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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM 10-SB
General Form of Registration of Securities of Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
TeraGLOBAL COMMUNICATIONS CORP.
(Name of Small Business Issuer in its charter)
Wyoming
(State or other jurisdiction of incorporation or organization)
33-0827963
(I.R.S. Employer Identification No.)
225 Broadway Street, Suite 1600
San Diego, California 92101
(Address of principal executive offices) (Zip Code)
(619) 231-0555
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of each class to be Name of each exchange on which
so registered each class is to be registered
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.001
(Title of Class)
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PART 1
BUSINESS
Overview
TeraGlobal Communications Corp., a Wyoming corporation (the
"Company") is a communications technology company with existing products and
products under development designed to fulfill diverse market needs. The
Company currently offers a range of video conferencing /collaboration
products for the consumer and business markets. In addition, the Company is
developing and introducing a set of communication technology products and
services that include the hardware, software, connectivity, network and
advanced compression technology necessary to deliver real time
point-to-multi-point interactive multimedia communication solutions including
high quality video, audio, virtual reality and traditional documents. The
Company has designed its products to address the growing demand for high
speed data transmission including voice, video, text and graphics. The
Company is in the process of developing product applications to address the
telemedicine, corporate distance training, distance education and corporate
and organizational communication markets.
The Company has developed and is in the process of developing
several products to address these markets, including the following:
- TeraConference(TM). A standard-based video conferencing solution
for business applications which provides high quality video
conferencing for any number of users.
- The POTS Box(TM). This product allows a user to turn an existing
touch-tone phone and television into an inexpensive video
conferencing system.
- TeraCom. A communication service currently under development
that "converges" voice, video and data networks. TeraCom
includes all of the hardware, software, and support necessary to
deliver the richest mix of audio, video, virtual reality and
traditional documents.
- TeraMedia(TM). A high-end version of TeraCom currently under
development that will allow video production professionals in
different locations to simultaneously view and edit full-motion
video.
- Fingerprint Scanner. The Company is completing development of a
USB based (Universal Serial Bus) fingerprint scanner for the
Power MacIntosh and the new iMac line of Apple Computers.
The Company's products are developed on a core base of proprietary and
licensed technology. This core technology can be applied to a variety of
applications. Initial aspects of the Company's technological developments
include the following:
- Advanced Video Compression. The Company licenses "Wavelet"
software which compresses and decompresses video in order to
effectively transport it in real time. Using a new ultra
high-speed microprocessor, the Company has enhanced the software
through proprietary modifications to allow the same amount of
data to be sent over less bandwidth.
- Advanced Processing Power. The Company has developed a
multiprocessor acceleration card which enhances the
capability of the new enhanced PowerPC processor from
Motorola to receive and display full-motion video,
transmit full-motion video, display high-resolution
graphics in real-time, and render 3D elements in real-time
simultaneously.
- Routerless Network. Through a unique combination of
off-the-shelf hardware, custom network interface modules, and
custom written software drivers, the Company has developed a
means to distribute data to large numbers of users without the
need for a router.
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- Communication Modules. The Communication Module permits sites
with different access -- ISDN, Frame Relay, ATM, HDSL, or cable
modem -- to be part of the same corporate wide network.
The goal of TeraCom's development effort is to bring to market a
complete communication solution for any size organization regardless of the
technical skill of its membership or their respective geographic locations. The
primary engineering goal of this effort is to deliver the first true convergence
technology. As a convergence technology TeraCom will deliver the functionality
in a single solution currently provided by telephony, video conferencing, cable
TV, Internet, data warehousing, document management, office automation, and
general purpose computing.
Markets and Target Customers
The Company's technology may be used in the marketplace in a number of
applications. Initially, the Company is focusing its development efforts on
applications for the distance learning and corporate training markets. The
Company has current plans to expand into the medical and film production
industries.
Distance Education. TeraCom will allow a teacher to conduct classes of
any number of students anywhere in the world. Each student will view and hear
the teacher as if the teacher were on television. The teacher, in turn, can view
whatever currently appears on the students' monitors, and can also view a
separate monitor that will be divided into separate segments. One segment may
show a student who has just transmitted a question; another may show a list of
all students currently attending the class session. Further, the teacher can
conduct a "pop quiz" by asking a question, to which the students will enter a
response. Those responses will immediately be assessed and graded with the
results appearing on a segment of the teacher's monitor. The teacher also
controls what the students will view, whether himself or herself, another
student with a comment or question, or a page from a student's paper which the
teacher edits on-screen. Importantly, the Company's security and assessment
technology will allow the teacher to verify that a student is in fact who he or
she claims to be, by periodically requiring each student to place his or her
finger on a touch-pad that will identify his or her fingerprint.
Corporate Training and Communication. A large corporation or
organization with an international sales staff will be able to train the entire
sales staff simultaneously in the same manner as teachers will conduct Distance
Learning, and the President who needs to communicate immediately with his or her
entire corporation will now be able to do so. Further, the corporation's
engineers (or attorneys, etc.) will be able to simultaneously view and edit
designs for a new product (or an agreement for an acquisition, etc.),
eliminating travel costs and more effectively communicating with staff.
Medical Industry. An expert in neurosurgery in New York will be able
to watch and hear a surgeon perform an operation in Texas immediately as it
occurs, as if the expert were "looking over the shoulder" of the operating
surgeon, while the operating surgeon listens to instructions from the expert, or
even pauses to look at a diagram or model projected onto his monitor.
Film Production Industry. A producer in California and a director
filming in Connecticut, for example, will be able to simultaneously view and
edit the full-motion video film recorded earlier in the day, while viewing and
talking (interactive video conferencing) to each other on another segment of
their monitors.
Convergence Industry Background
In recent years, there has been a dramatic increase in demand by
businesses and consumers for high-speed data access to the Internet and to
private corporate networks. This demand is being driven by the growth in
users who are accessing networks for a variety of applications, including
communications via the Internet and corporate intranets, electronics commerce
and telecommuting. These applications often require the transmission of
large, multimedia intensive files, necessitating the need for high-speed data
access services. According to projections made by International Data
Corporation in materials promoting its October 1998 conference, the number of
devices accessing the Internet will grow to over 500 million by 2002. This
will require
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vast increases in the efficiency of communications technology and develop a
great demand for higher capacity communications networks.
Advances in technology have also given rise to the demand for
"convergence", the integration of communications and computers. Converged
networks will combine voice, video and data, over a single communications
line. The ability to deliver voice, video and data over the same bandwidth
has been viewed as the inevitable evolution to the next step in
communications. It its October 1998 conference promotional materials,
International Data Corp. predicts that revenues in this market will grow to
$24 billion by 2002. The adoption of digital communications standards for
televisions, cameras and computers is the first step that will allow this to
be a reality.
To effect this transmission, different media are reduced to pieces
of data or "packets." The use of packets is bringing about a revolution of
change and opportunity, creating a fundamental shift in the way communication
networks are designed and operated. The significant hurdle to reaching a true
converged network has been the processing power and transmission speed
necessary to move vast quantities of packets in real time.
Existing architecture, hardware and software were not developed to
handle the volume of data necessary to deliver real time, full-motion video and
other high speed data delivery demands. Video conferencing products through
systems which lack adequate bandwidth or processing result in clipped and
fragmented imaging. Transmitting data such as movies in real time through the
Internet is not currently feasible because existing routers do not provide
uninterrupted flow of 30 frames per second broadcast quality video. Participants
with existing investment in current technology are taking steps to increase the
capacity of that infrastructure including the development of larger bandwidth,
faster switches, and enhanced routers in an effort to move data through networks
more rapidly. All of these will enhance the performance of existing systems, but
retain the structural limitations.
The TeraCom Solution
The Company is in the final stages of developing its "next
generation" product; a complete and supported solution for corporate
communications and training. Code named "TeraCom," the solution provides what
TeraGlobal management believes, based on its internal research and
communication with its potential customers, to be the first real-time
point-to-multi-point interactive multimedia based communications capability.
TeraCom users will be able to create, distribute, and manage their
information content and access a full range of communication services through
a single technology. The ability to use any media type such as audio, video,
graphics (still, 2D and 3D), animation, documents, virtual reality, etc. in
any combination is the central strength of the TeraCom product line. This
strength combined with the ability to communicate in real-time regardless of
geographic location and the number of simultaneous users represents the
technology convergence the rest of the industry has been trying to achieve.
Existing solutions using Digital Signal Processors (DSP) and video
compression technologies have not achieved the performance required of
integrating all media types in a seamless fashion in real-time. Because the
Company was able to approach this problem without a significant investment in
existing technology, inventory or architecture, it was able to craft a
solution which maximized performance and flexibility. The Company researched
the capabilities of all new processor technologies. Under a technology
non-disclosure relationship with Motorola, the Company determined that
Motorola's enhanced PowerPC microprocessor combination not only provided the
necessary processing power but that it surpassed all existing processor
technologies in performance, power consumption, flexibility and cost. The
Company also sought the best data compression technology available, and
enhanced that technology. The Company has already adapted its new Wavelet
video compression technology to operate on the enhanced PowerPC
microprocessor. As part of the TeraCom product line, the Company can bring to
market what it believes, based on its industry research, is the highest
quality video streaming capability in the industry.
When completely developed and implemented, the TeraCom system will
allow users within a university, governmental agency or corporation to be
connected to a secure private network. This network will be able to stream full
motion video in real time in two directions. In addition, the network can be
connected to the Internet or other
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existing architecture. Because the Company's products are software-based, they
are both powerful and easy to adapt and upgrade without costly changes to
computer hardware. Converged networks could redefine business communications in
the 21st century, creating competitive and productive advantages by enhancing
communication and collaboration among employees whether operating in the same
building or across continents.
Existing Products
TeraConference(TM). TeraConference(TM) is a hardware codec
(compression/decompression) technology developed as an existing video
conferencing solution for business applications. TeraConference(TM) conforms
with industry standards so that it can communicate with other manufacturers'
products. TeraConference(TM) uses both hardware and software to provide a
high quality video conferencing system. TeraConference(TM) can be configured
for any number of collaborators including individual desktop workstations,
fixed or portable systems for larger groups, or any other venue for large
audiences. The TeraConference(TM) system includes a 350 MHZ PC, a monitor
with built-in audio speakers, UPS, a composite color camera, image quality of
15 frames per second (CIF Standard) and 30 frames per second (QCIF Standard),
publishing software (cross platform), productivity software, the ability to
provide ATM connectivity, frame relay connectivity, Internet connectivity,
LAN connectivity, ISDN connectivity, and T1 connectivity.
TeraConference(TM) customers are also provided full-time technical
support through the Company's "up-and-running" guaranty, which includes an
on-line help desk and phone support in order to provide remote diagnostic and
repair capability for system and network connectivity. The following
customers have purchased and are currently using TeraConference(TM): Scripps
Clinics in multiple locations; the Orange County Board of Education; the
Saddleback Valley Unified School District in Orange County, California; the
Department of Justice; the Orange County Marine Institute; the New York City
School Board; Virginia Technical Institute, the Pentagon, GE Capital
Investments, World Circuit, a telecommunications company in Los Angeles,
California, and the Youthful Offender Program for the State of California,
Southwestern College in San Ysidro, California, Equitable in Los Angeles,
California, and Wheat International, Hawaii.
The POTS Box(TM). The POTS Box(TM) is an inexpensive video
conferencing system designed to transmit voice and images via traditional
phone lines. POTS stands for "plain old telephone service." This product is
directed to a segment of the market where image size, transfer speed and
resolution are not as critical as price. It is designed to allow anyone who
wants to combine video with a phone call, regardless of their technological
savvy, to use their existing touch-tone phone and TV to add a new dimension
to communications. The product works by connecting any television or computer
monitor with any touch-tone phone. Its main components are a digital camera,
video processing board and high performance modem. The product is easy to
install and use, allowing the Company to market it to home users and other
non-business consumers. The price is about $500. The Company has been a
reseller of this product, which was developed and is manufactured by an
unaffiliated third party.
Products Under Development
The following products are in development as discussed below.
Substantially all of the Company's operating costs, including research and
development costs, are incurred in the development of TeraCom, including the
Fingerprint Scanner (included in TeraCom), and TeraMedia(TM) (an enhanced
version of TeraCom).
TeraCom. TeraCom is the Company's "next generation" communication
service. The TeraCom service "converges" traditional voice, e-mail, video
conferencing, facsimile, and data networks. The service also includes all of
the hardware, software and support necessary for any size organization to
rapidly create, distribute, and manage content
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regardless of the subject matter. The service is delivered through a
client/server computer network called a TeraCom Service Cell. When TeraCom
service is ordered one or more custom designed TeraCom Service Cells are
constructed for the customer, creating a private and secure communication
infrastructure. By design, the TeraCom service provides a level of quality,
reliability, security, and functionality that the Internet and other
communication technologies cannot currently offer. The TeraCom service
provides the customer with a complete communication infrastructure and all
the tools necessary to effectively use it. The Company has extensively tested
prototypes of TeraCom, which is in the final stages of development. The
Company has received an initial purchase order from an early adopter and
plans to ship those units in February 1999.
Each TeraCom Service Cell is engineered to support up to several
thousand Clients communicating in an interactive fashion simultaneously. View a
Service Cell as a three-dimensional communication matrix that supports any
combination of point-to-point and point-to-multi-point communication sessions. A
Client with its camera, speakers, microphone, display(s), and powerful
processor(s) is designed to deliver the richest mix of audio, video, graphics,
virtual reality, documents, and data possible. As part of a single TeraCom
Service Cell an individual TeraCom Client can reside in any location worldwide,
with large quantities of other Clients in a classroom-like environment, or any
combination thereof. The TeraCom Service Cell is designed to guarantee access to
valuable content at all times. The Company's new fingerprint scanner allows a
customer to have any number of users per TeraCom Client, and makes logging onto
the TeraCom service a secure, reliable, fast, and simple process.
TeraCom is a packet-based communication technology. Any form of
information on any subject can be organized as a stream of digital packets and
sent to any number of recipients. This is the foundation of the ability to
deliver convergence. The appropriate combination of audio, video, text, and
graphics dramatically increases the effectiveness of any communication process.
TeraCom uses a next generation database architecture designed for
real-time communication networks. This architecture includes a mechanism for
keeping track of every user's actions at all times. This information is
called an "audit trail." Without an audit trail of what every user does and
what data they access there is no assessment, collaboration, or automated
administration. It is this new data structure implementation that facilitates
responsive interaction and subsequently real-time assessment. The Internet, a
20 year old technology designed to distribute reference and research
materials in non-real-time, is being patched with real-time functionality.
The current data structures of the Internet cannot inherently track data
access and usage.
TeraCom offers several content development tools that allow a
subject matter expert to focus on content development versus the complexity
of the software. Using the world's first "media processor", a TeraCom user
can freely mix audio, video, text, and graphics appropriately to create the
desired content or services. TeraCom includes a Digital Versatile Disc (DVD)
Read Only Memory (ROM) based library of audible and visual elements that can
be used during the Content development process. An example of the Content
elements includes high quality still images, 2D images, 3D images, audio
clips, etc. Each Client contains this library of data relating to the
formatting of content. Instead of actually transmitting formatting data, a
TeraCom user can instruct a Client to access the formatting data from its own
library. This facilitates the distribution of interactive multimedia Content
without actually consuming bandwidth and subjecting the User to unnecessary
delays. This also preserves communication bandwidth for real-time data like
audio and video.
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The TeraCom Server software knows how to rapidly assemble and
distribute data packets derived from user requests and interaction. It takes
great simplicity to be effective within a real-time packet distribution
infrastructure. Current server software cannot achieve the required efficiencies
established by the TeraCom requirements. In addition, the server software can be
used to customize data packets based on a user profile so that, for example,
different language versions of the same document can be transmitted in real time
to a number of users located worldwide. The TeraCom Server software also has
another key component, packet routing, eliminating the need for a router. The
purchase of a router represents the largest capital cost component of current
communication infrastructures. It also represents one more device handling data
packets contributing to existing inefficiencies. By eliminating the need for a
router TeraCom also eliminates the expensive skilled labor necessary to keep
them running. The TeraCom Client software is a user friendly, highly integrated
application that resides on a TeraCom Client computer.
TeraCom provides the Manager software to allow a subject matter expert
(teacher) to control a communication session. This session is live, full duplex,
point-to-multi-point in nature and includes live audio and video. The Manager
software lets the subject matter expert distribute prepared course content or
any other content desired. It is the Manager software that facilitates real-time
assessment as well as acting as the moderator during live collaboration. This
functionality is accomplished by analyzing the accumulated audit trail. For the
participants of the communication session, the Manager software facilitates the
electronic equivalent of raising your hand. The audio and video of a session
participant can be either broadcast to every user in the session or privately
transmitted to the subject matter expert (individual operating the TeraCom
Manager software). TeraCom provides a remote security software package due to
the necessity to deliver accredited course material, certification of skill
mastery, and to control access to sensitive Content. This security software
allows a security agent to validate, confirm, monitor, or limit in any way
desired the actions of any user on any TeraCom Service Cell.
Assessment is the most expensive and time-consuming aspect of
effective communication and the very first thing to be eliminated or neglected.
Assessment is simply the analysis of interaction and can now be highly
automated. The ability to automate the assessment process is the essence of the
TeraCom solution. By analyzing the accumulated audit trail the Administrator
software knows who has accessed what data, when, for how long, and what they did
with it. By hitting the clearly presented Help Desk button in any TeraCom
software package, the user is connected to a member of the TeraCom Help Desk
staff. The Help Desk staff member can either talk the user through the
resolution of their problem or take control of their computer and solve the
problem remotely.
TeraMedia(TM). TeraMedia(TM) is an enhanced version of TeraCom,
with all the functionality of TeraCom plus the capabilities that are specific
to the film production, post-production and commercial production companies.
With enhanced hardware and software, TeraMedia cost effectively and securely
transfers full motion, real-time, video and audio. The combination and
interoperability of the high bandwidth connectivity and the instantaneous,
interactive communications functionality of TeraMedia(TM) meets current
demand from the production and post-production industries. The Company is
currently working with industry participants to define their needs and the
final specifications of TeraMedia.
Fingerprint Scanner. The Company is in the final stages of
development of a USB based (Universal Serial Bus) Fingerprint Scanner for the
Power MacIntosh and the new iMac line of Apple Computers which it plans to
ship as part of the first shipment of TeraCom in February 1999. The current
labor cost to the industry of issuing, maintaining and re-issuing passwords
is growing. Through the use of the TeraCom Fingerprint Scanner, which
includes both hardware and software, network managers can provide a more
secure, economical, and intuitive means to control access. The TeraCom
Fingerprint Scanner can be used to grant prescribed levels of access or
restriction at any time in the communications process. There are a number of
current and potential applications for this product. In the corporate and
government setting method and database access can be limited for specified
individuals. Parents or businesses can restrict access to Internet sites.
Internet commerce transactions using credit cards can be validated through
fingerprint signatures. In the education arena, sign on times and testing can
be validated. In addition, multiple users can use a single computer without
having access to the other users' information. The product is expected to
ship in the first quarter of 1999. TeraGlobal will be using the TeraCom
Fingerprint Scanner for account management and accredited course content
delivery in its TeraCom product line.
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Technology
The Company's products are being developed on a core base of
proprietary and licensed technology including the following:
Advanced Video Compression. TeraCom includes new highly optimized
Wavelet software for the compression/decompression of video. Video places the
greatest demand on communication bandwidth. Low compression ratios for video
translate directly into a vastly more expensive communication infrastructure
in order to move data packets. By offering a higher quality of video that
simultaneously requires less bandwidth, TeraCom can deliver the best cost to
performance ratio in the industry. Moreover, because of the extent of data
compression, each TeraCom Client can send and receive the highest quality
video simultaneously to any number of users during a communication Session.
For a fraction of what it currently costs to broadcast one way video to a
large body of viewers TeraCom can provide two way interactive video.
Advanced Processing Power. For the TeraCom solution to deliver on
the claims of real-time performance, deal with multiple video streams, and
handle complex media types (3D graphics, virtual reality, and advanced
simulations) a next generation processor was required. After researching the
capabilities of all new processor technologies, the Company selected
Motorola's new enhanced PowerPC microprocessor on all of its computers.
Based on the Company's research, there is currently no other processor from
any other vendor that can deliver the performance of the enhanced PowerPC.
Routerless Network. TeraCom employs a new proprietary Server
architecture to deliver data to TeraCom Clients. The Server uses a unique
routerless design and takes advantage of the processing power of the new
enhanced PowerPC microprocessor from Motorola. Each Server is responsible for
a finite number of Clients. This gives each Client access to greater
responsiveness in comparison to overloaded Internet servers. Due to the low
cost per Server it is feasible to put more than one Server on line for each
group of Clients. Eliminating the router eliminates a majority of the capital
cost to build a network, reduces complexity, and lowers operational labor
costs. By using a high-speed communication backbone (like ATM) to connect the
Servers, in combination with the TeraCom Server software, a cluster of
Servers looks like a single high performance Server to the TeraCom Clients.
However, each user has more processing power dedicated to delivering them
data packets as well as dramatically greater reliability through redundancy.
An even higher level of savings is achieved by dramatically reducing the
number of long distance call charges. This is accomplished by physically
placing Servers from the cluster within a local calling area concentration of
TeraCom Clients.
Communication Modules. TeraCom is designed to service a user in any
location. To address this issue, the Company abstracted the communication layer
so that a TeraCom Client computer can use any communication technology that can
deliver a stream of data packets whether modem, ISDN, ATM or frame relay. The
abstraction is delivered by using a proprietary communication module that
connects to a TeraCom client via full-duplex 100 Base-T ethernet connection. The
Company is developing a complete array of Communication Modules that interface
with all known communication standards. This concept also protects the User from
planned obsolescence. When a cheaper and faster means of communication becomes
available in a User's location their communication module can be exchanged. The
User does not need a new computer or new software and they do not have to learn
new features. The TeraCom User receives better performance at a lower cost and
does not get subjected to a complicated upgrade process. To upgrade, the User
unplugs the old Communication Module and plugs in the new unit. For example, in
addition to supporting all traditional video formats and standards, TeraCom will
take advantage of a new digital video standards as they are developed. The
current NTSC video format is limited to 525 lines of video at a specified
refresh rate. Eventually TeraCom will support High Definition Television (HDTV)
transmission, the next video transmission standard.
Optimized Computer Architecture. TeraCom supports the ability for the
Client communication terminal to record both the incoming and outgoing streams
of data packets. In this situation, an outgoing video stream and an incoming
video stream are being recorded simultaneously while these respective streams
are being compressed and decompressed. If desired, both video streams are also
being viewed on the local computer display. All of this must take place while
providing a responsive User interface. The User may be participating in a
Session that may be rendering
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3D elements, displaying a virtual reality scene, or while participating in an
advanced simulation. Current computer architectures cannot move anywhere near
this much data simultaneously. Through a multiple phase development effort,
TeraCom computers will achieve the required data throughput capacity. This
includes a wider PCI bus, FireWire video, multiprocessor card with FireWire, and
a number of other optimizations.
Platform Neutral. The TeraCom communication terminal can run all major
operating systems allowing any popular application to be run. A TeraCom
communication terminal can connect to all major communication networks at the
same time participating in a TeraCom communication Session. A TeraCom
communication terminal can support a connection to all standards based video
conferencing products. Each TeraCom communication terminal has the necessary
software to convert all major file formats. Each TeraCom communication terminal
can import/export all major audio, video, and graphic formats. In essence,
TeraCom can protect a customer from losing a past investment in technology and
software while supporting an entirely new set of critical communication
capabilities.
