlord. Any amount paid by Tenant which exceeds the actual amount due shall be credited to the next succeeding payment due pursuant hereto. If Tenant has paid less than the actual amount due, Tenant shall pay the difference to Landlord within thirty (30) days after receipt of Landlord's request therefor. During the first and last years of the Term, the amount payable by Tenant hereunder shall be prorated for the Fraction of the Calendar Year included in the Term. In addition to any other administrative and overhead charges which Landlord is entitled to collect from Tenant as Property Expenses and a charge of fifteen (15%) percent of such Property Expenses and shall be added to Tenant's Expense Rent Share to cover Landlord's administrative overhead charges. (E) Books and Records. Landlord shall maintain books of account which shall be 5 open to Tenant and its representatives during normal business hours so that Tenant can determine that such Property Expenses have been paid or incurred. Any disagreement with respect to any one or more of said charges if not satisfactorily settled between landlord and Tenant shall be referred by either party to an independent Certified Public Accountant to be mutually agreed upon, and if such an accountant cannot be agreed upon, the American Arbitration Association in Somerset, New Jersey shall, at the request of either party, be asked to select an arbitrator, whose decision on the dispute will be final and binding upon both parties, who shall jointly share any cost of such arbitration. Pending resolution of said dispute, Tenant shall pay to Landlord the sum so billed by Landlord subject to its ultimate resolution as aforesaid. (F) Right of Review. Once Landlord has finally determined Property Expenses at the end of a Calendar Year, then as to the particular expense so established, Tenant shall only be entitled to dispute said expense or review the records therefor, for a period of three (3) months after such expense is established, and Tenant specifically waives any right to dispute any such expense, or review the records therefor, at the expiration of said three (3) month period. (G) Late Charge. Tenant hereby acknowledges that late payment by Tenant to Landlord of Basic Rent or Additional Rent or any part thereof will cause Landlord to incur costs not contemplated by the Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on the Landlord by the terms of any mortgage covering the Property. Accordingly, if payment of Basic Rent or Additional Rent or any part thereof shall not be received by Landlord within five (5) days after such amount shall be due, the Tenant, without any requirement for notice to Tenant, shall pay to Landlord a late charge equal to four (4%) percent of the unpaid amount due for each and every five (5) day period which has elapsed between the day said amount is due and the date the amount is received by Landlord. The parties hereby agree that such late Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount; nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. (H) Additional Rent. All payments Tenant is required to make pursuant to this Lease, other than Basic Rent, shall constitute additional rent ("Additional Rent") and, if Tenant defaults in any such payment, Landlord shall have (in addition to any rights and remedies granted herein) all rights and remedies provided by law for non-payment of Basic Rent. (I) Place of Payment. Tenant shall pay Rent as hereinafter provided, to Landlord at Landlord's above-stated address, or at such other place as Landlord may designate in writing, without the necessity of a bill therefore or demand of any nature whatsoever, and without counterclaim, deduction or set-off. 6. USE OF DEMISED PREMISES. The Tenant shall use and occupy the Demised Premises for office and light electronic assembly, as provided under the applicable zoning ordinances of the Borough of Mahwah and for no other purpose. It is a consideration of this 6 Lease, that the use of the Demised Premises shall be limited to those uses as otherwise hereinbefore specified, and that such uses be subject to and consistent with any Certificate of Occupancy issued by the Township of Mahwah. Such use does not permit the stacking of merchandise or materials against the walls, so as to create a load or weight factor upon the walls, or to tie in, Tenant's racking systems with such walls, not the hanging of equipment from (or otherwise loading) the roof or structural members of the Building without the express written consent of the Landlord. The Tenant shall not use or occupy or permit the Demised Premises to be used or occupied, nor do or permit anything to be done in or on the Demised Premises, in a manner which will in any way violate the Certificate of Occupancy affecting the Demised Premises, or make void or voidable any insurance then in force with respect thereto, or which will make it impossible to obtain fire or other insurance required to be furnished by the Tenant hereunder, at regular rates, or which will cause or be likely to cause structural damage to the Building or any part thereof, or which will constitute a public or private nuisance, or which would adversely affect the then value thereof. Tenant shall, in the use and occupancy of the Demised Premises, comply with all laws, orders and regulations of the federal, state and municipal governments or of any of their departments affecting the Demised Premises. If any repairs or improvements are made necessary in order to comply with any of the aforesaid governmental rules and regulations, then Tenant shall, at Tenant's cost and expense, make said repair and/or improvement subject to Tenant's obligation to secure Tenant's Approval. Landlord represents that at the time of the issuance of the Certificate of Occupancy the Demised Premises shall be in compliance with any laws, orders, or regulations of the federal, state or municipal governments or any of their departments affecting the Demised Premises. the Tenant shall not permit or cause any odor, sound, vibration, effluent, pollution or other condition that is either in Landlord's opinion or by law noxious or offensive. Nothing herein contained shall be deemed or construed to constitute a representation or guaranty by the Landlord that any specific business may be conducted in the Demised Premises or is lawful under the Certificate of Occupancy. 7. RIGHT TO INSPECT AND REPAIR. Landlord may enter the Demised Premises but shall not be obligated to do so (except as required by any specific provision of this Lease) at any reasonable time on reasonable notice to Tenant (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacement or additions, in, to, on, and about the Demised Premises or the Building, as Landlord deems necessary or desirable. Tenant shall have no claims or cause of action against Landlord by reason thereof. In no event shall Tenant have any claim against Landlord for interruption to Tenant's business, however occurring, including, but not limited to, that arising from negligence of Landlord, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Demised Premises and/or the Building, including the structural and non-structural portions thereof. 8. REPAIRS. (A) Tenant shall keep, replace and maintain in good order, condition and repair the premises and each and every part thereof (except for repairs specifically required of Landlord pursuant to subparagraph (C) of this Paragraph 8) including, without limitation, any air conditioning units and systems; heating units and systems; plumbing units and systems; sprinkler 7 systems; electrical systems; equipment; facilities and fixtures. Landlord represents to Tenant that on the Commencement Date, all systems servicing the Demised Premises shall be in good working order. The aforesaid obligation of Tenant shall also include, without limitation, all necessary painting and decorating and the replacement of any glass which may be damaged or broken. Notwithstanding the foregoing, all damage or injury to the Premises or to appurtenances, whether requiring structural or non-structural repairs, caused by the negligence or improper conduct of Tenant, or its employees, invitees, licensees or agents, shall be repaired promptly by Tenant at its sole cost and expense. If Tenant refuses or neglects to make such repairs of fails to diligently prosecute the same to completion within 15 days after written notice from Landlord to Tenant of the need therefor, Landlord may make such repairs at the expense of Tenant and such expense shall be collectible as additional rent together with a service fee, as provided in Paragraph 5 hereof, if Tenant shall fail to make such payment promptly. (B) Tenant shall obtain a maintenance contract for the heating, ventilation and air conditioning systems in the building. Such contract shall provide for semi-annual maintenance of the HVAC systems, and copies of the maintenance agreement shall be submitted to Landlord, together with an annual report of the maintenance company as to the condition and repairs made to the systems. The firm or person maintaining the HVAC systems shall be a person who is certified and licensed to service refrigerating equipment as such certification or licenses may be required by law or any governmental agency. (C) Landlord shall keep, replace and maintain in good order and condition and repair common areas and the roof, roof deck, outside walls and concrete floors, subject, however, the cost of same to the extent applicable shall be paid by the Tenant, as the Tenant's proportionate share, pursuant ot the provisions of Paragraph 5 hereof. 