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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
_____ TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-25115
TERAGLOBAL COMMUNICATIONS CORP.
(Name of Small Business Issue as specified in its charter)
WYOMING 33-0827963
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
225 BROADWAY, SUITE 1600, SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices) (Zip Code)
(619) 231-0555
Registrant's Telephone Number, including Area Code
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosures will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K-SB or any amendment to this Form 10-K-SB X
The Registrant generated revenues of $284,515 for the fiscal year
ended December 31, 1998.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 15, 1999 was $101,816,964. For purposes of this
computation, it has been assumed that the shares beneficially held by directors
and officers of Registrant were "held by affiliates." This assumption is not to
be deemed to be an admission by such persons that they are affiliates of
Registrant.
As of March 15, 1999, the registrant had outstanding 17,933,093 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report. The
Proxy Statement will be filed with the Securities and Exchange Commission no
later than April 30, 1999.
Transitional Small Business Disclosure Format: Yes No X
--- ---
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PART I
THE BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-KSB CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "RISK FACTORS
THAT MAY AFFECT OPERATING RESULTS" UNDER PART II, ITEM 6 OF THIS ANNUAL REPORT
ON FORM 10-KSB.
ITEM 1. BUSINESS.
OVERVIEW
TeraGlobal Communications Corp., a Wyoming corporation (the "Company")
is a communications technology company. The Company's principal executive
offices are located at 225 Broadway Street, Suite 1600, San Diego, California,
92101 and its telephone number is (619) 231-0555.
The Company was organized in 1997 under the name Video Stream, Inc.
In October 1997, the Company merged into Triple "D" Court, a Wyoming
corporation. Triple "D" Court was a non-reporting company whose shares traded
on the OTC Market maintained by NASDAQ. Triple "D" Court was not conducting
business operations at the time of the merger. On November 25, 1998 the
Company filed a Registration Statement on Form 10-SB with the Securities and
Exchange Commission to voluntarily become a reporting company.
The Company designs and markets microprocessor and software-based
products and services for real time communication and collaboration,
including the sharing of voice, video and data ("VVD"). The Company's
revenues to date have come exclusively from sales of existing, developed
videoconferencing products to the business, education and government markets.
The Company's business focus is the development of a next generation
communication service that delivers guaranteed network access in a real-time
two-way fashion. The communication service is delivered over a patent
pending network topology that allows multiple point-to-point and multiple
point-to-multpoint communication simultaneously. The service will allow users
to collaborate and deliver training on any subject matter using a variety of
media, including text, data, graphics, audio, video, virtual reality and 3-D
graphics.
During 1998 the Company completed a series of transactions that
resulted in the acquisition of intellectual property, an existing product
base, and corporate infrastructure. During July 1998 the Company acquired all
of the membership interests of ISG Acquisition, LLC, a Delaware limited
liability company. ISG Acquisition LLC was a special purpose limited
liability company that had been formed to acquire any intellectual property
owned by Interactive Solutions Group, Inc., a North Carolina corporation
engaged in the development of interactive communications technology markets.
In August 1998 the Company acquired substantially all of the outstanding
Common Stock of TechnoVision, Communications, Inc., a Georgia corporation.
TechnoVision Communications, Inc. was engaged in the sale of
videoconferencing products to the business, medical and education markets,
including the products that are currently sold under the TeraCONFERENCE-TM-
and The POTS Box-TM- brand names. In a transaction completed in December
1998, the Company acquired assets and employees in hardware design and
engineering from Design Analysis Associates, Inc. a Utah corporation. Further
information about these acquisitions can be found below under the heading
"Corporate History and Acquisitions" which information is incorporated herein
by this reference.
The purpose of the Company's acquisitions was the establishment of a
group of intellectual property, products and employees necessary to develop a
next generation communications collaboration system. The Company has
substantially completed development of its product, code named TeraCOM. The
Company shipped initial units to customers in the first quarter of 1999.
Additional information concerning the development of TeraCOM can be found
below under the headings "Products Under Development", "Key Features and
Technology" and "Sales and Marketing" which information is incorporated
herein by this reference.
EXISTING PRODUCTS
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TERACONFERENCE-TM-. The TeraCONFERENCE-TM- product is a
videoconferencing product that was developed to address the needs of the
business community. TeraCONFERENCE-TM- uses both hardware and software to
provide a high quality videoconferencing 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. TeraCONFERENCE-TM- conforms to current industry
standards so that it can communicate with other manufacturers' products. The
TeraCONFERENCE product is sold in two versions providing either moderate
quality (15 frames per second) or broadcast quality (30 frames per second)
video. 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), and productivity software. The system
has the ability to provide connectivity via ATM, frame relay, Internet, local
area networks, ISDN, and T-1.
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 per unit. 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
TeraScanner (a fingerprint scanner included in TeraCOM), and TeraMEDIA-TM-
(an enhanced version of TeraCOM).
TERACOM. TeraCOM is a communication service delivered over a
client/server computer network called a TeraCOM ServiceCell. The Service
Cells are custom designed and constructed for the Customer, creating a
private and secure communication network that delivers guaranteed network
access in a real-time two-way fashion. The TeraCOM Service is a complete and
supported communication service delivered over a patent-pending network
topology providing real-time two-way point-to-point, point to multipoint, and
multiple point-to-multipoint interactive multimedia-based communications
capability. TeraCOM is provided as a service for a monthly fee over the term
of a five year service contract, providing customers the full utility of the
network and TeraGLOBAL-communications technology without the high upfront
capital expenditures typically associated with the other networks. TeraCOM
allows users to create, distribute, and manage information and access a full
range of communication media (audio, video, data, still, animation,
documents, virtual reality or graphics) through a single technology, and
distribute it across a secure network.
THE TERACOM CLIENT. Each client station is a separate communications
terminal, which includes a monitor, processor, speaker, camera, and microphone.
The processors are currently PowerPC microprocessors from Motorola, Inc.
Customers can choose among several alternatives for monitors, speakers, cameras
and microphones to tailor the communications terminal to their specific
application requirements. As part of a single TeraCOM ServiceCell an individual
TeraCOM Client can reside in any location worldwide, with large quantities of
other Clients in a classroom-like environment, on a stand-alone basis, or any
combination thereof.
[SCHEMATIC OF SAMPLE CLIENT STATION SHOWING MONITOR, DESKTOP COMPUTER,
SPEAKERS, CAMERA AND MICROPHONE]
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THE TERACOM SERVER. The TeraCOM Server employs a unique architecture
to deliver data to TeraCOM Clients. Each ServiceCell may employ multiple
TeraCOM Servers, providing mission critical, fault tolerant service. The
Server uses a routerless design, taking advantage of the processing power of
the PowerPC microprocessor. In addition, each TeraCOM Server connects to a
finite number of clients. These two features significantly impact
performance. The routerless design eliminates a majority of the capital cost
to build a network, reduces complexity, and lowers operational labor costs.
By fixing the number of TeraCOM Clients to a single server, each Client is
assured guaranteed access to data and greater responsiveness in comparison to
statistically based Internet servers.
CONNECTING TO THE NETWORK. The TeraCOM network uses an Asynchronous
Transfer Mode ("ATM"). The network topology supports the use of T1, E1, Frame
Relay, HDSL, Wireless, and satellite connectivety simultaneously providing
the ability to deliver service globally. Service delivery currently requires
a minimum of 1 Mbps full-duplex bandwidth between a TeraCOM communication
terminal and the TeraCOM Server. By design, TeraCOM service provides a level
of quality, reliability, security, and functionality that the Internet and
other communication technologies cannot currently offer. The TeraCOM
ServiceCell can be constructed to ensure guaranteed access to valuable
content at all times. Existing telephone service and Internet service are
statistically based, with more users attached to the system than the system
could handle simultaneously. During high usage periods, some users will not
be able to access the system. Because each TeraCOM ServiceCell is designed
specifically for a customer, it can be constructed to establish a permanent
"virtual" circuit for each client station to the server, guarantying access
to the network by all users simultaneously.
When a customer orders the TeraCOM service, one or more custom designed
TeraCOM Service Cells are constructed for the customer, creating a private and
secure communication infrastructure. The TeraCOM Service Cell is scalable.
Additional servers and client stations can be added to meet nearly any
organization's demands. Each ServiceCell can be engineered to support up to
several thousand Clients communicating in an interactive fashion simultaneously.
The ServiceCell will support any combination of point-to-point and
point-to-multi-point communication sessions.
[SCHEMATIC OF A SAMPLE SERVICE CELL SHOWING CONNECTION OF SERVERS AND CLIENTS]
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Once the ServiceCell is installed, any user on the network can access
any other user for a communication session with the click of a mouse. In
addition, users can deliver to others on the network any form of digital media
stored in the TeraCOM Servers forming a portion of the ServiceCell, whether
text, graphics, video, virtual reality or other media. TeraCOM, like the
Internet, is a packet-based communication technology. It can take any form of
information stored in digital format and stream data packets to any number of
recipients. Unlike the Internet, however, the unique architecture and software
of the TeraCOM ServiceCell allows the data packets to be delivered in a manner
that permits broadcast quality video in real time.
The TeraCOM Service incorporates all of the software necessary to
effectively develop, distribute, manage and assess the flow of data, including
the following discrete components.
CONTENT DEVELOPMENT. TeraCOM contains sophisticated content
development tools that allows subject matter experts to focus on the quality
of the content they develop versus the complexity of the software. A subject
matter expert can access any form of media stored on the TeraCOM Servers to
assemble a presentation. That presentation may include, for example, an
introductory video before moving to a slide presentation followed by a
virtual reality demonstration. TeraCOM's content development software treats
each medium the same. Therefore a subject matter expert assembling a
presentation can access each component from the media library contained on
the TeraCOM Server. He or she then edits the content for the specific purpose
and places it within the presentation. The interface for accessing, editing
and organizing the data is uniform irrespective of the type of media
involved. 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. Each Client contains this library of data
relating to the formatting of content. In addition to the ability to transmit
formatted 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.