Objective
The goal of TeraCom's development effort is to bring to market a
complete communication solution for any size organization regardless of the
technical skill of its membership or their respective geographic locations. The
primary engineering goal of this effort is to deliver the first true convergence
technology. As a convergence technology TeraCom will deliver the functionality
in a single solution currently provided by telephony, video conferencing, cable
TV, Internet, data warehousing, document management, office automation, and
general purpose computing.
Strategy
The Company's strategy for reaching its objectives over the short run
includes the following elements:
(1) Develop a high quality technologically advanced multimedia
convergence technology and service that provides maximum performance and
flexibility to customers.
(2) Leverage strategic alliances with product and service suppliers
whose products or services represent the best of class to concentrate resources
on the Company's core development expertise.
(3) Establish relationships with high-end customers who will benefit
from the Company's technology and will have the resources to assist in the
development of communication solutions to address an industry's needs.
(4) Maintain a network-based communication solution that is fully
supported and provides reliable access.
Research and Development
Research and development activity continues to be the focal point
of the Company and the catalyst and engine behind the Company's success and
ability to achieve its business plan objectives. Research and development is
focused primarily on the TeraCom product (including the Fingerprint Scanner)
and its enhanced version, TeraMedia. The research and development functions
of the Company are performed by a combination of interdisciplinary talent
that is utilized throughout the Company's technical operations. Approximately
15 individuals, with a combined total of more than 200 years of related
experience, collaborate in product development activities, including
electrical, mechanical and material engineers and quality assurance support.
Key elements of the Company's research and development strategy include:
Product Flexibility. The Company seeks to implement product
modifications and enhancements in order to meet the needs of
particular customers and markets. For example, based in part on
feedback from early adopters, TeraCom will be modified to meet the
distinct requirements of both the movie production industry and the
medical industry.
Use of Industry Standard Components. The Company's design philosophy
emphasizes the use of industry standard hardware and software
components whenever possible to reduce time to market, decrease the
cost of
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goods and lessen the risks inherent in new design. The Company
maximizes the use of third-party software for operating systems and
standard programs such as e-mail and internet browsers, allowing the
companies designers and engineers to concentrate on proprietary
software.
New Technologies. Whenever possible, the Company seeks to produce the
highest quality products by incorporating cutting-edge technology. For
example, through its strategic relationship with Motorola, Inc., the
Company has secured early access to the new enhanced PowerPC
microprocessor chip produced by Motorola. Access to such cutting edge
technology will compliment the Company's proprietary technology such
as its routerless server cluster.
Because of its stage of development and the nature of its products,
the Company is highly dependent on a number of experienced and qualified
technical personnel. There is currently a high demand for skilled programmers
and engineers. In order to continue to maintain its technological advantages,
the Company will have to be successful in attracting and retaining a strong
technical staff.
Strategic Alliances
The success of the Company is, and will continue to be, dependent in
part upon a number of strategic relationships. At present, the Company has
established relationships with the following entities:
Apple Computer. The Company is currently one of approximately
fifteen Proprietary Value Added Resellers ("VAR") for Apple Computer. In
addition to the standard VAR license and ability to buy Apple product
directly from Apple Computer, the Company's development staff enjoys a direct
line of communication with engineers at Apple Computer. Developers are not
generally permitted direct communication to engineers and must coordinate
their efforts through developer services. This type of relationship ensures
that the solution developed by the Company takes full advantage of Apple
Computer's technology. This also gives the Company engineers and programmers
early access to a variety of innovative new technologies. The current
relationship with Apple Computer also includes the ability to buy all
maintenance parts directly (from mother boards to power supplies). This
access to parts permits the Company to act as a full service provider in
servicing and maintaining the TeraCom solution. Apple Computer has orally
agreed to a program of joint press releases and to promote the TeraGlobal
solutions through their sales and distribution channels.
Motorola, Inc. The Company is an Alpha Test site for Motorola,
Inc.'s new enhanced PowerPC microprocessor. Under a standard non-disclosure
agreement, the Company works directly with Motorola in the development and
improvement of the microprocessor. This relationship makes the Company part
of the processor "bring up" team which is responsible for bringing this new
processor to market. This allows the Company's engineers to develop an
expertise and new product around what the Company believes to be the world's
fastest processor before potential competition even knows the processor
exists. This relationship also allows the Company's development team to talk
directly to the designers of the processor which ensures that the Company can
maximize the performance of the TeraCom product line. Traditionally, the
processor user is restricted to studying the available literature and must
work independently of the processor manufacturer. This relationship has
allowed the Company to buy processors and other key semiconductor parts
directly from Motorola in quantity. As with Apple Computer, Motorola has
orally agreed to a program of joint press releases and to promote the
TeraGlobal solutions through their sales and distribution channels.
Sprint Communications. The Company is a customer of Sprint for the
provision of bandwidth in delivering the TeraCom service. Sprint was chosen
based on the fact that it has the most comprehensive fiber optic broadband
network. Its ATM SONET ring topology is ideal for the TeraCom system. This
allows the Company's engineers to access the OC-3 backbone of Sprint's
network directly from TeraCom servers, thus eliminating the need for
expensive hardware components. The Company is confident that Sprint's
redundant network architecture will reach the vast majority of its intended
target market.
Ingram Micro. The Company has entered into a contract manufacturing
agreement with Ingram Micro, Inc. for the assembly, integration and
distribution of the Company's product line, as needed by the Company and paid
for through traditional invoicing procedures. Through this arrangement, the
Company secures immediate experienced and scalable manufacturing capacity as
well as access to Ingram Micro's distribution
9
<PAGE>
channels. Ingram Micro is the world leading wholesale distributor of technology
products and services and a leading provider of assembly and integration
services. Ingram Micro has a worldwide distribution market and the ability to
meet large TeraCom production requirements.
The amount and timing of resources which these strategic partners
devote to these activities will not be within the control of the Company. There
can be no assurance that strategic partners will perform their obligations as
expected or that any revenue will be derived from strategic arrangements. If any
of the Company's strategic partners breaches or terminates its agreement with
the Company or otherwise fails to conduct its collaborative activities in a
timely manner, the development, commercialization or marketing of the product
which is the subject of the agreement may be delayed and the Company may be
required to undertake unforeseen additional responsibilities or to devote
additional resources to development, commercialization or marketing of its
products. The inability to enter into strategic relationships or the failure of
a strategic partner to perform its obligations could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to negotiate acceptable
strategic agreements in the future, that the resulting relationships will be
successful or that the Company will continue to maintain or develop strategic
relationships or to replace strategic partners in the event any such
relationships are terminated. The Company's failure to maintain any strategic
relationship could materially and adversely affect the Company's business,
financial condition and results of operations.
Suppliers
The Company is currently dependent upon a few critical suppliers for
the success of its business. The Company's business strategy has been to combine
its proprietary technology and products with "best of class" technology and
products and design an integrated, seamless product that takes advantage of the
superior quality of its components. As a result, the Company has necessarily
placed heavy reliance on suppliers of key elements of the Company's products.
The TeraCom service to be provided relies on access to a
communications network. The Company has secured Sprint as its provider of this
network. A significant portion of the cost of maintaining the TeraCom service
will be connecting to the telecommunications network. While several companies
compete globally for market share of the worldwide telecommunications market,
the performance, reliability and profitability of the TeraCom service will
depend heavily on the quality of the network and the price of connectivity that
the Company is able to secure from its telecommunications provider.
The Company currently licenses its Wavelet compression module which is
a significant contribution to the Company's ability to compress data. The
Company has enhanced the basic module licensed by the Company, and owns those
modifications. However, the existing license requires the Company to pay a
royalty for each unit sold by the Company. Failure to pay such royalties when
due could result in the termination of the license. Any loss of that license
could result in delays in securing or developing alternative technology.
In addition, the Company's compression technology is dependent upon
its continued access to the newly developed enhanced PowerPC microprocessor
which it currently purchases from Motorola, Inc. The combination of the
Company's enhanced Wavelet module and the processing power of the enhanced
PowerPC chip are the engine behind the Company's data compression which makes
the products viable. Any extended interruption in the supply of any of the
key components currently obtained from a single or limited source could
affect the Company's ability to meet its scheduled product deliveries to
customers, and thus have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that, as the Company's demand for such parts
and supplies increase, the Company or its manufacturers will be able to obtain
such parts and supplies in a timely manner in the future. In addition, financial
or other difficulties facing such suppliers or significant worldwide demand for
such components could adversely affect the availability of such components. If
the Company or its manufacturers were unable to obtain a sufficient supply of
components from their current sources, the Company could experience difficulties
in obtaining alternative sources or
10
<PAGE>
in altering product designs to use alternative components. Resulting delays or
reductions in product shipments could damage customer relationships and could
adversely affect the Company's business, financial condition or results of
operations. Further, the Company may also be subject to increases in component
costs, which could also have a material adverse effect on its gross margin or
results of operations.
Manufacturing
The Company's initial prototype requirements for the TeraCom product
will be manufactured in-house. Prototypes of certain system components will
be manufactured by outside vendors. For production scale manufacturing, the
Company has established a relationship with Ingram Micro for the purposes of
assembly, integration and distribution of substantially all of the Company's
product line. This relationship will allow the Company to concentrate on its
core competencies of design and development and out source the assembly and
shipment of product to its customers. The relationship capitalizes on the
ISO-9002 assembly facilities and global proliferation of Ingram Micro's
distribution network. Ingram Micro Inc. is the world's leading wholesale
distributor of technology products and services, and a leading provider of
assembly and integration services. The relationship will shorten the
Company's time to market for the wide proliferation of its core product and
services, providing several of the required assembly and distribution
components for delivery of products.
Beyond initial production runs, the Company does not manufacture any
of its products, but instead relies on Ingram Micro and contract manufacturers
to assemble, test and package the Company's products. Any interruption in the
operations of Ingram Micro or other contract manufacturers would adversely
affect the Company's ability to meet its scheduled product deliveries to
customers. In addition, as the Company makes enhancements to its existing
products and introduces new products, there can be no assurance that these
manufacturers will be able to meet the technological or delivery requirements
for such products. These contract manufacturers have had only limited experience
manufacturing the Company's products. In addition, the Company's inability to
accurately forecast the actual demand for its products could result in supply,
manufacturing or testing capacity constraints. Such constraints could result in
delays in the delivery of the Company's products or the loss of existing or
potential customers, either of which could have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company or any third party manufacturer will be successful in
manufacturing the Company's products in commercial quantities or in sufficient
volumes to meet anticipated demand.
Sales and Marketing
The Company currently employs 2 full-time sales people to generate
orders and focus its marketing efforts for its current TeraConference(TM) and
POTS Box(TM) product lines.
Because TeraCom is a new and developing product, the Company has
chosen to focus its marketing efforts on the use of "early adopters" of this
product in order to refine the product and develop the visibility in the
marketplace. In addition to customer specific marketing efforts, the
Company's marketing activities include attendance at major industry trade
shows and conferences (e.g. AFCEA and MacWorld), the distribution of sales
and product literature and ongoing communications with its customers, the
press and industry analysts.
The Company has strategically chosen early adopters that are
influential and highly visible in their industries, and are in a position to
recommend company products to other prospective customers. The Company has
identified three early adopters in the corporate training, consulting
services and distance education markets. The Company is seeking early
adopters within the advertising, federal government and tele-medicine
customer categories for TeraCom and members of the entertainment industry for
its TeraMedia(TM) product.
The Company's primary business model is designed to ease the
transition for early adopters and all future customers to its communication
service. By pricing the service on a fixed monthly fee over a 3-year term with
annual renewals for connectivity, software upgrades and help desk, potential
customers do not have the large up-front capital costs associated with a large
communication network purchases. The monthly service fee will include recovery
of hardware, software with continuous upgrades, bandwidth, network management
and maintenance and help desk.
11
<PAGE>
By pricing on a monthly fee basis, potential customers can easily
compare their current expenditures on network maintenance, connectivity
bandwidth, software upgrades and initial hardware capital costs and hardware
maintenance and upgrade costs to TeraCom's total cost. In addition TeraCom will
have added functionality that existing products cannot offer, such as real-time
two-way video conferencing, fully integrated multimedia communications,
real-time assessment, complete audit trail, completely network security, 24/7
interactive help desk, point to point communications and point to multi point
communications.
TeraGlobal has not simply chosen these early adopters for their
visibility and market potential. They are also the ideal candidates to assist
the Company in achieving their long-term marketing goals for the product and
TeraCom's future product evolutions. As all communication services new products
and services need to win market acceptance through an often-traveled road. First
high-end business productivity applications where the economic benefits outweigh
any premium in cost over existing systems. Second the use of the service will
expand within the early adopters after proving its functionality, competitive
advantage and overall cost savings through productivity gains. By completing
these steps the Company will have the additional information necessary to market
TeraCom to a wider audience. Until then the Company's focus is on the chosen and
additional early adopters as it will be easier to increase their usage of the
product and increase sales than to expand distribution. In addition, the current
and potential early adopters of TeraCom have significant market presence and on
their own can generate significant revenues for the Company.
Customer Support
In addition to ongoing client prospecting and product
demonstrations through direct sales, one of the most cost-effective sales
tools for the Company's current TeraConference(TM) systems is a satisfied
customer. The Company's customers will generally require significant support
and training with respect to the Company's products, particularly in the
initial deployment and implementation stage. The Company currently employs 2
full-time personnel to provide such support, via telephone, teleconference or
on-site visits, and anticipates hiring additional staff as its customer base
grows. Next to product quality and ease of use, the Company will always place
customer satisfaction and technical support as its highest marketing
priorities. However, the Company has limited experience with widespread
deployment of its products to a diverse customer base, and there can be no
assurance that it will have adequate personnel to provide the levels of
support that its customers may require during initial product deployment or
on an ongoing basis. An inability to provide sufficient support to its
customers could delay or prevent the successful deployment of the Company's
products. Failure to provide adequate support could have an adverse impact on
the Company's reputation and relationship with its customers, could prevent
the Company from gaining new customers and could have a material adverse
effect on the Company's business, financial condition or results of
operations.
Competition
The telecommunications, multimedia and convergence industry is highly
competitive, continually evolving and subject to rapid technological change. The
Company believes that it must remain competitive with regard to each of the
following factors in order to be successful: price, proprietary technology and
network engineering, product features and enhancements (including improvements
in product performance, reliability, size, compatibility and scalability),
breadth of product lines, product ease of deployment, sales and distribution
capability and technical support and service. Several significant companies are
seeking to deliver high volume data transmission through different alternatives.
These include efforts to increase bandwidth by installing more fiber optic
lines, increasing the efficiency of existing router-based server networks,
compressing data, and dividing bandwidth into smaller increments. Competitors
seeking to address these issues include AT&T, Microsoft, Intel, Cisco Systems,
Inc., Lucent Technologies, 3Com, Nortel, Net Rythyms, Tut Systems and others.
Substantially all of these companies have greater distribution channels, longer
tradition and greater financial resources than the Company. Furthermore, such
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
manufacturing, distribution and support capabilities to compete successfully.
12
<PAGE>
Intellectual Property
The Company's success and ability to compete is dependent in part
upon its proprietary technology. The Company relies on a combination of
patent, copyright and trade secret laws and non-disclosure agreements to
protect its proprietary technology. The Company currently has a United States
patent application pending which covers a substantial portion of the
Company's TeraCom Service Cell and network technology. The Company may seek
to file a number of patents emanating from this original application to
expand the scope of patent coverage. The Company does not currently have
patents relating to any of its products. There can be no assurance that
patents will be issued with respect to pending or future patent applications
or that the Company's patents will be upheld as valid or will prevent the
development of competitive products. The Company has filed trademark
applications with the PTO to register the names "TeraGlobal(TM),"
"TeraConference(TM),""TeraMedia(TM)" and "The POTS Box(TM)."
The Company also seeks to protect its intellectual property rights by
limiting access to the distribution of its software, documentation and other
proprietary information. In addition, the Company enters into confidentiality
agreements with its employees and certain customers, vendors and strategic
partners. There can be no assurance that the steps taken by the Company in this
regard will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
The Company is also subject to the risk of adverse claims and
litigation alleging infringement of the intellectual property rights of others.
In this regard, there can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonably terms.
Real Property
The Company does not own any real property. The Company leases
approximately 12,000 square feet of office space in San Diego, California on
a month-to-month basis. In addition, the Company leases approximately 2,300
square feet in Logan, Utah for research and development under a one year
lease expiring December 31, 1999, and approximately 1,500 square feet in
Vancouver, Canada under a one year lease expiring June 30, 1999.
Government Approvals
The Company and its customers are subject to varying degrees of
federal, state and local regulation. The Company believes it is currently in
compliance with all such regulation. The jurisdiction of the Federal
Communications Commission ("FCC") extends to the communications industry,
including products such as those sold by the Company. The FCC has promulgated
regulations that, among other things, set installation and equipment
standards for communications systems. There can be no assurance that future
regulations adopted by the FCC or other regulatory bodies will not have a
material adverse effect on the Company. Further, regulation of the Company's
customers may adversely impact the Company's business, operating results and
financial condition. For example, FCC regulatory policies affecting the
availability of data and Internet services and other terms on which
telecommunications companies conduct their business, may impede the Company's
penetration of certain markets. Changes in, or the failure by the Company to
comply with, applicable domestic and international regulations could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the increasing demand for communications
systems has exerted pressure on regulatory bodies worldwide to adopt new
standards for such products and services, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this governmental approval process may cause the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's customers, which in turn may have a material adverse effect on
the sale of products by the Company to such customers.
In the United States, in addition to complying with FCC
regulations, the Company's products are required to meet certain safety
requirements. For example, the Company is required to have its products
certified by Underwriters Laboratory in order to meet federal requirements
relating to electrical appliances to be used inside the home, and its
products must be Network Equipment Building Standard ("NEBS") certified
before they may be deployed by certain customers. All of the Company's
products are currently certified by both Underwriters Laboratory and NEBS.
Outside of the United States, the Company's products are subject to the
regulatory requirements of each country in which the products are
manufactured or sold. These requirements are likely to vary widely, and there
can be no assurance that the Company will be able to obtain on a timely basis
or at all such regulatory approvals as may be required for the manufacture,
marketing and sale of its products. Any delay in or failure to obtain
13
<PAGE>
such approvals could have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company and its products may also be subject to U.S. and
foreign regulation regarding export restrictions and controls on technology
such as that incorporated into the Company's products. The Company does not
currently export any of its products overseas. The Company has entered into
Agreements with entities in the Peoples Republic of China to purchase the
TeraConference(TM) and POTS Box(TM) products. However, no products have been
sold under those contracts to date. The Company does not anticipate any
international sales in the next twelve months.
Risks Associated with Year 2000 Problem
During 1999, computer systems and/or software used by many
companies may need to be upgraded to accept four digit entries to distinguish
21st century dates from 20th century dates. As is the case with most other
companies using computers in their operations, the Company recognizes the
need to ensure that its operations will not be adversely impacted by
software and/or system failures related to "Year 2000" noncompliance.
Within the past twelve months, the Company has been assessing and
upgrading components of its own internal computer and related information and
operations systems. Based on that assessment, the Company believes that its
existing computer systems and software for accounting and management
functions are all Year 2000 compliant. Further, the Company's existing
products are all Year 2000 compliant and contain four digit date codes. Based
on its assessment, the Company believes that neither the costs associated
with its Year 2000 compliance nor the consequences of incomplete or untimely
resolution of the Year 2000 problem by the Company will have a material
adverse effect on the Company's business, financial condition or results of
operations in any given year.
However, even if the internal systems of the Company are not
materially affected by the Year 2000 problem, the Company's business,
financial condition and results of operations could be materially adversely
affected by disruption in the operation of enterprises with which the Company
interacts. The Company currently relies or plans to rely on Apple Computer,
Motorola, Inc., Ingram Micro, Inc. and Sprint Corp. in connection with the
design, manufacture, distribution and operation of the TeraCom product. Each
of these entities is a public company that files reports with the Securities
and Exchange Commission regarding Year 2000 compliance. Based on these
reports, the Company believes the status of these entities with regard to
Year 2000 compliance to be as set forth below.
Apple Computer. The TeraCom product is based on a computer supplied
by Apple Computer. While Apple's computers and operating systems have been
Year 2000 compliant, any interruption in manufacturing the computers may
cause a significant interruption in the Company's sales. Interruptions in the
supply of computers to the Company may materially adversely affect the
Company's results of operations.
Motorola. The TeraCom product incorporates Motorola's new enhanced
Power PC microprocessor. Motorola has stated that it believes the
microprocessor is Year 2000 compliant. Further, Motorola has reported that it
does not expect significant interruption to its manufacturing capabilities
because of the failure of its manufacturing tools and equipment to be Year
2000 compliant. However, Motorola cannot guarantee its Year 2000 compliance
or that of its suppliers. Any interruption in the production of the
microprocessor may cause a significant interruption in the Company's sales.
Sprint Communications. The Company has chosen Sprint as its
preferred network supplier for its TeraCom Service. Sprint has reported that
it has developed a plan to achieve Year 2000 compliance of its business
systems in 1999. However, Sprint cannot guarantee its Year 2000 compliance or
that of its suppliers. While another company could be retained to supply
network capabilities, any interruption or failure of Sprint's network could
have a significant adverse effect on the Company's business.
Ingram Micro. The Company plans to rely on Ingram Micro for the
assembly and distribution of TeraCom. Ingram Micro has reported that it has
developed a comprehensive plan to achieve Year 2000 compliance of its
sensitive systems by the fall of 1999. However, Ingram Micro cannot guarantee
its Year 2000 compliance or that of its suppliers. While another company
could be retained to assemble and distribute TeraCom, any interruption in
Ingram Micro's assembly or distribution of TeraCom could have a significant
adverse effect on the Company's business.
Employees
The Company currently has approximately 31 full-time employees,
including 11 in administration, 2 in technical support, 15 in product
development, and 3 in sales and marketing. None of the Company's employees
is represented by an organized labor union. The Company believes its
relationship with its employees is very good and the Company has never
experienced an employee related work stoppage. The Company will need to hire
and retain highly-qualified experienced technical and select management
personnel in order to execute its business plan, complete product development
and maintain technical advantages over competitors in the marketplace.
Competition for skilled engineers has become intense over recent years, and
no assurances can be given that the Company will be able to locate and hire
such personnel, or that, if hired, the Company will continue to be able to
pay the higher salaries necessary to retain such skilled employees.
Corporate History and Acquisitions
The Company's predecessor was formed in February 1997 under the
name Video Stream, Inc. under the Canadian Corporations Act. Video Stream,
Inc. was founded to perform research and development on various connectivity
solutions and went on to develop specialty communications technology hardware
and services. In October 1997, Video Stream, Inc. was merged with and into
Triple ""D'' Court, a Wyoming corporation, with the shareholders of Video
Stream, Inc. gaining control of the combined entity. Triple ""D'' Court was
a publicly traded corporation, with no operations, whose shares were traded
on the NASDAQ OTC Bulletin Board. Following the consummation of the merger,
the surviving entity changed its name to Video Stream International, Inc.
Effective September 1998, the Company officially changed its name to
""TeraGlobal Communications Corp.''
TechnoVision Communications, Inc. (""TechnoVision'') was founded in
November of 1995 by David Fann, its President and a director of TechnoVision.
