<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________________ TO _______________.
COMMISSION FILE NUMBER 0-25115
TERAGLOBAL COMMUNICATIONS CORP.
(Exact name of small business issuer as specified in its charter)
WYOMING 33-0827963
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
9171 TOWNE CENTRE DRIVE, SUITE 600
SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices)
(858) 404-5500
(Issuer's telephone number)
225 BROADWAY, SUITE 1600
SAN DIEGO, CALIFORNIA 92101
(Former address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 9, 1999,
19,691,613 shares of the issuer's common stock were outstanding.
Transitional Small Business Disclosure Format (Check One): [ ] Yes [X] No
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 (audited) 3
Consolidated Statements of Operations - Nine Months and Three
Months Ended September 30, 1999 and September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
1999 and September 30, 1998 (unaudited) 6
Notes to Consolidated Financial Statements - September 30, 1999 and
September 30, 1998 (unaudited) 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION 18
ITEM 1. Legal Proceedings 18
ITEM 2. Change in Securities 19
ITEM 3. Defaults upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAGLOBAL, TERAMEDIA and TERASTUDIO are trademarks of TERAGLOBAL Communications
Corp.
2
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 7,048,531 $ 48,524
Marketable securities 4,938,250 -
Accounts receivable 127,157 -
Note receivable-related party 340,095 56,500
Inventory 99,830 20,073
Prepaid expenses and other current assets, including $4,241
to related parties 485,158 21,831
------------- -------------
Total current assets 13,039,022 146,928
FURNITURE AND EQUIPMENT, net 1,313,666 1,094,350
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $890,890
September 30, 1999 (unaudited) and $318,174
December 31, 1998 2,933,201 3,499,917
CERTIFICATE OF DEPOSIT 500,000 -
OTHER ASSETS 157,422 157,422
------------- -------------
TOTAL ASSETS $ 17,943,311 $ 4,898,617
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, including $0 to related parties
September 30, 1999 (unaudited) and $109,704
December 31, 1998 $ 1,308,708 $ 786,569
Customer deposits 30,560 -
Short-term loans 68,110 65,986
Accrued expenses, including $0 and $26,144, respectively
to a related party 346,129 142,464
Notes payable, including $50,000 to a related party 50,000 343,846
Convertible promissory notes - current 475,000 -
Current portion of capitalized lease obligations 1,292,372 706,055
------------- -------------
Total current liabilities 3,570,880 2,044,920
CONVERTIBLE PROMISSORY NOTES - 1,125,000
NOTES PAYABLE - RELATED PARTIES - 194,460
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT PORTION - 603,405
------------- -------------
Total liabilities 3,570,880 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 December 31, 1998
19,577,773 shares issued and outstanding September 30, 1999 19,578 15,189
Additional paid-in capital 27,976,000 5,310,516
Common stock subscribed 1,000,000 74,375
Accumulated deficit (14,591,891) (4,469,096)
Cumulative foreign currency translation adjustment (31,277) (155)
------------- -------------
Total shareholders' equity 14,372,431 930,832
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,943,311 $ 4,898,617
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Three months ended Sept. 30, Nine months ended Sept. 30,
----------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ---------------- ------------------ -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 130,542 $ 272,634 $ 274,407 $ 272,634
Cost of sales 99,051 233,337 178,161 233,337
----------------- ---------------- ------------------ -----------------
Gross profit 31,491 39,298 96,246 39,298
----------------- ---------------- ------------------ -----------------
OPERATING EXPENSES
Consulting, related party - 2,941 - 62,847
General and administrative 2,124,685 988,325 4,926,495 1,610,347
Legal 176,125 145,024 407,551 186,129
Research and development 1,517,597 106,771 4,558,264 245,808
Selling 131,308 95,624 242,382 110,646
----------------- ---------------- ------------------ -----------------
3,949,716 1,338,685 10,134,693 2,215,778
----------------- ---------------- ------------------ -----------------
LOSS FROM OPERATIONS (3,918,225) (1,299,387) (10,038,447) (2,176,480)
----------------- ---------------- ------------------ -----------------
OTHER INCOME (EXPENSES)
Interest income 171,024 155 252,706 903
Interest expense (105,329) (78,719) (337,054) (78,719)
Other income - - - -
----------------- ---------------- ------------------ -----------------
Total other income
(expense) 65,695 (78,564) (84,348) (77,816)
----------------- ---------------- ------------------ -----------------
MINORITY INTEREST (34) (34)
----------------- ---------------- ------------------ -----------------
----------------- ---------------- ------------------ -----------------
NET LOSS $ (3,852,530) $ (1,377,986) $ (10,122,795) $ (2,254,330)
----------------- ---------------- ------------------ -----------------
----------------- ---------------- ------------------ -----------------
BASIC LOSS PER COMMON SHARE
$ (0.20) $ (0.10) $ (0.56) $ (0.20)
----------------- ---------------- ------------------ -----------------
----------------- ---------------- ------------------ -----------------
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 18,904,282 13,225,422 17,941,015 11,374,040
----------------- ---------------- ------------------ -----------------
----------------- ---------------- ------------------ -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
1999 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES
Net loss $ (10,122,795) $ (2,254,296)
Adjustments to reconcile net loss to net cash used
in operating activities