DISTRIBUTION. The TeraCOM Server software knows how to rapidly assemble
and distribute data packets derived from user requests and interaction. 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.
MANAGEMENT. TeraCOM provides the Manager software to allow a subject
matter expert to control a communication session. The Manager software allows
any user on the ServiceCell to contact any other user with a single mouse click.
In addition, the Manager software can provide information concerning who is
actively on the
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system at any point in time, as well as limit access to the system or certain
client stations from other client stations. In a point-to-multipoint broadcast
situation, the Manager software lets the subject matter expert distribute
prepared course content to selected users. For the participants of the multicast
session, the Manager software facilitates the electronic equivalent of raising
your hand. Once a participant has notified the subject matter expert of his or
her desire to comment, the Manager software enables the audio and video of a
session participant to be broadcast to every user in the session or privately
transmitted to the subject matter expert.
ASSESSMENT. Assessment can be the most expensive and time-consuming
aspect of effective communication. In the corporate training or distance
education contexts, the time required to evaluate and administer exams makes
assessment impractical. Automating and facilitating the assessment process can
therefore be the key to assuring effective communication. The ability to
automate the assessment process is the essence of the TeraCOM solution. TeraCOM
uses 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, called an "audit trail" tracks
every user's activities and what data they access. It is this new data structure
implementation that facilitates responsive interaction and subsequently
real-time assessment. 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. This audit trail can be used, for example, to give online examinations,
with immediate feedback to the subject matter expert on the individual answers a
student gives, the percentage of correct answers, and the amount of time it took
to develop each answer.
HELP-DESK AND SECURITY. 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. 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,
being developed 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-TM- will
cost effectively and securely transfers full motion, real-time, video and
audio over a secure network. The Company is currently working with industry
participants to define their needs and the final specifications of
TeraMEDIA-TM-.
TeraSCANNER. The Company is in the final stages of delivering of a
USB-based (Universal Serial Bus) fingerprint scanner for the Power MacIntosh
and the new iMac line of Apple computers. The current labor cost to the
industry of issuing, maintaining and re-issuing passwords is growing. Through
the use of the TeraSCANNER, which includes both hardware and software,
network managers can provide a more secure, economical, and intuitive means
to control access. The TeraSCANNER can be used to grant prescribed levels of
access or restriction at any time in the communications process. The Company
will be using the TeraSCANNER for account management and accredited course
content delivery in its TeraCOM Service for the corporate training and
distance education markets.
There are a number of current and potential applications for the
TeraSCANNER. In the corporate and government settings, database access can be
limited for specified individuals. In addition, multiple users can use a
single computer without having access to the other users' information.
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.
KEY FEATURES AND TECHNOLOGY
The Company's TeraCOM service will provide unique features and services
compared to other product and solutions because of its core base of proprietary
and licensed technology, including the following:
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ADVANCED SOFTWARE-BASED VIDEO COMPRESSION. TeraCOM includes the
Company's highly optimized Wavelet software for the compression/decompression
of video. Video presently 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 a low cost to performance ratio. 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. The fact that the video compression is software
based is critical as well. Updates to the compression can be implemented
remotely through the network. The focus on software also reduces the
necessity for expensive short-lived hardware.
ADVANCED PROCESSING POWER. For the TeraCOM solution to deliver
real-time performance, deal with multiple video streams, and handle complex
media types (3D graphics, virtual reality, and advanced simulations) a next
generation microprocessor was required. After researching the capabilities of
all new processor technologies, the Company selected Motorola's new 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 PowerPC.
ROUTERLESS NETWORK TOPOLOGY. The Company has a patent pending on its
network topology. The TeraCOM ServiceCell takes advantage of the Company's
wavelet compression module and the processing power of the PowerPC
microprocessor to distribute data across the network without the use of
routers. The routerless design eliminates a majority of the capital cost to
build a network, reduces complexity, and lowers operational labor costs. In
addition, the absence of routers allows data packets to be distributed across
the network faster than in a router-based network.
ATM TO THE DESKTOP. The Company's software compression and the
processing power of the PowerPC Microprocessor allow the Company to deliver
ATM-based communications to the desktop. ATM is a communications networking
technology that carries voice, video and data in fixed 53 byte cells which
allows the network to carry any type of information and provide stringent
service qualities. TeraCOM's design matches the guaranteed access and data
transmission capacity of ATM with cost-effective high performance work
stations.
GUARANTEED "CONNECTIONLESS" ACCESS. On a TeraCOM ServiceCell every
communication terminal is always connected to every other communications
terminal. This eliminates the need to dial a phone number or enter in IP
address. The process of establishing communication consists simply of selecting
the individual recipient or recipients of a transmission. Moreover, the system
can identify whether an intended recipient is on the system and whether the
recipient is currently on another session. This information can dramatically
improve the efficiency of communicating with large groups of individuals. In
addition, access to the system is guaranteed. Every TeraCOM Client terminal
permanently owns one two-way communication channel to its respective TeraCOM
Server. Unlike existing telephone and Internet systems, a TeraCOM Client cannot
experience a busy signal. Through TeraCOM's service, a TeraCOM Client always has
access to the information on a TeraCOM Server.
BACKWARDS COMPATIBILITY. A TeraCOM ServiceCell is a secure private
communications network. Each ServiceCell can, however, be connected to other
networks including corporate Intranets as well as the Internet, with the same
level of performance inherent in those networks. Each TeraCOM Client
communication terminal has the ability to interoperate with all major digital
media assets, allowing users to import/export all major audio, video, and
graphic formats. Through this backwards compatibility, TeraCOM can protect a
customer from losing a past investment in technology and software while
supporting an entirely new set of critical communication capabilities.
SINGLE SOURCE SOLUTION. TeraCOM is a single source solution, delivering
a complete, integrated multimedia communications network. The Company charges
the service based upon a monthly service fee. The service fee includes all
hardware, installation, software, upgrades, bandwidth, network management and
hardware maintenance necessary to provide a turnkey service. The Company
maintains ownership of all of the hardware that is a part of the ServiceCell.
This removes the burden of repair, maintenance and replacement from the
customer, and places it on the Company, which is developing and operating the
service. The TeraCOM service is fully supported, with a 24 hour, seven day a
week Help-Desk. Because of the system design, a Help-Desk staff member can take
control of any
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TeraCOM Client communication terminal and do anything from
demonstrating for the user how to use the system to installing an upgraded
software package.
CONTINUOUSLY UPGRADEABLE. The TeraCOM Service, including both its
hardware and software aspects has been developed in a manner that allows it to
be upgraded. Every component of the TeraCOM ServiceCell can be selectively
upgraded at any time. This network design enables the Company to upgrade the
service, for example, as faster processors and bandwidth become available.
MARKETS AND TARGET CUSTOMERS
The Company has designed its products to address the growing demand for
high-speed data transmission including voice, video, text and graphics in a
variety of markets. The Company is in the process of developing enhancements to
the TeraCOM Service to address specific needs in the corporate training and
communication, distance education, medical and film production industries.
CORPORATE TRAINING AND COMMUNICATION. Corporations have long recognized
the impact of video on training and communications. Video conferencing
technology from a single location to another (point-to-point) has been available
to the corporate community for a number of years. Alternatively, corporations
that want to broadcast video (point-to-multipoint) have relied on satellite
broadcast, which sends video in one direction only. The TeraCOM Service is being
designed to permit point-to-multipoint communications in full duplex video.
Consequently, a large corporation or organization with numerous locations would
be able to conduct training or communication sessions instantaneously across the
TeraCOM ServiceCell. Similarly, mechanics or engineers in remote locations could
collaborate on problem-solving issues using a TeraCOM's ability to transmit
text, graphics, video or virtual reality images across the ServiceCell. This
technology provides numerous benefits to the corporation. Critical information
such as changes in significant policies, product recalls and other information
can be multicast simultaneously throughout the organization, subject matter
experts can answer questions throughout the organization from remote locations,
training time can be reduced, and travel costs can be significantly reduced.
DISTANCE EDUCATION. TeraCOM will also 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 a
separate monitor that can 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.
MEDICAL. 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.
Advances in digital camera technology will permit the expert to "look over the
shoulder" of the operating surgeon, and see in detail better than the human eye
could detect unaided. The surgeon meanwhile will be able to listen to
instructions from the expert, or even pause to look at a diagram or model
projected onto his monitor.
FILM PRODUCTION. 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.
GOVERNMENT. TeraCOM's two-way real-time communications and
collaboration have potential application for military command staff. Crisis
Actions Teams, Command Center staff and C41 leadership could, for example, use
TeraCOM's voice, video and data services to rapidly assess worldwide situations,
plan responses, track mission
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execution and measure mission effectiveness. TeraCOM can fuse Department of
Defense digital media into comprehensive situational assessments, using
encrypted and Wavelet-based compressed/decompressed media. TeraCOM provides
rapid data fusion, using multiple data formats from multi-platform sources,
and allows them to be transmitted over a single, secure network. Network
management and event tracking provide reliability with full auditing.
TeraCOM's two-way video combined with capabilities to accept the widest range
of digital media has direct benefits for a variety of government departments,
embassies, military and administrative. TeraCOM can reduce government travel
costs while providing higher levels of responsibilities between agencies, and
their constituents.
STRATEGIES AND OBJECTIVES
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
The Company believes, based upon its research and communication with
early adopters, that its TeraCOM Service offers a level of performance and
function in multimedia communications and management that is unique.
Accordingly, the Company continues to place significant emphasis on its
research and development activities. 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
21 individuals collaborate in product development activities, including
electrical, mechanical and material engineers and quality assurance support.