Pursuant to an exchange offer which concluded August 10, 1998, the Company
acquired 99.1% of the outstanding Common Stock of TechnoVision from its
stockholders on the basis of one share of the Company's stock for every two
shares of TechnoVision stock exchanged. Mr. Fann is an officer and director
of TechnoVision and was at the time of the Exchange Offer. Through this
acquisition, the Company gained TechnoVision's existing infrastructure,
including marketing and administration, with experience specifically in the
telecommunications and video conferencing fields. The Company also acquired a
base of existing products.
The Company acquired from Interactive Solutions Group, Inc. all of
the membership interests in ISG Acquisition, LLC, a Delaware limited
liability company wholly owned by Interactive Solutions Group, pursuant to a
Purchase Agreement in July 1998. ISG Acquisition LLC was capitalized
exclusively with certain intellectual property of Interactive Solutions
Group, Inc. related to the network and multimedia products and technologies.
The Company acquired the interest in ISG Acquisition in exchange for the
forgiveness of a loan of $160,000 and the assumption of liabilities of ISG
Acquisition up to $91,000, for a total purchase price of $251,000.
Interactive Solutions Group was formed on July 15, 1996 by Grant Holcomb, its
President. Mr. Holcomb is an officer and director of the Company, and was at
the time of the acquisition of Interactive Solutions Group. As a result of
the transaction, the Company acquired the goodwill and intellectual property
of Interactive Solutions Group.
In a series of transactions in October through mid-December 1998,
Design Analysis Associates, Inc., a Utah corporation, merged into TGCC
Acquisition, Inc., a wholly-owned subsidary of the Company. Before the merger
Design Analysis Associates consisted of two informal divisions: high
technology design engineering and the manufacture of water monitoring
products under the WATERLOG(TM) label. Pursuant to an Agreement and Plan of
Corporate Reorganization and Separation dated December 18, 1998, and
subsequent to the merger, the new subsidiary of the Company sold the assets
associated with the WATERLOG(TM) division including rights to the name
"Design Analysis," to the William I. Fletcher Family Trust, the sole
shareholder of Design Analysis Associates before the merger. As a result of
the merger and the subsequent sale of assets, the Company has acquired the
high technology design engineering business previously conducted by Design
Analysis Associates, including four engineers, intellectual property,
equipment, contract rights and cash, in exchange for 250,000 shares of common
stock of the Company.
Additional Information
The Company intends to provide an annual report to its security
holders, and to make quarterly reports available for inspection by its
security holders. The annual report will include audited financial statements.
The Company is filing this registration statement on a voluntary
basis in order to become a reporting company under the Securities Exchange
Act of 1934. The Company has elected to voluntarily become a reporting
company to provide assurances to existing and future stockholders that it
will provide current reports on its business and financial development. Upon
obtaining status as a reporting company, the Company intends to seek listing
on an exchange to improve the liquidity of the market for its common stock.
Upon completion of this registration, the Company will be subject
to the informational requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and, in accordance therewith, will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected at public reference
facilities of the Commission at Judiciary Plaza, 450 Fifth Street N.W.,
Washington D.C. 20549; Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; 7 World Trade Center, New
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York, New York, 10048; and 5670 Wilshire Boulevard, Los Angeles, California
90036. Copies of such material can be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street N.W.,
Washington, D.C. 20549 at prescribed rates. Documents filed electronically
via EDGAR may be viewed on the EDGAR website at http://www.sec.gov. The
Company's website address is http://www.teraglobal.com.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial data, except for the information
provided as of and for the nine months ended September 30, 1998, have been
derived from historical consolidated financial statements of the Company that
have been audited by Singer Lewak Greenbaum & Goldstein LLP, independent
auditors (the "Consolidated Financial Statements"). The historical financial
data provided as of and for the nine months ended September 30, 1998 have been
derived from the Company's unaudited internal consolidated interim financial
statements (the "Unaudited Internal Consolidated Interim Financial Statements,"
and together with the Consolidated Financial Statements, the "Financial
Statements"), but in the opinion of the Company's management contain all
adjustments, consisting only of normal recurring accruals, which are necessary
for a fair presentation of the information below.
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, 1997 September 30, 1998
-------------------------- -------------------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 27,705 500,052
Furniture and equipment, net 19,437 1,222,740
Total assets 58,024 17,297,850
Current liabilities 192,898 2,006,826
Total Shareholders' Equity (Deficit) (134,874) 13,457,803
</TABLE>
<TABLE>
<CAPTION>
Period from February Nine Months Ended
Statements of Operations Data: 7, 1997 (Inception) to September 30, 1998
December 31, 1997 (unaudited)
----------------------------- -----------------------
<S> <C> <C>
Sales -- 280,484
Cost of Sales -- 216,806
Operating Expenses:
Legal $ 67,463 189,684
General and administrative 130,237 1,407,936
Research and development, related parties 41,259 1,011,776
Consulting, related party 94,488 83,250
Selling -- 119,236
Total operating expenses 333,447 2,811,882
Loss from operations (333,447) (2,748,204)
Other income(expenses):
Interest income 754 894
Interest expense (3,601) (80,702)
Other income 759 -
Total other income (expense) (2,088) (79,808)
Net loss (355,535) (2,827,033)
Basic loss per common share (0.09) (0.25)
Weighted average common shares
outstanding 3,627,064 11,367,009
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the exception of historical matters, the matters discussed herein
are forward looking statements that involve risks and uncertainties. Forward
looking statements include, but are not limited to, statements concerning
anticipated trends in revenues and net income, the date of introduction or
completion of the Company's products, projections concerning operations and
available cash flow. The Company's actual results could differ materially from
the results discussed in such forward looking statements. The following
discussion of the Company's financial condition and results of operations should
be read in conjunction with the Company's financial statements and the related
notes thereto appearing elsewhere herein.
Overview
The Company is engaged in the development of communication
productivity solutions and multimedia (voice, video, image and data)
collaboration systems. The Company commenced operations in this business in
February 1997. Since that time, the Company has devoted substantially all of its
resources to the formation of its infrastructure and the research and
development of its products. The Company did not generate any revenues until
July 1998.
In July 1998, the Company acquired all of the membership interests
of ISG Acquisition LLC, and with that substantially all of the assets of
Interactive Solutions Group, Inc. for $251,000. In August 1998, the Company
completed a successful exchange offer acquiring 99% of the outstanding stock
of TechnoVision Communications, Inc. for an aggregate of 3,555,756 shares. In
transactions taking place from October through December 1998, the Company
completed the acquisition of Design Analysis Associates, Inc. in exchange for
an aggregate of 250,000 shares of stock. Each of these acquisitions was
accounted for on a purchase method of accounting.
The Company is currently receiving revenues from the sale of
TeraConference(TM) and The POTS Box(TM). The Company expects to begin
shipping units of its TeraCom product to early adopters in the first quarter
of 1999. Significant sales of TeraCom are not expected until the third
quarter of 1999 at the earliest. In addition, the Company expects initial
sales of its Fingerprint Scanner to commence in the first quarter of 1999.
Plan of Operations
Over the next twelve months, the Company intends to increase its
revenues by releasing its products under development to its target markets.
However, the Company will continue the research and development of its
products, increase the number of its employees by 40 or more, and expand its
facilities where necessary to meet product development and completion
deadlines. The Company anticipates spending $1,000,000 to $2,000,000 on
equipment for use in internal operations in the next twelve months.
The Company anticipates that it will incur operating losses in the
next six to nine months. The Company's lack of an operating history makes
predictions of future operating results difficult to ascertain. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as multi-media
communications. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model and the management of growth. To
address these risks, the Company must, among other things, obtain a customer
base, implement and successfully execute its business and marketing strategy,
continue to develop and upgrade its technology and products, provide superior
customer services and order fulfillment, respond to competitive developments,
and attract, retain and motivate qualified personnel. There can be no assurance
that the Company will be successful in addressing such risks, and the failure to
do so can have a material adverse effect on the Company's business prospects,
financial condition and results of operations.
The Company's cash reserves are sufficient to cover the Company's
operations for approximately ten months. Cash flow from operations is
expected to meet operating expenses during that period in time. The Company
hopes to begin generating sales in the fourth quarter of 1999.
The Company has not incurred, and does not anticipate incurring,
expenses in addressing Year 2000 compliance that would have any significant
effect on operating costs.
17
<PAGE>
Results of Operations
Period from February 7, 1997 (Inception) to December 31, 1997
The first year of operation for the Company achieved two main goals.
The formation of the Company's organization to pursue its business strategy and
achieving the public company status to assist in funding the Company's
objectives.
Sales. The Company experienced no sales in the period ended December
31, 1997.
General and Administrative. General and administrative, legal and
consulting expenses for the period from February 7 to December 31, 1997 were
$292,188, of which $94,488 was accrued to be paid to Paul Cox for his services
as President. Also included is $67,463 in legal expenses required for the
formation and initial financing of the Company.
Research and Development. Research and Development expenses were
$41,259 for the period from February 7 to December 31, 1997.
Nine Months Ended September 30, 1998 (Unaudited)
The first nine months of 1998 saw the Company dramatically increase
infrastructure and employees from three people at the beginning to 14 people by
June 30, 1998 and 25 by the period end. Nearly all of these employees were
engineers associated with the Company's research and development process.
Beginning in July 1998 and consummating August 1998, the Company acquired
substantially all of the common stock of TechnoVision Communications, Inc. The
results of operations for the period ended September 30, 1998 include the
operations of TechnoVision Communications, Inc. for the period from June 30 to
September 30, 1998.
Sales. Sales for the period ended September 30, 1998 were
$280,484, comprised principally of the sale of TeraConference(TM) product.
The Company anticipates that sales will increase dramatically in the third
and fourth quarter of 1999 as a result of the introduction of new products
such as the fingerprint Scanner and TeraCom and the enhancement of other
existing products.
Cost of Sales. Costs of sales for the period ended September 30, 1998
was $216,806. Cost of sales going forward will increase in proportion to any
increase in sales.
General and Administrative. General and administrative, legal and
consulting expenses for the nine months ending September 30, 1998 were
$1,680,870. This amount includes $525,264 in amortized goodwill resulting
from the acquisition of TechnoVision Communications, Inc. and ISG Acquisition
LLC. This reflects also the additional support that has been necessary for
the increased administrative activity in research and development and
administration of the public company status that was achieved late last year.
Management feels that this figure will continue to grow significantly in the
last quarter of the year as well as 1999 as a result of the acquisition of
TechnoVision and the additional resources necessary to prepare for the
introduction of the Company's products to the marketplace.
Research and Development. Research and development expenses grew to
$1,011,776 during the first nine months of 1998 from the $41,259 expensed in
fiscal 1997. This substantial increase indicates personnel and management's
focus in completing the development of the Company's TeraCom product. This
category will continue to be the priority of the Company and is expected to
continue to grow in the last quarter of 1998. Research and development
expenses will be higher in the last quarter as the engineering team was not
complete until the third month of 1998. In addition, the team continues to
grow as more development targets are identified and customers start to add on
specific product requirements for expected shipments.
18
<PAGE>
Selling. Selling expenditure for the period totaled $119,236. This
reflects the starting efforts of the Company in introducing the products into
the marketplace. This category will increase dramatically over the next six to
nine months as the Company rolls-out its complete product line.
Liquidity and Capital Resources
Since its inception, the Company has financed its formation and
operations primarily through the sale of equity securities and convertible
debt. During 1998, the Company completed the sale of 900,000 shares of its
common stock for $900,000, of which $90,000 was received before December 31,
1997. In May 1998, the Company raised an additional $150,000 upon the sale of
a convertible debenture. The debenture was converted into 100,000 shares of
common stock in October of 1998 with a forfeiture of interest payable. During
September of 1998 the Company received a share subscription for $74,375 and
issued convertible debentures totaling $850,000. Consequently, from inception
to September 1998, the Company had raised as an aggregate of $1,055,375 in
cash through share subscriptions net of costs and $1,000,000 in convertible
debentures. Subsequent to September 30, 1998 the Company received net
aggregate proceeds of $5,946,893 from the sale of additional securities.
As of September 30, 1998, the Company had cash and cash equivalents
totaling $500,052 and a working capital deficit of $(1,164,367). The Company
expects cash flows from operating activities to continue to be slightly negative
as increases in sales are offset by increases in general and administrative
expenses necessary to complete the Company's infrastructure and product
development and rollout.
In July 1998, the Company acquired ISG Acquisition LLC for
$251,000, including assumption of certain liabilities of which $43,800
remained unpaid at February 11, 1999. The Company expects to pay the balance
in full during the first quarter of 1999. During the period ended September
30, 1998, the Company acquired substantially all of the outstanding common
stock of TechnoVision Communications, Inc. TechnoVision Communications, Inc.
was operating at a loss, and is not expected to enhance operating income.
Effective November 1, 1998, the Company acquired Design Analysis Associates,
Inc., which had two core businesses: high technology design engineering and
the manufacture of water monitoring products under the WATERLOG(TM) label.
Pursuant to an agreement dated December 18, 1998, the Company sold the assets
associated with the WATERLOG(TM) division to the former shareholder of Design
Analysis Associates, Inc. The acquisition of Design Analysis Associates, Inc.
provided the Company with cash of approximately $375,000 and revenues from
the sale of WATERLOG(TM) products for the period from November 1, 1998 to
December 18, 1998. The Company does not expect the high tech design
engineering division to contribute significantly to cash flows over the next
six to twelve months.
Because of the Company's cash flow position, the Company has not had
any significant discussions with commercial lenders. Historically, the Company
has secured some financing through equipment lease financing. The Company may
seek additional equipment financing in the future provided cash flows are
adequate to service the lease payments. The Company has secured equipment lease
financing in the past from Alliance Leasing. Alliance Leasing is currently in
bankruptcy and under investigation by the SEC. The Company has been subpoenaed
for its records relating to its transactions with Alliance Leasing. The Company
is not presently a target of the investigation, and denies any wrongdoing in
connection with the Alliance Leasing transaction.
19
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of January 15, 1999 (a)
by each person who is known by the Company to own beneficially more than 5%
of the Company's Common Stock, (b) by each of the Company's directors, and
(c) by all officers and directors of the Company as a group. Except as
provided below, each person's address is c/o TeraGlobal Communications Corp.,
225 Broadway Street, San Diego, California 92101.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature of
Owner Beneficial Owner Percentage of Class
- ------------------------------------ ----------------------------- -----------------------------
<S> <C> <C>
Paul Cox 6,525,450 40.7%
Grant K. Holcomb 1,424,550(1) 8.7%
David Fann 1,300,000(1) 8.0%
Issa Nakhleh 61,850(2) 0.4%
All Executive Officers and
Directors (four persons) 9,313,850(3) 56.0%
</TABLE>
- ----------------
(1) Includes 300,000 shares issuable upon the exercise of outstanding stock
options.
(2) Includes 10,600 shares issuable upon the exercise of outstanding stock
options.
(3) Includes 610,600 shares issuable upon the exercise of outstanding stock
options.
MANAGEMENT
Directors , Executive Officers, Promoters and Control Persons
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- -------------- -------------------------------------
<S> <C> <C>
Paul Cox 35 Chairman of the Board and President
David Fann 44 Director and Chief Executive Officer
Grant Holcomb 39 Director, Chief Technical Officer and
Secretary
Issa Nakhleh 36 Chief Financial Officer
</TABLE>
Paul Cox has been Chairman of the Board and President of the
Company since its incorporation. He founded and became the President of ATI
Access Technologies Inc. in 1996 and Video Stream Inc. in February of 1997.
In 1995, Mr. Cox was the President and a shareholder of International Video
Conferencing, Inc., a provider of video conferencing facilities, and had
earlier been an Associate with Pierce Scraper, where he advised clients on
commercial investments. In 1994, he was a Senior Analyst with Colliers
International, a commercial real estate leasing and advisory firm. Prior to
1994, Mr. Cox practiced commercial and residential mortgage administration
with Canada Trust. Mr. Cox holds a B.A. in International Relations and
Economics from the University of British Columbia.
20
<PAGE>
David Fann is the Chief Executive Officer and a Director of the
Company since September 1998. He has been the President of TechnoVision,
Inc., a subsidiary of the Company, since Nov. 1995. From February 1995 to
October 1995, Mr. Fann served as Vice President of Sales and Marketing for
Quadraplex, a video conferencing company. He co-founded Totally Automated
Systems Communications in January 1993 and served as Vice President of that
company from January 1993 until January 1995. From January 1987 to December
1992, he served as Operations Officer for Networks, Inc. From January 1982 to
December 1986, Mr. Fann was Regional Manager for Famous Furniture Rentals.
Grant Holcomb has been a director and the Chief Technical Officer and
Secretary of the Company since December 1997. Mr. Holcomb was the founder and
President of Interactive Solution Group, Inc., where he developed user intraface
applications for some of the core technologies currently utilized by the
Company, from July 1996 until November of 1997. Mr. Holcomb worked as Vice
President of Research and Development at Multimedia Design Corporation from July
1991 to April 1996. He served in the United States Marine Corps as an Operations
and Commanding Officer in Operations Desert Shield and Desert Storm from August
1990 to April 1991. From August 1987 to August 1990, he served as an instructor
of Electrical Engineering and Digital Logic and Microprocessors at the U.S.
Naval Academy. Mr. Holcomb holds a Bachelor of Science degree in Electrical
Engineering from The Citadel and has completed his academic requirements for his
Masters of Science degree in Electrical Engineering from The Naval Postgraduate
School.
Issa Nakhleh has been the Chief Financial Officer of the Company
since June 1998. From November 1995 to May 1996, Mr. Nakhleh was a consultant
with European Acquisition Capital, a subsidiary of Enskildia Banken of
Sweden. From July 1995 until October 1995, he was associated with NatWest
Ventures, a subsidiary of the NatWest Banking Group, the second largest
venture capital company in the United Kingdom. With NatWest, he prepared a
detailed statistical analysis of 250 investments totaling $500 million. In
June 1995, Mr. Nakhleh obtained his MBA (Distinction) from the University of
Warwick, Coventry, England. From April 1992 to July 1994, he held an
associate position within a public accounting firm advising primarily on
corporate finance and corporate governance for public companies. From June
1990 to March 1992, Mr. Nakhleh served as Vice President, Finance and
Administration, for a video and audio storage products manufacturer. From
1987 to 1990, he served as controller for a lighting products manufacturer.
In 1989, Mr. Nakhleh obtained his professional accounting designation from
the Certified General Accountants Association of Canada.
All directors hold office until the next annual meeting of
stockholders and until their successors are elected. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed.
The compensation and benefits program of the Company is designed to
attract, retain and motivate employees to operate and manage the Company for the
best interests of its constituents.
Executive compensation is designed to provide incentives for those
senior members of management who bear responsibility for the Company's goals and
achievements. The compensation philosophy is based on a base salary, with
opportunity for significant bonuses to reward outstanding performance, and a
stock option program.
Executive Officer Compensation
The Company did not pay any of its officers or directors in excess of
$100,000 for the fiscal year ended December 31, 1997. Paul Cox, the Company's
Chief Executive Officer from October 31 through December 31, 1997 received cash
compensation of $94,488. He did not receive any other compensation.
Employment Agreements
The Company has entered into Employment Agreements with each of
Messrs. Paul Cox, David Fann and Grant Holcomb effective as of September 30,
1998. Pursuant to the Agreements, Paul Cox will serve as President of the
Company, David Fann will serve as Chief Executive Officer of the Company and
Grant Holcomb will serve as Chief
21
<PAGE>
Technology Officer of the Company. The Agreements provide for a base annual
salary of $162,000 per annum, or a higher amount as the Board of Directors may
determine.
In addition to base salary, Messrs. Fann, Cox and Holcomb are
eligible for bonuses under certain conditions. Both Messrs. Fann and Holcomb
are eligible for stock option grants under the Company's 1997 Stock Option
Plan and all other profit sharing or bonus plans generally available to
Company officers.
The Agreements expire on September 30, 2002. In the event the
executives are terminated by the Company without cause, the executives will
receive the salary remaining through the end of the term of the Employment
Agreement, and continuation of certain employee benefits.
1997 Stock Option Plan
The Company's 1997 Stock Option Plan (the "1997 Plan") authorizes the
Company to grant to its directors, officers and key employees qualified and
non-qualified stock options to purchase shares of the Company's Common Stock. At
September 30, 1998, 1,500,000 shares were reserved for issuance under the 1997
Plan of which 1,159,575 were subject to outstanding options and 340,825 remained
available for future grants. The Board of Directors or the Compensation
Committee of the Board of Directors (the "Committee") administers the 1997 Plan.
The Committee selects the recipients to whom options are granted and determines
the number of shares to be awarded. Options granted pursuant to the 1997 Plan
are exercisable at a price determined by the Committee at the time of the grant,
but in no event will the option price be lower than the fair market value of the
Common Stock on the date of the grant. Options become exercisable at such times
and in such installments (which may be cumulative) as the Committee provides in
the terms of each individual option agreement. In general, the Committee is
given broad discretion to issue options in exchange and to accept a wide variety
of consideration (including shares of Common Stock of the Company, promissory
notes, or unexercised options) in payment for the exercise price of stock
options.
Director Compensation
Directors currently receive no compensation for their services to the
Company as directors, but are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors.
Certain Relationships and Related Transactions
The Company's predecessor was formed in February 1997 under name
Video Stream, Inc. under the Canadian Corporations Act. Video Stream Inc. was
founded to perform research and development on various connectivity solutions
and went on to develop specialty communications technology hardware and
services. In October 1997, Video Stream, Inc. was merged with and into Triple
"D" Court, a Wyoming corporation, with the shareholders of Video Stream,
Inc., Paul Cox and Grant Holcomb, gaining control of the combined entity.
Triple "D" Court was a publicly traded shell corporation, with no operations,
whose shares were traded on the OTC Bulletin Board maintained by NASDAQ.
Following the consummation of the merger the surviving entity changed its
name to Video Stream International, Inc. Effective September 1998, the
Company officially changed its name to "TeraGlobal Communications Corp."
TechnoVision Communications, Inc. ("TechnoVision") was founded in
November of 1995 by David Fann, its President and a director of TechnoVision.
Pursuant to an exchange offer which concluded August 10, 1998, the Company
acquired 99.1% of the outstanding Common Stock of TechnoVision from its
stockholders on the basis of one share of the Company's stock for every two
shares of TechnoVision stock exchanged. Mr. Fann is an officer and director of
TechnoVision and was at the time of the Exchange Offer.
The Company acquired from Interactive Solutions Group, Inc. all of
the membership interests in ISG Acquisition, LLC, a Delaware limited
liability company wholly owned by Interactive Solutions Group pursuant to a
Purchase Agreement in July 1998. ISG Acquisition holds substantially all of
the intellectual property assets of Interactive Solutions Group
22
<PAGE>
related to the network and multimedia products and technologies. The interest
in ISG Acquisition was acquired by the Company in exchange for the
forgiveness of a loan of $160,000 and the assumption of liabilities of ISG
Acquisition up to $91,000, for a total purchase price of $251,000.
Interactive Solutions Group was formed on July 15, 1996 by Grant Holcomb, its
President. Mr. Holcomb is an officer and director of the Company, and was at
the time of the acquisition of Interactive Solutions Group.