9. UTILITIES. Landlord shall not be required to provide any services to Tenant, other than bringing the utilities to the building, and Tenant agrees to arrange directly with the appropriate utility companies for supply of gas, electricity, water, light, power, telephone and any other utility service and shall pay all fees, deposits, expenses and charges therefrom to such companies. Landlord shall not be liable to Tenant for any delay or failure in Tenant's receipt of any such utilities, and in no event shall such delay or failure, regardless of cause or cost, constitute a constructive eviction of Tenant or permit Tenant any abatement of Rent or allow Tenant to terminate this Lease. 10. ALTERATIONS. The Tenant shall not change the Demised Premises or make any additions, alterations, or improvements to the Demised Premises without the Landlord's prior written consent. Any alterations, improvements or additions in or about the Demised Premises that Tenant shall desire to make shall be submitted to Landlord in written form, with proposed detailed plans. any alterations, improvements or additions proposed by Tenant shall be further subject to the following: (a) Tenant shall first obtain requisite permits including, but not limited to, a new 8 Certificate of Occupancy, if necessary, and authorizations from governmental authorities having jurisdiction; (b) Obtain, if applicable, any fee mortgagee's or ground lessee's prior written consent; (c) Any alterations shall be made promptly (unavoidable delays excepted), in a workmanlike manner in accordance with any alteration plans and in compliance with applicable laws and governmental regulations; (d) The cost of the alterations shall be paid by Tenant so that the Demised Premises remains free of any liens; (e) If requested by Landlord, post with Landlord adequate security to assure restoration of the premises at the end of the Term; (f) Tenant shall maintain proper insurance as required by Landlord; (g) No change or alterations shall, when completed, tie in or connect the Demised Premises with any other building on adjoining property; (h) No permitted alteration shall be undertaken until detailed Plans and Specifications have first been submitted to and approved in writing by Landlord, and if required, by the fee mortgagee or ground lessee. The Tenant shall be responsible for paying any of Landlord's fees in reviewing the Plans and Specifications. At the completion of the alteration or restoration, "as-built" plans shall be delivered to Landlord; (i) Any alteration made by Tenant under this Paragraph 10 hereof shall, at Landlord's option, become Landlord's property, or, at the election of Landlord, shall be removed by the Tenant thirty (30) days prior to the termination of the Term and the Demised Premises shall be restored to its condition prior to such alteration. The security deposited under Paragraph 10(e) hereof shall be returned to the Tenant at the end of the Term if Landlord elects to have such improvement remain, or, returned to Tenant after restoration by Tenant if Landlord directs that said alteration be removed and the Demised Premises restored. 11. SIGNS. The Tenant shall not install any sign on the roof or on the exterior surface of the Building walls or grounds, or any portion of the Demised Premises without the prior written consent of the Landlord. 12. ASSIGNMENT AND SUBLETTING. The terms of the Paragraph 12 shall apply every time that an assignment arises by operation of law and every time that the Tenant desires to make any of the following agreements: 9 a) an assignment of all or part of this Lease; b) a sublease of all or part of the Demised Premises; or c) an agreement allowing a third party to use or occupy all or part of the Demised Premises. If an assignment arises by operation of law, or if the Tenant desires to make any of the above-described agreements, then the Tenant shall: a) provide the Landlord, in writing, with an explanation of the circumstances of the assignment by operation of law or provide the Landlord with the complete terms of the proposed agreement; b) arrange for the prospective assignee, sublessee, or third party user to meet with the Landlord; and c) provide the Landlord, in writing, with any reasonably requested information about the assignment by operation of law, the proposed agreement, or the proposed assignee, sublessee, or third party use. Within fourteen (14) days after the Tenant satisfies the above-described three requirements, the Landlord, in its sole discretion, in accordance with the terms of this paragraph, shall either: (a) consent, (b) withhold its consent, or (c) terminate this Lease. The Tenant shall not permit any assignee, sublessee, or third party user to use or take possession of all or part of the Demised Premises, unless the Landlord has consented in writing. In addition, before any assignment by operation of law or any proposed agreement takes effect, the Tenant, at its own expense, shall either comply with N.J.S.A. 13:1K et seq. ("ISRA"), if applicable, or obtain approval of a nonapplicability application. The Landlord shall consent to any proposed agreement to be made with any of the following "permitted" assignees, sublessees, or third party users which do not have a Standard Industrial Classification ("SIC") number which is covered by ISRA and provided that such assignees, sublessees, or third party users have a total net worth equal to or greater than the Tenant as of the date of such assignment or sublet: a) a parent corporation which has the power to direct the Tenant's management and operation; b) a subsidiary corporation whose management and operation are controlled by the Tenant; c) a corporation in which or with which the Tenant is merged or consolidated in accordance with applicable law; or d) a company which purchases substantially all of the Tenant's assets, and which assumes in writing all of Tenant's obligations under the Lease. 10 By consenting to any assignment by operation of law or any proposed agreement, the Landlord shall not by releasing the Tenant from any of its obligations under the terms of this Lease. Any assignment shall include the assignee's assumption and agreement to perform all of the Tenant's obligations which arise during the term of the assignment. The Tenant shall promptly pay any "profit", related to this Lease of the Demised Premises, which the Tenant receives from any assignee, sublessee, or third party user, to the Landlord as Additional Rent. For purposes of this clause, "profit" shall mean any consideration received by the Tenant in excess of the Base Rent and additional rent due under the terms of this Lease, regardless of the costs incurred by the Tenant to effect any assignment by operation of law or any proposed agreement. Consent to any one assignment by operation of law or any one proposed agreement shall not be deemed to be consent to any subsequent assignment by operation of law or any subsequent proposed agreement and shall not be deemed to be a waiver of any of the terms of this clause. If the Landlord exercises its right of termination under the terms of this paragraph, and if an assignment by operation of law or a proposed agreement applies to all of the Demised Premises, then the Landlord may terminate this Lease for all of the Demised Premises. If, however, an assignment by operation of law or a proposed agreement only applies to part of the Demised Premises, then the Landlord may either: (a) terminate this Lease for that part of the Demised Premises or (b) terminate this Lease for that part of the Demised Premises covered by the assignment by operation of law or the proposed agreement, in which case the amount of Basic Rent and Additional Rent shall be prorated. Any termination shall be effective (60) days from the date on which the Tenant receives the Landlord's notice of termination. If the Landlord terminates this Lease for all of the Demised Premises, then the Landlord may lease all or part of the Demised Premises and/or any other space directly to the proposed assignee, sublessee, or third party user. If the Landlord terminates this Lease for part of the Premises, then the Landlord may lease that part of the Demises Premises and/or space other than the Demised Premises directly to the proposed assignee, sublessee, or third party user. Tenant shall reimburse Landlord for any expenses that may be incurred by Landlord in connection with any proposed assignment or sublease, including, without limitation, the reasonable costs of making investigations as to the acceptability of a proposed assignee or subtenant and reasonable legal expenses incurred in connection with the granting of any requested consent to the assignment or sublessee. 