Stock issued for services rendered 2,043,100 -
Options issued for services rendered 450,000 -
Depreciation 441,459 88,003
Amortization of goodwill 572,714 -
(Increase) decrease in
Accounts receivable (127,157) 226,669
Note receivable - related party (283,595) -
Prepaid expenses and other current assets (423,952) 26,255
Inventory (79,757) (364)
Increase (decrease) in
Accounts payable 522,140 365,059
Accrued expenses 203,665 168,630
Customer deposits 30,560 (105,000)
----------------- -----------------
Net cash used for operating activities (6,773,618) (1,485,044)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of TechnoVision Cash - 54,629
Acquisition of ISG - (251,000)
Purchase of certificate of deposit (500,000) -
Purchase of furniture and equipment (660,775) (11,398)
----------------- -----------------
(1,160,775) (207,769)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of short-term loans 2,124 (675)
Payment of note payable - related party (243,846) (80,989)
Payment of capital lease obligations (17,088) 107,451
Procceds from common stock subscriptions (74,375) -
Payment of convertible debenture (650,000) 977,500
Proceeds from issuance of common stock, net of fees 20,739,439 805,375
Foregiveness of debt on acquisition of TechnoVision - 334,884
Proceeds from exercise of stock options 147,520 -
----------------- -----------------
19,903,774 2,143,546
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
1999 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT (31,122) 21,596
Net increase in cash and cash equivalents 11,938,258 472,330
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,524 27,705
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,986,782 $ 500,035
----------------- -----------------
----------------- -----------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 1999, the Company issued 15,000
shares valued at $39,375 as a pre-payment of software license fees.
During the nine months ended September 30, 1999, the Company converted a
$244,460 related party promissory note into 47,059 shares of common stock.
During the nine months ended September 30, 1999, the Company issued 6,000
shares valued at $6,000 as payment for the acquisition of additional shares
in TechnoVision Communications, Inc.
See accompanying notes to consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September
30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1999. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998.
The consolidated financial statements include the accounts of
TeraGlobal Communications Corp. (the "Company"), and its wholly owned
subsidiaries, TeraGlobal Communications (Canada) Corp. and TGC
Acquisition Inc. In addition, the accounts of TechnoVision
Communications, Inc. ("TechnoVision"), the Company's 99.1% owned
subsidiary are consolidated. All material inter-company balances and
transactions have been eliminated in the consolidation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MINORITY INTEREST
The accompanying consolidated balance sheet as of September 30, 1999,
does not reflect a minority interest liability because TechnoVision, on
a stand-alone basis, had a shareholders' deficit as of that date. The
accompanying consolidated statements of operations for the nine months
ended September 30, 1999, and nine months ended September 30, 1998, do
not reflect the minority interest's share of TechnoVision's losses for
said periods because the related accrual would result in the Company's
recording of a minority interest receivable.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
During the nine months ended September 30, 1999 the Company loaned
$283,595 to certain officers and directors of the Company. The
promissory notes are unsecured, payable on demand and bear interest at
the minimum applicable federal rate.
NOTE 4 - INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited)
-------------------------------------------
<S> <C> <C>
Raw materials $99,830 $20,073
-------------------------------------------
Total $99,830 $20,073
-------------------------------------------
-------------------------------------------
</TABLE>
8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited)
-------------------------------------------
<S> <C> <C>
Furniture and fixtures $193,376 $192,064
Office equipment 523,652 306,284
Computer equipment 1,460,307 1,018,212
-------------------------------------------
2,177,335 1,516,560
Less accumulated depreciation 863,669 422,210
-------------------------------------------
TOTAL $1,313,666 $1,094,350
-------------------------------------------
-------------------------------------------
</TABLE>
Depreciation expense for the nine months ended September 30, 1999 and the year
ended December 31, 1998 was $441,459 and $417,350 respectively.
NOTE 6 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
In March of 1999, the Company entered into an agreement with a former
officer and Director of TechnoVision and current shareholder of the
Company to settle debt totaling $244,460 through the issuance of 47,059
shares of common stock. This amount is owed to an individual who is
currently in litigation against the Company. This amount may be offset
if the litigation is resolved in the Company's favor.
Notes payable - related parties at September 30, 1999 consisted of
the following:
<TABLE>
<S> <C>
Note payable to a former employee of TechnoVision is
unsecured, non-interest bearing with no repayment terms. $ 50,000
Less current portion 50,000
-----------
LONG-TERM PORTION $ -
-----------
-----------
Future principal payments required under such notes are
summarized as follows
Year Ending December 31, 1999 $ 50,000
</TABLE>
NOTE 8 - CONVERTIBLE PROMISSORY NOTES
During February 1999, the Company repaid outstanding convertible
promissory notes in the aggregate principal amount of $650,000 together
with accrued interest.