During 1997 and 1998, Grant Holcomb, a current officer and director
of the Company, provided consulting services for the Company relating to
software development and hardware requirements in connection with the
development of the TeraCom product and related technologies. The Company paid
Mr. Holcomb $10,000 in the year ended December 31, 1997 and for the nine
month period ended September 30, 1998. In addition, Mr. Holcomb provided
consulting services with TechnoVision in connection with the development of
the TeraConference(TM) technology. TechnoVision paid Mr. Holcomb
approximately $30,000 in the year ended December 31, 1997 and $20,000 in the
six month period ended June 30, 1998. During 1998, TechnoVision loaned an
aggregate of $56,500 to Grant Holcomb. The loans are evidenced by promissory
notes, payable on or before June 1, 1999, bearing interest at 8% per annum.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of Common
Stock, $.001 par value, of which 15,210,356 were outstanding at January 15,
1999. At January 15, 1999 there were approximately 263 registered
shareholders, one of which is a clearing house holding the shares for a
number of beneficial holders. Holders of Common Stock are entitled to
dividends, pro rata, when, as and if declared by the Board of Directors out
of funds available therefor. Holders of Common Stock are entitled to cast one
vote for each share held at all stockholder meetings for all purposes,
including the election of directors. The holders of more than 50% of the
Common Stock issued and outstanding and entitled to vote, present in person
or by proxy, constitute a quorum at all meetings of stockholders. The vote of
the holders of a majority of Common Stock present at such a meeting will
decide any question brought before such meeting, except for certain actions
such as amendments to the Company's Articles of Incorporation, mergers or
dissolutions which require the vote of the holders of a majority of the
outstanding Common Stock. Upon liquidation or dissolution, the holder of each
outstanding share of Common Stock will be entitled to share equally in the
assets of the Company legally available for distribution to such stockholder
after payment of all liabilities. Holders of Common Stock are not granted any
preemptive, subscription, redemption rights or registration rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 100,000 shares of Preferred Stock,
$1.00 par value, of which no shares are currently outstanding. Holders of
Preferred Stock are not entitled to any voting rights. In all other respects,
the rights and preferences of the Preferred Stock are equivalent to those of the
Common Stock. The Company does not currently have any plans or arrangements
to issue any Preferred Stock.
23
<PAGE>
PART II
Market Price of Dividends All of The Registrant's Common Equity and Other
Shareholder Matters
The Company's Common Stock is traded on the OTC Bulletin Board
maintained by NASDAQ under the symbol "TGCC." The following table sets forth,
for the fiscal period indicated, the high and low closing bid prices for the
Common Stock as reported on the NASDAQ Bulletin Board. The quotations for the
Common Stock traded on the NASDAQ Bulletin Board may reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
---------------- -------------
<S> <C> <C>
Fiscal 1997
November 1, 1997 to December 31, 1997 1.42 1.30
Fiscal 1998
First Quarter 1.44 0.81
Second Quarter 6.63 1.03
Third Quarter 5.13 3.06
Fourth Quarter 4.75 3.00
Fiscal 1999
First Quarter to the date of this document 9.50 3.50
</TABLE>
Dividend Policy
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
Litigation
The Company has been named in a securities class action lawsuit
filed by two former TechnoVision shareholders on July 15, 1998 in Los Angeles
County Superior Court, case number SC053400. The Complaint names the Company,
TechnoVision, Grey Venture Capital, Inc. and certain present and former
officers and employees of each as defendants. The Complaint alleges that the
Company, TechnoVision and Grey Venture Capital, Inc. each conspired and
engaged in fraudulent and deceptive sales practices in connection with
TechnoVision's private placement of securities in an offering conducted by
Grey Venture Capital, Inc. from November 1997 through May 1998. TechnoVision
entered into a relationship with Grey Venture Capital, Inc. in 1997. Under
the terms of the relationship Grey Venture formed an investment partnership.
One-half of the proceeds raised by the investment partnership was invested in
TechnoVision Common Stock. TechnoVision terminated the relationship with Grey
Venture Capital, Inc. in May 1998. The Complaint as originally filed stated
causes of action for breach of fiduciary duties, intentional
misrepresentation and fraudulent concealment, negligent misrepresentation,
violation of California securities laws, unfair trade practices, negligence,
RICO violations conversion and conspiracy. The Company demurred to all causes
of action in the Complaint with the exception of negligent misrepresentation.
The demurrer was sustained without leave to amend as to the violation of
California securities laws, unfair trade practices and RICO violations,
causes of action, and sustained with leave to amend as to the remaining
causes of action. The Complaint was amended to state causes of action for
breach of fiduciary duty, intentional misrepresentation and fraudulent
concealment, negligent misrepresentation, conversion and conspiracy. In
addition, plaintiff's counsel has indicated that he will replead causes of
action for violation of California securities laws. The Company intends to
demurrer again with respect to substantially all of the remaining causes of
action. The Complaint seeks damages in an amount to be proved. The Company
denies any involvement or wrongdoing in connection with the private placement
and intends to vigorously defend the lawsuit.
24
<PAGE>
TechnoVision, along with David Fann its President, has been sued by
Darryl Spangler, a shareholder in TechnoVision for breach of contract,
misrepresentation and fraud, and breach of fiduciary duty. The Complaint,
originally filed in January 1998, has been amended twice and split into two
separate Complaints, stating causes of action for breach of fiduciary duty in
a derivative claim in one instance and breach of contract and fraud in the
second instance. The action is before the California Superior Court for the
County of San Diego under case numbers 717275 and 724427. The Complaint
arises out of a settlement agreement entered into between TechnoVision and
Mr. Spangler. Under the terms of the Settlement Agreement, Mr. Spangler was
given 750,000 shares of TechnoVision's Common Stock, which are subject to a
repurchase option in favor of TechnoVision. The Complaint alleges that
TechnoVision fraudulently induced Mr. Spangler to enter into the Settlement
Agreement. The Complaint seeks to invalidate the Settlement Agreement, cause
TechnoVision to issue to Mr. Spangler 2,000,000 shares of Common Stock,
invalidate the repurchase option and pay damages. The Company denies any
wrongdoing and intends to vigorously defend the lawsuit.
Changes in and Disagreements with Accountants
The Company has not had any changes in or disagreements with
Accountants since inception.
Recent Sales of Unregistered Securities
The Company was incorporated on August 13, 1987 in the state of
Wyoming with an initial share allocation of 55 shares. These shares have been
forward split twice. In March of 1994 these shares were forward split on a
ratio of 2000 for 1. This resulted in an outstanding share total of 110,000.
In July of 1994 another forward split on a ratio of 20 for 1 was completed
resulting in a total outstanding of 2,200,000.
In October of 1997, the Company issued 7,650,000 shares for the
acquisition of Video Stream, Inc., a Canadian Corporation in reliance on
Section 4(2) of the Securities Act of 1933 (the "Act"). These shares were
issued to the principals of Video Stream, Inc. in a share exchange. Paul Cox
and Grant Holcomb received 6,524,450 and 1,124,550 shares, respectively, in
exchange for their shareholdings in Video Stream, Inc.
In December of 1997, the Company completed a private placement for
500,000 shares to two unaffiliated third parties in reliance on Rule 504 of
Regulation D under the Act ("Rule 504"). The proceeds from this placement
were $100,000.
In June of 1998, the Company completed a private placement for
900,000 shares to four unaffiliated third parties in reliance on Rule 504.
The proceeds from this placement were $900,000.
In May of 1998, the Company issued a convertible debenture to an
unaffiliated third party accredited investor raising $150,000 in reliance on
Section 4(2) of the Act. The debenture is convertible into 100,000 shares.
The holder requested the conversion of this debenture and the Company
issued these shares in October 1998.
In August of 1998, the Company completed the acquisition of
TechnoVision Communications, Inc., a Georgia corporation, via a share
exchange in reliance on Rule 506 of Regulation D under the Act. All
TechnoVision shareholders were offered one share in the Company in exchange
for two shares in TechnoVision, except for a founding shareholder whom
accepted a earlier offer from the Company for his 2,000,000 shares in
TechnoVision. At closing on August 10, 1998, the Company had received by
tender 99.1% of the outstanding shares in TechnoVision from approximately 240
TechnoVision shareholders.
In September of 1998, the Company issued 17,500 shares of Common
Stock to a family member of David Fann, who was an accredited investor, for
$74,375 in reliance on Section 4(2) of the Act.
In transactions occurring in October and December of 1998, the
Company acquired Design Analysis Associates Inc of Logan Utah for 250,000
shares of the Company's Common Stock, paid to the sole shareholder of Design
Analysis Associates, the William I. Fletcher Family Trust, an accredited
investor, in reliance on Section 4(2) of the Act.
25
<PAGE>
In October of 1998, the Company completed the sale to an accredited
investor of a convertible debenture raising $475,000 in reliance on Section
4(2) of the Act. The term note is for 2 years and earns interest at 9%. The
conversion price is $4.00 per share.
In transactions in September of 1998 through January 1999 the
Company issued convertible debentures to 10 unaffiliated third parties raising
$675,000 in reliance on Section 4(2) of the Act. The note is for 2 years and
earns interest at 9%. The conversion price is $4.25 per share. Each investor
was an accredited investor.
In January and February 1999, the Company received $6,821,893 from
unaffiliated third parties in subscriptions for the issuance of 2,598,816
common shares in reliance on Rule 506. Each investor was an accredited
investor. Court Capital acted as placement agent for $5,327,201 of this
offering and received aggregate cash compensation of $106,544 and 81,176
shares of common stock of the Company.
During January 1999, the Company issued 27,100 common shares as a
result of the exercising of stock options by a former employee of the Company
at an exercise price of $1.50, raising $40,650.
Indemnification of Directors and Officers
Article VII of the Company's Bylaws provides that the Company shall
indemnify each of its directors against any claim or liability incurred by
the director by reason of his being a director of the Company, except for a
claim or liability arising from a director's own negligence or willful
misconduct.
Under the Wyoming General Corporation Law, the Company may
indemnify any of its directors who is a party to a proceeding because he is a
director against liability incurred in the proceeding if (1) he acted in good
faith, (2) he reasonably believed that his conduct was not opposed to the
Company's best interests and, (3) in the case of a criminal proceeding, he had
no reasonable cause to believe his conduct was unlawful. The Company may not
indemnify a director in connection with a proceeding by or in the name of the
Company, except for reasonable expenses incurred by the director in connection
with the proceeding, and only if the director has met the standard of conduct
set forth in the previous sentence. Further, the Company may not indemnify a
director to the extent he received an improper financial benefit as a result
of his conduct.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
26
<PAGE>
PART F/S
TeraGlobal Communications Corp Audited Consolidated Financial
Statements to December 31, 1997 and Unaudited Consolidated Financial
Statements to September 30, 1998
TechnoVision Communications, Inc. Audited Financial Statements to
December 31, 1997
TechnoVision Communications, Inc. Audited Financial Statements to
December 31, 1996
Design Analysis Associates, Inc. Audited Financial Statements to
December 31, 1997
Design Analysis Associates, Inc. Audited Financial Statements to
December 31, 1996
27
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 7, 1997
(INCEPTION) TO DECEMBER 31, 1997 AND
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONTENTS
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
TeraGlobal Communications Corp.
We have audited the accompanying consolidated balance sheet of TeraGlobal
Communications Corp. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the period from February 7, 1997 (inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TeraGlobal
Communications Corp. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the period from February 7, 1997 (inception) to December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred a net loss of $335,535 during the
period from February 7, 1997 (inception) to December 31, 1997, and, as of that
date, the Company's current liabilities exceeded its current assets by $154,311,
its total liabilities exceed its total assets by $134,874, and it had negative
cash flows from operations of $211,068. In addition, the Company is involved in
certain litigation in which the outcome is uncertain as discussed in Note 7.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 17, 1998
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 27,705 $ 500,052
Accounts receivable - 43,193
Note receivable - related party - 56,500
Inventory - 38,641
Prepaid expenses and other current assets, including $4,351
and $1,900 (unaudited) from a related party 10,882 204,073
---------------- ----------------
Total current assets 38,587 842,459
Furniture and equipment, net 19,437 1,222,740
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $0 and $525,264 (unaudited) - 15,232,651
--------------- ----------------
Total assets $ 58,024 $ 17,297,850
--------------- ----------------
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1997 and September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(unaudited)
---------------- -------------------
<S> <C> <C>
Current liabilities
Accounts payable, including $84,000 and $113,250 (unaudited)
to a related party $ 111,819 $ 756,788
Short-term loans 77,583 192,896
Convertible promissory note - 127,500
Accrued expenses, including $0 and $113,086 (unaudited)
to a related party 3,496 171,886
Notes payable - 66,508
Current portion of note payable - related party - 150,000
Current portion of capitalized lease obligations - 541,248
--------------- -----------------
Total current liabilities 192,898 2,006,826
Convertible promissory notes - 850,000
Note payable - related party, less current portion - 209,460
Capitalized lease obligations, less current portion - 773,761
--------------- -----------------
Total liabilities 192,898 3,840,047
--------------- -----------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $1.00 par value, no voting rights
100,000 shares authorized
no shares issued and outstanding - -
Common stock, $0.001 par value
50,000,000 shares authorized, 9,850,000 and
14,805,756 (unaudited) shares issued and outstanding 9,850 14,806
Additional paid-in capital 55,890 16,588,367
Common stock subscribed 190,000 74,375
Accumulated deficit (391,480) (3,218,513)
Cumulative foreign currency translation adjustment 866 (1,232)
--------------- -----------------
Total shareholders' equity (deficit) (134,874) 13,457,803
--------------- -----------------
Total liabilities and shareholders' equity (deficit) $ 58,024 $ 17,297,850
--------------- -----------------
--------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1998 1997
(unaudited) (unaudited)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ - $ 280,484 $ -
Cost of sales - 216,806 -
Gross profit - 63,678 -
Operating expenses
Legal 67,463 189,684 -
General and administrative 130,237 1,407,936 84,035
Selling - 119,236 -
Research and development 41,259 1,011,776 9,795
Consulting, related party 94,488 83,250 44,050
---------------- --------------- ----------------
Total operating expenses 333,447 2,811,882 137,880
---------------- --------------- ----------------
Loss from operations (333,447) (2,748,204) (137,880)
---------------- --------------- ----------------
Other income (expense)
Interest income 754 894 577
Interest expense (3,601) (80,702) -
Other income 759 - -
---------------- --------------- ----------------
Total other income (expense) (2,088) (79,808) 577
---------------- --------------- ----------------
Net loss before minority interest (335,535) (2,828,012) (137,303)
Minority interest in loss of subsidiary - 979 -
---------------- --------------- ----------------
Net loss (335,535) (2,827,033) (137,303)
---------------- --------------- ----------------
---------------- --------------- ----------------
Basic loss per share $ (0.09) $ (0.25) $ (0.06)
---------------- --------------- ----------------
---------------- --------------- ----------------
Weighted-average common shares outstanding 3,627,064 11,367,009 2,200,000
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from February 7, 1997 (Inception) to December 31, 1997
and for the Nine Months Ended September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Common
-------------------------- Paid-In Stock
Shares Amount Capital Subscribed
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, February 7, 1997 2,200,000 $ 2,200 $ (2,200) $ -
Common stock issued by Video Stream, Inc. for services
rendered - related party 9,795
Common stock issued by Video Stream, Inc. for stock
dividend - related party 69,930
Cancellation of common stock issued by
Video Stream, Inc. for stock dividend (13,985)
Reverse merger
Shares issued for the acquisition of Video Stream, Inc. 7,650,000 7,650 (7,650)
Common stock subscribed 190,000
Change in cumulative translation adjustment
Net loss
------------ ----------- ------------ ------------
Balance, December 31, 1997 9,850,000 9,850 55,890 190,000
Common stock issued (unaudited) 1,210,000 1,210 789,790
Common stock subscribed (unaudited) 74,375
Common stock issued for acquisition of
TechnoVision Communications, Inc. (unaudited) 3,555,756 3,556 15,552,877
Issuance of common stock subscribed (unaudited) 190,000 190 189,810 (190,000)
Change in cumulative translation adjustment (unaudited)
Net loss (unaudited)
------------ ----------- ------------ ------------
Balance, September 30, 1998 (unaudited) 14,805,756 $ 14,806 $ 16,588,367 $ 74,375
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency
Accumulated Translation
Deficit Adjustment Total
------------ -------------- ------------
<S> <C> <C> <C>
Balance, February 7, 1997 $ - $ - $ -
Common stock issued by Video Stream, Inc. for services
rendered - related party 9,795
Common stock issued by Video Stream, Inc. for stock
dividend - related party (69,930) -
Cancellation of common stock issued by
Video Stream, Inc. for stock dividend 13,985 -
Reverse merger
Shares issued for the acquisition of Video Stream, Inc. -
Common stock subscribed 190,000
Change in cumulative translation adjustment 866 866
Net loss (335,535) (335,535)
------------- -------------- -------------
Balance, December 31, 1997 (391,480) 866 (134,874)
Common stock issued (unaudited) 791,000
Common stock subscribed (unaudited) 74,375
Common stock issued for acquisition of
TechnoVision Communications, Inc. (unaudited) 15,556,433
Issuance of common stock subscribed (unaudited) -
Change in cumulative translation adjustment (unaudited) (2,098) (2,098)
Net loss (unaudited) (2,827,033) (2,827,033)
------------- -------------- -------------
Balance, September 30, 1998 (unaudited) $ (3,218,513) $ (1,232) $13,457,803
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine months Ended September 30, 1998 and 1997 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1998 1997
---------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (335,535) $ (2,827,033) $ (137,303)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 4,860 67,116 -
Amortization of goodwill - 525,264 -
Minority interest - (979) -
Issuance of stock by Video Stream, Inc. to
related party for services rendered 9,795 - 9,795
(Increase) decrease in
Accounts receivable - 212,608 (2,797)
Prepaid expenses and other current assets (5,503) 2,615 -
Inventory - (4,523) -
Increase (decrease) in
Accounts payable 111,819 823,263 62,922
Accrued expenses 3,496 (81,810) -
---------------- --------------- ---------------
Net cash used in operating activities (211,068) (1,283,479) (67,383)
---------------- --------------- ---------------
Cash flows from investing activities
Acquisition of ISG membership interests - (105,800) -
Acquisition of ATI Access Technologies, Inc. 1 - 1
Purchase of furniture and equipment (854) (3,929) -
Acquisition of TechnoVision Communications cash - 54,629 -
---------------- --------------- ---------------
Net cash provided by (used in) investing activities (853) (55,100) 1
---------------- --------------- ---------------
Cash flows from financing activities
Proceeds from short-term loan 69,920 127,338 91,566
Payments on notes payable - (85,667) -
Payments on short-term loan (69,920) (12,025) (24,297)
Proceeds from loan from affiliate 48,760 - -
Proceeds from common stock subscription 190,000 74,375 -
Payments on capital leases - (59,497) -
Proceeds from common stock issuance - 791,000 -
Proceeds from convertible promissory notes - 977,500 -
---------------- --------------- ---------------
Net cash provided by financing activities 238,760 1,813,024 67,269
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine months Ended September 30, 1998 and 1997 (unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1998 1997
---------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cumulative translation adjustment $ 866 $ (2,098) $ -
---------------- --------------- ----------------
Net increase (decrease) in cash and cash
equivalents 27,705 (472,347) (113)
Cash and cash equivalents, beginning of period - 27,705 -
---------------- --------------- ----------------
Cash and cash equivalents (book overdraft), end
of period $ 27,705 $ 500,052 $ (113)
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
Supplemental schedule of non-cash investing and financing activities
As discussed further in Note 8, during the period from February 7, 1997
(inception) to December 31, 1997, Video Stream, Inc. declared and issued a stock
dividend of 100,000 shares of its common stock valued at $69,930. 80,000 of
these shares, valued at $55,936, were issued to a current shareholder/officer
and a former shareholder/officer of the Company. 20,000 shares, valued at
$13,985, were issued to ATI Access Technologies, Inc. and were subsequently
cancelled prior to December 31, 1997.
During the nine months ended September 30, 1998, the Company issued 190,000
shares valued at $190,000 that had been subscribed at December 31, 1997.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
TeraGlobal Communications Corp. (a Wyoming corporation) and
subsidiaries (the "Company") is engaged in the development of
communications productivity solutions and multimedia (voice, video,
image, and data) collaboration systems. Effective September 17, 1998,
the Company changed its name from Video Stream International, Inc. to
TeraGlobal Communications Corp.
Canada, Inc. was formed under the laws of Canada on February 7, 1997
and subsequently changed its name to Video Stream, Inc. ("VSI") on
April 25, 1997. On October 31, 1997, Triple "D" Court, Inc. ("Triple
D") acquired all of the outstanding stock of VSI in exchange for an
aggregate of 7,650,000 shares of newly issued common stock. For
accounting purposes, the transaction has been treated as a
recapitalization of VSI, with VSI as the accounting acquirer (reverse
acquisition). The operations of Triple D have been included with those
of the Company from the acquisition date. Triple D subsequently
changed its name to TeraGlobal Communications Corp. Triple D was
incorporated in Wyoming on February 7, 1997 and was a development
stage enterprise from the date of incorporation until its acquisition
of VSI. Triple D had no assets or liabilities at the date of the
acquisition and did not have significant operations prior to the
acquisition. Therefore, no pro forma information is presented.
ATI Access Technologies, Inc.
On December 11, 1997, VSI completed a merger with ATI Access
Technologies, Inc. (previously B.C. LTD) ("ATI"), a Canadian company,
whereby VSI purchased the net assets of ATI through the forgiveness of
a short-term loan to ATI by VSI of $48,760 and payment of $1. The
acquisition was accounted for in a manner similar to a pooling of
interests. The assets acquired and the liabilities assumed were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Note receivable $ 2,797
Prepaids and other current assets 2,582
Furniture and equipment, at net book value 23,443
Short-term loan to VSI 48,760
----------------
Total assets 77,582
Short-term loan (77,583)
Purchase price $ (1)
----------------
----------------
</TABLE>
F-8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS (Continued)
Acquisitions
During June 1998, the Company made an offer, pursuant to a
confidential Private Placement Memorandum, an Exchange Offer letter,
and related Letter of Transmittal, to shareholders of TechnoVision
Communications, Inc. ("TechnoVision"), a Georgia company, to acquire
all of the issued and outstanding common stock of TechnoVision.
TechnoVision shareholders were offered one common share of the Company
for every two common shares of TechnoVision tendered. Such offer
originally expired on July 15, 1998, but was extended to August 7,
1998. At the date of this report, the Company believes that
TechnoVision shareholders have tendered approximately 99% of the total
issued and outstanding common shares of TechnoVision, and as a result,
believes it has effective control of TechnoVision.
The Company purchased the net assets of TechnoVision through the
forgiveness of a short-term loan by TechnoVision to the Company of
$334,884 and payment of $15,556,433 in common stock of the Company.
The acquisition was accounted for by the purchase method. The assets
acquired and the liabilities assumed were as follows:
<TABLE>
<S> <C>
Cash $ 54,629
Accounts receivable 255,801
Prepaids and other current assets 195,806
Note receivable - related party 56,500
Inventory 34,118
Furniture and equipment, at net book value 1,266,490
Accounts payable (156,590)
Customer deposits (105,000)
Notes payable (511,636)
Capital leases (1,374,505)
Minority interest (979)
-------------
Total assets (285,366)
Excess of cost over fair value of net assets acquired 15,506,915
-------------
Consideration $ 15,221,549
-------------
-------------
</TABLE>
F-9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS (Continued)
Acquisitions (Continued)
The information provided in the above table is based on TechnoVision's
unaudited financial statements as of June 30, 1998. The consideration
is based on the issuance of 3,555,756 shares for 99% of TechnoVision
at the closing price for the Company's stock on August 10, 1998, the
closing date of the acquisition, of $4.375 per share, reduced by the
value of the forgiven short-term loan. The excess of cost over fair
value of net assets acquired is being amortized on a straight-line
basis over five years.