13. COMPLIANCE WITH ISRA AND OTHER ENVIRONMENTAL LAWS. Tenant acknowledges the existence of environmental laws, rules and regulations, including but not limited to the provisions of ISRA, as hereinafter defined. tenant shall comply with any and all such laws, rules and regulations. tenant warrants to Landlord that Tenant's SIC Number will not subject the Demised Premises to ISRA applicability. Any change by Tenant to an operation with an SIC Number subject to ISRA shall require Landlord's written consent. Any such proposed change shall be sent in writing to Landlord sixty (60) days prior to the proposed change. 11 Landlord, at its sole option, may deny consent. Tenant hereby agrees to execute such documents as Landlord reasonably deems necessary and to make such applications as Landlord reasonably requires to assure compliance with ISRA. Tenant shall bear all costs and expenses incurred by Landlord associated with any required ISRA compliance resulting from Tenant's use of the Demised Premises including but not limited to legal fees, state agency fees, engineering fees, clean-up costs, filing fees and suretyship expenses. As used in this Lease, ISRA compliance shall include applications for determinations of nonapplicability by the appropriate governmental authority. The foregoing undertaking shall survive the termination or sooner expiration of the Lease and surrender of the Demised Premises and shall also survive sale, or lease of assignment of the Demised Premises by Landlord. the Tenant shall immediately provide the Landlord with copies of all correspondence, reports, notices, orders, findings, declarations and other materials pertinent to the Tenant's compliance and the requirements of the New Jersey Department of Environmental Protection ("NJDEP") under ISRA as they are issued or received by Tenant. At no time during this Lease may Tenant store, upon the premises, hazardous substances as that term may be defined from time to time by the New Jersey Department of Environmental Protection and Energy or, by the Federal Environmental Protection Agency pursuant to Section 311 of the "Federal Water Pollution Act, amendments of 1972" (33 U.S.C. Section 1321) and the list of toxic pollutants designated by Congress of the Environmental Protection Agency pursuant to Section 307 of that Act (33 U.S.C. Section 1317). Tenant agrees not to generate, store, manufacture, refine, transport, treat, dispose of, or otherwise permit to be present on or about the Demised Premises, any Hazardous Substances. As used herein, Hazardous Substances shall be defined as any "hazardous chemical," "hazardous substance" or similar term as defined in the Comprehensive Environmental Responsibility Compensation and Liability Act, as amended (42 U.S.C. 9601, et seq.), the New Jersey Environmental Cleanup Responsibility Act, as amended, N.J.S.A. 13:1K-6 et seq. and/or the Industrial Site Recovery Act ("ISRA"), the New Jersey Spill Compensation and Control Act, as amended, the New Jersey Spill Compensation and Control Act, as amended, N.J.S.A. 58:10-23.11b, et seq., any rules or regulations promulgated thereunder, or in any other applicable federal, state or local law, rule or regulation dealing with environmental protection. It is understood and agreed that the provisions contained in this Section shall be applicable notwithstanding the fact that any substance shall not be deemed to be a Hazardous Substance at the time of its use by the Tenant but shall thereafter be deemed to be a hazardous Substance. In the event Tenant fails to comply with ISRA as stated in this paragraph or any other governmental law as of the termination or sooner expiration of this Lease and as a consequence thereof Landlord is unable to rent the Demised Premises, then the Landlord shall treat Tenant as a holdover tenant in possession of the Demised Premises, until such time as Tenant complies with the foregoing. In such event, Tenant shall be responsible for the rental obligations as a month-to-month Tenant as provided in Paragraph 56 hereof. 12 Tenant agrees to indemnify and hold harmless the Landlord and each mortgagee and ground lessee of the Demised Premises from and against any and all liabilities, damages, claims, losses, judgments, causes of action, costs and expenses (including the reasonable fees and expenses of counsel)which may be incurred by the Landlord or any such mortgagee or ground lessee or threatened against the Landlord or such mortgagee and ground lessee, relating to or arising out of any breach by Tenant of the undertakings set forth in this paragraph, said indemnity to survive the Lease expiration or sooner termination. 14. DAMAGE BY FIRE OR OTHER CASUALTY (A) Substantial Damage. If the Demised Premises, Building or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. If as a result the Demised Premises or Building is so damaged that substantial alterations or reconstruction of the Demised Premises or Building shall, in Landlord's sole opinion, be required (whether or not the Demised Premises or Building shall have been damaged) or if any mortgagee of the Demised Premises or Building requires the proceeds payable be used to retire the mortgage debt, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of such damage. If this Lease is so terminated, rent shall be abated as of the date of such damage. (B) Restoration. If Landlord does not terminate this Lease pursuant to Subsection A of this Paragraph 14, Landlord shall, within seventy-five (75) days after receipt by Landlord of the proceeds payable in respect of such fire or other casualty, proceed with reasonable diligence to restore the Demised Premises or Building (subject to Force Majeure) to substantially the same condition in which it was immediately prior to the occurrence of the casualty. Landlord shall not be required to rebuild, repair or replace any part of Tenant's furniture, furnishings, fixtures or equipment. Such work shall include the scope of the work done by the Landlord when originally finishing the Demised Premises in accordance with the working drawings, provided the Landlord shall not be required to spend for such work an amount in excess of the proceeds actually received by the Landlord and allocable thereto. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant, resulting in any way from damage or repair thereof, except that, subject to the provisions in the next sentence, Landlord shall allow Tenant a fair diminution of Basic Rent and Additional Rent during the time and to the extent the premises are unfit for occupancy. If the Demised Premises or any portion of the Building be damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees or invitees, the Basic and Additional Rent hereunder shall not be diminished during repair of such damage. (C) Right of Cancellation by Tenant in the Event of a Casualty. If this Lease is not otherwise terminated as provided in Subparagraphs A and B above, then Landlord agrees that Landlord shall within twenty (20) days of the date of the casualty notify Tenant as to Landlord's estimate, as verified by Landlord's architect or engineer, of the amount of time reasonably anticipated to complete restoration after the casualty. If the estimated time of 13 completion of the restoration would exceed one (1) year, then Tenant shall have the right by written notice to Landlord to terminate this Lease, such written notice to be given by Tenant to Landlord within ten (10) days of the date of receipt by Tenant of Landlord's original notification of the estimated restoration time period. Failure of Tenant to cancel and terminate this Lease within the ten (10) day period as aforesaid shall be deemed a waiver of Tenant's rights under this Subparagraph C. 15. EMINENT DOMAIN. (A) The term "Total Taking" means the taking of the Fee Title or Landlord's master Leasehold Estate to so much of the Demised Premises or a portion of the Building in which the Demised Premises is located, by right of Eminent Domain or other authority of law or a voluntary transfer under the threat of the exercise of law or a voluntary transfer under the threat of the exercise of the right of Eminent Domain or other authority. The term "Partial Taking" means the taking of only a portion of the Demised Premises or a portion of the Building in which the Demised Premises is located which does not constitute a Total Taking. (B) If a Total Taking occurs during the Term of this Lease, this Lease will terminate as of the date of the Taking. The phrase "Date of Taking" means the date of taking actual physical possession by the condemning authority or such earlier date as the condemning authority gives notice that it is deemed to have taken possession. (C) If a Partial Taking occurs during the Term of this Lease, Landlord may cancel this Lease by written notice given within sixty (60) days after the date of the Taking and this Lease will terminate on the date of the Taking. If the Lease is not so terminated, this Lease will continue in full force and effect as to the remainder of the Demised Premises. The Basic Rent payable by Tenant under Paragraph 5(a) for the balance of the Term will be abated in the proportion that the leasable area of the Demised Premises immediately prior to such taking, and Landlord