9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
NOTE 9 - SHAREHOLDERS' EQUITY
COMMON STOCK
During the three months ending March 31, 1999, the Company sold
2,679,987 shares of common stock, receiving $6,748,394, net of offering
costs of $73,580. During the same period, the Company received $40,650
in connection with the exercise of stock options for 27,100 shares of
common stock and converted a note payable to a related party for
$244,460 into 47,059 shares of common stock. The Company also issued
15,000 shares of common stock as a pre-payment for software license
fees valued at $39,375. In addition, the Company issued 5,000 shares of
common stock to purchase additional shares in TechnoVision
Communications, Inc.
During the three months ended June 30, 1999, the Company issued 100,000
shares of common stock, as payment for services rendered valued at
$1,000,000 pursuant to an employment agreement.
During the three months ended September 30, 1999, the Company issued
1,431,711 shares of common stock receiving $13,956,670, net of offering
costs of $126,130. The Company also received $106,870 in connection
with the exercise of stock options for an aggregate of 63,100 shares of
common stock. The Company also issued 100,000 shares of common stock at
a value of $1,000,000 to an executive officer as additional
compensation. The Company issued 4,310 shares, valued at $43,100, for
services rendered and issued 1,000 shares to purchase additional shares
in TechnoVision Communications, Inc. The Company also cancelled 2,500
shares for a payment of $40,000.
STOCK OPTION PLAN
During the three months ended March 31, 1999, the Company granted
84,000 options under its 1997 Stock Option Plan (the "1997 Plan") at
prices ranging from $4.00 to $10.50 per share to certain employees.
Employees exercised 27,100 options during the same time period.
During the three months ended June 30, 1999, the Company granted
117,875 options under its 1997 Plan at prices ranging from $10.00 to
$16.62 per share to certain employees. Employees exercised 8,600
options and forfeited 14,400 options under this plan during the same
time period.
During the three months ended September 30, 1999, the Company granted
58,500 options under its 1997 Plan at prices ranging from $8.00 to
$16.03 per share to certain employees. Employees exercised 54,500
options and forfeited 5,000 options under this plan during the same
time period.
In February 1999 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.
During the three months ended March 31, 1999, the Company granted
850,000 options under its 1999 Plan at prices ranging from $8.88 to
$10.00 per share to certain employees, directors and corporate
advisors.
10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
During the three months ended June 30, 1999, the Company granted
260,000 options under its 1999 Plan at prices ranging from $8.25 to
$10.13 per share to certain directors and corporate advisors.
During the three months ended September 30, 1999, the Company granted
no options under its 1999 Plan.
The following summarizes the stock option transactions under the 1997
and 1999 Plans:
<TABLE>
<CAPTION>
Stock Options Weighted Average
Outstanding Exercise Price
<S> <C> <C>
Outstanding, December 31, 1998 1,225,875 $2.17
Granted 1,370,375 $9.45
Exercised (90,200) $1.63
Forfeited (19,400) $7.12
--------- -----
Outstanding, September 30, 1999 2,486,650 $6.17
--------- -----
--------- -----
Exercisable, September 30, 1999 1,810,325
---------
---------
</TABLE>
NOTE 10 - COMMITMENTS
The Company entered into a lease agreement to occupy new office space
in San Diego, California. The agreement calls for a security deposit of
$500,000 and commitments of $434,148, $449,940, $465,720, $481,512 and
$497,292 in annual payments from the commencement of the five year
term, starting October 27, 1999. The certificate of deposit is
collateral for a standby letter of credit required as part of the lease
with the new landlord.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company issued 14,340 shares of
common stock upon the exercise of options under the 1997 Plan for
proceeds of $22,820.
Subsequent to September 30, 1999, the Company granted 32,500 options
under its 1997 Plan at prices ranging from $8.75 to $10.03 per share to
certain employees.
Subsequent to September 30, 1999, the Company granted 51,850 options
under its 1999 Plan at prices ranging from $8.75 to $10.25 per share to
certain employees.
Subsequent to September 30, 1999, the Company loaned $10,000 to an
officer and director of the Company. The note is payable on demand and
bears interest at the minimum applicable rate.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS
REPORT CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES, FORECASTS AND PROJECTIONS ABOUT THE COMPANY AND THE
INDUSTRY IN WHICH IT OPERATES. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE.
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
THE LEVEL AND NATURE OF COMPETITION, THE ADEQUACY OF EXISTING STAFF AND
INFRASTRUCTURE TO SUSTAIN OPERATIONS AND PROJECTIONS CONCERNING THE ADEQUACY
OF CASH FLOW. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS BASED ON A NUMBER OF
FACTORS INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT FUTURE
RESULTS AND FINANCIAL CONDITION" BELOW AND MORE COMPLETELY IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE. 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 IN
THIS REPORT.
OVERVIEW
TeraGlobal Communications Corp. is an emerging communications
service provider. TeraGlobal is first in convergence, having developed the
first real-time converged communication service delivering voice, video and
data over an integrated network. The Company is introducing a suite of
services that integrate the hardware, software, network design, and advanced
compression technology necessary to deliver real-time, point-to-point and
point-to-multipoint, interactive communications and collaboration solutions.