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. The Company has established
relationships with each of the following entities. Executives from the sales
department of each of these companies, except Ingram Micro, have assisted the
Company with, and appeared at product demonstrations to potential customers for
the Company's TeraCOM product. As described below, in some instances the Company
has negotiated agreements with these entities. In others, no contractual
commitment exists.
APPLE COMPUTER. The Company is a direct Value Added Resellers ("VAR")
and a registered developer for Apple Computer, Inc. In addition to the standard
VAR license and ability to buy products directly from Apple Computer, Inc., the
Company's development staff enjoys a direct line of communication with engineers
at Apple Computer, Inc. This type of relationship ensures that the solution
developed by the Company takes full advantage of Apple Computer, Inc.'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, Inc. also includes the ability
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to buy all maintenance parts directly (from motherboards 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, Inc. 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 PowerPC microprocessor. 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 the processor before
potential competition is given access. 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 Service. 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, Inc. in quantity. The
Company has entered into a standard non-disclosure agreement with Motorola,
Inc., but has not entered into any written agreement to co-develop or
purchase any specified amount of microprocessors. No assurances can be given
that the Company will enter into such an agreement in the future. As with
Apple Computer, Inc., Motorola, Inc. has orally agreed to a program of joint
press releases and to promote the TeraGLOBAL solution through their sales and
distribution channels.
SPRINT COMMUNICATIONS. The Company is a customer of Sprint
Communications for the provision of bandwidth in delivering the TeraCOM
service. Sprint Communications 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 Communication's network directly from
TeraCOM servers, thus eliminating the need for expensive hardware components.
The Company is confident that Sprint Communication's redundant network
architecture will reach the vast majority of its intended target market. The
Company does not have any contractual commitment with Sprint Communications
at this time. The Company has approached Sprint Communications about entering
into a Service Agreement; however, no agreement has been reached and no
assurances can be given that an agreement will be reached on terms favorable
to the Company or at all.
FORE SYSTEMS The Company is a customer of Fore Systems which is
building customized ATM network interface components for TeraCOM. Fore
Systems also provides the Company with ATM switches and related components.
Fore Systems is a premier provider of hardware and software for ATM-based
communications. The Company does not have any contractual commitment with
Fore Systems and no assurances can be given that such an agreement will be
reached on terms favorable to the Company or at all.
INGRAM MICRO, INC. 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 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 production
requirements.
The Company cannot control the amount and timing of resources which
these strategic partners devote to the business relationship. 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 relationship 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 relationship 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. 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
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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. As a result, the Company is dependent on providers of bandwidth to
deliver its TeraCOM service to the desktop. Currently, the Company has secured
Sprint Communications as its provider of this 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
does not have a contractual commitment from Sprint Communications to provide
bandwidth to the Company.
The Company currently licenses a Wavelet compression module which is at
the core of its software-based compression. The Company has enhanced the basic
module, 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.
The Company licenses a "rapid development" software package from an
employee. The software packages establish a framework for developing a
significant portion of the Company's application software. The license is a
permanent license exclusive in the first year with options to extend the
exclusivity. The license calls for payment of a royalty based upon the number of
units sold.
The Company's compression technology is dependent upon its continued
access to the newly developed PowerPC microprocessor, which it currently
purchases from Motorola, Inc. The combination of the Company's enhanced Wavelet
module and the processing power of the PowerPC microprocessor is the engine
behind the Company's data compression, which makes the TeraCOM Service viable.
The Company does not have a contractual commitment from Motorola, Inc. to
provide the PowerPC microprocessor to the Company.
The Company acquires its TeraSCANNER from a third party
manufacturer. The Company has developed an interface, which integrates the
scanner with the Mac OS operating system, and the Company's TeraCOM interface.
The Company purchases the scanners on a purchase order basis.
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 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.
12
<PAGE>
MANUFACTURING
The Company's initial prototype requirements for the products
associated with the TeraCOM Service have been manufactured both in-house and
through outside vendors. For production scale manufacturing, the Company has
established a relationship with Ingram Micro to assemble, integrate and
distribute 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 outsource 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
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 historically has relied on a combination of in-house and
independent sales representatives to sell its TeraCONFERENCE-TM- and The POTS
Box-TM- product lines. Sales of these products have historically been
disappointing. The Company has also focused its resources at bringing the
TeraCOM project to market, which the Company believes has unique features
companed to existing technology in the marketplace. Disappointing historical
sales and the impending introduction of the TeraCOM service has caused the
Company to reduce its commitment to sales of these products. The Company
currently employs one full-time sales person to generate orders and focus its
marketing efforts for its current TeraCONFERENCE-TM- and POTS Box-TM- product
lines. It has terminated its relationships with independent sales
representatives for those products.
Because TeraCOM is a new and developing product, the Company has
chosen to focus its marketing efforts for Teracom on the use of "early
adopters." The Company has identified four early adopters in the corporate
training, consulting services, medical and distance education markets. The
Company is seeking early adopters within the advertising and federal
government customer categories for TeraCOM and members of the entertainment
industry for its TeraMEDIA-TM- product. The Company has strategically chosen
early adopters whose internal requirements would help define a service with
universal functionality and that are influential and highly visible in their
industries.
The Company is marketing TeraCOM to its early adopters as a fully
integrated and supported multimedia collaboration service. TeraCOM is priced
on a fixed monthly fee basis over a specified term with annual renewals for
connectivity; software upgrades and help desk. The monthly service fee will
cover the Company's costs of recovery of hardware, software with continuous
upgrades, bandwidth, network management and maintenance and help desk. The
Company, therefore, offers the customer a single point of contact for all
aspects of TeraCOM. Potential customers also avoid the large up-front capital
costs typically associated with a large communication network purchases. The
Company hopes to establish price points for TeraCOM which are comparable to a
potential customer's current expenditures on network maintenance, bandwidth,
hardware, software and upgrades, but include the added functionality that
TeraCOM offers, such as real-time two-way videoconferencing, fully integrated
multimedia communications, real-time assessment,
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complete audit trail, completely network security, 24/7 interactive help desk,
point-to-point communications and point-to-multi point communications.
COMPETITION
The telecommunications, multimedia and convergence industry is highly
competitive, continually evolving and subject to rapid technological change. The
convergence industry, by its nature is a combination of what has historically
been diverse industries. The Company's TeraCOM will provide an integrated group
of features that have been provided by separate networking, videoconferencing,
digital broadcast satellite and multimedia development companies. As a result
the Company faces competition at many different levels, depending upon the
specific needs of a potential customer.
Several companies compete in the market for network solutions. These
include Microsoft, Inc., Cisco Systems, Inc., 3Com, Lucent Technologies, Inc.
and Nortel Networks. These companies seek to deliver high volume data
transmission through different means, including efforts to increase bandwidth
increasing the efficiency of existing router-based server networks, compressing
data, and dividing bandwidth into smaller increments. Several of those companies
have been working on products and services intended to provide features similar
to TeraCOM. Cisco Systems has announced a videoconferencing product based on the
Internet protocol. Other companies have announced intentions to develop
browser-based videoconferencing and collaboration applications.
The Company believes that competition in this market will focus upon
product features, ease of use, cost, backwards compatibility, ease of
deployment, sales and distribution capability and technical support and service.
The Company believes its TeraCOM product offers a unique set of features on a
cost-effective basis, based on its review of publicly available information from
its competitors as well as reports from its early adopters of their own reviews
of available product. The Company intends to compete on the basis of providing a
comprehensive, single source solution. Other competitors have focused on
providing bandwidth, videoconferencing, broadcast satellite or digital media
components. The Company hopes to establish market share by providing all of
these components, and additional features, in a seamless integrated service. The
Company also believes that the routerless design of its network topology, and
the ability to remote access, monitor and upgrade client communication terminals
provide the Company with cost advantages over competing technologies. The
Company also recognizes that some potential customers have significant
investments in the media content or existing infrastructure. As a result, the
Company is carefully evaluating the need for backwards compatibility of the
TeraCOM solution.
Substantially all of the Company's competitors have greater
distribution channels, longer tradition and greater financial resources than the
Company. While the Company has undertaken efforts to remain apprised of the
development of competing technology, it is possible that these competitors or
others are developing products or services which are unknown to 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.
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 ServiceCell 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
14
<PAGE>
development of competitive products. The Company has filed trademark
applications with the United States Patent and Trademark Office 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.
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 will be 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 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.
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EMPLOYEES
The Company currently has approximately 35 full-time employees,
including 12 in administration, 2 in technical support, 19 in product
development, and 2 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 OTC Bulletin
Board maintained by NASDAQ. Following the consummation of the merger, the
surviving entity changed its name to Video Stream International, Inc. The
Company officially changed its name to "TeraGlobal Communications Corp." in
September 1998.
TechnoVision Communications, Inc. ("TechnoVision") was incorporated in
Georgia 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's current TeraCONFERENCE-TM- and The POTS
Box-TM- 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
markets. 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 transaction completed in December 1998, Design Analysis
Associates, Inc., a Utah corporation, merged into TGCC Acquisition, Inc., a
wholly owned subsidiary 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, the new subsidiary of
the Company did not retain the assets associated with the WATERLOG-TM-
division including rights to the name "Design Analysis." Such assets were
retained by the William I. Fletcher Family Trust, the sole shareholder of
Design Analysis Associates before the merger. As a result of the merger, 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.
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ADDITIONAL INFORMATION
Company reports, proxy statements and other information filed with the
Securities and Exchange Commission (the "Commission") 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 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.
ITEM 2. PROPERTIES.
The Company does not own any real property. The Company leases
approximately 9,800 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.
ITEM 3. LEGAL PROCEEDINGS.