will make all necessary repairs or alterations to make the remaining Demised Premises a complete architectural unit. (D) If, this Lease has not been otherwise canceled as hereinabove provided, and, if a Partial Taking occurs of more than fifty (50%) percent of the Demised Premises during the term of this Lease, then, in such even, Tenant may cancel this Lease by written notice given within sixty (60) days after the date of the Taking of this Lease will terminate as of the date of the Taking. (E) All compensation awarded for any such taking or conveyance, whether for the whole or in part of the Demised Premises or otherwise, shall be the property of the Landlord, whether such damages shall be awarded as compensation for the diminution or total loss in value of the leasehold or of the fee of the Demised Premises, and Tenant hereby assigns to Landlord all of Tenant's rights, title and interest in and to any such compensation. Tenant shall be entitled to separately petition the condemning authority for a separate award for its moving expenses and trade fixtures, but only if such separate award will not diminish the amount of proceeds payable to 14 Landlord. (F) If this Lease is terminated pursuant to the provisions of this paragraph, then all rentals and all other charges payable by Tenant to Landlord under this Lease will be paid up to the date of the Taking and any rentals and other charges paid in advance and allocable to the period after the date of the Taking will be repaid to Tenant by Landlord. Landlord and Tenant will then be released from all further liability under this Lease, subject to Tenant's liability for compliance with Paragraph 13. 16. WAIVER OF LANDLORD'S LIABILITY. Tenant agrees, in addition to complying with Tenant's insurance requirements, to take such steps as it may deem necessary and adequate for the protection of itself and its agents, employees, invitees, and licensees, and the property of the foregoing by insurance, as a self-insurer or otherwise. As a consideration for the making of this Lease, Landlord shall not be liable for any injury to persons or damage to property located in the Demised Premises resulting from any cause whatsoever, including, without limitation, theft, fire, explosion, water, rain, snow, frost, steam, gas, electricity, heat, cold, dampness, sewers, odors, noise, leaks from any part of the Building or the roof, the bursting or leading of pipes, plumbing, electrical wiring and equipment, and fixtures of all kinds, or by any act or neglect of others, tenants or occupants of the Building. Tenant hereby waives all right of recovery which it might have against Landlord, Landlord's agents and employees for loss or damage to Tenant's furniture, Tenant Improvements, inventory, furnishings, fixtures, chattels and articles of personal property located on the Demised Premises, notwithstanding that such loss or damage may result from the negligence or fault of Landlord. 17. INSURANCE TO PROVIDED BY TENANT. The Tenant, at its sole cost, shall maintain: (A) Property insurance against all risk of loss or damage to Tenant's Improvements by fire and such other casualties as may be included in the broadest form of all risk property insurance, specifying, among other hazards, insurance against flood and earthquake, and against such other risks or hazards as Landlord from time to time may designate, in an amount equal to the full replacement costs; (B) Comprehensive general liability insurance under a policy in which Landlord and others designated by Landlord are named as insured, with limits of not less than ONE MILLION ($1,000,000.00) DOLLARS for personal injuries and death resulting therefrom, and ONE MILLION ($1,000,000.00) DOLLARS for damage to property. The minimum limits shall be increased periodically during the Lease term as may be required by Landlord. Tenant's liability policy shall also afford coverage for products coverage, liquor law coverage (if applicable) and if Tenant's business includes temporary custody of customers' personal property, third party liability coverage; (C) Insurance against claims of personal injury (including death) or property damage 15 arising out of or in connection with Tenant's construction activities, including without limitation, "all-risk builder's risk," worker's compensation and other insurance coverage as may be reasonably required by Landlord; (D) All insurance shall be effected under policies issued by insurers of recognized responsibility authorized to do business in the Stat of New Jersey and shall name Landlord and Tenant and any mortagee or ground lessor as their interest may appear, as the insured. Upon the execution of this Lease, Tenant shall deliver to Landlord a binder evidencing the required coverage and payment of premiums and shall deliver an original policy or certificate of insurance within fifteen (15) days of execution and thereafter not less than ten (10) days prior to the expiration dates of expiring policies, originals of the policies or certificates evidencing the same bearing notations evidencing the payment of premium shall be delivered by Tenant to Landlord except that whenever the Demised Premises shall be mortgaged by the Landlord, such policies of insurance shall be lodged with the holder of the mortgage lien and certified copies shall be delivered to the Landlord. Each such policy shall not be canceled or modified without at least ten (10) days prior to written notice to the Landlord and to any mortgagee named therein; (E) Upon the default of the Tenant in effecting any such insurance or procuring or delivering the policies therefor as directed by the Landlord, or in paying the premiums thereof and any and all charges incidental thereto when the same become payable, or in procuring and delivering to the Landlord renewals of expired insurance and/or pay the premiums and other charges incidental thereto, and any and all amounts so paid by Landlord shall have all rights and remedies including summary proceedings, with respect to the same as with respect to Rent; (F) Landlord makes no representation that the limits of liability specified to be carried by Tenant or Landlord, under the terms of this Lease are adequate to protect Tenant against loss of Tenant's business, improvements and personal property, and in the event Tenant believes that any such insurance coverage called for under this Lease is insufficient Tenant shall provide, at its own expense, such additional insurance as Tenant deems adequate. 18. WAIVER OF SUBROGATION. Notwithstanding the provisions of this paragraph of the Lease or any other provision of this Lease, in the event of any loss or damage to the Building, the Demised Premises and/or any contents (herein "property damage"), each party waives all claims against the other for any such loss or damage and each party shall look only to any insurance which it has obtained to protect against such loss (or in the case of Tenant, waives all claims against any tenant of the Building that has similarly waived claims against such Lessee) and each party shall obtain, for each policy of such insurance, provisions waiving any claims against the other party (and against any other tenant(s) in the Building that has waived subrogation against the Lessee) for loss or damage within the scope of such insurance. 19. INDEMNITY. Tenant is and shall be in exclusive control and possession of the Demised Premises as provided herein, and Landlord shall not in any event whatsoever be liable for any injury or damage to any property or to any person happening on or about the Demised 16 Premises, nor for any injury or damage to the Demised Premises, nor to any property of Tenant, or of any other person contained therein. Tenant shall indemnify and save Landlord harmless against and from all liabilities, claims, suits, fines, penalties, damages, losses, fees, costs, and expenses (including reasonable attorneys' fees) which may be imposed upon, incurred by or asserted against Landlord by reason of: (a) Any work or thing done in, on or about the Demised Premises or any part thereof; (b) Any use, occupation, condition, operation of the Demised Premises or any part thereof or of any street, alley, sidewalk, curb, vault, passageway, or space adjacent thereto by Tenant or any employees, licensees or invitees; (c) Any other act or omission on the part of Tenant or any subtenant or any employees, licensees or invitees; (d) Any accident injury (including death) or damage to any person or property occurring in, on or about the Demised Premises; or any part thereof or in, on or about any street, alley, sidewalk, curb, vault, passageway, or space adjacent thereto by Tenant or any employees, licensees or invitees; (e) Any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease. The provision of this Paragraph 19 shall survive the expiration or earlier termination of this Lease. 