The solutions deliver the future of communication, saving customers time and
money while enhancing workflow efficiency and personal productivity. The
services have been described as revolutionary in their ability to transform
the organizational communications landscape.
Historically, the Company's revenues have come principally from
sales of hardware-based videoconferencing products by its TechnoVision
Communications, Inc. subsidiary. The Company has not generated significant
revenues to date. It has received most of its financing from equity
investments during the first three quarters of 1999. The Company has just
completed development of its initial version of the TeraMedia converged
voice, video and data service. During the third quarter of 1999, the Company
focused on further development and the early stage marketing of TeraMedia.
Research and development efforts during the third quarter centered
on the actions necessary to deliver pilot systems to early adopter clients,
including improvement of video quality, improvement of audio quality,
improvement of contact management and registry services, the addition of
content development features and authoring tools. The Company also added five
employees to its research and development staff during the third quarter,
including strategic hires in the area of hardware development, quality
assurance, release engineering and related functions.
The Company focused its sales and marketing efforts during the third
quarter on several significant events. On August 31, 1999, the Company
provided the first public technology demonstration of the TeraMedia service
at the Seybold Conference in San Francisco, California. On September 13, 1999
the Company officially launched its introductory version of TeraMedia at
Motorola's Horizons `99 Conference in Austin, Texas.
With the product launch, the Company also began building its direct
sales and marketing infrastructure. The Company has moved into larger
headquarter facilities in San Diego, California, and has entered into a lease
for larger office space with a demonstration facility in its Logan, Utah
office. The Company announced the opening of a regional sales office in
Dallas, Texas and has taken steps towards securing office space in Boston,
Massachusetts. In addition, the Company has added three people to its sales
personnel.
12
<PAGE>
The Company is continuing to market to potential customers in the
corporate, distance education, medical, entertainment and government
industries. The Company entered into a Service Agreement with Lacerte
Technologies in the third quarter. The agreement with Lacerte Technologies,
Inc. provides for payments of $600,000 over three years. The agreement also
grants TeraGlobal the right to use a portion of Lacerte Technologies, Inc.'s
office space in Dallas, Texas as a regional sales office and demonstration
facility.
The Company is in various stages of negotiation with potential
customers. Based on the status of those negotiations and the Company's
progress in developing the TeraMedia service, TeraGlobal hopes to secure
additional Service Agreements in the fourth quarter of 1999; however, no
assurances can be made as to the scope or timing of any additional agreements.
RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of
operations for the nine months ending September 30, 1999 and 1998, as well as
the audited results of operations for the year ended December 31, 1998.
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 DECEMBER 31, 1998
(UNAUDITED) (UNAUDITED)
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Cash and cash equivalents $11,986,781 $500,035 $48,524
Furniture and equipment, net 1,313,666 1,143,042 1,094,350
Total assets 17,943,311 5,757,820 4,898,617
Current liabilities 3,570,880 1,740,601 2,044,920
Total Shareholders' Equity 14,372,431 2,061,272 930,832
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA: NINE MONTHS ENDING NINE MONTHS ENDING YEAR ENDED DECEMBER
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 31, 1998
(UNAUDITED) (UNAUDITED)
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Sales $274,407 272,634 $284,515
Cost of Sales 178,161 233,337 270,132
General and administrative 4,926,495 1,610,347 1,802,048
Research and development 4,558,264 245,808 1,484,886
Net Loss $(10,122,795) $(2,254,330) $(4,077,616)
Basic loss per common share $(0.56) $(0.20) $(0.33)
Weighted average common shares
Outstanding 17,941,015 8,502,983 12,300,908
Number of Employees 50 17 27
</TABLE>
13
<PAGE>
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998.
SALES. Sales for the three months ended September 30, 1999, were
$130,542 compared to $272,634 in the three months ended September 30, 1998.
This figure included $61,560 in revenue from TeraMedia Service Agreements
with early adopting clients Cinetech Labs, Inc. and the South Carolina
Manufacturers' Extension Partnership. During this period the Company also
entered into a Service Agreement with Lacerte Technologies, Inc, which is
expected to contribute to revenues in the fourth quarter. The balance of the
revenues were generated from one-time hardware sales to TeraMedia customers
for additional equipment as extras for their networks. This revenue is not
expected to recur. However, this trend may continue as each TeraMedia
customer will require some specialized equipment for their specific
applications that they prefer we source and incorporate into our networks.
The Company expects that substantially all of its revenues over the
next several quarters will be derived from Service Agreements for its
TeraMedia service. As discussed below, the Company is expanding its sales and
support infrastructure and is actively pursuing a number of leads for
potential customers in the distance education, corporate, film, and
government industries. The Company hopes to secure Service Agreements for
initial pilot systems with some of these leads in the fourth quarter.