Information relating to legal proceedings is set in part II, Item 7 of
this Annual Report on Form 10-KSB at Note 8 under the subheading "Litigation"
which information is incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER 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 OTC Bulletin Board. The quotations for the
Common Stock traded on the Bulletin Board may reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
------ -----
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
<S> <C> <C>
November 1, 1997 to December 31, 1997 1.42 1.30
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
<S> <C> <C>
First Quarter 1.44 0.81
Second Quarter 6.63 1.03
Third Quarter 5.13 3.06
Fourth Quarter 4.75 3.00
17
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
- ----------------------------
<S> <C> <C>
First Quarter to March 15, 1999 11.13 3.50
</TABLE>
At March 15, 1998, there were approximately 290 holders of record of
the Company's Common Stock. The Company believes that there are a significant
number of beneficial owners of its Common Stock whose shares are held in "street
name".
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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, a Delaware limited liability company, and with that
substantially all of the assets of Interactive Solutions Group, Inc., a North
Carolina corporation, for $251,000. In August 1998, the Company completed a
successful exchange offer acquiring 99% of the outstanding stock of
TechnoVision Communications, Inc., a Georgia corporation, for an aggregate of
3,563,506 shares. In a transaction completed in December 1998, the Company
completed the acquisition of Design Analysis Associates, Inc., a Utah
corporation, in exchange for an aggregate of 250,000 shares of stock. Each of
these acquisitions was accounted for on a purchase method of accounting.
Revenues during the past year have come from sales of subsidiary
corporations. In connection with the acquisition of TechnoVision Communications,
Inc., the Company began reporting, on a consolidated basis, revenues from the
sales of its existing product line.
The Company began shipping units in connection with its TeraCOM Service
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.
PLAN OF OPERATIONS
With respect to operating revenues, the Company has been disappointed
with the sales of both the
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TeraCONFERENCE and The POTS Box products. From time to time the Company has
had interest which it believed would result in significant interest for these
products; however, no significant sales have been achieved. The Company also
entered into a contract to sell a significant amount of equipment to a
prospective customer in the Peoples Republic of China. However the buyer
under that agreement has not delivered any purchase orders to date. The
Company does not expect to sell any equipment under that agreement at this
time. The Company has also made the decision not to pursue recovery for
breach of the agreement, as any legal proceeding for recovery would have to
take place in the People's Republic of China, and would divert resources from
the Company's ongoing product development efforts. As a result of all of
these factors, the Company does not expect sales of the TeraCONFERENCE-TM- or
The POTS Box-TM- products to contribute significantly to revenues in 1999.
The Company is, however, continuing to progress with the development
and early stage marketing of the TeraCOM. The Company shipped initial units of
the TeraCOM to an early adopter in March 1999. The early adopter acquired the
units to begin to develop course content for distance learning applications.
In March 1999, the Company also demonstrated its TeraCOM solution
for an early adopter in the corporate training area. This early adopter had
formed a task force to review the marketplace for fully interactive
multimedia training delivery systems, and had completed their product review
process. The TeraCOM solution was one of several technologies presented in a
demonstration to the task force. The Company's demonstration, which included
participation from several of the Company's strategic alliances, secured the
task force's recommendation to proceed with a TeraCOM installation program
commencing with an initial ServiceCell to test the TeraCOM in a trial phase.
The recommendation will be presented to the early adopter's board of
directors for review and approval. The task force's recommendation is not
binding on the board of directors, and no decision has been made concerning
the adoption of TeraCOM.
The Company has scheduled demonstrations of the TeraCOM and TeraMEDIA
solutions with other early adopters in corporate, distance learning, medical,
film and government industries in the second quarter of 1999. The Company hopes
to secure additional initial orders from these demonstrations, but no assurances
can be given as to the nature, scope or timing of any orders. Based on the
status of the development of TeraCOM and an allocation of time for testing the
systems with early adopters, the Company hopes to secure sales in connection
with the implementation of systems from early adopters in the third and fourth
quarter of 1999.
The Company believes its existing administrative infrastructure is
sufficient to support the completion and roll out TeraCOM in 1999. If the
Company does not receive preliminary indications for orders in the second or
third quarters of 1999, the Company may scale back all non-essential
operations in order to conserve its cash position. Alternatively, the Company
may seek additional equity funding to bolster its cash position and enable it
to accelerate development efforts. No terms have been established for any
potential equity financing. No commitments for such a financing exist and no
assurances can be given that such funding would be available on terms
acceptable to the Company, if at all.
Depending upon the progress of the roll out of TeraCOM and the
Company's cash position, the Company may add additional management and staff
to oversee and manage the Company's growth. In addition the Company intends
to relocate to new executive offices in 1999. The Company currently has
approximately 20 software and hardware engineers. In addition, the Company
has budgeted $1 million in equipment expenses to equip the engineers.
Depending upon available cash, the Company may add 20 to 25 additional
engineers to accelerate the development and roll out of TeraCOM. In the event
that TeraCOM is successful with its early adopters, and the Company begins
implementation, it will need to obtain, train and retain staff to service a
help desk and call center. If the Company decides to increase its staff level
in research and development it will also incur additional equipment expense
to equip those additional employees.
All of the Company's employment agreements with its employee's
provide for termination at will, except for agreements with certain of its
executive officers. The aggregate annual commitment under those employment
agreements is approximately $600,000.
The Company added two people to its marketing department in the first
quarter of 1999 to assist in the roll out of TeraCOM. The level of selling
expenses in 1999 will depend upon the level of acceptance by early adopters. If
the Company is successful in implementing test units with the early adopters and
moving to an implementation phase, the Company's marketing department will begin
targeting additional customers within the Company's target markets.
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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
The following table sets forth annual results of operations for the
fiscal years 1998 and 1997.
BALANCE SHEET DATA: DECEMBER 31, 1997 DECEMBER 31, 1998
- -------------------------------------------------------------------------------
19
<PAGE>
<S> <C> <C>
Cash and cash equivalents $ 27,705 $ 48,524
Furniture and equipment, net 19,437 1,094,350
Total assets 58,024 4,898,617
Current liabilities 192,898 2,044,920
Total Shareholders' Equity (Deficit) (134,874) 930,832
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA: PERIOD FROM YEAR ENDED DECEMBER
FEBRUARY 7, 1997 31, 1998
(INCEPTION) TO
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales - $ 284,515
Cost of Sales - 270,132
Operating Expenses:
Legal $ 67,463 472,248
General and administrative 130,237 1,802,048
Research and development 41,259 1,484,886
Consulting, related parties 94,488 62,847
Selling 0 114,068
Total operating expenses 333,447 3,936,097
Loss from operations (333,447) (3,921,714)
Other income(expenses):
Interest income 754 984
Interest expense (3,601) (156,852)
Other income 759 -
Total other income (expense) (2,088) (155,868)
Net Loss (355,535) (4,077,616)
Basic loss per common share (0.09) (0.33)
Weighted average common shares 3,627,064 12,300,908
outstanding
</TABLE>
The Company achieved two primary goals in its first year of operations
of 1997: (i) the formation of the Company's organization to pursue
its business strategy and (ii) achieving the public company status to assist in
its funding objectives.
The fiscal year ended 1998 saw the Company dramatically increase
infrastructure and employees from three people at the beginning to 35 by year
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 fiscal year 1998 include
the operations of TechnoVision Communications, Inc. for the period from June 30
to December 31, 1998.
20
<PAGE>
SALES. The Company experienced sales of $284,515 in fiscal 1998
compared to no sales in fiscal 1997. All of these sales were attributable to
the Company's Technovision subsidiary. Sales from TechnoVision were primarily
related to the TeraConference product. The Company hopes that declining sales
of its existing products will be offset by an increase in sales of TeraCom in
1999.
COST OF SALES. Costs of sales for fiscal 1998 was $270,132, compared
to no cost of sales in fiscal 1997. As a percentage of sales, cost of sales
in fiscal 1998 were 95%. The cost of sales going forward will increase on a
dollar basis in connection with any increase in sales. The Company hopes to
achieve increasing gross profit margins on the TeraCOM product, based on its
unique features in the marketplace.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,337,143 in fiscal 1998, compared to $292,188 in fiscal 1997, an increase of
800%. General and administrative expenses in 1998 includes $318,174 in amortized
goodwill resulting from the acquisition of TechnoVision Communications, Inc. and
ISG Acquisition LLC. The increase reflects 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 is continuing to seek additional personnel and facilities
necessary to prepare for the introduction of TeraCOM to the marketplace. As a
result general and administrative expenses should continue to grow significantly
in 1999.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$1,484,886 in fiscal 1998, compared to $41,259 for fiscal 1997. This substantial
increase is the result of management's focus in completing the development of
TeraCOM. The Company will continue to devote substantial resources to research
and development in 1999 to complete the development of the core software package
for TeraCom, as well as the development of applications to tailor TeraCom to the
needs of specific industries.
SELLING. Selling expenditures for fiscal 1998 were $114,068, compared
to no selling expenses in fiscal 1997. This increase is a result of the
Company's acquisition of existing product lines in 1998. Selling expenses are
expected to increase significantly in connection with the completion of the
TeraSCANNER and the TeraCOM service.
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.
In early 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. In September
1998, the Company sold 17,500 shares of its common stock for $74,375. In October
1998, the Company sold $475,000 in convertible debentures. The debentures bear
interest at 9%, are convertible into common stock at $4.00 per share and expire
in October 2000. In transactions occurring from September to December 1998, the
Company sold an additional $650,000 of convertible debentures. These debentures
bear interest at 9%, are convertible into common stock at $4.25 per share and
expire two years after the date of issuance.
As of December 31, 1998, the Company had cash and cash equivalents
totaling $48,524 and a working capital deficit of $1,897,992. In transactions in
January and February 1999, the Company sold an additional 2,598,815 shares of
common stock for an aggregate of $6,821,892. The Company paid back $650,000 of
convertible debentures with these proceeds
The Company expects cash flows from operating activities to continue to
be negative over the next six to nine months as increases in sales are offset by
increases in general and administrative expenses necessary to complete the
Company's infrastructure, product development and roll-out. The Company believes
that available cash, together with anticipated operating revenues will be
adequate to fund the Company's operations over the next
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<PAGE>
13 months. Nonetheless, the Company is evaluating a potential equity financing
in the second or third quarter of 1999. These additional cash reserves would
allow the Company the flexibility to increase staff in an effort to accelerate
the roll out or the marketing of TeraCOM. No decisions have been made and no
assurances can be given as to the timing or terms of any such financings or
whether a financing will occur at all.