Effective July 28, 1998, the Company acquired all of the membership
interests in ISG Acquisition, LLC, a Delaware limited liability
company wholly-owned by Interactive Solutions Group, in exchange for
the forgiveness of a loan for $160,000 and the assumption of
liabilities of ISG Acquisition, LLC up to $91,000 for a total purchase
price of $251,000. The principal shareholder of Interactive Solutions
Group was a director and officer of the Company at December 31, 1997
and September 31, 1998. The excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over five
years.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, during the
period from February 7, 1997 (inception) to December 31, 1997, the
Company incurred a net loss of $335,535, and as of that date, the
Company's current liabilities exceeded its current assets by $154,311,
its total liabilities exceed its total assets by $134,874, and it had
negative cash flows from operations of $211,068. In addition, the
Company is involved in certain litigation in which the outcome is
uncertain as discussed in Note 7. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Presentation (Continued)
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost
structure. In addition, realization of a major portion of the assets
in the accompanying balance sheet is dependent upon the Company's
ability to meet its financing requirements and the success of its
plans to sell its products. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Management plans to obtain additional debt and equity financing. In
addition, the Company believes that the acquisition of Design Analysis
Associates, Inc. will bring a positive cash flow thereby reducing the
monthly cash requirements of the consolidated Company. (See further
discussion of the acquisition of Design Analysis Associates, Inc. in
Note 12.)
Estimates
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 disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of
TeraGlobal Communications Corp. and its wholly-owned subsidiaries, ATI
Access Technologies, Inc., TGC Acquisition, Inc., TeraGlobal
Communications (Canada) Corporation, and TechnoVision Communications,
Inc. All intercompany accounts and transactions have been eliminated.
F-11
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Minority Interest
The accompanying consolidated balance sheet as of September 30, 1998
does not reflect a minority interest liability as TechnoVision, on a
stand-alone basis, had a shareholders' deficit as of that date. The
accompanying consolidated statement of operations for the nine months
ended September 30, 1998 reflects the minority interest's share of
TechnoVision's losses for the two months since its acquisition only in
the amount of minority interest recorded at the time of the
acquisition of TechnoVision. The remainder of the minority interest's
share of TechnoVision's losses for the two months since its
acquisition is not reflected as the related accrual would result in
the Company's recording of a minority interest receivable.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly-liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using specific identification and consists of raw materials.
Furniture and Equipment
Furniture and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over an estimated useful life of five years. Betterments, renewals,
and extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to
assets retired are removed from the Company's accounts, and the gain
or loss on dispositions, if any, is recognized in the statement of
operations.
Development Stage Enterprise
During the nine months ended September 30, 1998, the Company ceased to
be a development stage company as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." The Company's planned principal
operations have commenced, and there have been significant revenues
from those operations.
Research and Development Costs
Research and development costs are charged to expense as incurred.
F-12
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes under the asset and liability
method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each
period-end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes, if applicable, represents
the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Earnings per Share
During the period from February 7, 1997 (inception) to December 31,
1997, the Company adopted SFAS No. 128, "Earnings per Share." Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include
the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Diluted earnings per share are
not presented for 1998 and 1997 because common stock equivalents are
anti-dilutive.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
F-13
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
The FASB issued SFAS 131, "Disclosure about Segments of an Enterprise
and Related Information," which is effective for financial statements
with fiscal years beginning after December 31, 1997. This statement
establishes standards for the way that public entities report selected
information about operating segments, products, and services,
geographic areas, and major customers in interim and annual financial
reports. The Company does not expect adoption of SFAS No. 131 to have
a material effect, if any, on its financial position or results of
operations.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For certain
of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable,
and accrued expenses, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for short-term loans and
notes payable also approximate fair value because current interest
rates offered to the Company for short-term loans of similar
maturities are substantially the same or the difference is immaterial.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
The loans are to a current officer/director of the Company. The notes
are due on or before June 1, 1999, bear interest at 8% per year, and
are unsecured.
F-14
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------- ----------------
(unaudited)
<S> <C> <C>
Furniture and fixtures $ - $ 28,979
Office equipment 674 1,075
Computers and software 23,623 1,264,662
--------------- ----------------
24,297 1,294,716
Less accumulated depreciation 4,860 71,976
--------------- ----------------
Total $ 19,437 $ 1,222,740
--------------- ----------------
--------------- ----------------
</TABLE>
Depreciation expense for the period from February 7, 1997 (inception)
to December 31, 1997 and for the nine months ended September 30, 1998
was $4,860 and $67,116 (unaudited), respectively.
NOTE 5 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30, 1998 consisted of the following:
<TABLE>
<S> <C>
Note payable to former officer/director and current shareholder,
dated April 27, 1998, is non-interest bearing, and unsecured.
Monthly payments of $12,500 are required, and the note is due
in April 2001. $ 359,460
Notes payable with various dates to former employees are
unsecured, non-interest bearing, and are payable upon demand. 66,508
----------
</TABLE>
F-15
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
$ 425,968
Less current portion 216,508
----------------
Long term portion $ 209,460
----------------
----------------
</TABLE>
NOTE 7 - CONVERTIBLE PROMISSORY NOTES
On May 8, 1998, the Company entered into a Subscription Agreement and
a 10.25% Convertible Subordinated Promissory Note (the "Note") for
$150,000, and incurred offering costs of $22,500 in connection
therewith. Principal and interest thereon are due on November 8, 1998
if the Note has not been converted prior to such date by either party
to the Note. Otherwise, the remaining principal amount of this Note
will automatically be converted to the Company's common stock on
November 8, 1998. The conversion price applicable to this Note is
$1.50. During July 1998, the Company received a notice of conversion
from the lender and is in the process of facilitating the conversion.
During September 1998, the Company entered into two convertible
promissory notes. The first note is unsecured, bears interest at 9%
per year, and is convertible upon issuance into shares of the
Company's common stock at $4.00 per share. The principal is due on
November 30, 2000, and interest is due annually. The Company has the
right to call the note, with accrued interest, upon 30-days
notification to the lender. At September 30, 1998, the Company had
received $350,000 under this note.
The second note is unsecured, bears interest at 9% per year, and is
convertible upon issuance into shares of the Company's common stock at
$4.25 per share. The principal is due on November 30, 2000, and
interest is due annually. The Company has the right to call the note,
with accrued interest, upon 30-days notification to the lender. At
September 30, 1998, the Company had received $500,000 under this note.
F-16
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities for its corporate offices under
a month-to-month and a one year operating lease agreement. Rent
expense was $9,506 and $113,912 (unaudited) for the period from
February 7, 1997 (inception) to December 31, 1997 and for the nine
months ended September 30, 1998, respectively.
As discussed in Note 1, the Company assumed certain non-cancelable
capital leases for computers and software as part of its acquisition
of TechnoVision. Future minimum lease payments under non-cancelable
capital leases with initial or remaining terms of one year or more at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Capital
September 30, Leases
------------- ---------------
<S> <C>
1999 $ 1,110,707
2000 796,704
--------------
1,907,411
Less amount representing interest 592,402
--------------
1,315,009
Less current portion 541,248
--------------
Long-term portion $ 773,761
--------------
--------------
</TABLE>
Of the total capital lease obligation of $1,315,009, $1,124,954 is
owed to Alliance Leasing. Alliance Leasing has filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code.
Leased capital assets included in furniture and equipment consisted of
the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------- ----------------
(unaudited)
<S> <C> <C>
Computers and software $ - $ 1,185,221
Less accumulated amortization - 71,577
--------------- ----------------
Total $ - $ 1,113,644
--------------- ----------------
--------------- ----------------
</TABLE>
F-17
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
The Company has been named in a securities class action lawsuit filed
by two former TechnoVision shareholders on July 15, 1998 in Los
Angeles County Superior Court. The Compliant names the Company,
TechnoVision, Grey Venture Capital, Inc., and certain present and
former officers and employees of each as defendants. The Complaint
alleges that the Company, TechnoVision, and Grey Venture Capital, Inc.
each conspired and engaged in fraudulent and deceptive sales practices
in connection with TechnoVision's private placement of securities in
an offering conducted by Grey Venture Capital, Inc. from November 1997
through May 1998. The Complaint, as originally filed, stated causes of
action for breach of fiduciary duties, intentional misrepresentation
and fraudulent concealment, negligent misrepresentation, violation of
California securities laws, unfair trade practices, negligence,
Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO")
violations, conversion, and conspiracy. The Company demurred to all
causes of action in the Complaint with the exception of negligent
misrepresentation. The demurrer was sustained with lease to amend
certain causes of action. The Complaint as amended now states causes
of action for breach of fiduciary duty, intentional misrepresentation
and fraudulent concealment, negligent misrepresentation, conversion,
and conspiracy. The Company intends to demurrer again with respect to
substantially all of the causes of action. The Complaint seeks damages
in an amount to be proved. The Company denies any involvement or
wrongdoing in connection with the private placement and intends to
vigorously defend the lawsuit.
F-18
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
TechnoVision, along with its chief executive officer, has been sued by
a shareholder of TechnoVision for breach of contract,
misrepresentation and fraud, and breach of fiduciary duty. The
Complaint, originally, filed in January 1998, has been amended twice
and split into two separate Complaints, stating causes of action for
breach of fiduciary duty in a derivative claim in one instance and
breach of contract and fraud in the second instance. The Complaint
arises out of a Settlement Agreement entered into between TechnoVision
and the shareholder. Under the terms of the Settlement Agreement, the
shareholder was given 750,000 shares of TechnoVision's common stock,
which were subject to a repurchase option in favor of TechnoVision.
The Complaint alleges that TechnoVision fraudulently induced the
shareholder to enter into the Settlement Agreement. The Complaint
seeks to invalidate the Settlement Agreement, cause TechnoVision to
issue to the shareholder 2,000,000 shares of its common stock,
invalidate the repurchase option, and pay damages. The Company denies
any wrongdoing and intends to vigorously defend the lawsuit.
Due to the uncertainty related to the above issues, the Company
maintains no reserves for these issues.
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The Company has 100,000 authorized shares of $1.00 par value preferred
stock that have no voting rights. The preferred stock may be issued in
series, from time to time, with such designations, rights,
preferences, and limitations as the Board of Directors may determine
by resolution. The Company had no preferred stock issued and
outstanding at December 31, 1997 or September 30, 1998.
Common Stock
During the year ended December 31, 1997, the Company received $100,000
for the subscription of 500,000 shares of common stock to be issued
subsequent to December 31, 1997. These shares were issued in September
1998. In addition, the Company received $90,000 related to the
subscription of 900,000 shares of common stock to be issued subsequent
to December 31, 1997. The Company received the remaining $791,000, net
of offering costs of $19,000, related to this sale of stock during
June 1998 and issued the shares during September 1998.
F-19
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
Common Stock (Continued) During the nine months ended September 30,
1998, the Company received $74,375 (unaudited) related to the
subscription of 17,500 shares (unaudited) of common stock to be issued
subsequent to September 30, 1998.
Video Stream, Inc.
Prior to the reverse acquisition discussed in Note 1, VSI issued
10,000 shares of common stock to a consultant for research and
development services rendered. Such issuance resulted in an expense of
$9,795, based on the invoice amount for the services. This consultant
subsequently became an officer of the Company during the year ended
December 31, 1997.
In addition, VSI declared and issued a stock dividend for 100,000
shares prior to the reverse acquisition. 20,000 of these shares were
canceled prior to December 31, 1997.
Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the "1997 Plan")
during November 1997 and amended it in September 1998. Under the terms
of the 1997 Plan, the aggregate number of shares that may be issued
pursuant to the exercise of options granted initially will not exceed
1,500,000, provided that such number shall be adjusted annually by the
Board of Directors on July 1 to a number equal to 10% of the number of
shares of stock of the Company outstanding on June 30 of the
immediately preceding year, or 1,500,000, whichever is greater, and
provided further that such number will be increased by the number of
shares of option stock that the Company subsequently may reacquire
through repurchase or by other means. Options are not considered to be
granted until an option agreement is executed. Non-qualified options
may be issued at a price less than, equal to, or greater than the fair
market value of the common stock on the grant date. Incentive stock
options must be issued at a price not less than 100% of the fair
market value of the common stock on the grant date. Non-qualified and
incentive stock options expire up to ten years from the grant date. At
December 31, 1997 and September 30, 1998, the granting of 500,000
options at exercise prices from $1.35 to $1.50 per share, and
1,159,175 options at exercise prices ranging from $1.35 to $3.75 per
share, respectively, had been authorized by the Option Committee;
however, no option agreements had been executed during 1997 or during
the nine months ended September 30, 1998. Accordingly, no pro forma
earnings have been included in the financial statements for the year
ended December 31, 1997.
NOTE 10 - INCOME TAXES
F-20
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of December 31, 1997, the Company had approximately $474,000 in
Canadian net operating loss carryforwards that may be offset against
future taxable income through 2004. The deferred income tax benefit of
the loss carryforward is the only significant deferred income tax
asset or liability of the Company and has been offset by a valuation
allowance of the same amount as management does not believe the
recoverability of this deferred tax asset is more likely than not.
Accordingly, no deferred income tax benefit has been recognized in
these financial statements.
NOTE 11 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and September 30, 1998, $671 and $623
(unaudited), respectively, of the short-term loans outstanding were
due to a former shareholder/officer of VSI.
During the period from February 7, 1997 (inception) to December 31,
1997 and the nine months ended September 30, 1998, the Company paid
$94,488 and $83,250 (unaudited), respectively, to an officer/director
for consulting services rendered and had an account payable to the
officer/director for $84,000 and $139,336 (unaudited) at December 31,
1997 and September 30, 1998, respectively.
At December 31, 1997 and September 30, 1998, the Company had a prepaid
expense and other assets of $4,351 and $1,900 (unaudited),
respectively, from a company whose principal shareholder is a former
shareholder/officer of VSI.
During the period from February 7, 1997 (inception) to December 31,
1997, the Company paid $31,464 to certain former shareholders/officers
of VSI for research and development. During the nine months ended
September 30, 1998, the Company paid $63,250 (unaudited) to two
shareholders/officers for research and development.
During the period from February 7, 1997 (inception) to December 31,
1997 and the nine months ended September 30, 1998, ATI purchased
certain computer equipment for $23,443 and $0 (unaudited),
respectively, from TechnoVision.
Prior to its acquisition by the Company, the Company paid TechnoVision
approximately $133,000 for certain cost reimbursements and loaned
TechnoVision approximately $70,000.
NOTE 12 - SUBSEQUENT EVENTS (UNAUDITED)
Convertible Promissory Note
During October 1998, the Company entered into a $125,000 convertible
promissory note,
F-21
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from February 7, 1997 (Inception) to December 31, 1997 and
for the Nine Months Ended September 30, 1998 and 1997 (unaudited)
(The information with respect to the nine months ended
September 30, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
which is convertible at $4.00 per share.
During October 1998, the Company completed the conversion of the
10.25% Convertible Subordinated Promissory Note for $150,000 and
issued 100,000 shares of common stock.
During December 1998 and January 1999, the Company entered into
convertible promissory notes totaling $150,000 and $25,000,
respectively, which are convertible at $4.25 per share.
Common Stock
During January 1999, the Company received $30,000 in subscriptions
for the issuance of 10,000 common shares.
During January 1999, the Company issued 27,100 common shares, as a
result of the exercising of stock options at an exercise price of
$1.50 per share, raising $40,650.
Acquisition
Effective November 1, 1998, the Company acquired, pursuant to an
Agreement of Merger, all of the issued and outstanding common stock of
Design Analysis Associates, Inc. ("DAA"), a Utah company, in exchange
for 1,100,000 shares of the Company's common stock. In addition, under
the terms of the Agreement of Merger, the Company will issue up to an
additional 400,000 shares of common stock if the gross sales of DAA
exceed certain amounts. The acquisition was accounted for under the
purchase method. The assets acquired and the liabilities assumed were
as follows:
<TABLE>
<S> <C>
Cash $ 220,371
Accounts receivable 534,986
Investments 37,500
Inventory 25,700
Furniture and equipment, at net book value 196,093
Accounts payable (103,954)
----------------
Total assets 910,695
----------------
Excess of cost over fair value of net assets acquired 2,939,305
----------------
Consideration $ 3,850,000
----------------
----------------
</TABLE>
The information provided in the above table is based on DAA's
unaudited financial statements. The consideration is based on the
issuance of 1,100,000 shares at the closing price of the Company's
stock on October 29, 1998, the closing date of the acquisition, of
$3.50 per share. The excess of cost over fair value of net assets
acquired will be amortized on a straight-line basis over ten years.
On December 18, 1998, pursuant to an Agreement and Plan of
Corporate Reorganization and Separation, the Company completed the
sale of the Waterlog-TM- Division acquired as part of the DAA
purchase. The founder of DAA has surrendered 850,000 of the 1.1
million shares originally issued to acquire DAA and has foregone
the 400,000 earn-out shares from the initial agreement. The
surrendered shares are to be cancelled by TeraGlobal, valuing the
sale of the Waterlog-TM- Division at $3,240,625, based on $3.8125
per share, the price of the Company's stock on the closing date of
the sale.
The assets disposed and the liabilities discharged were as follows:
<TABLE>
<S> <C>
Accounts receivable $277,115
Investments 37,500
Inventory 25,700
Furniture and equipment, at net book value 96,093
Accounts payable (103,954)
----------
Total assets 332,454
----------
Excess of proceeds over fair value
of net assets disposed 2,908,171
----------
PROCEEDS $3,240,625
----------
----------
</TABLE>
F-22
<PAGE>
TeraGlobal COMMUNICATIONS CORP. AND SUBSIDIARIES
Proforma Consolidated Balance Sheet
As of December 31, 1997
<TABLE>
<CAPTION>
TeraGlobal
Communications, TechnoVision
Corp. and Communications Design Analysis
Subsidiaries Inc. Associates, Inc. Adjustments Total
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 27,705 $ (410) $ (21,223) $ 396,223 6 5 $ 402,295
Accounts receivable 10,971 314,834 (314,834) 7 10,971
Prepaid expenses and other current assets 10,882 59,036 69,918
Investments 16,700 (16,700) 6 --
Inventory 82,785 38,427 (38,427) 9 82,785
---------- ---------- ---------- ----------- -----------
Total current assets 38,587 152,382 348,738 26,262 565,969
Furniture and equipment, net 19,437 156,194 82,102 (42,102) 10 215,631
Organization costs, net 10,764 10,764
Guaranty deposits 5,752 5,752
Goodwill, net 12,911,821 3 12,911,821
---------- ---------- ---------- ----------- -----------
Total assets 58,024 325,092 430,840 12,895,981 13,709,937
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable, including $113,250 to
related parties 111,819 361,181 88,838 (423,722) 2 138,116
Accrued liabilities, including $113,086
to related parties 3,496 20,580 (20,580) 11 3,496
Accrued retirement & profit sharing 242,946 (242,946) 12 --
Short term loans, including $623
to a related party 77,583 133,997 211,580
---------- ---------- ---------- ----------- -----------
192,898 495,178 352,364 (687,248) 353,192
Long term liabilities 83,187 83,187
---------- ---------- ---------- ----------- -----------
Total Liabilities 192,898 578,365 352,364 (687,248) 436,379
---------- ---------- ---------- ----------- -----------
Shareholders' Deficit
Preferred stock, $1.00 par value, no
voting rights 100,000 shares authorized
no shares issued and outstanding
Common stock, $.001 par value
50,000,000 shares authorized
14,841,502 shares issued and outstanding 9,850 1,720,570 200 14,445,038 1 16,175,658
Additional paid-in capital 55,890 800 109,769 4 166,459
Common stock subscribed 190,000 190,000
Accumulated deficit (391,480) (1,973,843) 77,476 (971,578)5 (3,259,425)
Cumulative foreign currency translation
adjustment 866 866
---------- ---------- ---------- ----------- -----------
(134,874) (253,273) 78,476 13,583,229 13,273,558
---------- ---------- ---------- ----------- -----------
$ 58,024 $ 325,092 $ 430,840 $12,895,981 $13,709,937
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
Explanation of Pro Forma Adjustments
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Adjusting Journal Entry 1
Investment in TVC 15,556,433 x
Common Stock (TGC) 15,556,433 1
To record issuance of shares to acquire TVC
Adjusting Journal Entry 2
Investment in DAA 3,850,000 x
Common Stock (TGC) 3,850,000 1
To record issuance of charges to acquire DAA
Adjusting Journal Entry 3
Goodwill 15,506,915 3
Common Stock (TVC) 1,720,570 1
Accounts Payable (TGC) 334,884 2
Paid in Capital 32,093 4
Investment in TVC 15,556,433 x
Earnings (TVC) 1,973,843 5
Balance 17,562,369 17,562,369
Consolidate/Eliminate TVC at 12-31-97
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Adjusting Journal Entry 4
Amortization Expense 2,842,934 13
Goodwill 2,842,934 3
To record TVC amort for 11 months
Adjusting Journal Entry 5
Amortization Expense 25,011 5
Goodwill 25,011 3
To record DAA amort for 11 months
Adjusting Journal Entry 6
Goodwill 3,850,000 3
Common Stock DAA 200 1
Paid in Cap DDA 800 4
Earnings DAA 77,476 5
Investment in DAA 3,850,000 x
Paid in Cap TGC 78,476 4
Balance 3,928,476 3,928,476
Consolidate/Eliminate DAA at 12-31-97
</TABLE>
<TABLE>
<S> <C> <C>
Adjusting Journal Entry 7
Cash 396,223 6
Accounts receivable 314,834 7
Investments 16,700 8
Inventory 38,427 9
Furniture and equipment, at net book value 42,102 10
Accounts payable 88,838 2
Accrued liabilities 20,580 11
Accrued retirement payable 242,946 12
Goodwill 3,577,149 3
Common Stock, par value 850 1
Paid in Capital 3,239,775 4
3,989,212
3,989,212
To record spin-off of Waterlog Division Assets
Adjusting Journal Entry 8
Sales 2,233,864 14
Cost of Sales 1,527,613 14
G&A 586,363 13
Selling 73,725 14
Interest Expense 7,957 14
Returned earnings 38,207 14
2,233,864 2,233,864
To record spin-off of Waterlog Division sales and associated costs
</TABLE>
F-23
<PAGE>
TeraGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
Proforma Consolidated Statement of Operations
For Year Ended December 31, 1997
<TABLE>
<CAPTION>
For the Period from
February 7, 1997
(Inception) to For the Year ended For the Year ended
December 31, 1997 December 31, 1997 December 31, 1997
TeraGlobal
Communications, Techno Visiona Design Analysis
Corp. and Subsidiaries Communications Inc Associates, Inc.