However, the TeraMedia service represents adoption of a new communications
infrastructure for a customer and the approval process can be long. In
addition, some customers may delay purchasing decisions on computer and
communications purchases until after the end of the current year as a result
of Year 2000 concerns. The TeraMedia service is currently delivered through a
desktop workstation that includes Apple Computer's newly introduced G-4
computer. Apple has announced production delays in its G-4 line of computers
and demand is outpacing current production levels. The limited supply of G-4
computers may impact the Company's ability to install systems for new
customers in the fourth quarter. Once a Service Agreement is secured, it
typically takes 60 days to establish the network connections to deliver the
TeraMedia service. Consequently, if the Company is successful in securing
additional Service Agreements, revenues will not likely be significantly
affected until the first quarter of 2000.
COSTS OF SALES. Costs of sales in the three months ended September
30, 1999 were $99,051 resulting in a gross profit margin of 24%, compared to
$233,337 and a gross profit margin of 14% in the three months ended September
30, 1998. Cost of sales includes principally the bandwidth costs associated
with providing the TeraMedia service.
The cost of sales for TeraMedia is expected to decline over time as the
Company establishes a broader base of users. The gross profit will continue
to improve as additional communication terminals are added to the nationwide
network thereby better utilizing overall bandwidth costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
including legal expenses were $2,300,810 in the three months ended September
30, 1999, compared to $1,133,349 in the three months ended September 30,
1998, an increase of 203%. The bulk of this increase was attributable to
added salaries and amortization of goodwill. The figure for the quarter
includes a one-time non-cash charge of $1 million as a result of stock
compensation issued to an officer of the Company.
The Company expects to continue to add infrastructure to support the
completion and roll out of TeraMedia in 1999 and into 2000. The Company will
add additional financial and accounting personnel to support billing and
collection functions as it generates additional service revenue income. In
addition, the Company expects to add significantly to its customer service
and support efforts. Legal expenses are expected to rise in the fourth
quarter as the Company expects to incur substantial litigation costs in
connection with the Spangler matter described below. In connection with the
anticipated increase in staffing, the Company relocated its headquarters in
San Diego effective November 1, 1999. The Company is also negotiating for
larger space for its Logan, Utah offices and is evaluating lease options for
office space in Boston, Massachusetts. The increases in office space will
continue to add to the growth in these expenditures.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$1,517,597 in the three months ended September 30, 1999, as compared to
$106,771 in the three months ended September 30, 1998. Substantially all of
this increase is attributable to an increase in employees in research and
development and the associated equipment costs. At the end of the three
months ended September 30, 1998, the Company had 10 employees in research and
development. At the end of the current period, the Company employed 32 people
and had 5 people on working on an contractor basis.
The balance of the year will continue to see increases in research and
development spending to hire additional personnel and purchase additional
equipment for testing. During the third quarter the Company added five
additional employees to research and development. The increased salary from
these employees will not be fully recognized until the fourth quarter. The
Company will continue to devote substantial resources to research and
development in 2000 to complete the development of the core software and
hardware package for TeraMedia, as well as the development of applications to
tailor TeraMedia to the needs of specific industries. In October 1999, the
Company introduced its initial
14
<PAGE>
version of the TeraMedia service. This service contains the core framework
for delivering real-time converged communications. The Company will continue
to develop applications and improve the architecture of its communications
infrastructure. Currently plans call for the Company to devote resources to
the network server architecture, registry services and unified messaging over
the next two quarters. The Company has formulated a development plan based on
its current cost structure and anticipated revenues. That plan calls for
additional strategic hires into the research and development team. To the
extent that the Company generates greater sales and net income than
anticipated or receives external financing, it may accelerate development of
some of its projects and correspondingly increase research and development
expenses.
SELLING. Selling expenditures were $131,308 in the three months
ended September 30, 1999, as compared to $95,624 in the three months ended
September 30, 1998. This increase is attributable to the Company's addition
of personnel to market and sell the TeraMedia service.
Selling expenses are expected to increase significantly in
connection with the rollout of the TeraMedia service. Subsequent to the
closing of the third quarter, the Company opened a regional sales office in
Dallas, Texas, which includes a demonstration facility. The Company also
intends to open a regional sales office in the Boston, Massachusetts area
during the fourth quarter. The Company has hired three additional sales
account executives during the third quarter, and the additional salary
associated with these employees will begin to be reflected in the fourth
quarter. The Company expects to pursue both a direct and a channel sales
strategy in connection with the TeraMedia rollout. In that regard, the
Company will continue to add employees to its direct sales force each quarter
for the next several quarters. The Company may also increase selling expenses
in connection with a channel sales program with a strategic partner. The
Company is only beginning to evaluate channel sales at this time, and no
assurances can be given that the Company will successfully negotiate and
implement any such strategy.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents
totaling $11,986,781 and a working capital surplus of $9,468,142.
For the three months ended September 30, 1999, net cash used in
operating activities was $2,589,169. For the nine months ended September 30,
1999 net cash used in operating activities was $6,773,618.
The Company made capital expenditures of $256,875 for new equipment
in the three months ended September 30, 1999 and $660,775 for the nine months
ended September 30, 1999. These expenditures were primarily for testing and
office equipment.