In July 1998, the Company acquired ISG Acquisition LLC for $251,000,
including assumption of certain liabilities of which $43,800 remained unpaid
at March 15, 1999. The Company expects to pay the balance in full during
1999. In July and August 1998, the Company acquired substantially all of the
outstanding common stock of TechnoVision Communications, Inc. TechnoVision
Communications, Inc. operated at a loss at the time of the acquisition, and
is not expected to enhance operating income. The acquisition of Design
Analysis Associates, Inc. provided the Company with cash of approximately
$400,000. The Company does not expect the high tech design engineering
division to contribute significantly to cash flows over the next six to
twelve months.
The Company has secured equipment lease financing in the past from
Alliance Leasing. Alliance Leasing is currently in bankruptcy and has been
investigated by the SEC. In connection with that investigation, the SEC
subpoenaed the Company for its records relating to its transactions with
Alliance Leasing. The Company has had discussions with commercial lenders to
establish equipment lease financing and working capital line of credit
arrangements. However, no commitments have been issued to date and no
assurances can be given that the Company will secure commercial financing, or
secure financing on terms that are acceptable to it.
RISK FACTORS THAT MAY EFFECT OPERATING RESULTS
EARLY STAGE COMPANY. The Company is in its early stage, and its
operations are subject to all of the risks inherent in the establishment of a
new business enterprise, including the absence of an operating history. The
likelihood of the success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the formation of a new business, the
development of new technology, and the competitive environment in which the
Company will operate. To date the Company has focused on research and
development of technology that addresses communications needs in existing
corporate, educational and government markets. In order to achieve
profitability, the Company will need to successfully complete development of
its products, hire and manage additional staff for administrative,
manufacturing and sales related functions, establish internal accounting,
inventory and cost controls, market and sell products and effectively service
clientele. The Company is only now facing the challenges of moving from a
development stage company to an operating company, and no assurances can be
given as to the likelihood of success in the transition.
DEVELOPING MARKET. The multimedia communications market has only
recently begun to develop, continues to be defined, is evolving rapidly and is
characterized by a large number of market entrants with alternative solutions to
similar perceived needs. The Company's success in this market will be dependent
in part upon its ability, and in certain cases, the ability of its strategic
partners, to convince potential customers that the Company's products satisfy
their needs, or satisfy them more effectively than direct or indirect
competitors. In addition, the Company has been selling its products for only a
short time and has not yet achieved significant market penetration. There can be
no assurance that potential customers in this market will accept the Company's
technology and products, that the Company will be successful in creating
solutions tailored to the requirements of these potential customers or that a
more significant market for the Company's products will become established. In
addition, the Company's future success will depend in large part on the
continued expansion of the multimedia communications market in general, the
identification of customers with technological requirements which can be met by
the Company's systems in particular, and the acceptance of the Company's
systems. As is typical in a rapidly evolving industry, demand for and acceptance
of products are subject to a high level of uncertainty. In addition, sales of
systems introduced into the
22
<PAGE>
multimedia communications market require intense effort over long periods of
time. New customers typically acquire a pilot system to evaluate before
purchasing systems. In many cases, customers need to purchase a number of
systems to meet their requirements and such purchases require the approval of
the customer's senior management or board of directors prior to the purchase,
which could lead to delays in the purchase or, in some cases, eliminate
decisions to purchase the Company's products.
DEPENDENCE ON NEW PRODUCTS AND RAPIDLY DEVELOPING TECHNOLOGIES. Certain
of the Company's products are new to the marketplace, while others are still
under development. Once the market for these products is more fully established,
competitors may develop and manufacture products similar to the Company's
products and may be able to manufacture competitive products which provide
higher quality than the Company's systems or which can be manufactured at lower
cost. The markets in which the Company operates are subject to rapid
technological change and product obsolescence. The Company has primarily focused
on developing its technology and products and believes that its future success
will depend in part upon its ability to develop and enhance its existing
products and develop new products and to meet such anticipated technological
changes. If the Company does not successfully introduce new products or enhanced
versions of its current products in a timely manner, any competitive position
the Company has or may develop could be lost and the Company's sales would be
reduced. There can be no assurance that the Company will be able to develop and
introduce enhanced or new products which satisfy a broad range of customer needs
and achieve market acceptance or that such development and introduction will
occur without adverse delays.
RISK OF PRODUCT DEFECTS. Products and services as complex as those the
Company offers and intends to offer may contain undetected errors or "bugs" when
introduced or when new products or versions are released. No assurance can be
given that, despite testing by the Company, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of market share or failure to achieve market acceptance. In addition, the
Company has not yet begun mass production of its products. There is no assurance
that the mass-produced version of a product will perform as well as the current
prototype of that product. Any such occurrence could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
COMPETITION. The Company also faces competition from companies, who
are focused on network communications such as Microsoft, Lucent, 3COM, Nortel
Networks and Cisco. Each of these competitors has far greater capital,
marketing, and other resources than the Company. Those competitors may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements and may be able to devote greater resources to the
promotion and sale of their products and services. There can be no assurance
that the Company's products will achieve significant market penetration, that
the Company's products will obtain or retain a technological advantage in the
market, or that these or other firms will not develop new or enhanced
products that are more effective than any that have been or may be developed
by the Company. Any increase in competition could result in material price
reductions or the inability to obtain or retain market share by the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON CERTAIN SUPPLIERS AND LICENSES. The Company is currently
dependent upon a few critical suppliers and licenses 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 Company currently
licenses its wavelet compression module. 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. In addition, the Company's compression technology is dependent
upon its continued access to the newly developed PowerPC microprocessor, which
it currently purchases from Motorola, Inc. The Company's enhanced wavelet module
and the processing power of the Power PC microprocessor enable the data
compression that makes the products viable. The
23
<PAGE>
loss of access to the wavelet compression module or Power PC microprocessor
would result in slower processing times until a substitute technology could be
developed. Further delays in the receipt of such key elements from suppliers
could adversely affect the Company's ability to meet production schedules and
fill orders.
RELIANCE ON PROPRIETARY TECHNOLOGY. The Company has filed a patent on
its network topology. The Company anticipates that its activities will also
result in a number of additional patent applications and patents. However, no
such patents have been issued to date and no assurance can be given that any
such patents will be issued or, if issued, will provide significant commercial
protection. The Company regards its software covering the operation of its
products as proprietary and relies primarily on a combination of copyright,
trademark, trade secret and confidential information laws, and on employee and
third-party non-disclosure agreements and other methods, to protect its
proprietary rights. There can be no assurance that these protections will be
adequate to protect the Company's intellectual property rights or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies. The Company
believes that its products, trademarks and other proprietary rights do not
infringe on the proprietary rights of third parties. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products, trademarks or other
Company works or that such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation.
NEED FOR ADDITIONAL SKILLED PERSONNEL. The Company believes that its
success will depend in large part upon its continued ability to attract and
retain programmers and other skilled employees, which is difficult because
the market for the services of such individuals is very competitive. As such,
the Company's success will depend to some extent on new employees who have
not been identified, and have not agreed to join the Company. In addition,
the Company will necessarily utilize the services of certain outside,
independent parties (programmers, marketing, sales, etc.). While the Company
will have consulting agreements with these entities, there can be no
assurance that such entities will not violate the terms of the consulting
agreements, or otherwise fail to meet the terms of the agreements.
DEPENDENCE UPON KEY PERSONNEL. The Company is particularly dependent
on the services of David Fann, Paul Cox and Grant Holcomb, its Chief
Executive Officer, President, and Chief Technology Officer, respectively. The
loss of any of these individuals would have a material adverse effect on the
Company. The Company has applied for, and obtained, key-man life insurance
for Paul Cox and Grant Holcomb. It has applied for, but not yet obtained,
key-man life insurance for David Fann.
YEAR 2000 COMPLIANCE
THE INFORMATION PRESENTED BELOW RELATED TO YEAR 2000 COMPLIANCE
CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
BELOW AND ELSEWHERE IN THIS FORM 10-K REGARDING YEAR 2000 COMPLIANCE.
THE YEAR 2000. The Year 2000 (Y2K) issue is the result of certain
computer hardware, operating system software and software application programs
having been developed using two digits rather than four to define a year. For
example the clock circuit in certain hardware may be incapable of holding a date
beyond the year 1999; some operating systems may recognize a date using "00" as
the year 1900 rather than 2000 and certain applications may have limited date
processing capabilities. These problems could result in the failure of major
systems or miscalculations, which could have a material impact on companies
through business interruption or shutdown, financial loss, damage to reputation,
and legal liability to third parties.
STATE OF READINESS. Within the past twelve months, the Company has been
assessing its exposure to risks relating to the Y2K issue. That analysis and
remediation issues are addressed in a four-phase plan of action.
PHASE I-- INVENTORY AND RISK ASSESSMENT. This Phase requires an
inventory and assessment of the business and information systems used by the
Company, including desktop hardware and software, network hardware and software,
telephone systems, and general business systems with embedded technology. The
Company uses desktop products from Apple Computer. As reported below, Apple
Computer has reported that its products and operating system are Y2K compliant.
In addition the Company uses "off the shelf" software for desktop applications.
In
24
<PAGE>
connection with a review of this software the Company intends to replace is
accounting software on or before June 30, 1999. The Company intends to relocate
its corporate headquarters on or before December 31, 1999, and is evaluating the
compliance of general business systems for prospective relocation sites.
Further, the Company's existing products are all Year 2000 compliant and contain
four digit date codes. As a result, the Company believes is has completed 75% of
its Phase I analysis, and anticipates that this Phase will be completed during
the second quarter of fiscal 1999.