<S> <C> <C> <C>
Sales $ $ 547,363 $ 3,749,238
Cost of sales 530,998 2,603,125
----------- -----------
Gross profit -- 16,365 1,146,113
Operating expenses
Legal 67,463 70,019 2,737
General and administrative 130,237 272,292 984,130
Research and development 41,259 675,148
Consulting, related party 94,488
Selling 504,839 123,738
---------------- ------------- --------------
333,447 1,522,298 1,110,605
---------------- ------------- --------------
Loss from operations (333,447) (1,505,933) 35,508
---------------- ------------- --------------
Other income (expenses)
Fines and penalties (66)
Income taxes (800)
Interest income 754
Interest expense (3,601) (11,066) (13,354)
Investment loss (25,000)
Other income 759
---------------- ------------- --------------
Total other income (expense) (2,088) (11,932) (38,354)
---------------- ------------- --------------
Net Loss $ (335,535) $(1,517,865) $ (2,846)
---------------- ------------- --------------
Basic loss per common share $ (0.09)
----------------
Weighted-average common shares outstanding 3,627,064
----------------
</TABLE>
<TABLE>
<CAPTION>
Adjustments Total
<S> <C> <C>
Sales $ (2,233,864) 14 $ 2,062,737
Cost of sales (1,527,613) 14 1,606,510
----------- -----------
Gross profit (706,251) 456,227
Operating expenses
Legal 140,219
General and administrative 2,281,583 13 3,668,242
Research and development 716,407
Consulting, related party 94,488
Selling (73,725) 14 554,852
----------- -----------
2,207,857 5,174,207
----------- -----------
Loss from operations (2,914,102) (4,717,981)
----------- -----------
Other income (expenses)
Fines and penalties (66)
Income taxes (800)
Interest income 754
Interest expense 7,957 14 (20,064)
Investment loss (25,000)
Other income 759
----------- -----------
Total other income (expense) $ 7,957 (44,417)
----------- -----------
Net Loss $(2,906,152) $(4,762,398)
----------- ------------
Basic loss per common share (0.64)
------------
Weighted-average common shares outstanding 7,432,820
------------
</TABLE>
F-24
<PAGE>
TeraGLOBAL COMMUNICATIONS, CORP. AND SUBSIDIARIES
Proforma Consolidated Balance Sheet
As of September 30, 1998
<TABLE>
<CAPTION>
TeraGlobal
Communications,
Corp. and Design Analysis
Subsidiaries Associates, Inc. Adjustments Total
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 500,052 $ 220,371 $ $ 720,423
Accounts receivable 43,193 534,986 (380,357) 6 197,822
Notes receivable - related party 56,500 56,500
Inventory 38,641 25,700 (25,700) 8 38,641
Investments 37,500 (37,500) 7 --
Prepaid expenses and other current assets 204,073 204,073
------------ ------------ ----------- ------------
Total current assets 842,459 818,557 (443,557) 1,217,459
Furniture and equipment, net 1,222,740 196,093 (96,093) 9 1,322,740
Goodwill on acquisition of
Design Analysis Associates 966,691 1 894,100
Goodwill on acquisition of
TechnoVision Communications Inc. 15,232,651 15,232,651
------------ ------------ ----------- ------------
Total assets 17,297,850 1,014,649 427,041 18,666,950
------------ ------------ ----------- ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable, including $113,250 to related parties 756,788 103,954 (103,954) 10 756,788
Short Term Loans 192,896 192,896
Convertible Debenture 127,500 127,500
Accrued liabilities, including $113,086 to related parties 171,886 171,886
Notes payable 66,508 66,508
Current Portion of notes payable, related party 150,000 150,000
Current Portion of capitalized lease obligations 541,248 541,248
------------ ------------ ----------- ------------
2,006,826 103,954 (103,954) 2,006,826
Long term liabilities
Convertible debentures 850,000 850,000
Notes Payable, less current portion 209,460 209,460
Capitalized lease obligations 773,761 773,761
------------ ------------ ----------- ------------
Total Liabilities 3,840,047 103,954 (103,954) 3,840,047
------------ ------------ ----------- ------------
Shareholders' Deficit
Preferred stock, $1.00 par value, no voting rights
100,000 shares authorized
no shares issued and outstanding
Common stock, $.001 par value
50,000,000 shares authorized
14,841,502 shares issued and outstanding 14,806 3,849,150 2 15,056
Additional paid-in capital 16,588,367 800 (3,162,099) 3 17,197,492
Common stock subscribed 74,375 200 (200) 4 74,375
Accumulated Deficit (3,218,513) 909,695 (155,856) 5 (2,458,788)
Cumulative foreign currency translation adjustment (1,232) (1,232)
------------ ------------ ----------- ------------
13,457,803 910,695 530,995 14,826,903
------------ ------------ ----------- ------------
$ 17,297,850 $ 1,014,649 $ 427,041 $ 18,666,949
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
</TABLE>
Explanation of Pro Forma Entries
<TABLE>
<CAPTION>
<S> <C> <C>
Adjusting Journal Entry 1
Goodwill 3,850,000 (1)
Common Stock DAA 200 (4)
Paid in Cap DAA 800 (3)
Earnings DAA 77,476 (5)
Investment in DAA par value 3,850,000 (2)
Investment in DAA paid in capital 78,476 (3)
3,928,476 3,928,476
Consolidate/Eliminate DAA at September 30, 1998
Adjusting Journal Entry 2
Amortization Expense 78,380 (5)
Goodwill 78,380 (1)
To record DAA amortization for 9 months
Adjusting Journal Entry 3
Accounts receivable 380,357 (6)
Investments 37,500 (7)
Inventory 25,700 (8)
Furniture and Equipment, at net book value 96,093 (9)
Accounts payable 103,954 (10)
Goodwill 2,804,929 (1)
Common Stock, par value 850 (2)
Paid in Capital 3,239,775 (3)
3,344,579 3,344,579
To record spin off of Waterlog Division Assets
Adjusting Journal Entry 4
Sales 2,369,378 (11)
Cost of Sales 1,313,609 (11)
G & A 441,159 (5)
Selling 39,320 (11)
Interest Income 7,533 (11)
Accumulated earnings 582,823 (11)
2,376,911 2,376,911
To record spin off of Waterlog Division sales and associated costs
</TABLE>
F-25
<PAGE>
TeraGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
Proforma Consolidated Statement of Operations
For Period Ended September 30, 1998
<TABLE>
<CAPTION>
For the 9 months For the 9 months
ending September 30, ending September 30,
1998 1998
TeraGlobal
Communications, Design Analysis
Corp. and Subsidiaries Associates, Inc. Adjustments Total
<S> <C> <C> <C> <C>
Sales $ 280,484 $ 3,198,808 (2,369,378) 11 $ 1,109,914
Cost of sales 216,806 1,773,454 (1,313,609) 11 676,651
---------- ---------- --------- ----------
Gross profit 63,678 1,425,354 1,055,769 433,263
Operating expenses
Legal 189,684 6,200 195,884
General and administrative 1,407,936 595,592 (368,664) 5 1,634,864
Research and development 1,011,776 1,011,776
Consulting, related party 83,250 83,250
Selling 119,236 53,085 (39,320) 11 133,001
---------- ---------- --------- ----------
2,811,882 654,878 (407,985) 3,058,775
---------- ---------- --------- ----------
Loss from operations (2,748,204) 770,476 (647,784) (2,625,512)
---------- ---------- --------- ----------
Other income (expenses)
Interest income 894 10,170 (7,533) 11 3,532
Interest expense (80,702) (80,702)
Other income -- -- --
---------- ---------- --------- ----------
Total other income (expense) (79,808) 10,170 (7,533) (77,170)
---------- ---------- --------- ----------
Net Loss before Minority Interest (2,828,012) 780,646 (655,317) (2,702,683)
Minority Interest in loss of subsidiary 979 -- -- 979
Net Gain(Loss) (2,827,033) 780,646 (655,317) (2,701,704)
Basic loss per common share $ (0.25) (0.23)
---------- ----------
---------- ----------
Weighted-average common shares outstanding 11,367,009 11,617,009
---------- ----------
---------- ----------
</TABLE>
F-26
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Audited Financial Statements
For the Year Ended December 31, 1997
and the Period from December 8, 1995 (Inception)
to December 31, 1997
F-27
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Company)
Contents
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-32
Financial Statements
Balance Sheet F-33
Statements of Operations F-34
Statements of Cash Flows F-35
Statements of Shareholders' Equity F-37
Notes to Financial Statements F-38 - F-44
</TABLE>
F-28
<PAGE>
REPORT ALL OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
TechnoVision Communications, Inc.
I have audited the accompanying balance sheet of TechnoVision Communications,
Inc., (a development stage company) as of December 31, 1997 and 1996 and the
related statements of operations, shareholders' equity, and cash flows for the
period ending December 31, 1997 and the period from December 8, 1995,
(inception), to December 31, 1997. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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
basis for my opinion. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of TechnoVision Communication, Inc. as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the period ending December 31, 1997 and for the period from
(inception) December 8, 1995 to December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern as discussed in Note 2 to the financial
statements, the Company incurred a net loss of $1,973,473 during the period from
December 8, 1995 (inception) to December 31, 1997, and, as of that date, the
Company's current liabilities exceeded its current assets by $342,796, its total
liabilities exceed its total assets by $253,273. In addition the company is
involved in certain litigation in which the outcome is uncertain as discussed in
Note 9. These factors, among others, as discussed in Note 2 to the financial
statements raise substantial doubt about the company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Louis Tommasino, CPA
September 25, 1998
San Diego, California
F-29
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ (410) $ 80,847
Accounts receivable 10,971 34,580
Stock subscription receivable -- 37,999
Inventory 82,785 --
Prepaid expenses 59,036 --
----------------- -----------------
Total current assets 152,382 153,426
Furniture and equipment, net 156,194 211,875
Other Assets
Guaranty deposits 5,752 --
Organization cost net 10,764 --
----------------- -----------------
Total other assets 16,516 --
----------------- -----------------
Total assets 325,092 365,301
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 353,359 $ 130,170
Short-term loans including $66,508 to related parties 126,508 64,612
Accrued taxes 7,822 --
Leases payable current portion 7,489 --
----------------- -----------------
Total current liabilities 495,178 194,782
Long-Term Liabilities
Leases payable 43,230 --
Note payable - Shareholder related party 39,957 --
----------------- -----------------
Total long-term liabilities 83,187 --
----------------- -----------------
Total liabilities 578,365 194,782
Commitments and Contingencies
Shareholders' equity
Common stock, no par value
10,000,000 shares authorized
6,624,442 shares issued and outstanding 1,720,570 588,500
Common stock subscribed -- 37,999
Deficit accumulated during the development stage (1,973,843) (455,980)
----------------- -----------------
Total shareholders' equity (253,273) 170,519
----------------- -----------------
Total liabilities and shareholders' equity $ 325,092 $ 365,301
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
from Inception
December 8, 1995
For the Year to December 31,
ending December 1997
31, 1997 ----------------
---------------
<S> <C> <C>
Operating Revenue
System sales $ 547,363 $ 869,169
Cost of Sales
System sales 495,922 678,309
Commissions 35,076 73,109
----------- -----------
Total costs of sales 530,998 751,418
----------- -----------
Gross profit from operations 16,365 117,751
----------- -----------
Operating Expenses
Consulting -- 118,528
Depreciation and amortization 36,985 47,822
Legal expenses 70,019 108,559
General and administrative 235,307 544,907
Marketing and advertising 276,444 325,334
Salaries and payroll taxes 228,395 228,395
Research and development 675,148 706,117
----------- -----------
Total operating expenses 1,522,298 2,079,662
----------- -----------
Loss from operations (1,505,933) (1,961,917)
----------- -----------
Other income (expenses)
Interest expense (11,066) (11,066)
Income taxes (800) (800)
Fines and penalties (66) (66)
----------- -----------
Total other income (expenses) (11,932) (11,932)
----------- -----------
Net loss $(1,517,865) $(1,973,843)
----------- -----------
----------- -----------
Basic loss per common share $ (0.23) $ (0.30)
----------- -----------
----------- -----------
Weighted average common share outstanding 6,624,442 6,624,442
----------- -----------
----------- -----------
Loss per share fully diluted $ (0.21) $ (0.28)
----------- -----------
----------- -----------
Fully diluted common shares outstanding 7,063,442 7,063,442
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Cash Flows from Operating Activities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
from Inception
December 8, 1995
For the Year to December 31,
ending December 1997
31, 1997 ----------------
---------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $(1,517,865) $ (1,973,843)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation amortization 36,985 47,822
Increase (decrease)in
Accounts payable 223,189 353,359
Accrued taxes 7,822 7,822
Leases payable 50,719 50,719
Decrease (increase) in
Accounts receivable 23,609 (10,973)
Inventories (82,785) (82,785)
Prepaid expenses (59,036) (59,036)
Other assets (19,828) (19,828)
------------ -------------
Net cash used in operating activities $(1,337,190) $ (1,686,743)
------------ -------------
Cash Flows from Investing Activities
Purchase of furniture and equipment (60,775) (285,487)
Reclass of demo equipment to inventory 82,785 82,785
------------ -------------
Net cash provided (used) in investing activities 22,010 (202,702)
------------ -------------
Cash Flows from Financing Activities
Proceeds from notes from shareholders 39,957 39,957
Proceeds from short-term loans 61,896 128,508
Proceeds from common stock subscription 1,132,070 1,720,570
Decrease (increase) in
Stock subscription receivable 37,999 --
Increase (decrease) in
Common stock subscribed (37,999) --
------------ -------------
Net cash provided by financing activities 1,233,923 1,889,035
------------ -------------
Net decrease in cash and cash equivalents $ (81,257) $ (410)
Cash and cash equivalents beginning of period 80,847 --
------------ -------------
Cash and cash equivalents end of period $ (410) $ (410)
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Cash Flows from Operating Activities
For the Year ending December 31, 1997
and the Period from (Inception) December 8, 1995 to December 31, 1997
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information.
During the period ending December 31, 1997, the Company paid no income taxes.
During the period ending December 31, 1997, the Company paid interest in the
amount of $11,066.
F-33
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Shareholders' Equity
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Common during the
------------------------- Stock Development
Shares Amount Subscribed Stage Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 8, 1995 0 $ 0 $ 0 $ 0 $ 0
Common stock issued to the original
Founders and Shareholders of the Company 4,000,000 40,000 40,000
Common stock issued by TechnoVision 853,501 548,500 548,500
Common stock subscribed 1996 37,000 37,999 37,999
Net loss from inception
December 8, 995 to December 31, 1996 (455,980) (455,980)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 4,891,500 $ 588,500 $ 37,999 $ (455,980) $ 170,519
Common stock issued by TechnoVision, 37,999 (37,999)
1997
Common stock subscribed 1997 1,732,942 1,094,071 1,094,071
Net loss of the year ended December 31, (1,517,863) (1,517,863)
1997
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 6,624,442 $ 1,720,570 $ -- $(1,973,843) $ (253,273)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION ALL OF BUSINESS
TechnoVision Communication, Inc. (the "Company") is a development
stage enterprise and is engaged in the development of video
conferencing products.
The Company was incorporated under the laws of the state of Georgia on
December 8, 1995. During the period beginning December 8, 1995 and
ending December 31, 1995 there was no activity. The company commenced
formal operations on January 1, 1996.
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, during the
period from December 8, 1995 (inception) to December 31, 1997, the
Company incurred a net loss of $1,973,843, and as of that date, the
Company's current liabilities exceeds its current assets by $342,796,
and it had negative cash flows from operations of $81,257. In addition,
the Company is involved in certain litigation in which the outcome is
uncertain as discussed in Note 9. The Company is also in the
development stage at December 31, 1997. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost
structure. In addition, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its plans to sell
its products. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise additional equity capital, continue to
develop its products, and look for merger or acquisition candidates.
Estimates
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 disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
F-35
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory
Inventories are recorded at cost. During 1997 the company reclassified
its demo equipment in the amount of $ 82,785 to inventory, because this
equipment will be sold to the public. Inventory consists of all costs
relating to the production of video communications equipment. Inventory
at December 31, 1997 is in the amount of $82,785.
Furniture and Equipment
Furniture and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over an estimated useful life of five years. Betterments, renewals, and
extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to
assets retired are removed from the Company's accounts, and the gain or
loss on dispositions, if any, is recognized in the statement of
operations.
Organization Costs
Organization costs are being amortized over five years using the
straight-line method. Amortization expense for the year ending December
31, 1997 is in the amount of $ 3,312.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business.
All losses accumulated since inception have been considered as part of
the Company's development stage activities, even though the company's
operations have commenced, the company is currently in its development
stage.
Research and Development Costs
Research and development costs are charged to expense as incurred.
F-36
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes under the liability and asset
method, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences
in the future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period-end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The
provision for income taxes if applicable, represents the tax payable
for the period and the change during the period in deferred tax assets
and liabilities.
Earnings per Share
For the period from December 8, 1995 (inception) to December 31, 1997,
the Company adopted SFAS No. 128, "Earnings per Share." Basic earnings
per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional
common shares were dilative.
Recent Accounting Pronouncements
The financial Accounting Standards Board ("FASB") issues SFAS No. 130,
"Reporting Comprehensive Income, "which is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information," issued by FASB, which is effective for financial
statements with fiscal years beginning after December 31, 1997. This
statement establishes standards for the way that public entities report
selected information about operating segments, products, and services,
geographic areas, and major customers in interim and annual financial
reports. The Company does not expect adoption of SFAS No. 131 to have a
material effect, if any, on its financial position or results of
operations.
F-37
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
company's financial instruments, including cash and cash equivalents,
accounts payable, and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for short-term loans also approximate fair value because current
interest rates offered to the Company for short-term loans of similar
maturities are substantially the same.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
December 1997 December 1996
------------- -------------
<S> <C> <C>
Office equipment $ 34,735 $ 27,000
Computer equipment and software 164,722 195,712
Transportation equipment 4,656 --
------------- -------------
240,113 222,712
Less accumulated depreciation 47,919 10,837
------------- -------------
Total $156,194 $211,875
------------- -------------
------------- -------------
</TABLE>
Depreciation expense for the period ending December 31, 1997 and 1996
was $33,673 and $10,837.
NOTE 4 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
F-38
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease
The company entered into a lease agreement with Sentre Partners, San
Diego 225 RPF III Limited Liability Company, a Delaware Limited
Liability company, whereby the company will provide $120,000 of Video
Conference Equipment in exchange for eighteen months of rent. The
company leases other facilities for its corporate offices, under a
month-to-month operating lease agreement. Rent expense was $75,704 for
the period ending December 31, 1997.
Capital Leases
The company acquired some of its computer and telephone equipment in
1997 under the provisions of a long-term lease. For financial statement
purposes, minimum lease payments relating to this equipment of $58,208
have been capitalized. Accumulated depreciation on the equipment on
December 31, 1997 was $11,642.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments
<TABLE>
<CAPTION>
Year Ended
1997 1998 2000
-------- -------- --------
<S> <C> <C> <C>
Minimum lease payments $12,854 $27,888 $ 9,248
Lease amount representing interest 5,365 9,155 432
-------- -------- --------
Present value of net minimum lease $ 7,489 $18,733 $ 8,816
payment
Current portion by year $ 7,489 $18,733 $ 8,816
</TABLE>
Litigation
The company and certain of its officers are subject to certain
litigation. Related to its 1998 common stock exchange offer made by
Video Stream International, Inc. as more fully described in NOTE 9.
F-39
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
NOTE 6 - SHAREHOLDERS' EQUITY
Common Stock
The Company issued 4,000,000 shares of common stock to its founders and
original shareholders of the company and received $40,000 for the
issuance of those shares of stock, during the period from December 8,
1995 (inception) to December 31, 1996.
During the year ending December 31, 1997 the company received
$1,094,071 for the subscription of 1,732,942 shares of stock.
Stock Option Plan
The company adopted a Stock Option Plan. (the "Plan") in 1997. Under
the terms of the plan options are granted to employees, officers, and
directors of the Company to purchase shares of the company's common
stock at an option price of $1.00 per share. Options generally vest and
become exercisable to the extent of 25% three months from the grant
date and the remainder ratably over the twelve months period,
thereafter. If an employee terminates his/her employment all vested
options will remain with the employee until March 31, 2006. At December
31, 1997 there were 973,000 shares under option and 439,000 vested
shares outstanding. These vested option shares outstanding will be used
to calculate the fully diluted shares outstanding.
NOTE 7 - INCOME TAXES
As of December 31, 1997, the company had approximately $1,973,843 in
net operating loss carry forwards that may be offset against future
taxable income through the year 2018. The company also has a research
activities credit in the amount of $55,737 to offset against future
corporate taxes. The deferred income tax benefit of the loss carry
forward is the only significant deferred income tax asset or liability
of the Company and has been offset by a valuation allowance of the same
amount as management does not believe the recoverability of this
deferred tax asset is more likely than not. Accordingly, no deferred
income tax benefit has been recognized in these financial statements.
NOTE 8 - RELATED PARTIES
At December 31, 1997, $126,508 of the short- term loans outstanding
were due to the current shareholders and officers of the company.
During the period from December 8, 1995 (inception) to December 31,
1997 the company paid to officers and shareholders of the Company
$33,323 of reimbursement for General and Administrative expenses.
During the period ending December 31, 1997 the Company paid salaries to
officers and shareholders of the
F-40
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Year ended December 31, 1997
and the Period from December 8, 1995 (inception) to December 31, 1997
- --------------------------------------------------------------------------------
company in the amount of $94,402.
NOTE 9 - SUBSEQUENT EVENTS
During June 1998, the Company's shareholders were offered, pursuant to
a Confidential Private Placement Memorandum made by Video Stream
International, Inc. to acquire all of the issued and outstanding common
stock of the Company. The shareholders of the Company are being offered
one common share of Video Stream International, Inc. for every two
common shares of the Company's stock tendered. Such offer originally
expired on July 15, 1998, but was extended to August 7, 1998. At the
date of this report, Video Stream International, Inc. believes that the
Company's shareholders have tendered approximately 99.1% of the total
issued and outstanding common shares of TechnoVision, and as a result,
Video Stream International, Inc. believes it has effective control of
the Company.
The Company has been named in a securities class action lawsuit filed
by two former shareholders of the Company on July 15, 1998 in Los
Angeles County Superior Court. The Compliant names the Company, Video
Stream International, Inc., Grey Venture Capital, Inc. and certain
present and former officers and employees of each as defendants. The
Complaint alleges that the Company and each conspired and engaged in
fraudulent and deceptive sales practice in connection with private
placement of securities in an offering conducted by Grey Venture
Capital from November 1997 through May 1998. The Complaint states
causes of action for breach of fiduciary duties, intentional
misrepresentation and fraudulent concealment, negligent
misrepresentation, unfair trade practices, negligence, Racketeer
Influenced and Corrupt Organizations Act of 1970 ("RICO") violations,
conversion, and conspiracy. The Company denies any involvement or
wrongdoing in connection with the private placement and intends to
vigorously defend the lawsuit.
The Company along with its Chief Executive Officer has been sued by
shareholder in for breach of contract, misrepresentation and fraud, and
breach of fiduciary duty.
The Complaint arises out of a settlement agreement entered into between
the Company and the shareholder. Under the terms of the Settlement
Agreement, the shareholder was given 750,000 shares of TechnoVision's
common stock which are subject to a repurchase option in favor of the
Company
The Complaint alleges that TechnoVision fraudulently induced the
shareholder to enter into the Settlement Agreement. The Complaint seeks
to invalidate the Settlement Agreement, cause the Company to issue to
the shareholder 2,000,000 shares of its common stock, invalidate the
repurchase option, and pay damages. The Company denies any wrongdoing
and intends to vigorously defend the lawsuit.
F-41
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
Audited Financial Statements
For the Period from December 8, 1996 (Inception)
to December 31, 1996
F-42
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
AND SUBSIDIARIES
(A Development Stage Company)
Contents
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-47
Financial Statements
Balance Sheet F-48
Statements of Operations F-49
Statements of Cash Flows F-50
Statements of Shareholders' Equity F-51
Notes to Financial Statements F-52-F-56
</TABLE>
F-43
<PAGE>
REPORT ALL OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
TechnoVision Communications, Inc.