20. DEFAULT OF TENANT. Any of the following events shall be a default of Tenant: (A) Tenant's default in the payment of the due date of the Basic Rent and/or Additional Rent and/or any other payment required by tenant by this Lease, unless Tenant shall cure such default within ten (10) days after written notice thereof that such Basic Rent and/or Additional Rent and/or other payment required of Tenant hereunder is unpaid. (B) Tenant's default in the performance of any of the other covenants to Tenant or conditions of this Lease, unless Tenant wall cure such default within thirty (30) days after written notice of such default given by Landlord (or if any such default is of such nature that it cannot be completely cured within such period, then unless Tenant shall commence such curing within thirty (30) days after notice of such default given by Landlord and shall thereafter proceed with reasonable diligence and in good faith to cure such default). (C) Either: (i) the appointment of a receiver to take possession of all or substantially all of the assets of Tenant, (ii) a general assignment by Tenant for the benefit of creditors, (iii) any action taken or suffered by Tenant, voluntarily, under any insolvency or bankruptcy or reorganization act or law, or (iv) any order, judgment or decree entered, without the application, approval or consent of Tenant, by any Court of competent jurisdiction approving a petition seeking reorganization of Tenant, or appointing a custodian, receiver, trustee or liquidator of Tenant, or a substantial part of its assets and such order, judgment or decree continuing unstayed and in effect for any period of one hundred twenty (120) consecutive days or failing to have 17 dismissed an involuntary petition in bankruptcy filed against it within one hundred twenty (120) days of the filing thereof. 21. LANDLORD'S REMEDIES ON DEFAULT OF TENANT. Upon any default of Tenant as set forth in Paragraph 20 hereof, not cured within any notice and cure period provided, Landlord, at Landlord's sole option, may elect and enforce any one of the remedies hereinafter provided in this Paragraph 21; provided, however, that Landlord may, at Landlord's sole option, elect and enforce multiple remedies from among those remedies hereinafter provided to the extent such remedies are not inconsistent and are not legally mutually exclusive and to the extent Landlord deems the enforcement of such multiple remedies necessary or appropriate to indemnify and make Landlord whole from any loss or damage as a result of the default or defaults of Tenant; and provided further that Landlord deems necessary or appropriate to indemnify and make Landlord whole from any loss or damage as a result of the defaults of Tenant. Landlord shall have an affirmative duty to mitigate its damages. (A) Termination and Tenant's Liabilities. Landlord shall have the right to terminate this Lease forthwith, and upon notice of such termination given by Landlord to Tenant in accordance with the notice provisions of this Lease, Tenant's right to possession, use and enjoyment of the Demised Premises shall cease, and Tenant shall immediately quit and surrender the Demised Premises to Landlord, but Tenant shall remain liable to Landlord as hereinafter provided. Upon termination of this Lease, Landlord may at any time thereafter re-enter and resume possession of the Demised Premises by any lawful means and remove Tenant and/or other occupants and their goods and chattels. In any case where Landlord has recovered possession of the Demised Premises by reason of Tenant's default, Landlord may, at Landlord's option, occupy the Demised Premises or cause the Demised Premises to be redecorated, altered, divided, consolidated with other adjoining premises, or otherwise changed or prepared for reletting, and may relet the Demised Premises or any part thereof as agent of Tenant or otherwise, for a term or terms to expire prior to, at the same time as, or subsequent to, the original termination date of this Lease, at Landlord's sole option, and Landlord shall receive the rent therefor. Rent so received shall be applied first to the payment of such reasonable expenses as Landlord may have incurred in connection with the recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises, or otherwise changing or preparing for reletting, and the reletting, including brokerage and reasonable attorneys' fees, and then to the payment of damages in amounts equal to the lost Rent (Basic and Additional) and other payments required of Tenant hereunder and to the costs and expenses of performance of the other covenants of Tenant as herein provided. Tenant agrees, in any such case, whether or not Landlord has relet, to pay to Landlord damage equal to the Basic Rent and Additional Rent and other sums herein agreed to be paid by Tenant less rentals, if any, receded in connection with any reletting as hereinafter provided. Tenant shall not be entitled to any surplus accruing as a result of any such reletting. In reletting the Demised Premises as aforesaid, Landlord may grant rent concessions, and Tenant shall not be credited with the rent so waived. Neither Landlord's occupancy nor any such reletting shall constitute a surrender and acceptance or be deemed evidence thereof for Basic Rent, Additioanl Rent, other payments and damages as herein defined, or shall be construed as a release 18 of Tenant's liability hereunder. (B) Liquidated Damages. In any case where Landlord has recovered possession of the Demised Premises by reason of Tenant's default, hereunder landlord may at Landlord's option, and at any time thereafter, and without notice or other action by Landlord, and without prejudice to any other rights or remedies it might have hereunder or at law or equity, become entitled to recover from Tenant, as damages for such default, in addition to such other sums herein agreed to be paid by Tenant, to the date of re-entry, expiration and/or dispossession, an amount equal to the difference between (i) the sum of the Basic Rent and Additional Rent and other payments reserved in this Lease and required of Tenant hereunder from the date of such default to the Termination Date, and (ii) the then fair and reasonable rental value of the Demised Premises for the same period. Said damages shall become due and payable to Landlord immediately upon such breach of this Lease and without regard to whether this Lease shall have been terminated or not; and if this Lease be terminated or not; and if this Lease be terminated, without regard to the manner in which it is terminated. In the computation of such damage, the difference between any installments of Rent (Basic and Additional) thereafter becoming due and the fair and reasonable rental value, if less than the rent due under this Lease, of the Demised Premises for the period for which such installment was payable, shall be discounted to the date of such default at the rate of four (4%) percent per annum. (C) Specific Performance of Lease. If Tenant defaults in the observance or performance of any term to be observed or performed by Tenant under this Lease, Landlord may immediately or at any time thereafter and without notice to Tenant, perform the same for the account of Tenant and the expenses incurred with respect to such performance together with attorneys' fees and interest thereon shall be deemed Additional Rent hereunder and shall be paid by Tenant to Landlord on demand therefor. (D) Waiver of Right of Redemption. Tenant hereby waives all right of redemption to which Tenant or any person under Tenant, or any successor in interest to Tenant might be entitled by any law now or hereafter in force. (E) Other Remedies. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right or remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary dispossess proceedings, and other remedies were not provided for in this Lease. During the pendency of any proceedings brought by Landlord to recover possession by reason of default, Tenant shall continue all money payments required to be made to Landlord, and Landlord may accept such payments for use and occupancy of the Demised Premises. In such event, Tenant waives its right in such proceedings to claim as a defense that the receipt of such money payments by landlord constitutes a waiver by Landlord of such default. (F) Payment of Landlord's counsel Fees and Other Costs, Interest. Tenant shall pay the Landlord as Additional Rent, upon demand, Landlord's attorneys' fees and all other costs 19 and expenses of any proceedings instituted by reason of default of Tenant, together with any late charges which may apply for Tenant's failure to make such payments to Landlord when due. 22. SUBORDINATION OF LEASE. This lease shall, at Landlord's option, or at the option of any ground lessee or holder of any first mortgage or deed of trust (the "Mortgage"), be subject and subordinate to any such ground lease and to any such Mortgage which may now or hereafter affect the real property of which the Demised Premises form a part, and also to all renewals, modifications, consolidations and replacements of said ground lease(s) and said Mortgage. Although no instrument or act on the part of Tenant shall be necessary to effectuate such subordination, Tenant will, nevertheless, within five (5) days of receipt of same, execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holder of said Mortgage or by any of the Landlords under such ground lease(s). Tenant hereby appoints Landlord attorney-in-fact, irrevocably, to execute and deliver any such instrument for Tenant. If any ground lease(s) to which this Lease is subject terminates and any Mortgage superior to this Lease if foreclosed upon or otherwise sold, Tenant shall, on timely request, attorn to the owner of the reversion. 