PHASE II--REMEDIATION COST ESTIMATION. This Phase involves the analysis
of each Y2K compliance issue, determination of how such risks will be remediated
and the cost of such remediation. As indicated, the Company does not anticipate
needing to replace any significant hardware. It will upgrade some desktop
software with readily available prepackaged programs. Because of the Company's
limited operating history, it does not expect to incur significant time or
expense in connection with transferring data to any upgraded desktop software.
Any cost the Company incurs in connection with upgrading embedded systems in new
physical facilities will be dependent on the exact location selected. The
Company anticipates that this Phase will be completed during the second quarter
of fiscal 1999. Based on its assessment to date, 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.
PHASE III-- REMEDIATION. This Phase includes the replacement or
correction of any necessary business or information systems. The Company has not
incurred significant remediation expenses to date. A detailed project plan for
the remediation is being developed. The Company anticipates that this Phase will
be completed during the second quarter of fiscal 1999.
PHASE IV-- REMEDIATION TESTING. This Phase includes the future date
testing of all remediation efforts made in Phase III to confirm that the changes
made bring the affected systems into compliance, no new problems have arisen as
a result of the remediation and that all new systems which replaced noncompliant
systems are Y2K compliant regardless of whether vendors represent that such
systems are Y2K complaint. This Company anticipates that this Phase will be
completed during third quarter fiscal 1999.
THIRD PARTY RELATIONSHIPS. 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, Inc., Motorola, Inc., Ingram Micro, Inc. and Sprint Communications
in connection with the design, manufacture, distribution and operation of
components of the TeraCOM Service. Each of these entities is a reporting
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, INC.. The TeraCOM product is based on a computer
supplied by Apple Computer, Inc. Apple Computer, Inc. has reported that its
computers and operating systems are Year 2000 compliant. However, the vendors
that provide products and services to Apple Computer, Inc. may experience
difficulties associated with the Y2K issue. Any interruption in manufacturing or
distributing 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, INC. The TeraCOM Service takes advantage of the PowerPC
microprocessor from Motorola, Inc. Motorola, Inc. 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, Inc. 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 Communications as
its preferred network supplier for TeraCOM. Sprint Communications has reported
that it has developed a plan to achieve Year 2000
25
<PAGE>
compliance of its business systems in 1999. However, Sprint Communications
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 Communication's network could have a
significant adverse effect on the Company's business.
INGRAM MICRO, INC. The Company plans to rely on Ingram Micro, Inc. for
the assembly and distribution of hardware components used to deliver TeraCOM.
Ingram Micro, Inc. 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, Inc. 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 Inc.'s assembly or
distribution of TeraCOM could have a significant adverse effect on the Company's
business.
RISK FACTORS. Based on current information, the Company believes the
Y2K issue will not have a material adverse effect on the Company, its
consolidated financial position, results of operations or cash flows. However,
there can be no assurance that the Company's Y2K remediation efforts, or those
of third parties will be properly and timely completed, and the failure to do so
could have a material adverse effect on the Company, its business, results of
operation, and its financial condition. In particular, the Company has not yet
completed its assessment of the Y2K readiness of its significant third party
service providers. Completion of this assessment may result in the
identification of additional issues, which could have a material adverse effect
on the Company's results of operations. In addition, important factors that
could cause results to differ materially include, but are not limited to, the
ability of the Company to successfully identify systems which have a Y2K issue,
the nature and amount of remediation effort required to fix the affected system,
and the costs and availability of labor and resources to successfully address
the Y2K issues.
CONTINGENCY PLANS. The Company is continuing to formulate its
contingency plans. The Company views its dependence on critical suppliers as its
primary exposure to potential Y2K concerns. The Company will continue to
evaluate potential alternatives to reduce its dependence on those suppliers, and
secure alternate supplies in the event that any supplier experiences significant
business interruption as a result of Y2K or other concerns. Development of the
Y2K contingency plans is expected to be substantially complete by the end of
the third quarter of 1999.
26
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ITEM 7. FINANCIAL STATEMENTS.
TERAGLOBAL COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6-7
Notes to Consolidated Financial Statements F-8-25
</TABLE>
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information regarding directors and executive officers of the Company
will appear in the Proxy Statement for the Annual Meeting of Stockholders and is
incorporated herein by this reference. The Proxy Statement will be filed with
the SEC within 120 days following December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Stockholders and is incorporated herein by
this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management will appear in the Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions
will appear in the Proxy Statement for the Annual Meeting of Stockholders and is
incorporated herein by this reference.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
4.1 Form of Convertible Debenture (1)
10.1 Agreement and Plan of Merger with Design Analysis
Associates, Inc. dated September 30, 1998 (1)
10.2 Asset Purchase Agreement with Interactive Solutions Group,
Inc. dated July 31, 1998 (1)
10.3 Agreement and Plan of Corporate Reorganization and
Separation dated December 18, 1998 (2)
10.4 Ingram Micro Agreement (1)
10.5 Employment Agreement with Mr. Cox (1)
10.6 Employment Agreement with Mr. Fann (1)
10.7 Employment Agreement with Mr. Holcomb (1)
10.8 Employment Agreement with Mr. Nakhleh (2)
10.9 1997 Employee Stock Option Plan (1)
10.9.1 1999 Employee Stock Option Plan
10.10 MENTAT Agreement (1)
10.11 Alliance Leasing Form of Capital Equipment Lease (1)
10.12 Infinop Licensing Agreement (1)
10.13 Apple Direct Value Added Reseller U.S. Sales Agreement (3)
11 Statement re Computation of Earnings Per Share (1)
21 Subsidiaries of the Registrant (2)
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration
Statement on Form 10-SB (000-25115) filed on November 25,
1998.
(2) Incorporated by reference to the Company's Pre-Effective
Amendment No. 1 to Form 10-SB filed on January 22, 1999.
(3) Incorporated by reference to the Company's Post-Effective
Amendment No. 1 to Form 10-SB filed on February 12, 1999.
</TABLE>
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company filed no reports
on Form 8-K.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 1999 TERAGLOBAL COMMUNICATIONS CORP.
By: /S/ ISSA NAKHLEH
------------------------------------------
Issa Nakhleh, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ PAUL COX Chairman of the Board and March 29, 1998
- ---------------------- President
Paul Cox
/s/ DAVID FANN Director and Chief Executive March 29, 1998
- ---------------------- Officer
David Fann
/s/ GRANT HOLCOMB Director, Chief Technical Officer March 29, 1998
- ---------------------- and Secretary
Grant Holcomb
29
<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, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended and 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, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended and for the period from February 7, 1997 (inception) to
December 31, 1997 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 19, 1999
F-1
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 48,524
Note receivable - related party 56,500
Inventory 20,073
Prepaid expenses and other current assets, including $4,200
from related parties 21,831
----------
Total current assets 146,928
FURNITURE AND EQUIPMENT, net 1,094,350
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of
accumulated amortization of $318,174 3,499,917
OTHER ASSETS 157,422
----------
TOTAL ASSETS $4,898,617
----------
----------
</TABLE>
F-2
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable, including $109,704 to a related party $ 786,569
Short-term loans 65,986
Accrued expenses, including $26,144 to a related party 142,464
Current portion of notes payable - related parties 343,846
Current portion of capitalized lease obligations 706,055
-----------
Total current liabilities 2,044,920
CONVERTIBLE PROMISSORY NOTES 1,125,000
NOTES PAYABLE - RELATED PARTIES, less current portion 194,460
CAPITALIZED LEASE OBLIGATIONS, less current portion 603,405
-----------
Total liabilities 3,967,785
-----------
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value, non-voting
100,000 shares authorized
no shares issued and outstanding --
Common stock, $0.001 par value
50,000,000 shares authorized
15,188,506 shares issued and outstanding 15,189
Additional paid-in capital 5,310,516
Common stock subscribed 74,375
Accumulated deficit (4,469,096)
Cumulative foreign currency translation adjustment (155)
-----------
Total shareholders' equity 930,832
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,898,617
-----------
-----------
</TABLE>
F-3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM FEBRUARY 7, 1997 (INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 284,515 $ --
COST OF SALES 270,132 --
------------ ------------
GROSS PROFIT 14,383 --
------------ ------------
OPERATING EXPENSES
Legal 472,248 67,463
General and administrative 1,802,048 130,237
Selling 114,068 --
Research and development 1,484,886 41,259
Consulting - related parties 62,847 94,488
------------ ------------
Total operating expenses 3,936,097 333,447
------------ ------------
LOSS FROM OPERATIONS (3,921,714) (333,447)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 984 754
Interest expense (156,852) (3,601)
Other income -- 759
------------ ------------
Total other income (expense) (155,868) (2,088)
------------ ------------
LOSS BEFORE MINORITY INTEREST IN LOSS OF SUBSIDIARY (4,077,582) (335,535)
MINORITY INTEREST IN LOSS OF SUBSIDIARY (34) --
------------ ------------
NET LOSS $ (4,077,616) $ (335,535)
------------ ------------
------------ ------------
BASIC LOSS PER SHARE $ (0.33) $ (0.09)
------------ ------------
------------ ------------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 12,300,908 3,627,064
------------ ------------
------------ ------------
</TABLE>
F-4
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM FEBRUARY 7, 1997 (INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Common Currency
--------------------- Paid-in Stock Accumulated Translation
Shares Amount Capital Subscribed Deficit Adjustment
--------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <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 (69,930)
CANCELLATION OF COMMON STOCK ISSUED BY VIDEO STREAM,
INC. FOR STOCK DIVIDEND (13,985) 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 FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 866
NET LOSS (335,535)
--------- ---------- ---------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1997 9,850,000 9,850 55,890 190,000 (391,480) 866
COMMON STOCK ISSUED FOR
Cash 1,210,000 1,210 789,790
Acquisition of TechnoVision Communications, Inc. 3,563,506 3,564 3,559,942
Acquisition of Design Analysis Associates, Inc. 250,000 250 476,162