Substantially all of the Company's liquidity has been the derived
from equity financing transactions taking place this year. In January and
February 1999 the Company sold 2,679,987 shares of common stock for an
aggregate of $6,748,394, net of offering costs. In May, June and July, the
Company sold 1,408,280 shares of common stock for an aggregate of
$13,956,670, net of offering costs.
The Company is continuing to discuss lease financing and working
capital line of credit arrangements with commercial lenders. However, no
arrangements have been made 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. The Company's TechnoVision subsidiary has secured
equipment lease financing from Alliance Leasing. Alliance Leasing has filed
bankruptcy. The SEC has brought an enforcement proceeding against Alliance
Leasing and its principals alleging securities fraud in connection with the
sale of investment contracts. TechnoVision has stopped making payments and is
not current under the equipment leases to Alliance Leasing. The Company is
attempting to renegotiate those leases with the bankruptcy trustee for
Alliance Leasing; however, no assurances can be given concerning the outcome
of such negotiations.
The Company anticipates that revenues will continue to increase over
the next several quarters as the Company increases the installed base of
customers for its TeraMedia service. Nonetheless, the Company expects cash
flows from operating activities to continue to be negative over the next six
to nine months as increases in sales resulting from the initial introduction
of TeraMedia are offset by increases in 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 12 months.
15
<PAGE>
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-QSB 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. Those
analysis and remediation issues are addressed in a four-phase plan of action.
PHASE I-- INVENTORY AND RISK ASSESSMENT. This Phase includes an
inventory and assessment of potential risks arising out of Y2K issues. The
Company has now completed this initial Phase, having conducted an inventory
and assessment of its business and information systems, its physical
properties and its product and service offerings. Nearly all of the hardware,
software and network products used by the Company have been reported by their
manufacturer to be Y2K compliant. The Company uses "off the shelf" software
for desktop business and accounting applications. In connection with its
review of this software the Company identified potential problems with its
accounting software. The Company relocated its corporate headquarters on
November 1, 1999. The landlord for the new facilities has represented that
its general business facilities are Y2K compliant. Finally, the Company's
TeraMedia service is delivered on a platform of existing products from
vendors such as Apple Computer, Motorola, Inc., Fore Systems, and Sun
Microsystems. Each of those manufacturers has published its opinions that the
products are all Y2K compliant. In connection with its service delivery, the
Company's software has all been developed in the last few years and contains
four digit date codes.
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. The Company does not
anticipate needing to replace any significant hardware. It is in the process
of upgrading certain accounting desktop software with a prepackaged program
that is warranted to be Y2K compliant. 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. The
Company does not expect to incur any costs in connection with upgrading
embedded systems in new physical facilities. This Phase is now substantially
complete.
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. The Company has spent
a nominal amount for new accounting software. The Company believes that
neither the costs associated with its Y2K compliance nor the consequences of
incomplete or untimely resolution of the Y2K 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 IV-- REMEDIATION TESTING. Because of the limited exposure
uncovered in the Company's risk assessment, the Company will not undertake
significant remediation testing. With respect to its accounting systems the
Company is tracking its financial and accounting records into both its legacy
software as well as its new software program to minimize the risk of any
errors.
THIRD PARTY RELATIONSHIPS. Even if the Company's internal systems
are not materially affected by the Y2K 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 TeraMedia service. Each of these entities is a public
company that files reports with the Securities and Exchange Commission
regarding Y2K compliance. Based on these reports, the Company believes the
status of these entities with regard to Y2K compliance to be as set forth
below.
16
<PAGE>
APPLE COMPUTER, INC.. The TeraMedia Service is based on a computer
supplied by Apple Computer, Inc. ("Apple"). Apple has reported that its
computers and operating systems are Y2K compliant. However, the vendors that
provide products and services to Apple 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, and
may materially adversely affect the Company's results of operations.
MOTOROLA, INC. The TeraMedia Service takes advantage of the PowerPC
microprocessor from Motorola, Inc. ("Motorola"). Motorola has stated that it
believes the microprocessor is Y2K 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 Y2K compliant. However, Motorola cannot guarantee its Y2K compliance or
that of its suppliers. Any interruption in the production of the
microprocessor may cause a significant interruption in the Company's sales,
and may adversely affect the Company's results of operations.
SPRINT COMMUNICATIONS. The Company uses Sprint Communications
("Sprint") as a network supplier for TeraMedia. Sprint has reported that it
has developed a plan to achieve Y2K compliance of its business systems in
1999. However, Sprint cannot guarantee its Y2K compliance or that of its
suppliers. While another company could be retained to supply network
capabilities, any interruption or failure of Sprint's network could have a
significant adverse effect on the Company's business.
INGRAM MICRO, INC. The Company plans to rely on Ingram Micro, Inc.
("Ingram Micro") for the assembly and distribution of hardware components
used to deliver TeraMedia. Ingram Micro has reported that it has developed a
comprehensive plan to achieve Y2K compliance of its sensitive systems by the
fall of 1999. However, Ingram Micro cannot guarantee its Y2K compliance or
that of its suppliers. While another company could be retained to assemble
and distribute TeraMedia, any interruption in Ingram Micro's assembly or
distribution of TeraMedia 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. 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.