I have audited the accompanying balance sheet of TechnoVision Communications,
Inc. (a development stage company as of December 31, 1996 and the related
statements of operations, shareholders' equity, and cash flows for the period
from December 8, 1995, (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of TechnoVision Communication, Inc. as
of December 31, 1996, and the results of their operations and their cash flows
for the period from December 8, 1995, (inception) to December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern as discussed in Note 2 to the financial
statements, the company incurred a net loss of $(455,980) during the period from
December 8, 1995 (inception) to December 31, 1996, and, as of that date, the
Company's current liabilities exceeded its current assets by $41,356. In
addition, the Company is involved in certain litigation in which the outcome is
uncertain as discussed in Note 9. These factors, among others, as discussed in
Note 2 to the financial statements raise substantial doubt about the company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Louis Tommasino, CPA
September 25, 1998
San Diego, California
F-44
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 80,847
Accounts receivable 34,580
Stock subscription receivable 37,999
-----------------
Total current assets 153,426
Furniture and equipment, net 211,875
-----------------
Total assets $ 365,301
-----------------
-----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 130,170
Short-term loans including $64,612 to related parties 64,612
-----------------
Total current liabilities 194,782
Commitments and Contingencies
Shareholders' equity
Common stock, no par value
10,000,000 shares authorized
4,891,500 shares issued and outstanding 588,500
Common stock subscribed 37,000
Deficit accumulated during the development stage (455,980)
-----------------
Total shareholders' equity 170,519
-----------------
Total liabilities and shareholders' equity $ 365,301
-----------------
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period from
December 8, 1995
(inception to
December 31, 1996
-----------------
<S> <C>
Operating Revenue
System sales $ 321,806
-----------------
Cost of Sales
Systems costs 182,387
Commissions 38,033
-----------------
Total costs of sales 220,420
-----------------
Gross profit from operations 101,386
-----------------
Operating Expenses
Consulting, related party 118,528
Depreciation 10,837
Legal expenses 38,540
General and administrative 309,600
Marketing and advertising 48,890
Research and development 30,971
-----------------
Total operating expenses $ 557,366
-----------------
Loss from operations (455,980)
-----------------
Other income (expenses) --
Net loss $ (455,980)
-----------------
Basic loss per common shares $ (0.09)
-----------------
Weighted average common shares outstanding 4,891,500
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-46
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Cash Flows form Operating Activities
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(455,980)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation 10,837
Increase (Decrease) in accounts payable 130,170
Decrease (Increase) in accounts receivable (34,580)
-------------
Net cash used in operating activities $(349,553)
-------------
Cash flows from investing activities
Purchase of furniture and equipment (222,712)
-------------
Net cash used in investing activities (222,712)
-------------
Cash flow from investing activities
Proceeds from short-term loans 64,612
Proceeds from common stock subscription 588,500
Decrease (increase) in
Stock subscription receivable (37,999)
Increase (decrease) in
Common stock subscribed 37,999
-------------
Net cash provided by financial activities 653,112
-------------
Net increase in cash and cash equivalents $ 80,847
-------------
Cash and cash equivalents, beginning of period --
Cash and cash equivalents, end of period $ 80,847
-------------
</TABLE>
SUPPLEMENTAL DISCLOSURES ALL OF CASH FLOW INFORMATION
During the period from December 8, 1995 (inception) to December 31, 1996, the
Company paid no income taxes
During the period from December 8, 1995 (inception) to December 31, 1996, the
Company paid no interest
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Statement of Shareholders' Equity
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit/Accumulated
Common Stock during the
--------------------------- Common Stock Development
Shares Amount Subscribed Stage Total
------------ ------------ ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 8, 1995 0 $ 0 $ 0 $ 0 $ 0
Common stock issued to the
original founders and
shareholders of the 4,000,000 40,000 40,000
Company
Common stock issued for 853,501 548,500 548,500
cash
Common stock subscribed 37,000 37,000 37,999
Net loss (455,980) (455,980)
------------ ------------ ------------ ---------------- ------------
Balance, December 31, 1996 $ 4,891,500 $ 588,500 $ 37,999 $ (455,980) $ 170,519)
------------ ------------ ------------ ---------------- ------------
------------ ------------ ------------ ---------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION ALL OF BUSINESS
TechnoVision Communication, Inc. (the "Company") is a development stage
enterprise and is engaged in the development of video conferencing
products.
The company was incorporated under the laws of the state of Georgia on
December 8, 1995. The company did not commence its operation until
January 1, 1996 and therefore, did not have any financial activity from
the period December 8, 1995 to January 1, 1996.
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, during the
period from December 8, 1995 (inception) to December 31, 1996, the
Company incurred a net loss of $455,980, and as of that date, the
Company's current liabilities exceeds its current assets by $41,356,
and it had negative cash flows from operations of $349,553. In
addition, the Company is involved in certain litigation in which the
outcome is uncertain as discussed in Note 9. The Company is also in the
development stage at December 31, 1996. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost
structure. In addition, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its plans to sell
its products. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise additional equity capital, continue to
develop its products, and look for merger or acquisition candidates.
Estimates
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 disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
F-49
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Furniture and Equipment
Furniture and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over an estimated useful life of five years. Betterments, renewals, and
extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to
assets retired are removed from the Company's accounts, and the gain or
loss on dispositions, if any, is recognized in the statement of
operations.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes under the liability and asset
method, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences
in the future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period-end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The
provision for income taxes if applicable, represents the tax payable
for the period and the change during the period in deferred tax assets
and liabilities.
Earnings per Share
For the period from December 8, 1995 (inception) to December 31, 1996,
the Company adopted SFAS No. 128, "Earnings per Share." Basic earnings
per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include
the
F-50
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional
common shares were dilutive.
NOTE 2 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
The financial Accounting Standards Board ("FASB") issues SFAS No. 130,
"Reporting Comprehensive Income, "which is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information," issued by FASB, which is effective for financial
statements with fiscal years beginning after December 31, 1997. This
statement establishes standards for the way that public entities report
selected information about operating segments, products, and services,
geographic areas, and major customers in interim and annual financial
reports. The Company does not expect adoption of SFAS No. 131 to have a
material effect, if any, on its financial position or results of
operations.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
company's financial instruments, including cash and cash equivalents,
accounts payable, and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for short-term loans also approximate fair value because current
interest rates offered to the Company for short-term loans of similar
maturities are substantially the same.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1996, consisted of the
following:
<TABLE>
<S> <C>
Office equipment $ 27,000
Computer equipment and software 195,712
--------
222,712
Less accumulated depreciation 10,837
--------
Total $211,875
--------
--------
</TABLE>
Depreciation expense for the period from December 8, 1995 (inception)
to December 31, 1996 was $10,837
F-51
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
NOTE 4 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease
The company leases certain facilities for its corporate officers, under
a month -to -month operating lease agreement. Rent expense was $18,270
for the period from December 8, 1995 (inception ) to December 31, 1996.
Litigation
The company and certain of its officers are subject to certain
litigation, related to its 1998 common stock exchange offer made by
Video Stream International, Inc. as more fully described in NOTE 9.
NOTE 6 - SHAREHOLDERS' EQUITY
Common Stock
During the year ending December 31, 1996 the company received $588,500
for the subscription of 4,891,500 shares of stock. The company had a
subscription receivable balance in the amount of $37,999 at December
31, 1996. In addition, the Company issued 4,000,000 shares of common
stock to its founders and original shareholders of the corporation and
received $40,000 for the issuance of those shares of stock.
NOTE 7 - INCOME TAXES
As of December 31, 1996, the company had approximately $455,980 in net
operation loss carryforwards that may be offset against future taxable
income through the year 2017. The deferred income tax benefit of the
loss carryforward is the only significant deferred income tax asset or
liability of the Company and has been offset by a valuation allowance
of the same amount as management does not believe the recoverability of
this deferred tax asset is more likely than not. Accordingly, no
deferred income tax benefit has been recognized in these financial
statements.
NOTE 8 - RELATED PARTIES
At December 31, 1996, $64,612 of the short- term loans outstanding were
due to the current shareholders and officers of the company.
F-52
<PAGE>
TECHNOVISION COMMUNICATIONS, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Period from December 8, 1995 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------
During the period from December 8, 1995 (inception) to December 31,
1996 the company paid to officers and shareholders of the Company
$33,323 of reimbursement for general and administrative expenses.
NOTE 9 - SUBSEQUENT EVENTS
During June 1998, the Company's shareholders were offered, pursuant to
a Confidential Private Placement Memorandum made by Video Stream
International, Inc. to acquire all of the issued and outstanding common
stock of the Company. The shareholders of the Company are being offered
one common share of Video Stream International, Inc. for every two
common shares of the Company tendered. Such offer originally expired on
July 15, 1998, but was extended to August 7, 1998. At the date of this
report, Video Stream International, Inc. believes that the Company's
shareholders have tendered approximately 99.1% of the total issued and
outstanding common shares of the Company, and as a result, Video Stream
International, Inc. believes it has effective control of TechnoVision
Communication, Inc.
The Company has been named in a securities class action lawsuit filed
by two former Shareholders' of the Company on July 15, 1998 in Los
Angeles County Superior Court. The Compliant names the Company, Video
Stream International, Inc., Grey Venture Capital, Inc. and certain
present and former officers and employees of each as defendants. The
Complaint alleges that the Company and each conspired and engaged in
fraudulent and deceptive sales practices in connection with private
placement of securities in an offering conducted by Grey Venture
Capital from November 1997 through May 1998. The Complaint states
causes of action for breach of fiduciary duties, intentional
misrepresentation and fraudulent concealment, negligent
misrepresentation, unfair trade practices, negligence, Racketeer
Influenced and Corrupt Organizations Act of 1970 ("RICO") violations,
conversion, and conspiracy. The Company denies any involvement or
wrongdoing in connection with the private placement and intends to
vigorously defend the lawsuit.
The Company along with its Chief Executive Officer has been sued by one
of its shareholders for breach of contract, misrepresentation and
fraud, and breach of fiduciary duty. The Complaint arises out of a
settlement agreement entered into between the Company and the
shareholder. Under the terms of the Settlement Agreement, the
shareholder was given 750,000 shares of the Company's' common stock
which are subject to a repurchase option in favor of the Company. The
Complaint alleges that the Company fraudulently induced the shareholder
to enter into the Settlement Agreement.
The Complaint seeks to invalidate the Settlement Agreement, cause the
Company to issue to the shareholder 2,000,000 shares of its Common
stock, invalidate the repurchase option, and pay damages. The Company
denies any wrongdoing and intends to vigorously defend the lawsuit.
F-53
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
F-54
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
Contents
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Auditor's Report F-59
Balance Sheet F-60
Statement of Income and Retained Earnings F-61
Statement of Cash Flows F-62
Notes to Financial Statements F-63
</TABLE>
F-55
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Design Analysis Associates, Inc.
Logan UT 84321
I have audited the accompanying balance sheet of Design Analysis Associates,
Inc. (a corporation) as of December 31, 1997 and the related statements of
income and retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of Design Analysis' management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted may audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Design Analysis Associates, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Steven R. Misener
Certified Public Accountant
Logan, Utah
October 10, 1998
F-56
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Balance Sheet
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable $314,834
Inventory (note 1) 16,700
Investments 38,427
-----------
Total current assets $369,961
Fixed assets: (note 1)
Lab equipment 516,026
Leasehold improvements 35,235
Office furniture 22,693
-----------
Fixed assets 573,954
Less accumulated depreciation (491,852)
-----------
Total fixed assets 82,102
-----------
Total assets $452,063
-----------
-----------
LIABILITIES AND EQUITY
Current liabilities:
Cash overdraft $21,223
Accounts payable 88,838
Accrued expenses 20,580
Accrued retirement & profit sharing 242,946
-----------
Total current liabilities $373,587
Stockholders' equity:
Common stock 200
Paid-in capital 800
Retained earnings 77,476
-----------
Total equity 78,476
-----------
Total liabilities and equity $452,063
-----------
-----------
</TABLE>
See accompanying notes and accountant's report.
F-57
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Statement of Income and Retained Earnings
For the Year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Income:
Sales $ 3,749,238
Cost of sales 2,469,894
-----------
Gross profit 1,279,344
-----------
General, administrative and overhead expenses:
Office salaries and wages 310,585
Marketing 123,738
Insurance 79,567
Commissions 133,231
Retirement contributions 242,946
Repairs and maintenance 15,362
Utilities and telephone 38,124
Supplies 60,342
Employee benefits 62,847
Dues and subscriptions 1,916
Taxes and licenses 7,733
Depreciation (note 1) 37,075
Rent 86,663
Legal and accounting 2,737
Meals and entertainment 8,521
Equipment lease 32,449
-----------
Total general, administrative and overhead expenses 1,243,836
-----------
Income (loss) from operations 35,508
Other income (expenses)
Interest income --
Interest expense (13,354)
Investment loss (25,000)
-----------
Net income (loss) (2,846)
Retained earnings, beginning 80,322
Owner draws --
-----------
Retained earnings, ending $ 77,476
-----------
-----------
</TABLE>
See accompanying notes and accountant's report.
F-58
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Statement of Cash Flows
For the Year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss) $ (2,846)
Non-cash items included in net income:
Depreciation 37,075
Net (increase) decrease in receivables, inventory and payables 189,007
-----------
Net cash provided (used by operating activities 223,236
-----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (22,378)
-----------
Net cash provided (used) by investing activities (22,378)
-----------
Cash flows from financing activities:
Loan payment (100,000)
Owner (draws) contributions --
-----------
Net cash provided (used by financing activities (100,000)
-----------
Net increase (decrease) in cash 100,858
Cash at beginning of period (122,081)
-----------
Cash at end of period $ (21,223)
-----------
-----------
</TABLE>
See accompanying notes and accountant's report.
F-59
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
Notes to Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of Design Analysis Associates, Inc.
(the "Company") is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management, who are responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Business Activity
The Company was incorporated in 1973 under the laws of the State of
Utah. The accrual method of accounting is used for financial reporting.
The business develops and sells water measurement equipment and also
provides hardware and software consulting services.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straightline and accelerated methods. When assets are retired
or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals and
betterments are capitalized. Deduction is made for retirement resulting
from betterments or renewals.
NOTE 2 - RENT
The Company rents is building under an informal arrangement with a
partnership owned 33% by the Company's majority stockholder. Monthly
rentals under this informal arrangement are presently $7,026.
NOTE 3 - DEFINED CONTRIBUTION PENSION PLAN
The Company has a defined contribution pension plan covering all
qualifying employees. The Company makes a contribution to the plan each
year based on a percent of the employee's compensation. Total expenses
for the year ended December 31, 1997 was $242,946.
NOTE 4 - INCOME TAXES
The Company has elected, with the consent of its stockholders, to be
taxes as an "S" Corporation under the Internal Revenue Code. An "S"
Corporation does not generally pay income taxes but, instead, its
stockholders are taxed on the Company's income. Therefore, these
statements do not include any provision for corporate income taxes.
F-60
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
F-61
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
Contents
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Auditor's Report F-66
Balance Sheet F-67
Statement of Income and Retained Earnings F-68
Statement of Cash Flows F-69
Notes to Financial Statements F-70 - F-71
</TABLE>
F-62
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Design Analysis Associates, Inc.
Logan UT 84321
I have audited the accompanying balance sheet of Design Analysis Associates,
Inc. (a corporation) as of December 31, 1996 and the related statements of
income and retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of Design Analysis' management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted may audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Design Analysis Associates, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Steven R. Misener
Certified Public Accountant
Logan, Utah
October 10, 1998
F-63
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Balance Sheet
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable 320,378
Inventory (note 1) 1,500
----------
Total current assets $321,878
Fixed assets: (note 1)
Lab equipment 493,648
Leasehold improvements 35,235
Office furniture 22,693
----------
Fixed assets 551,576
Less accumulated depreciation (454,777)
----------
Total fixed assets 96,799
---------
Total assets $418,677
---------
---------
LIABILITIES AND EQUITY
Current liabilities:
Cash overdraft 122,081
Accounts payable 104,585
Accrued expenses 10,689
Notes payable, short-term (note 2) 100,000
----------
Total current liabilities $337,355
Stockholders' equity:
Common stock 200
Pain-in capital 800
Retained earnings 80,322
----------
Total equity 81,322
---------
Total liabilities and equity $418,677
---------
---------
</TABLE>
See accompanying notes and accountant's report.
F-64
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Statement of Income and Retained Earnings
For the Year ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Income:
Sales $ 3,375,608
Cost of sales 2,403,404
-----------
Gross profit 972,204
-----------
General, administrative and overhead expenses:
Office salaries and wages 342,633
Marketing 159,138
Insurance 65,267
Commissions 46,010
Pension and profit sharing 14,626
Repairs and maintenance 19,457
Utilities and telephone 41,471
Supplies 47,912
Employee benefits 20,127
Dues and subscriptions 1,409
Taxes and licenses 4,016
Depreciation (note 1) 39,189
Rent 85,251
Training and seminars 3,399
Legal and accounting 27,563
Meals and entertainment 12,130
Equipment lease 87,782
-----------
Total general, administrative and overhead expenses 1,040,693
-----------
Income (loss) from operations (68,489)
Other income (expenses)
Interest income 106
Interest expense (8,433)
-----------
Net income (loss) (76,816)
Retained earnings, beginning 213,932
Owner draws (56,794)
-----------
Retained earnings, ending $ 80,322
-----------
-----------
</TABLE>
See accompanying notes and accountant's report.
F-65
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC
Statement of Cash Flows
For the Year ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss) $ (76,816)
Non-cash items included in net income:
Depreciation 39,189
Net (increase) decrease in receivables, inventory and payables (46,097)
----------
Net cash provided (used) by operating activities (83,724)
----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (22,763)
----------
Net cash provided (used) by investing activities (22,763)
----------
Cash flows from financing activities:
Loan proceeds 100,000
Owner (draws) contributions (56,794)
----------
Net cash provided (used) by financing activities 43,206
----------
Net increase (decrease) in cash (63,281)
Cash at beginning of period (58,800)
----------
Cash at end of period $(122,081)
----------
----------
</TABLE>
See accompanying notes and accountant's report.
F-66
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY ALL OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of Design Analysis Associates, Inc.
(the "Company") is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management, who are responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Business Activity
The Company was incorporated in 1973 under the laws of the State of
Utah. The accrual method of accounting is used for financial reporting.
The business develops and sells water measurement equipment and also
provides hardware and software consulting services.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straightline and accelerated methods. When assets are retired
or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals and
betterments are capitalized. Deduction is made for retirement resulting
from betterments or renewals.
NOTE 2 - LINE ALL OF CREDIT
The Company has a line of credit with a bank. Maximum borrowings are
$100,000, interest is payable monthly at the bank's prime rate plus
1.50%, principal is payable on demand, and collateralization is
provided by accounts receivable and inventory. The balance owed at
December 31, 1996 was $100,000.
Interest expense was $8,433 for the year ended December 31, 1996.
NOTE 3 - RENT
The Company rents is building under an informal arrangement with a
partnership owned 33% by the Company's majority stockholder. Monthly
rentals under this informal arrangement are presently $7,026.
NOTE 4 - DEFINED CONTRIBUTION PENSION PLAN
The Company has a defined contribution pension plan covering all
qualifying employees. The Company makes a contribution to the plan each
year based on a percent of the employee's compensation. Total expenses
for the year ended December 31, 1996 was $14,091.
F-67
<PAGE>
DESIGN ANALYSIS ASSOCIATES, INC.
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
NOTE 5 - INCOME TAXES
The Company has elected, with the consent of its stockholders, to be
taxes as an "S" Corporation under the Internal Revenue Code. An "S"
Corporation does not generally pay income taxes but, instead, its
stockholders are taxed on the Company's income. Therefore, these
statements do not include any provision for corporate income taxes.
F-68
<PAGE>
PART IV - Exhibits
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended*
3.2 Bylaws, as amended*
4.1 Form of Convertible Debenture*
5.1 Legal Opinion re Legality*
10.1 Agreement and Plan of Merger with Design Analysis
Associates, Inc. dated September 30, 1998*
10.2 Asset Purchase Agreement with Interactive Solutions Group,
Inc. dated July 31, 1998*
10.3 Agreement and Plan of Corporate Reorganization and
Separation dated December 18, 1998*
10.4 Ingram Micro Agreement*
10.5 Employment Agreement with Mr. Cox*
10.6 Employment Agreement with Mr. Fann*
10.7 Employment Agreement with Mr. Holcomb*
10.8 Employment Agreement with Mr. Nakhleh*
10.9 1997 Employee Stock Option Plan*
10.10 MENTAT Agreement*
10.11 Alliance Leasing Form of Capital Equipment Lease*
10.12 Infinop Licensing Agreement*
10.13 Apple Direct Value Added Reseller U.S. Sales Agreement
11 Statement re Computation of Earnings Per Share*
21 Subsidiaries of the Registrant*
24 Power of Attorney (incorporated by reference from page II-2)
27 Financial Data Schedule*
</TABLE>
- --------------------
* Previously filed.
II-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
TERAGLOBAL COMMUNICATIONS CORP.
Date: February 12, 1999 By: /s/ DAVID FANN
-----------------------------------
David Fann, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Fann and Paul Cox, or either of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ DAVID FANN Director and Chief Executive Officer February 12, 1999
- ------------------
David Fann
/s/ PAUL COX* Chairman of the Board and President February 12, 1999
- ------------------
Paul Cox
/s/ GRANT K. HOLCOMB* Director, Chief Technology Officer February 12, 1999
- -------------------- and Secretary
Grant K. Holcomb
* By David Fann, attorney-in-fact.
II-2
<PAGE>
Apple Computer, Inc.
DIRECT VALUE ADDED RESELLER U.S. SALES AGREEMENT
This Direct Value Added Reseller U.S. Sales Agreement is made between Apple
Computer, Inc., a California corporation with its principal place of business
located at 1 Infinite Loop, Cupertino, California 95014 ("Apple") and
Interactive Solutions Group, Inc., a corporation, partnership, or sole
proprietorship organized under the laws of North Carolina with its principal
place of business located at Suite 114, 300 South Breward St., Charlotte NC,
28202 ("VAR").
DEFINITIONS
As used in this Agreement, the following terms have the meanings specified
A. "Agreement" - this Direct Value Added Reseller U.S. Sales Agreement,
Direct VAR Application, Direct VAR Renewal, and any documents incorporated
herein by reference.
B. "Apple Product(s)" and/or "Product(s)" - hardware, software, support,
and training products, including items manufactured, distributed or licensed
("sold") exclusively by Apple -Registered Trademark- and items manufactured
or distributed by others, that may be sold by Apple to VAR for resale to
customers.
C. "Apple Service Programs" - the then-current so titled document which
Apple's policies and procedures for providing customer service and support.
D. "Authorized Apple Products List" - the then-current list which designates
those Authorized Products VAR is authorized to resell.
E. "Authorized Product(s)" - those Products that VAR is authorized by this
Agreement to resell to customers.
F. "Consumables" - those items, such as paper, toner cartridges, printer
ribbons, floppy disks, and labels, as specified by Apple in the Price List.
G. "Customer" - the end user(s) located in the United States who purchase(s)
and/or might purchase Product from VAR.
H. "Modification" and/or "Modified Products" - hardware modifications to
the Products incorporated into the Solution System including but not limited
to modifications that require cutting, soldering, or TEMPESTing (or
modifications as defined in the Apple Service Programs).