Services rendered 25,000 25 89,025
Conversion of promissory note 100,000 100 149,900
ISSUANCE OF COMMON STOCK SUBSCRIBED 190,000 190 189,810 (190,000)
COMMON STOCK SUBSCRIBED 74,375
CHANGE IN CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (1,021)
NET LOSS (4,077,616)
--------- ---------- ---------- ---------- ---------- ------------
BALANCE, DECEMBER 31, 1998 15,188,506 $ 15,189 $ 5,310,519 $ 74,375 $(4,469,096) $ (155)
--------- ---------- ---------- ---------- ---------- ------------
--------- ---------- ---------- ---------- ---------- -----------
</TABLE>
<TABLE>
Total
------------
<S> <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 -
CANCELLATION OF COMMON STOCK ISSUED BY VIDEO STREAM,
INC. FOR STOCK DIVIDEND -
REVERSE MERGER
Shares issued for the acquisition of Video Stream, Inc. -
COMMON STOCK SUBSCRIBED 190,000
CHANGE IN CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 866
NET LOSS (335,535)
---------
BALANCE, DECEMBER 31, 1997 (134,874)
COMMON STOCK ISSUED FOR
Cash 791,000
Acquisition of TechnoVision Communications, Inc. 3,563,506
Acquisition of Design Analysis Associates, Inc. 476,412
Services rendered 89,050
Conversion of promissory note 150,000
ISSUANCE OF COMMON STOCK SUBSCRIBED -
COMMON STOCK SUBSCRIBED 74,375
CHANGE IN CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (1,021)
NET LOSS (4,077,616)
---------
BALANCE, DECEMBER 31, 1998 $ 930,832
---------
---------
</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 YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM FEBRUARY 7, 1997 (INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (4,077,616) $ (335,535)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 417,350 4,860
Amortization of goodwill 318,174 -
Minority interest 34 -
Stock issued for services rendered 89,050 -
Issuance of stock by Video Stream, Inc. to related party for
services rendered - 9,795
(Increase) decrease in
Accounts receivable 420,705 -
Prepaid expenses and other current assets 26,636 (5,503)
Inventory 14,045 -
Increase (decrease) in
Accounts payable 843,535 111,819
Accrued expenses (111,232) 3,496
--------------- ----------------
Net cash used in operating activities (2,059,319) (211,068)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of ISG membership interests (105,800) -
Acquisition of ATI Access Technologies, Inc. - 1
Purchase of furniture and equipment (193,465) (854)
Acquisition of Design Analysis Associates, Inc.'s cash 235,584 -
Acquisition of TechnoVision Communications, Inc.'s cash 54,629 -
--------------- ----------------
Net cash used in investing activities (9,052) (853)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 127,338 69,920
Payments on notes payable (142,516) -
Payments on short-term loan (11,597) (69,920)
Proceeds from loan from affiliate - 48,760
Proceeds from common stock subscription 74,375 190,000
Payments on capital leases (23,389) -
Proceeds from common stock issuance 791,000 -
Proceeds from convertible promissory notes 1,275,000 -
--------------- ----------------
Net cash provided by financing activities 2,090,211 238,760
--------------- ----------------
</TABLE>
F-6
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE PERIOD FROM FEBRUARY 7, 1997 (INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT $ (1,021) $ 866
--------------- ----------------
Net increase in cash and cash equivalents 20,819 27,705
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 27,705 -
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 48,524 $ 27,705
--------------- ----------------
--------------- ----------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
As discussed further in Note 9, 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 year ended December 31, 1998, the Company issued 190,000 shares
valued at $190,000 that had been subscribed at December 31, 1997.
During the year ended December 31, 1998, the Company converted a $150,000
promissory note into 100,000 shares of common stock.
F-7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 Video Stream International, Inc. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 $3,563,506 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>
<CAPTION>
<S> <C>
Cash $ 54,629
Accounts receivable 252,705
Prepaids and other current assets 195,007
Note receivable - related party 56,500
Inventory 34,118
Furniture and equipment, at net book value 1,200,212
Accounts payable (140,340)
Customer deposits (105,000)
Notes payable (553,484)
Capital leases (1,332,849)
Minority interest 34
----------------
Total net assets (338,468)
Excess of cost over fair value of net assets acquired 3,567,090
----------------
CONSIDERATION $ 3,228,622
----------------
----------------
</TABLE>
The information provided in the above table is based on TechnoVision's
audited financial statements as of June 30, 1998. The consideration is
based on the issuance of 3,563,506 shares for 99% of TechnoVision at
$1.00 per share, the price of the last private placement financing
completed in May and June 1998, 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.
F-9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS (CONTINUED)
ACQUISITIONS (Continued)
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/officer of the Company at December 31, 1997 and December
31, 1998. The excess of cost over fair value of net assets acquired is
being amortized on a straight-line basis over five years. ISG did not
have significant operations prior to the acquisition. Therefore, no pro
forma information is presented.
Effective November 1, 1998, the Company acquired, pursuant to an
Agreement of Merger and a Plan of Corporate Reorganization and
Separation, all of the issued and outstanding common stock of Design
Analysis Associates, Inc. ("DAA"), a Utah company, in exchange for
250,000 shares of the Company's common stock. The acquisition was
accounted for under the purchase method. The assets acquired and the
liabilities assumed were as follows:
<TABLE>
<S> <C>
Cash $ 235,584
Accounts receivable 167,997
Furniture and equipment, at net book value 98,587
Accounts payable (25,756)
----------------
Total net assets 476,412
Excess of cost over fair value of net assets acquired -
----------------
CONSIDERATION $ 476,412
----------------
----------------
</TABLE>
The information provided in the above table is based on DAA's audited
financial statements. The consideration is based on the issuance of
250,000 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,
discounted by 46% to reflect the thin trading of the Company's stock.
F-10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONCENTRATIONS OF CREDIT RISK
The Company sells its products throughout the United States and extends
credit to its customers and performs ongoing credit evaluations of such
customers. The Company does not obtain collateral to secure its
accounts receivable. The Company evaluates its accounts receivable on a
regular basis for collectability and provides for an allowance for
potential credit losses as deemed necessary.
One customer accounted for 77% of the Company's net sales for the year
ended December 31, 1998. At December 31, 1998, there were no amounts
due from this customer.
At December 31, 1998, five vendors accounted for 34%, 20%, 19%, 14%
and 11% of cost of sales. At December 31, 1998, the amounts due to
these vendors were not material.
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.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of products when the
products are shipped.
MINORITY INTEREST
The accompanying consolidated balance sheet as of December 31, 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 statements of operations for the year ended
December 31, 1998 and the period from February 7, 1997 (inception) to
December 31, 1997 do not reflect the minority interest's share of
TechnoVision's losses for said periods as the related accrual would
result in the Company's recording of a minority interest receivable.
F-11
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and consists of raw
materials. Cost is determined using specific identification.
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 year ended December 31, 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.
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.
F-12
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE INCOME
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from
net income, include foreign currency translation adjustments, minimum
pension liability adjustments, and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the difference between net
income and comprehensive income was immaterial.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-Retirement Benefits." The Company does not expect adoption of SFAS
No. 132 to have a material impact, if any, on its financial position or
results of operations.
F-13
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for financial
statements with fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not expect
adoption of SFAS No. 133 to have a material effect, if any, on its
financial position or results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," which
is effective for financial statements with the first fiscal quarter
beginning after December 15, 1998. The Company does not expect adoption
of SFAS No. 134 to have a material effect, if any, on its financial
position or results of operations.
In February 1999, the FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections," which is effective for
financial statements with fiscal years beginning February 1999.
This statement is not applicable to the Company.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
The loan is to a current officer/director of the Company. The note is
due on or before June 1, 1999, bears interest at 8% per year, and is
unsecured.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Furniture and fixtures $ 192,064 $ -
Office equipment 306,284 674
Computers and software 1,018,212 23,623
--------------- ----------------
1,516,560 24,297
Less accumulated depreciation 422,210 4,860
--------------- ----------------
TOTAL $ 1,094,350 $ 19,437
--------------- ----------------
--------------- ----------------
</TABLE>
F-14
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 4 - FURNITURE AND EQUIPMENT (CONTINUED)
Depreciation expense for the year ended December 31, 1998 and the
period from February 7, 1997 (inception) to December 31, 1997 was
$417,350 and $4,860, respectively.
NOTE 5 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at December 31, 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. $ 344,460
Notes payable with various dates to former employees are
unsecured, non-interest bearing, and are payable upon
demand. 16,508
Note payable to a former employee is unsecured, non-interest
bearing, with no repayment terms 50,000
Note payable to current shareholder, dated February 6, 1998,
bears interest at 15%, is unsecured, and is payable upon
demand. 127,338
----------------
538,306
Less current portion 343,846
----------------
LONG-TERM PORTION $ 194,460
----------------
----------------
</TABLE>
Future principal payments required under such notes are summarized as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 343,846
2000 150,000
2001 44,460
---------
TOTAL $ 538,306
---------
---------
</TABLE>
F-15
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 were due on November 8, 1998
if the Note had not been converted prior to such date by either party
to the Note. During July 1998, the Company received a notice of
conversion from the lender and completed the conversion during October
1998 by issuing 100,000 shares of common stock at $1.50 per share.
During September 1998, the Company entered into two convertible
promissory notes totaling $1,125,000. The first note for $475,000 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.
The second note for $650,000 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.
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 $202,880 and $9,506 for the year ended December 31, 1998 and the
period from February 7, 1997 (inception) to December 31, 1997,
respectively.