23. EASEMENTS. Tenant shall permit Landlord or its designees to erect, use, maintain and repair pipes, cables, conduits, plumbing, vents and wires, in, to and through the Demised Premises, as and to the extent that Landlord may now or hereafter deem to be necessary or appropriate for the proper operation and maintenance of the Building in which the Demised Premises are located or any other portion of the Building and/or Property. All such work shall be done, so far as practicable, in such manner as to avoid unreasonable interference with Tenant's use of the Demised Premises. 24. LANDLORD'S INABILITY TO PERFORM. This Lease and the obligation to pay Rent hereunder and perform all of the other terms to be performed by tenant hereunder shall not be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease. 25. NO PERSONAL LIABILITY OF LANDLORD. (a) Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Landlord, its constituent members (to include, but not be limited to, officers, directors, partners and trustees), their respective successors, assigns or any mortgagee in possession (for purposes of this paragraph, collectively referred to as "Landlord"), with respect to any of the terms, covenants and conditions of this Lease, Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of each and every remedy of Tenant in the event of any breach by Landlord of any of the terms, covenants and conditions of this Lease to be performed by Landlord, such exculpation of liability to be absolute and without exceptions whatsoever. (b) With respect to any provision of this Lease which provides that Tenant shall 20 obtain Landlord's prior consent or approval, Landlord may withhold such consent or approval for any reason at its sole discretion, unless the provision specifically states that the consent or approval will not be unreasonably withheld. Should Landlord unreasonably withhold its consent, Tenant's sole remedy shall be Tenant's right to seek specific performance and no money damages shall be sought or allowed. 26. SUBMISSION NOT AN OFFER TO LEASE. The submission of this Lease for examination does not constitute a reservation of, or option for, the Demised Premises, and this Lease becomes effective only upon execution and delivery thereof by Landlord and Tenant. 27. TENANT'S ESTOPPEL. Tenant shall from time to time, within ten (10) days of receipt of a request from Landlord, execute, acknowledge and deliver to Landlord, or to anyone Landlord shall designate, without charge to Landlord, a written statement of Tenant certifying that (i) the Lease is unmodified and in full force and effect as modified and listing the instruments of modification; (ii) the dates to which the rents and charges have been paid; (iii) that Tenant has not discharged or used and does not discharge or use any Hazardous Substances or waste at the Demised Premises or Building; and (iv) whether or not, to the best of Tenant's knowledge, Landlord is in default hereunder, and if so, specifying the nature of the default, and as to any other matters as may reasonably be so requested. It is intended that any such statement delivered pursuant to this Paragraph 27 may be relied upon by a prospective purchaser of Landlord's interest or mortgagee of Landlord's interest or of the fee or assignee or of any mortgage of Landlord's interest. 28. FINANCIAL AND OTHER INFORMATION. Tenant has furnished the Landlord with Profit and Loss Statements and Balance Sheets and related statements, certified by a Certified Public Accountant. Tenant further agrees that it will, upon request by Landlord or any present or future mortgagee of Landlord, furnish to the Landlord an audited Profit and Loss Statement and Balance Sheet prepared by a Certified Public Accountant for the immediately preceding fiscal year and any other information regarding Tenant as Landlord or any present or future mortgagee of Landlord may reasonably request. 29. LANDLORD'S RIGHT TO SHOW PREMISES. Throughout the Term of this Lease, Landlord shall have the right to enter the Demised Premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the Property, and during the last twelve (12) months of the Term for the purpose of showing the same to prospective tenants. Landlord agrees to notify Tenant, either by telephone or writing, of the need for entry for purposes of showing the Demised Premises. 30. QUIET ENJOYMENT. Landlord covenants that if and so long as Tenant pays the Basic Rent and Additional Rent and performs the covenants hereof, Tenant shall peaceably and quietly have hold and enjoy the Demised Premises for the term herein mentioned, subject to the provisions of this Lease and to any mortgage underlying this Lease or other agreements to which this Lease is subordinate. 21 31. NO ABATEMENT OF RENT. Except as otherwise specifically provided in this Lease, there shall be no abatement, diminution or reduction of Basic Rent, Additional Rent or other charges or other compensation due to the Landlord by Tenant or any person claiming under it under any circumstances, including, but not limited to, any inconvenience, discomfort, interruption of business or otherwise. 32. ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than any Rent payable hereunder shall be deemed to be other than a payment on account of the stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy provided herein or by law. 33. EFFECT OF WAIVERS. No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent or waiver, express or implied, by Landlord to or of any breach of any covenant, condition or duty of Tenant shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Landlord. 34. LEASE CONDITION. This Lease is expressly conditioned upon Landlord receiving the consent and approval of Landlord's mortgagee to its terms and provisions not later than thirty (30) days after its execution and delivery by both parties. Should said consent not be received within the aforesaid time period, Landlord may, at Landlord's sole option, cancel this Lease and return the first month's Basic Rent and Security Deposit to Tenant, which Tenant has deposited with Landlord upon execution of this Lease, and thereafter the parties shall have no further obligations to each other with respect to this Lease. 35. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE. Tenant agrees to give any mortgagees, by registered or certified mail, a copy of any notice of default served upon Landlord, provided that, prior to such notice, Tenant has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the name and address of such mortgagees. Tenant further agrees that, if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within the time, then such additional time as may be necessary, if within such thirty (30) days, any mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to commencement of foreclosure proceedings if necessary to effect such a cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 22 36. LANDLORD'S RESERVED RIGHT. Landlord and Tenant acknowledge that the Demised Premises are in a Building which is not open to the general public. Access to the Building is restricted to Landlord, Tenant, their agents, employees, and contractors and to their invited visitors. In the event of a labor dispute, including a strike, or picketing, informational or associational activities directed at Tenant or any other tenant, Landlord reserves the right unilaterally to alter Tenant's ingress and egress to the Building or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. 37. CORPORATE/PARTNERSHIP AUTHORITY. (A) If Tenant is a corporation, Tenant represents and warrants that this Lease, and the undersigned's execution of this Lease, has been duly authorized and approved by the board of directors. The undersigned officers and representatives of the corporation executing this Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and, within ten (10) days of execution hereof, Tenant will provide Landlord with a corporate resolution confirming the aforesaid. (B) If Tenant is a partnership, Tenant shall deliver to Landlord, at the time of execution of this Lease, a duly executed Consent of Partners confirming the authority of the General Partner(s) to execute this Lease, together with a certified copy of the filed Certificate of Partnership. Notwithstanding the foregoing, Tenant shall not be personally liable under the terms of this Lease and their personal assets shall not be subject to liens, changes, attachments or collections as a result of any actual or alleged default under the Lease. 38. RECORDING. Tenant covenants that it will not record this Lease without the prior written consent of Landlord. 39. NUMBER AND GENDER. The terms "Landlord" and "Tenant" wherever used herein shall be applicable to one or more persons, as the case may be, and the singular shall include the plural and neuter shall include the masculine and/or feminine, and if there be more than one, the obligations hereof shall be joint and several. 