I. "Policies and Practices Manual" - Apple's then-current policies relating
to doing business in Apple Products and Apple administrative programs and
procedures which a VAR must follow.
J. "Price List" - the Apple Computer, Inc. Authorized Apple Direct VAR
Confidential Price List.
K. "Solution System" - the Product(s) incorporating Value-Added
Enhancement(s).
L. "Value-Added Enhancement(s)" - custom and/or proprietary software and/
or hardware or expertise within a vertical market which are an integral part
of each Product sold by VAR. Value-Added Enhancements are set forth in the
VAR Application. VAR's Value-Added Enhancement(s) shall (1) be an integral
part of each system sold by VAR; and (2) significantly enhance, in function
or capability or both, the Apple Products contained in such system.
M. "Wholesaler" and/or "Authorized Wholesaler" - an entity authorized by
Apple in the United States to resell Authorized Products to VAR.
1. APPOINTMENT
A. Apple appoints VAR as an Authorized Apple Direct Value Added Reseller
and VAR accepts such appointment. The appointment is limited, non-exclusive
and effective only so long as VAR complies with the terms and conditions of
this Agreement.This appointment is based upon representations made by VAR in
the VAR Application and VAR's agreement to abide by the terms and conditions
of this Agreement. Appointment allows VAR to perform the functions described
herein and represent to the public that VAR has been authorized by Apple to
do so.
B. VAR is an independent contractor, has no power or authority to bind
Apple and is contracting for certain goods and services. Nothing in this
Agreement shall be construed as creating any relationship such as
employer-employee, principal-agent or franchisor-franchisee.
C. The appointment is based upon the existing ownership of VAR and is,
therefore, personal in nature. Consequently, VAR may not assign or transfer
any or all of its rights or obligations under this Agreement without express
written approval from Apple.
2. SCOPE OF AUTHORIZATION
A. VAR shall only sell Products for which it has been specifically
authorized by Apple. As of the date of this Agreement those Products include
Products designated on the Authorized Apple Products List. Apple reserves the
right to remove Products from the Authorized Apple Products List, to limit
those Products available to VAR and to require Product specific
authorizations in the future.
B. VAR shall only sell Authorized Products for use within the United States
of America (50 states and the District of Columbia).
C. Each Product sale to a Customer must be part of the Solution System.
D. VAR will only advertise, promote, and sell Products as components of its
Solution System.
E. VAR shall not sell Authorized Products as follows unless specifically
authorized to do so by an amendment to this Agreement:
(1) by mail-order or any similar means;
(2) for resale. If Apple authorizes VAR to resell Products to other Apple
resellers, VAR shall pass on to the reseller all promotional allowances
received from Apple for the Products sold;
(3) for export, either directly or indirectly;
(4) to public and private non-profit educational institutions, including,
without limitation, those portions of state contracts concerning purchases
for educational institutions; and
(5) to Premium/Incentive customers defined by Apple for programs that will
compete with existing Apple Premium/Incentive programs.
F. VAR shall determine its own resale prices unilaterally. Although Apple
may provide suggested retail prices, those are suggestions only and VAR may
freely choose to charge different prices.
3. VAR'S OBLIGATIONS
A. VAR'S SOLUTION
VAR hereby certifies that all Apple Products purchased or licensed pursuant
to this Agreement are to be incorporated into VAR's own Solution System for
resale or used internally by VAR to develop or demonstrate VAR's Solution
System.
B. PROMOTION AND SALES
VAR shall promote and sell Products and Consumables to Customers, maintaining
a high level of customer satisfaction. VAR agrees and represents that it
shall accomplish at least the following:
(1) comply with Apple's programs and policies either contained in the
Policies and Practices Manual or other documentation available to VAR;
(2) assist each Customer in person to properly assess the Customer's needs
and fully explain the features, benefits, operation, and applications of the
Solution System. VAR shall provide Customers with the benefit of
ongoing, skilled, face-to-face, presale, and postsale education, orientation,
service, and support on the Solution System;
(3) purchase and take delivery from Apple, during the term of this
Agreement: for an integration solution VAR, no less than one million dollars
($1,000,000) worth of Apple Products; or for a proprietary solution VAR, no
less than five
<PAGE>
hundred thousand dollars ($500,000) worth of Apple Products;
(4) utilize the promotional programs and funds Apple makes available from
time to time;
(5) make available (a) Apple's standard Limited Warranty, (b) any warranties
provided by the vendor of any bundled products, and (c) applicable end user
Software License Agreements to all purchasers prior to purchase;
(6) not engage in any deceptive, misleading or unethical practices that are
or might be detrimental to Apple, Apple products or the public;
(7) not make any representations, warranties, or guarantees to Customers or
to the trade with respect to the specifications, features, or capabilities of
Apple products that are inconsistent with Apple's literature, including all
warranties and disclaimers contained in such literature; and
(8) not make modifications to Products without authorization from Apple.
C. SERVICE
(1) VAR shall provide for the service of all Apple Product in a manner which
ensures customer satisfaction and conforms to Apple's requirements. VAR shall
meet its service obligation by executing an Apple Authorized Service Provider
Agreement and performing service and repair itself; The service requirements
are more fully described in the Apple Service Programs. VAR must itself
perform service on all Modified Product.
(2) VAR shall report to Apple which service option(s) it will utilize to
fulfill its service obligations.
(3) If VAR elects at any time to use another third party Apple authorized
service provider to perform its service obligations on its behalf, VAR
acknowledges that it shall remain responsible for ensuring service and
repairs are performed in accordance with this Agreement.
D. SUPPORT
VAR shall support all Apple Products it offers for sale. Adequate minimum
support of Apple Products includes:
(1) providing satisfactory technical support for the Products in a timely
manner. Technical support shall include, but not be limited to, information
and training on Product configurations, compatibility, and general product
information. At a minimum VAR will provide the support outlined in the VAR
Application; and
(2) explaining to the Customers the various Apple service and support
program options available for Apple Products.
4. PRODUCT PURCHASES
In addition to Products ordered for resale, VAR may order Products in
reasonable quantities for internal use in developing and demonstrating VAR's
Solution System.
A. PURCHASES DIRECT FROM APPLE
(1) If eligible to purchase directly from Apple, VAR may submit orders for
Products and Consumables. Orders shall be subject to acceptance by Apple. The
price shall be Apple's price on the then-current Price List on the date of
Apple's acceptance. The prices set forth in Apple's then-current Price List
include freight (using an Apple-selected carrier) to VAR and insurance.
Apple shall use reasonable efforts to ship according to VAR's request, but
shall not be liable for any failure to do so or for any failure to meet a
proposed delivery date. Unless VAR clearly advises Apple to the contrary in
writing, Apple may make partial shipments on account of VAR's orders, to be
separately invoiced and paid for when due. Title to all shipped Product shall
pass to VAR at Apple's shipping location. When shipping pursuant to Apple's
standard practices, Apple will place tracers, file claims and replace product
lost or damaged in transit.
(2) Should orders for Product exceed Apple's available inventory, Apple will
allocate its available inventory and make deliveries (including partial
shipments) on a basis Apple deems equitable, in its sole discretion and
without liability to VAR.
(3) VAR shall be invoiced upon shipment of Product and, provided VAR is
eligible for credit from Apple, shall pay each invoice no later than THIRTY (30)
DAYS from the date of invoice. Upon Apple's request, VAR shall provide
financial statements to Apple. Apple reserves the right to change credit terms
should VAR's financial status or payment record so warrant.
B. PURCHASES FROM WHOLESALERS
(1) VAR is authorized by this Agreement to purchase Apple Products from any
Authorized Wholesaler provided VAR complies with the terms of this Agreement.
Should VAR violate the terms of this Agreement, in addition to any other
remedies Apple may otherwise have, Apple may terminate VAR's purchase
authorization and notify all Wholesalers of such termination. VAR agrees that
neither Apple nor any Wholesaler shall be liable to VAR for not fulfilling
VAR's orders should Apple remove or terminate VAR's purchase authorization.
(2) The terms and conditions of any purchases shall be between VAR and
Wholesaler. VAR understands and acknowledges that Apple shall not in any way
be responsible or liable to VAR for any act, or failure to act, by any
Wholesaler.
5. LIMITED WARRANTY TO VAR
A. Apple warrants to VAR that any Authorized Products purchased directly
from Apple shall conform to the general description of that Product on the
Price List. This warranty is non-transferable.
VAR's sole and exclusive remedy for any breach by Apple of the foregoing
warranty shall be a credit to the VAR's account upon return to Apple of the
non-conforming unit.
B. VAR-owned Apple Products used for demonstration, display, seeding, or
training purposes are covered by Apple's standard Limited Warranty; coverage
shall commence on the date VAR first uses the Product. If VAR does not
maintain records indicating the date of first use, the coverage period will
start from VAR's date of purchase.
C. APPLE MAKES NO OTHER WARRANTY TO VAR, EITHER EXPRESS OR IMPLIED, WITH
RESPECT TO ANY APPLE PRODUCTS OR CONSUMABLES PURCHASED BY VAR HEREUNDER.
APPLE SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
D. For Apple Products sold by VAR to Customers, Apple's standard Limited
Warranty shall flow to the Customer provided the Product has not been
modified or is otherwise ineligible for warranty (except for modifications
authorized in the Apple Service Programs). VAR shall furnish each customer
with a proof of purchase (that is, a bill of sale or other receipt) that
states the customer's name and address, date of sale, and the serial numbers
of the Apple products sold.
E. For Modified Products, VAR agrees both to remove any Apple warranty
cards and other warranty documents shipped to it with Apple Products prior to
providing such Apple Products to its Customers and to disclaim, on Apple's
behalf, all liability for product warranty to its Customers in material
supplied to such Customers at the time of sale.
6. INSPECTIONS, RECORDS, AND REPORTING
A. Apple shall have the right to inspect VAR's location and its operation
at any time during regular business hours to verify VAR's compliance with the
terms and conditions of this Agreement and Apple programs. Upon Apple's
request, VAR shall promptly make and provide copies of any and all requested
records and documents.
B. VAR shall maintain at the Authorized Location for at least FIVE (5)
YEARS its records, contracts, and accounts relating to the sale of Apple
Products.
C. Upon Apple's request, VAR will provide sales and inventory reports. The
frequency, content and format of these reports shall be prescribed by Apple.
D. VAR will promptly notify Apple in writing of any suspected Product
defect or safety problem.
E. VAR shall notify Apple in writing no less than TEN (10) DAYS prior to
any material change in the management or control of VAR, any new affiliation
or association, or transfer of any substantial part of VAR's business. VAR
shall also notify Apple in writing no less than TEN (10) DAYS prior to any
acquisition by VAR in whole or in part of a third party engaged in the sale
of Apple Products.
7. APPLE PROPRIETARY RIGHTS
A. TRADEMARKS, SERVICE MARKS AND TRADE NAMES
(1) During the term of this Agreement, VAR is authorized and permitted by
Apple to display the registered trademarks "Apple" and the Apple logo, the
service mark "AppleCare -Registered Trademark- ," the other trademarks,
service marks and names belonging or licensed to Apple ("Apple Marks"), and
the designation "Authorized Apple Direct VAR" solely in connection with VAR's
promotion of, or VAR's support and service capabilities for, Authorized
Products and/or Consumables. VAR's display of such Apple Marks shall be in
accordance with Apple's written policies in effect from time to time. VAR
will not remove any Apple Marks from any Authorized Products or Consumables
nor shall VAR add any marks to such products.
(2) Apple retains all rights not expressly conveyed to VAR by this
Agreement. VAR recognizes the great value of the publicity and goodwill
associated with the
<PAGE>
Apple Marks and acknowledges that such goodwill exclusively accrues to the
benefit of and belongs to Apple. VAR has no rights of any kind whatsoever with
respect to the Apple Marks. VAR shall not use or license others to use the Apple
Marks on or in connection with any goods or services (including but not limited
to promotional and merchandising items such as key chains, mugs, and T-shirts)
other than the Apple Products, except in accordance with Apple's written
merchandising programs and policies.
B. SOFTWARE RIGHTS
(1) VAR acknowledges that Authorized Products often contain not only hard-ware
but also software. Software may be provided on separate media, such as floppy
diskettes or CD-ROM or may be included within the hardware. Such software is
proprietary, is copyrighted, and may also contain valuable trade secrets and be
protected by patents. VAR shall not separate the software from the associated
Authorized Product as shipped by Apple, nor may VAR disassemble, decompile,
reverse engineer, copy, modify, prepare derivative works thereof, or otherwise
change any of the software or its form.
(2) VAR understands that Apple does not sell software. Rather, VAR is licensed
to distribute software that is incorporated in or packaged with Authorized
Products only as part of its authorized distribution, sale, or resale of the
associated Authorized Products. The end user of an Apple Product is licensed
directly to use any software contained in such Product, subject to the terms of
the license accompanying the Apple Product, if any, and the applicable patent,
trademark, copyright, and other federal and state intellectual property laws.
8. INSURANCE AND INDEMNITIES
A. While this Agreement is in effect, VAR shall keep in force and effect a
sufficient general liability insurance policy, including premises liability,
products, and completed operations, with limits of coverage not less than
$1,000,000 bodily or personal injury and $1,000,000 property damage, or
$1,000,000 com-bined single limit.
B. Apple agrees to defend any proceeding or action brought by a third party
against VAR to the extent based on a claim that: (1) the marketing or use of
any product sold by Apple to VAR infringes any U.S. patent, copyright,
trademark, trade secret or other proprietary right of a third party; or (2) a
defective Apple product directly caused death or personal injury (provided
the product at issue has not been altered, modified or otherwise changed by
VAR). Apple agrees to indemnify VAR for damages awarded to third parties
solely as a result of such claims. Apple's obligation to so defend and
indemnify VAR is contingent on VAR's compliance with Section 8D below.
C. VAR agrees to defend any proceeding or action brought by a third party
against Apple to the extent based on a claim arising from the acts or
omissions of VAR, its employees or agents in conduct associated with the
offering for sale or marketing of Apple products, except acts or omissions
expressly required by Apple's written programs and policies. VAR agrees to
indemnify Apple for any losses, damages, liabilities, costs and reasonable
expenses arising from such acts or omissions. VAR's obligation to so defend
and indemnify Apple is contingent on Apple's compliance with Section 8D below.
D. Each party shall promptly notify the other party of any claim, demand,
proceeding or suit of which the other party becomes aware which may give rise
to a right of defense or indemnification pursuant to this section ("Claim").
Notice of any Claim which is a legal proceeding, by suit or otherwise, must
be provided to the indemnifying party within THIRTY (30) DAYS of first
learning of such proceeding. Notice shall include an offer to tender the
defense of the Claim to the indemnifying party. The indemnifying party, if it
accepts such tender, shall be entitled to take over sole control of the
defense of the Claim. That control shall include the right to take any and
all actions necessary to completely and finally resolve the Claim by
settlement or compromise (in which case the indemnifying party shall be
responsible for the cost of settlement/compromise related to the Claim). Upon
acceptance of tender, the indemnified party shall cooperate with the
indemnifying party with respect to such defense and settlement. In the event
a Claim is settled, both parties agree not to publicize the settlement and
will make every effort to ensure the settlement agreement contains a
non-disclosure provision.
9. CONFIDENTIALITY
Any information disclosed to VAR by Apple relating to Apple's present or
future developments, including but not limited to future product
information, business activities, terms and conditions of this Agreement
(including any documents incorporated by reference), pricing, and all other
amendments and addenda between VAR and Apple (except such information as is
previously known to VAR without an obligation of confidentiality or is
publicly disclosed by Apple either prior or subsequent to VAR's receipt of
such information from Apple), shall be characterized as confidential
information. VAR shall hold such confidential information in trust and
confidence for Apple and shall not use it except in furtherance of the
relationship set forth in this Agreement, nor publish, disclose, or
disseminate it for a period of FIVE (5) YEARS after receipt thereof by VAR,
except as may be authorized by Apple in writing. VAR shall have no right to
prepare any derivative works of such confidential information.
10. LIMITATION OF LIABILITY
IN NO EVENT SHALL APPLE BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR
SPECIAL DAMAGES OF ANY NATURE, INCLUDING, WITHOUT LIMITATION, LOST BUSINESS
PROFITS. DIRECT DAMAGES SHALL BE LIMITED TO AN AMOUNT NOT TO EXCEED $100,000
PER INCIDENT.
11. LIMITATION OF REMEDIES
THE REMEDIES SET FORTH IN THIS AGREEMENT SHALL BE VAR'S SOLE AND EXCLUSIVE
REMEDIES FOR ANY BREACH OF THIS AGREEMENT BY APPLE.
12. TERM AND TERMINATION
A. TERM
Unless terminated as provided herein, the term of this Agreement shall be ONE
(1) YEAR commencing on the date it is executed by Apple ("Effective Date").
B. TERMINATION WITH THIRTY (30) DAYS NOTICE
Either party may terminate this Agreement at will, at any time, with or
without cause, by written notice to the other party not less than THIRTY (30)
DAYS before the effective date of such notice. C. Immediate Termination To
the extent permitted by applicable law, Apple may terminate this Agreement
effective immediately and without notice in the event that:
(1) VAR fails to perform any obligation, duty, or responsibility imposed
under this Agreement and such failure or default remains unremedied FIFTEEN
(15) DAYS after written notice thereof;
(2) VAR commits a felony, engages in an unlawful business practice, or
conducts business in any manner prohibited by Sections 2 or 3;
(3) there is any material change or transfer in the management or control of
VAR, VAR's business operations, or any new affiliation or transfer of any
substantial part of its business;
(4) any conduct or proposed conduct of VAR exposes or threatens to expose
Apple to any liability or obligation, including any federal, state, or local
law; or
(5) VAR fails to maintain sufficient net worth and working capital to
perform its obligations; has a receiver or similar party appointed for its
property; becomes insolvent or makes an assignment for the benefit of
creditors; or ceases to do business in Apple Products.
D. EFFECT OF NOTICE OF TERMINATION
In the event that notice of termination of this Agreement is given for any
reason, the due date of all Apple invoices shall be accelerated so that they
become due and payable as of the date of notice of termination, even if
longer terms had been provided previously. Apple shall be entitled, in its
sole discretion, to reject all or part of any orders received from VAR after
the date of such notice or to cancel any orders previously accepted. Apple
may restrict VAR's use of any available promotional allowances. VAR may
continue to represent publicly that it is an authorized Apple VAR but shall
not enter into any commitments requiring Apple Authorized Products or
Consumables after the termination date.
E. EFFECT OF TERMINATION
Upon expiration or termination of this Agreement: (1) VAR shall submit to
Apple within TEN (10) DAYS after such expiration or termination a list of all
Authorized Products owned by VAR as of such termination.
Apple, at its option, may purchase from VAR any or all Authorized Products
that are still in their original, unopened containers, in good condition, at
the respective prices paid by VAR for such items. These prices shall be
determined by assuming that the Products are from VAR's most recent purchase
of such items.
Apple, at its option, may purchase any or all Authorized Products in opened
<PAGE>
containers at prices determined by Apple. If the prices offered by Apple are
unacceptable to VAR, VAR may refuse Apple's offer and thereafter resell such
Authorized Product to an authorized Apple VAR.
After receipt of any such Authorized Product from VAR, Apple will issue an
appropriate credit to VAR's account, subject to offset for any amounts due
Apple.
(2) VAR shall immediately cease use of the Apple Marks provided by Section 7
herein, and otherwise discontinue representing to the public and trade that
it is an authorized Apple VAR.
(3) All promotional allowance or other fund accruals shall cease. VAR may
claim against any available balances for any activities approved by Apple and
conducted prior to the date of termination.
(4) VAR shall promptly return to Apple all property of Apple in its
possession, including but not limited to loaned equipment and any documents
of any kind containing Apple confidential information.
F. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY KIND,
INCLUDING INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, ON ACCOUNT OF
EXPIRATION OR TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS.
G. To the extent permitted by applicable law, and in consideration of its
entering into this Agreement, VAR hereby waives and relinquishes any rights
or claims under franchise, VARship, or other statutes, or at common law, that
would or might arise out of a termination of this Agreement by Apple or
refusal by Apple to renew or extend the term of this Agreement.
H. VAR's obligations under Sections 6, 7, 8, 9, 10, 11, 12 and 13 and their
subsections shall survive expiration or termination of this Agreement.
13. GENERAL TERMS
A. GOVERNING LAW
This Agreement and the corresponding relationships of the parties shall be
governed by and construed in accordance with the laws of the state of
California without giving effect to its conflict of law provisions.
B. DISPUTES
(1) Any dispute, resolution, or proceeding with respect to this Agreement
shall take place in the County of Santa Clara, State of California. VAR
expressly agrees that venue within this district is proper and voluntarily
submits to the jurisdiction of the courts within same.
(2) Any action arising from or related to this Agreement must be brought
within ONE (1) YEAR from the date such action could have first been brought.
The parties expressly agree to this provision notwithstanding any longer
period which may be provided by statute and any such period is expressly
waived.
C. NOTICE
Notices and demands of any kind that VAR may be required or desire to serve
upon Apple pursuant to this Agreement shall be served by United States mail,
postage prepaid, or overnight courier, to Apple, at
Apple Computer, Inc.
Contracts Management
1 Infinite Loop, M/S 38-CM
Cupertino, CA 95014
Notices and demands of any kind that Apple may be required or desire to serve
upon VAR pursuant this Agreement shall be served by personal service, United
States mail, postage prepaid, overnight courier, or electronic mail to VAR,
at VAR's address set forth in this Agreement.
With written notice to the other, Apple and VAR may designate in writing
different addresses. All notices or demands by United States mail shall be
deemed given and complete upon mailing.
D. SEVERABILITY
(1) In the event that any provision of this Agreement shall be held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
portions of this Agreement shall remain in full force and effect and be
construed so as to best effectuate the intention of the parties upon
execution.
(2) The paragraph headings contained herein are for reference only and shall
not be considered as substantive parts of this Agreement. Use of the singular
or plural form shall include the other.
E. WAIVER
The waiver of any one default shall not waive subsequent defaults of the same
or different kind.
F. SUCCESSORS IN INTEREST
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties, their successors, and permitted assigns.
14. Entire Agreement
This document and all documents referred to or incorporated herein by
reference contain all the agreements, warranties, understandings, conditions,
covenants, and representations made between VAR and Apple. Neither Apple nor
VAR shall be liable for any agreements, warranties, understandings,
conditions, covenants, or representations that are not expressly set forth in
this Agreement. Any different or additional terms or conditions in any
purchase order, invoice or other such document are hereby expressly rejected
by Apple and shall have no force or effect.
This Agreement may only be modified in writing by an instrument signed by an
authorized representative of each party. Apple may unilaterally modify the
Price List, the Authorized Apple Products List, the Policies and Practices
Manual, the Apple Service Programs and the AppleFund(TM) Guidelines effective
on the date designated by Apple. VAR shall have a reasonable period of time
to implement changes requiring VAR to materially alter its activities
provided such period does not exceed THIRTY (30) DAYS from the stated
effective date.
The duly authorized representatives of the parties execute this Agreement as
of the dates set forth below.
VAR
SIGNATURE: /s/ "Grant K. Holcomb"
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PRINT NAME: Grant K. Holcomb
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TITLE: President
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DATE: March 11, 1997
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Apple Computer, Inc.
SIGNATURE: /s/ "signed"
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PRINT NAME: [ILLEGIBLE]
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TITLE: Sr. Contracts Specialist
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DEPT: Contracts Management
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EFFECTIVE DATE: 3/19/97
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