F-16
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (Continued)
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
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Capital
December 31, Leases
------------- -----------------
<S> <C>
1999 $ 1,208,557
2000 544,271
----------------
1,752,828
Less amount representing interest 443,368
----------------
1,309,460
Less current portion 706,055
----------------
LONG-TERM PORTION $ 603,405
----------------
----------------
</TABLE>
Leased capital assets included in furniture and equipment at December
31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Furniture and fixtures $ 150,000 $ -
Office equipment 35,000 -
Computers and software 992,728 -
Less accumulated amortization 295,685 -
--------------- ----------------
TOTAL $ 882,043 $ -
--------------- ----------------
--------------- ----------------
</TABLE>
During September 1998, the lessor of $1,277,475 of the $1,309,460 of
the capital leases declared bankruptcy. The Company is in the process
of negotiating a settlement with the bankruptcy trustee. The Company
has not made any capital lease payments since September 1998.
F-17
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
officers of the Company, expiring October 31, 2002. Future minimum
payments under these agreements are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 576,250
2000 600,000
2001 600,000
2002 500,000
----------------
TOTAL $ 2,276,250
----------------
----------------
</TABLE>
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 demur 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 the remaining causes of action.
Accordingly, the First Amended Complaint stated causes of action for
breach of fiduciary duty, intentional misrepresentation and fraudulent
concealment, negligent misrepresentation, conversion, and conspiracy.
F-18
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION (Continued)
By virtue of the California Supreme Court's January 4, 1999 decision in
DIAMOND MULTIMEDIA V. SUPERIOR COURT (1999) 19 Cal. 4th 1036, the
plaintiffs have been permitted to again amend the Complaint to
re-assert causes of action for violation of California securities laws.
By stipulation of the parties, the plaintiffs will file in the
immediate future a Second Amended Complaint stating three causes of
action: violation of California Corporation Code Section 25400,
violation of California Corporation Code Section 25500, and breach of
fiduciary duties. The Company intends to answer the Second Amended
Complaint asserting all appropriate affirmative defenses. The Second
Amended Complaint seeks damages in an amount to be provided. The
Company denies any involvement or wrongdoing in connection with the
private placement and intends to vigorously defend the lawsuit.
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 are 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. By stipulation of the parties, both complaints have been
consolidated into a single action. The Company filed a demurrer as to
certain causes of action in both Complaints. The Court sustained the
demurrers as to certain causes of action and overruled the demurrers as
to other causes of action. The Court has set a trial date of November
12, 1999 for this consolidated action. 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.
F-19
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 100,000 authorized shares of non-voting preferred stock
with a $1.00 par value. 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,
1998 or 1997.
COMMON STOCK
During the period from February 7, 1997 (inception) to 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 at $1.00 per share to be issued subsequent to December 31,
1997. The Company received the remaining $810,000, net of offering
costs of $19,000, related to this sale of stock during June 1998 and
issued the shares during September 1998.
During the year ended December 31, 1998, the Company received $74,375
related to the subscription of 17,500 shares of common stock to be
issued subsequent to December 31, 1998. The Company also issued 25,000
shares of common stock as payment for services rendered by a third
party valued at $90,000.
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 fiscal 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.
F-20
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
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 vest over various periods as determined by the Company
for each grant, ranging for zero to five years and expire up to ten
years from the grant date.
The following summarizes the stock options transactions under the stock
option plan:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Options Exercise
Outstanding Price
--------------- -----------------
<S> <C> <C>
Outstanding, December 31, 1997 - $ -
Granted 1,228,675 $ 2.18
Forfeited (2,800) $ (3.06)
---------------
OUTSTANDING, DECEMBER 31, 1998 1,225,875 $ 2.17
---------------
---------------
EXERCISABLE, DECEMBER 31, 1998 902,480
---------------
---------------
</TABLE>
F-21
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 1998 is 9.5 years. The exercise prices for
the options outstanding at December 31, 1998 ranged from $1.35 to
$4.50, and information relating to these options is as follows:
<TABLE>
<CAPTION>
Stock Stock Remaining
Exercise Options Options Contractual
Price Outstanding Exercisable Life
-------------- ------------- ------------- --------------
<S> <C> <C> <C>
$ 1.35 315,000 315,000 9.2
$ 1.50 438,125 268,125 9.3
$ 3.06 337,750 305,855 9.7
$ 4.00 98,000 9,800 9.9
$ 4.50 37,000 3,700 9.9
</TABLE>
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under its plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be
reduced to the pro forma amounts indicated below for the year ended
December 31, 1998:
<TABLE>
<S> <C>
Net loss
As reported $ (4,077,616)
Pro forma $ (5,043,339)
Basic loss per common share
As reported $ (0.33)
Pro forma $ (0.41)
</TABLE>
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended December 31, 1998:
dividend yield of 0%, expected volatility of 75%, risk-free interest
rate of 5.5%, and expected life of two years. The weighted-average
fair value of options granted during the year ended December 31, 1998
was $0.79.
F-22
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (Continued)
For options granted during the year ended December 31, 1998 where the
exercise price equaled the stock price at the date of the grant, the
weighted-average fair value of such options was $1.22, and the
weighted-average exercise price of such options was $3.06. For options
granted during the year ended December 31, 1998 where the exercise
price exceeded the stock price at the date of the grant, the
weighted-average fair value of such options was $0.63, and the
weighted-average exercise price of such options was $1.85. No options
were issued during the year ended December 31, 1998 where the exercise
price was less than the stock price at the date of the grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 10 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred
taxes at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Deferred tax assets
Canadian net operating loss carryforwards $ 291,896 $ 134,214
United States net operating loss carryforwards 1,473,365 -
--------------- ----------------
Total gross deferred tax assets 1,765,261 134,214
Less valuation allowance 1,765,261 134,214
--------------- ----------------
NET DEFERRED TAX ASSETS $ - $ -
--------------- ----------------
--------------- ----------------
</TABLE>
The valuation allowance increased by approximately $1,631,047 and
$134,214 during the years ended December 31, 1998 and 1997,
respectively. All other deferred tax assets were immaterial. No
provision for income taxes for the years ended December 31, 1998 and
1997 is required, except for minimum state taxes, since the Company
incurred losses during such years. As of December 31, 1998, the
Company had approximately $3,700,000 in federal net operating loss
carryforwards and $700,000 in Canadian net operating loss carryforwards
attributable to losses incurred since the Company's inception that may
be offset against future taxable income through the year 2013.
F-23
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (CONTINUED)
Income tax expense was $0 and differs from the amounts computed by
applying the United States federal income tax rate of 34% to loss
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Computed "expected" tax benefit $ (1,386,389) $ (114,082)
Increase in income taxes resulting from
Canadian income taxes (23,653) (20,132)
Change in the beginning-of-the-year balance
of the valuation allowance for deferred tax
assets allocated to income tax expense 1,631,047 134,214
State income taxes (221,005) -
--------------- ----------------
TOTAL $ - $ -
--------------- ----------------
--------------- ----------------
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, $627 and $671, respectively, of the
short-term loans outstanding were due to a former shareholder/officer
of VSI.
During the year ended December 31, 1998 and the period from February 7,
1997 (inception) to December 31, 1997, the Company paid $46,523 and
$94,488, respectively, to an officer/director for consulting services
rendered and had an account payable to the officer/director for
$110,487 and $84,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had a prepaid expense and
other assets of $1,900 and $4,351, 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 year ended December 31,
1998, the Company paid $16,324 to a shareholder/officer for research
and development.
During the year ended December 31, 1998 and the period from February 7,
1997 (inception) to December 31, 1997, ATI purchased certain computer
equipment for $0 and $23,443, respectively, from TechnoVision.
F-24
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
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 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not
believe the cost of implementation will be material to the Company's
financial position and results of operations.
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 disruptions in the operation of enterprises
with which the Company interacts. The Company currently relies or
plans to rely on certain third parties in connection with the
design, manufacture, distribution and operation of components of the
Company's products. 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
that these companies are either Year 2000 compliant or have
developed a plan to achieve Year 2000 compliance during 1999.
However, none of these companies can guarantee its Year 2000
compliance or that of its suppliers.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company entered into an agreement
to license certain software in exchange for 15,000 shares of common
stock valued at $39,375.
Subsequent to December 31, 1998, the Company sold 2,598,816 shares of
common stock at $2.625 per share through a private placement and
received cash of $6,821,892. The Company also issued 81,176 shares of
common stock at $2.625 per share to consultants as consideration for
locating potential investors.
Subsequent to December 31, 1998, the Company issued 17,500 shares of
common stock valued at $74,375 that had been subscribed at December 31,
1998.
Subsequent to December 31, 1998, the Company repaid in full the
$650,000 due to the holders of the 9% convertible promissory notes with
the conversion rate of $4.25 per share.
Subsequent to December 31, 1998, the Company issued 27,100 shares of
common stock upon the exercise of 27,100 stock options with an exercise
price of $1.50 per share.
Subsequent to December 31, 1998, the Company adopted the 1999 Stock
Option Plan (the "1999 Plan"). Under the terms of the 1999 Plan, the
aggregate number of shares that may be issued pursuant to the
exercise of options granted initially will not exceed 1,500,000. The
Company has granted 700,000 stock options under this Plan.
F-25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 48,524
<SECURITIES> 0
<RECEIVABLES> 56,500
<ALLOWANCES> 0
<INVENTORY> 20,073
<CURRENT-ASSETS> 146,928
<PP&E> 1,516,560
<DEPRECIATION> (422,210)
<TOTAL-ASSETS> 4,898,617
<CURRENT-LIABILITIES> 2,044,920
<BONDS> 0
0
0
<COMMON> 5,325,705
<OTHER-SE> (4,394,876)
<TOTAL-LIABILITY-AND-EQUITY> 4,898,617
<SALES> 284,515
<TOTAL-REVENUES> 284,515
<CGS> 270,132
<TOTAL-COSTS> 384,200
<OTHER-EXPENSES> 3,822,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,852
<INCOME-PRETAX> (4,077,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,077,616)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