40. COMPLIANCE WITH RULES AND REGULATIONS. Tenant shall, at Tenant's sole cost and expense, observe and comply with the Rules and Regulations hereinafter set forth in Exhibit D, annexed hereto and made a part hereof, and with such further reasonable rules and regulations as Landlord may prescribe, or written notice to Tenant, for the safety, care and cleanliness of the Building and of the Park and the comfort, quiet and convenience of other occupants of the Building. 41. SECURITY DEPOSIT. Tenant shall deposit with Landlord on the signing of this Lease the Security Deposit, as set forth in Paragraph 1, for the full and faithful performance of 23 Tenant's obligations under this Lease, including, without limitation, the surrender of possession of the Demised Premises to Landlord as herein provided. If Landlord applies any part of said Security Deposit to cure any default of Tenant, Tenant shall, on demand, deposit with Landlord the amount so applied so that Landlord shall have the full Security Deposit on hand at all times during the Term. Landlord, in the event that the Demised Premises are sold, shall transfer and deliver the Security Deposit, as such, to the purchaser of the Demised Premises and shall notify Tenant thereof, and thereupon Landlord shall be discharged from any further liability in reference thereto. The Security Deposit, (less any portions thereof used, applied or retained by Landlord in accordance with the provisions of this Paragraph 41) which need not be placed in any separate account of Landlord, shall be returned to Tenant, without interest, within thirty (30) days after the expiration or sooner termination of this Lease without the fault of Tenant and after delivery of the entire Demised Premises to Landlord in accordance with the provisions of this Lease and satisfaction of an ISRA or other environmental requirements still pending at the time of expiration or termination of the Lease. Tenant covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and Landlord shall not be bound by any such assignment, encumbrance or attempt thereof. In the event of the insolvency of Tenant, or in the event of the entry of a bankruptcy judgment in any court against Tenant which is not discharged within thirty (30) days after entry, or in the event a petition is filed by or against Tenant under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then in such event, Landlord may require Tenant to deposit additional security, to be held by, Landlord pursuant to the terms of this Lease, in an amount which in Landlord's sole judgment would be sufficient to adequately assure Tenant's performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Tenant to deposit the security required by this paragraph, within ten (10) days after Landlord's written demand, shall constitute a material breach of this Lease by Tenant. Landlord further agrees that upon the Tenant's initial public offering and submission to Landlord of documentation confirming such initial public offering, the Security Deposit amount shall be reduced to three (3) months' Basic Rent. 42. RIGHT TO CURE TENANT'S BREACH. If Tenant breaches any covenant or condition of this Lease, Landlord may (but shall not be obligated to), on reasonable written notice to Tenant (except that no notice need be given in case of emergency), cure such breach at the expense of Tenant and the reasonable amount of all costs and expenses (including, without limitation, attorneys' fees, disbursements and costs), incurred by Landlord in so doing (whether paid by Landlord or not) shall be deemed Additional Rent payable on demand. 43. MECHANIC'S LIENS. Tenant covenants not to suffer or permit any mechanic's or materialmen's or other liens to be filed against Landlord's fee or leasehold interest in the Building or Demised Premises by reason of work, labor, services or materials supplied or claimed to have been supplied to Tenant or any contractor, subcontractor or any other party or person acting at the request of Tenant or anyone holding the Demised Premises or any part thereof or under the tenant, and Tenant shall, within (15) days after receiving notice of the filing thereof, cause the same to be discharged of record by payment, deposit, bond or Order of a Court of competent jurisdiction or otherwise. 24 44. EXTENSION OF TERM. (INTENTIONALLY OMITTED) 45. PARKING SPACES. Tenant's occupancy of the Demised Premises shall include the use of those Assigned parking spaces as enumerated in Paragraph 1. Tenant shall, upon request, promptly furnish the Landlord the license numbers of the cars operated by Tenant and its subtenants, licensees, invitees, concessionaires, officers and employees. All amounts due under the provisions of this paragraph shall be deemed to be Additional Rent. Landlord reserves the right to substitute assigned parking spaces at any time and from time to time during the Term as may be reasonably required by Landlord. Tenant shall not abandon or permit to be abandoned any vehicles on the Demised Premises or in any Common Facilities nor shall Tenant keep vehicles on the Demised Premises or in any Common Facilities which, in the Landlord's sole opinion, create a nuisance or hazard. Landlord shall not be responsible for any damage or theft of any vehicle in the parking area and shall not be required to keep parking spaces clear of unauthorized vehicles or to otherwise supervise the use of the parking area. 46. LANDLORD'S LIABILITY FOR LOSS OF PROPERTY Landlord shall not be liable for any loss of property from any cause whatsoever, including, but not limited to, theft or burglary, fire and other casualty, from the Demised Premises, and any such loss arising from the negligence of Landlord, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Demised Premises and/or the Building including the structural and non-structural portions thereof, and Tenant covenants and agrees to make no claim for any such loss at any time. 47. PARTIAL INVALIDITY/GOVERNING LAW. If any provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of the Lease shall be valid and enforceable to the fullest extent permitted by law. This Lease agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 48. BROKER. Tenant represents and warrants to Landlord that the Brokers, as defined in Paragraph 1, are the sole brokers with whom Tenant has negotiated in bringing about this Lease, and Tenant agrees to indemnify and hold Landlord and its mortgagee (s) harmless from any and all claims of other brokers and expenses in connection therewith arising out of or in connection with the negotiation of or the entering into this Lease by Landlord and Tenant. Landlord shall pay the Brokers' commission pursuant to a separate agreement with Burns Commercial Realty, Inc.; the Brokers shall not be deemed third-party beneficiaries of this provision. In no event shall Landlord's mortgagee (s) have any obligation to any broker involved in this transaction. In the event that no broker was involved as aforesaid, then Tenant represents and warrant to Landlord that no broker brought about this transaction, and Tenant agrees to indemnify and hold Landlord harmless from any and all claims of any broker arising out of or in connection with the negotiations of or the entering into of this Lease by Tenant and Landlord and to that end shall indemnify Landlord for all loss, costs or damage including reasonable attorneys' 25 fees arising therefrom. 49. COMPLETE AGREEMENT. This Lease constitutes the complete agreement and understanding between the parties hereto with respect to the matters set forth herein, and supersedes and terminates any and all prior negotiations or understandings between the parties hereto. No alteration, amendment or modification of any of the terms and provisions of this Lease shall be valid unless made pursuant to an instrument in writing signed by each of the parties hereto. No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promises(s). The parties do not intend to confer any benefit hereunder on any person, firm, corporation or other entity, other than the parties hereto. 50. PARAGRAPH HEADINGS. The paragraph headings in this Lease and position of its provision are intended for convenience only and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions. 51. LANDLORD'S LIEN. (INTENTIONALLY OMITTED) 52. NOTICE. Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if delivered personally or sent by registered mail or certified mail in a postpaid envelope, if to Tenant at the address as set forth in Paragraph 1, Attention: Manager; if to Landlord, at Landlord's address as set forth in Paragraph 1, Attention: Jeffrey Kessel or Steve Kessel; or to either at such address as Tenant or Landlord, respectively, may designate by written notice in accordance with this paragraph. Notice shall be deemed to have been duly given, if delivered personally, or delivery thereof, and if mailed, upon the 10th day after mailing thereto. 53. WAIVER OF TRIAL BY JURY. To the extent such waiver is permitted by law, the parties waive trial by jury in any action or proceeding brought in connection with this Lease or the Demised Premises. 54. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this Lease shall apply to, bind and inure to the benefit of Landlord and Tenant and their respective heirs, successors, legal representatives and assigns. It is understood that the term "Landlord" as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof or if a mortgagee shall take possession of the Premises, Landlord named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder accruing thereafter and Tenant shall, upon receipt of notice from the owner of the reversion, attorn thereto. 26 55. EXPIRATION OF TERM - RETURN OF DEMISED PREMISES IN GOOD CONDITION. On the last day or sooner termination of this Lease, Tenant shall quit and surrender the Demised Premises broom-clean, in good condition and repair, reasonable wear and tear excepted, together with all alterations, additions and improvements which may have been made in, on, or to the Demised Premises, except movable furniture or unattached movable trade fixtures put in at the sole expense of the Tenant (provided Tenant has not been in default under this Lease) provided, however, that Tenant shall ascertain from Landlord at least thirty (30) days before the end of the Term whether Landlord desires to have the Demised Premises, or any part thereof, restored to the condition in which it was originally delivered to Tenant prior to Landlord's Work, and if Landlord shall so desire then Tenant, at its own cost and expense, shall restore the same before the end of the Term. All trade fixtures, equipment, furniture, alterations, additions and improvements not so removed will conclusively be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant or to any other person and without obligation to account for them. Tenant will pay Landlord all expenses incurred in connection with Landlord's disposition of such property, including without limitation the cost of repairing any damage to the Building or Demised Premises caused by removal of such property. Tenant agrees upon termination of this Lease, the air conditioning, cooling systems, heating equipment and plumbing and electrical systems shall be in good, operable conditions, and all lighting fixtures shall be operable and, in the same location as when delivered to Tenant by Landlord and bulbs where necessary, replaced. Tenant shall also comply with the provision of Paragraph 14 prior to termination of this Lease. If the Demised Premises are not surrendered as and when aforesaid, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Demised Premises including, without limiting, any claims made by any succeeding occupant founded on such delay. Tenant's obligations under this paragraph shall survive the expiration or sooner termination of the Term. 56. HOLDOVER TENANCY. If Tenant holds possession of the Demised Premises after the Term of this Lease, at the option of Landlord, Tenant shall become a tenant from month-to-month, at a monthly basic rental equal to three (3) times the sum of (i) the Monthly Basic Rent payable for the last month of the Term, and (ii) one twelfth (1/12th) of Property Expense Rent. Such month-to-month tenancy shall continue until termination of intent to terminate such month-to-month tenancy. 57. ADDITIONAL COVENANTS. Tenant covenants and agrees that at all times during the Term it shall not at any time without first obtaining Landlord's prior written consent: (A) Not Change Exterior Architecture. Change (whether by alteration, replacement, rebuilding or otherwise) the exterior color and/or architectural treatment of the Demised Premises or of the Building in which the same is located, or any part thereof. (B) Not Misuse Plumbing Facilities. Use the plumbing facilities for any purpose other than that for which they were constructed, or dispose of any garbage or other foreign 27 substance therein, whether through the utilization of so-called "garbage disposal" or similar units or otherwise. (C) No Liens. Subject any fixtures, furnishings or equipment in or on the Demised Premises which are affixed to the realty, to any mortgages, liens, conditional sales agreements, security interests or encumbrances. (D) Not Damage the Demised Premises. Perform any act or carry on any practice which may damage, mar or deface the Demised Premises or any other part of the Building. (E) Not Exceed Electrical Load. Install, operate or maintain in the Demised Premises, any electrical equipment which does not bear approval of the underwriters' laboratories, or which would overload the electrical system therein, or any part thereof, beyond its reasonable capacity for proper and safe operation. (F) Not Permit Odors, etc. Suffer, allow or permit any offensive or obnoxious vibration, noise, odor or other undesirable effect to emanate from the Demised Premises, or any machine or other installation therein, or otherwise suffer, allow or permit the same to constitute a nuisance or otherwise unreasonably interfere with the safety, comfort or convenience of Landlord or any other occupants of the Building; upon notice by Landlord to Tenant that any of the aforesaid is occurring, Tenant shall forthwith (but in all events within five (5) days) remove or control the same. (G) Not Interfere with Insurance, Compliance, Improper Use. Use or occupy the Demised Premises or do or permit anything to be done thereon in any manner which shall prevent Landlord and/or other Tenants from obtaining at standard rates any insurance required or desired, or which would invalidate or increase the cost to Landlord of any existing insurance, or which might cause structural injury to the Building, or which would constitute a public or private nuisance or which would violate any present or future laws, regulations, ordinances or requirements (ordinary or extraordinary, foreseen or unforeseen) of the federal, state or municipal governments, or of any department, subdivisions, bureaus or offices thereof, or of any other governmental public or quasi-public authorities now existing or hereafter created having jurisdiction in the Demised Premises, or the Building of which the Demised Premises forms a part. If, at any time, and from time to time, as a result of, or in connection with, any failure by Tenant to comply with the foregoing or any act of omission or commission by Tenant, its employees, agents, contractors or licensees, or as a result of, or in connection with, the use to which the Demised) put (notwithstanding that such use may be for purposes hereinbefore permitted, or that such use may have been consented to by Landlord), the insurance rates applicable to the Demised Premises or the Building in which same are located, or to any other Demised Premises in said Building and/or to the contents in any or all of the aforesaid properties (including rent insurance relating thereto) shall be higher than that which would be applicable for the least hazardous type of occupancy legally permitted therein, Tenant agrees that it will pay to Landlord, on demand, as Additional Rent, such portion of the premiums for all fire insurance policies (including extended coverage) in force with respect to the aforesaid properties (including rent insurance relating 28 thereto) and the contents of any occupant thereof as shall be attributable to such higher rates. 58. MISCELLANEOUS. (A) Tenant warrants and represents that it will, at no time, install any underground storage tanks on the Demised Premises. A breach of this covenant shall be deemed a default under the Lease, and Landlord shall have the right to terminate the Lease upon the happening of such event. (B) Tenant shall, not without Landlord's prior written consent, install any window coverings, blinds, curtains, shades, except, as may be otherwise consented to by Landlord. Tenant acknowledges that Landlord intends to have all Tenants in the Building in which the Demised Premises are located use a uniform window treatment. (C) Tenant shall be responsible for removal of its own trash. Tenant shall engage the services of the refuse hauler, as designated by Landlord. Tenant acknowledges that for economies of scale, all Tenants in the Building in which the Demised Premises are located are to use the same refuse hauler. (D) Tenant shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installments shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's judgement, to absorb and prevent vibration, noise and annoyance. IN WITNESS WHEREOF, the parties hereto have set their hands and seals or caused these presents to be signed by their proper corporate officers, and their proper corporate seal to be hereto affixed, in the day and year first above written. WITNESS: JOLIN REALTY Landlord - ----------------------- By: /s/ Jeffrey A. Kessel ----------------------------------- Jeffrey A. Kessel ATTEST: TELLURIAN, INC., By: /s/ Stuart French --------------------------------- Stuart French 29 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1996 AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,761,186 1,975,386 134,362 115,000 287,851 3,125,602 274,411 69,235 4,498,379 1,181,751 0 0 0 30,025 3,286,603 4,498,379 819,380 819,380 284,007 284,007 1,273,224 0 111,333 (962,410) 0 (962,410) 0 0 0 (962,410) (.53) (.53)
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