CONCLUSION AND CONTINGENCY PLANS. The Company employs cutting edge
technology in its business and information systems as well as its service
offerings. As a result, its systems are based on current products which have
been represented by their vendors to be Y2K compliant. Based on its risk
assessment, the Company believes that the likelihood of significant risk from
Y2K compliance issues is significantly lower than companies with longer
operating histories. Nonetheless, the Company believes that there are three
areas where Y2K issues, if they arise, may significantly impact operations.
The first is a potential slow down in customer purchase decisions, as
companies evaluate the financial impact of Y2K on their legacy systems.
Second, problems affecting the national or regional electrical or
communications infrastructure could materially impact the Company's ability
to offer service until such issues are resolved. Finally, the Company relies
on products and services from third parties in order to deliver its TeraMedia
service. In each of these areas, the Company cannot formulate significant
contigency plans. The Company is dependent on products or services from its
strategic partners to deliver TeraMedia. In critical areas there are no
suitable alternatives.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company operates in a rapidly changing environment that involves
a number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, there are
many factors that will affect the Company's future results and business,
which may cause the actual results to differ from those currently expected.
The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully develop, manufacture, and market
technologically innovative products and services in order to meet dynamic
customer demand patterns. Inherent in this process are a number of factors
that the Company must successfully manage in order to achieve favorable
future operating results and a favorable financial condition.
17
<PAGE>
Potential risks and uncertainties that could affect the Company's
future operating results and financial condition include, among other things:
continued competitive pressures in the marketplace and the effect of any
reaction by the Company to such competitive pressures; the availability of
key components on terms acceptable to the Company; the Company's ability to
deliver products and services at a certain price point in the marketplace;
the Company's ability to supply products free of latent defects or other
faults; the Company's ability to make timely delivery to the marketplace of
technological innovations, including its ability to continue to make timely
delivery of planned enhancements to the current TeraMedia Service and timely
delivery of future versions of the TeraMedia Service; the availability of
third-party software for particular applications; the Company's ability to
attract, motivate and retain key employees; and the effect of Y2K compliance
issues.
For a discussion of these and other factors affecting the Company's
future results and financial condition, see "Item 6 - Management's Discussion
and Analysis - Risk Factors That May Affect Operating Results" in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LAM & KEES LITIGATION. On July 15, 1998, two shareholders filed a
class action lawsuit in Los Angeles Superior Court against the Company, its
TechnoVision subsidiary and certain of its officers and directors. The
shareholders had purchased shares of common stock of TechnoVision in a
private placement conducted by Grey Venture Capital, Inc. from November 1997
to May 1998 (the "Offering"). In June 1998, the Company commenced an exchange
offer to TechnoVision shareholders, offering the shareholders the right to
voluntarily exchange two of their TechnoVision shares for one share of the
Company's common stock (the "Exchange Offer"). The plaintiffs accepted the
Exchange Offer.
The Complaint, which has been amended on three occasions, alleges
that TechnoVision, and Grey Venture Capital, Inc. engaged in fraudulent and
deceptive sales practices in connection with the Offering which raised an
aggregate of $4 million. It also alleges that the Company planned its
Exchange Offer for TechnoVision shares prior to the Offering and had
conspired with TechnoVision and Grey Venture Capital, Inc. to defraud
investors because the documents describing the Offering failed to mention the
Exchange Offer. The Company vehemently denies having planned the Exchange
Offer prior to the consummation of the Offering and all allegations of
wrongdoing.
The Complaint states causes of action for violation of California
Corporation Code Sections 25400 and Section 25500(securities fraud) against
all defendants. The Complaint seeks rescission of the Offering and a refund
of the purchase price paid (effectively $10.00 per TeraGlobal share, or $5.00
per TechnoVision share), plus interest and attorney's fees.
The plaintiffs sought the court's certification that the Complaint
alleges causes of action which are appropriately heard as a class action. On
October 18, 1999 the court approved the plaintiffs' request for certification
of the class members. The Company and related defendants not contest the
motion for class certification. The certification of the class was a
determination that, based on the plaintiff's assertions in the complaint, the
case qualifies to be heard as a class action. No determination has been made
to date concerning the substantive merits of the lawsuit.
The class includes holders of approximately 400,000 shares of the
Company's common stock. Those shares have been transferrable under Rule 144
since August 10, 1999. During that period of time, the Company's common stock
was traded for extended periods at prices above $10.00 per share. The Company
estimates that approximately 50,000 shares from this plaintiff class have
been transferred in transactions resulting in a profit for the investor.
SPANGLER LITIGATION. TechnoVision, certain of its present and former
officers and directors and Mr. Grant Holcomb, the Company's Chief Technology
Officer, have 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. At a hearing on October 29, 1999, the court
agreed to bifurcate the cases for trial purposes.
18
<PAGE>
The first complaint states causes of action for breach of contract,
misrepresentation and fraud in connection with the execution and delivery of
a Settlement Agreement entered into between TechnoVision and the plaintiff on
April 17, 1997. The plaintiff, a former founder of TechnoVision had been
granted the right to purchase 2,000,000 shares of TechnoVision's common
stock. Under the terms of the Settlement Agreement, the shareholder agreed to
reduce his holdings to 750,000 shares of TechnoVision's common stock. The
shareholder exchanged those shares for 375,000 shares of the Company's common
stock in the Exchange Offer. The Complaint alleges that TechnoVision
fraudulently induced the shareholder to enter into the Settlement Agreement.
The Complaint seeks to invalidate the Settlement Agreement, and to cause
TeraGlobal to issue the shareholder 625,000 shares of its common stock and to
pay attorneys fees and expenses. The case will be tried before a jury. Trial
date is expected to be on or about November 12, 1999. The Company denies any
wrongdoing and intends to vigorously defend the action.
The second complaint, brought as a derivative action in the name of
TechnoVision, states a cause of action for breach of fiduciary against
certain former officers and directors and alleged officers and directors of
TechnoVision. The complaint alleges that certain officers and directors of
TechnoVision breached their duties to that company by wasting corporate
assets, allowing TechnoVision to transfer assets to third parties and failing
to defend TechnoVision from the Exchange Offer. TechnoVision, its former
officers and directors deny any wrongdoing and intend to vigorously defend
the action. This case will be tried before a trial judge immediately
following the jury trial of the breach of contract case.
Due to the uncertainty related to the above issues, the Company
maintains no reserves for these cases.
ITEM 2. CHANGE IN SECURITIES
During the three months ending March 31, 1999, the Company sold
2,679,987 shares of common stock, receiving $6,748,394, net of offering costs
of $73,580. During the same period, the Company received $40,650 in
connection with the exercise of stock options for 27,100 shares of common
stock and converted a note payable to a related party for $244,460 into
47,059 shares of common stock. The Company also issued 15,000 shares of
common stock as a pre-payment for software license fees valued at $39,375. In
addition, the Company issued 5,000 shares of common stock to purchase
additional shares in TechnoVision Communications, Inc.
During the three months ended June 30, 1999, the Company issued
100,000 shares of common stock, as payment for services rendered valued at
$1,000,000 pursuant to an employment agreement. The Company also received
$21,900 in connection with the exercise of stock options for an aggregate of
8,600 shares of common stock.
During the three months ended September 30, 1999, the Company issued
1,431,711 shares of common stock receiving $13,956,670, net of offering costs
of $126,130. The Company also received $106,870 in connection with the
exercise of stock options for an aggregate of 63,100 shares of common stock.
The Company also issued 100,000 shares of common stock at a value of
$1,000,000 to an executive officer as additional compensation. The Company
issued 4,310 shares, valued at $43,100, for services rendered and issued
1,000 shares to purchase additional shares in TechnoVision Communications,
Inc. The Company also cancelled 2,500 shares for a payment of $40,000.
19
<PAGE>
<TABLE>
<CAPTION>
USE OF PROCEEDS FROM FEBRUARY $6.8 MILLION FINANCING
<S> <C>
Capital Expenditures $ 403,900
Loans to related parties 198,595
Repayment of notes payable 243,846
Repayment of convertible debentures 650,000
Research & Development 2,722,186
Offering Costs 73,580
Working Capital 2,529,785
-----------------
$ 6,821,892
-----------------
USE OF PROCEEDS FROM JULY $14.1 MILLION FINANCING
Capital Expenditures $ 256,875
Loans to related parties 85,000
Research & Development 836,078
Purchase of Certificate of Deposit 500,000
Offering Costs 126,130
Working Capital 12,152,587
-----------------
$ 13,956,670
-----------------
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits.
NUMBER DESCRIPTION METHOD OF FILING
27 Financial Data Schedule Filed herewith
b) Reports on Form 8-K
None
In accordance with the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED: November 10, 1999 TERAGLOBAL COMMUNICATIONS CORP.
BY: /s/ ISSA NAKHLEH
-------------------------------------
Issa Nakhleh, Chief Financial Officer
BY: /s/ DAVID FANN
-------------------------------------
David Fann, Chief Executive Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,048,531
<SECURITIES> 4,938,250
<RECEIVABLES> 127,157
<ALLOWANCES> 0
<INVENTORY> 99,830
<CURRENT-ASSETS> 13,039,022
<PP&E> 2,177,335
<DEPRECIATION> (863,669)
<TOTAL-ASSETS> 17,943,311
<CURRENT-LIABILITIES> 3,570,880
<BONDS> 0
0
0
<COMMON> 19,578
<OTHER-SE> 28,976,020
<TOTAL-LIABILITY-AND-EQUITY> 17,943,311
<SALES> 130,542
<TOTAL-REVENUES> 130,542
<CGS> 99,051
<TOTAL-COSTS> 230,359
<OTHER-EXPENSES> 3,818,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,329
<INCOME-PRETAX> (3,852,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,852,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,852,529)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
