<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 JUNE 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.)
225 BROADWAY, SUITE 1600
SAN DIEGO, CALIFORNIA 92101
(Address of principal executive offices)
(619) 231-0555
(Issuer's telephone number)
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 July 31, 1999, 18,118,252
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 JUNE 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements
Consolidated Balance Sheets June 30, 1999 (unaudited) and December 31,
1998 (audited) 3
Consolidated Statements of Operations - Six Months and Three Months Ended
June 30, 1999 (unaudited) and June 30, 1998 5
Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 (unaudited)
and June 30, 1998 6
Notes to Condensed Consolidated Financial Statements - June 30, 1999 (unaudited)
and June 30, 1998 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
PART II. OTHER INFORMATION 19
ITEM 1. Legal Proceedings 19
ITEM 2. Change in Securities 19
ITEM 3. Defaults upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
</TABLE>
TERAGLOBAL, TERACONFERENCE, TERASCAN, TERAMEDIA, ServiceCell and
The POTS Box are trademarks of TERAGLOBAL Communications Corp.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 13,668,219 $ 48,524
Accounts receivable 74,752 -
Note receivable related party 255,095 56,500
Inventory 76,931 20,073
Prepaid expenses and other current assets, including $4,200
from related parties 81,739 21,831
------------ -----------
Total current assets 14,156,734 146,928
FURNITURE AND EQUIPMENT, net 1,223,716 1,094,350
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $699,984 and $318,174,
respectively 3,123,106 3,499,917
OTHER ASSETS 157,422 157,422
------------ -----------
TOTAL ASSETS $ 18,660,980 $ 4,898,617
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, including $0 and $109,704, respectively,
to a related party $ 898,684 $ 786,569
Customer deposits 26,000 -
Short-term loans 66,667 65,986
Accrued expenses, including $0 and $26,144, respectively, 135,964 142,464
to a related party
Current portion of notes payable - related parties 50,000 343,846
Current portion of capitalized lease obligations 1,192,701 706,055
----------- -----------
Total current liabilities 2,370,016 2,044,920
CONVERTIBLE PROMISSORY NOTES 475,000 1,125,000
NOTES PAYABLE - RELATED PARTIES, less current portion - 194,460
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT PORTION 105,610 603,405
----------- -----------
Total liabilities 2,950,626 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
18,080,052 shares issued and outstanding June 30, 1999 18,081 15,189
Additional paid-in capital 13,459,878 5,310,516
Common stock subscribed 12,986,700 74,375
Accumulated deficit (10,739,361) (4,469,096)
Cumulative foreign currency translation adjustment (14,944) (155)
----------- -----------
Total shareholders' equity 15,710,354 930,832
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,660,980 $ 4,898,617
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDING JUNE 30, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ----------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 56,380 - $ 143,865 -
Cost of sales 38,151 - 79,110 -
------------ ----------- ----------- -----------
Gross profit 18,229 - 64,755 -
------------ ----------- ----------- -----------
OPERATING EXPENSES
Legal 95,284 $ 38,292 231,426 $ 41,105
General and administrative 1,915,275 520,679 2,801,810 622,022
Research and development 1,708,495 66,847 3,040,667 139,037
Consulting, related party - - - 59,906
Selling 84,315 14,627 111,074 15,022
------------ ----------- ----------- -----------
3,803,369 640,446 6,184,977 877,092
------------ ----------- ----------- -----------
LOSS FROM OPERATIONS (3,785,140) (640,446) (6,120,222) (877,092)
------------ ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest income 75,244 677 81,682 748
Interest expense (114,720) - (231,725) -
------------ ----------- ----------- -----------
Total other income (expense) (39,476) 677 (150,043) 748
------------ ----------- ----------- -----------
NET LOSS $ (3,824,616) $ (639,769) $(6,270,265) $ (876,344)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
BASIC LOSS PER COMMON SHARE $ (0.21) $ (0.06) $ (0.36) $ (0.08)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 18,063,992 10,480,841 17,409,468 10,424,586
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------
1999 1998
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,270,265) $ (876,344)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 274,533 -
Amortization of goodwill 381,809 -
Stock issued for services rendered 1,000,000 -
Options issued for services rendered 450,000 -
(Increase) decrease in
Accounts receivable (74,752) 10,272
Prepaid expenses and other current assets (20,533) 502
Inventory (56,858) -
Increase (decrease) in
Accounts payable 112,116 27,801
Accrued expenses (6,500) (2,779)
Customer deposits 26,000 -
------------ ------------
Net cash used in operating activities (4,184,450) (840,548)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (403,900) (1,777)
Note receivable -- related parties (198,595) 80,800
Acquisition of TechnoVision Communications, Inc's cash - 54,629
------------ ------------
Net cash used in investing activities (602,495) 133,652
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable -- related party (293,846) -
Proceeds from note payable -- related party 50,000 118,655
Forgiveness of debt on acquisition of TechnoVision - 334,884
Proceeds from short-term loan 681 -
Proceeds from common stock subscription 12,514,800 787,000
Payments on capital leases (11,150) -
Proceeds from common stock issuance 6,748,394 -
Proceeds from stock option exercise 62,550 -
Proceeds from the issuance of convertible promissory notes - 127,500
Payments on convertible promissory notes (650,000) -
------------ ------------
Net cash provided by financing activities 18,421,429 1,368,039
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
1999 1998
----------------- ----------------
Unaudited Unaudited
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT (14,789) 8,247
------------ ------------
Net increase in cash and cash equivalents 13,619,695 507,790
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,524 27,705
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,668,219 $ 535,495
------------ ------------
------------ ------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended June 30, 1999, the Company issued 15,000
shares valued at $39,375 as a pre-payment of software license fees.
During the six months ended June 30, 1999, the Company converted a $244,460
related party promissory note into 47,059 shares of common stock.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed 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 six-month period ended June 30,
1999 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 1999. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes there to
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., 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 June 30, 1999 does
not reflect a minority interest liability in TechnoVision, although on
a stand-alone basis, TechnoVision had a shareholders' deficit as of
that date. The accompanying consolidated statements of operations for
the six months ended June 30, 1999 and six months ended June 30, 1998
do not reflect the minority interest's share of TechnoVision's losses
for those periods since the related accrual would result in the
Company's recording of a minority interest receivable.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
During the six months ended June 30, 1999 the Company loaned $198,595
to certain officers and directors of the Company. The 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>
June 30, 1999 December 31, 1998
(Unaudited)
-------------------- -----------------------
<S> <C> <C>
Raw materials $10,137 $20,073
Work-in-progress 66,794 -
-------------------- -----------------------
Total $76,931 $20,073
-------------------- -----------------------
-------------------- -----------------------
</TABLE>
8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited)
-------------------- ----------------------
<S> <C> <C>
Furniture and fixtures $192,064 $192,064
Office equipment 306,284 306,284
Computer equipment 1,422,112 1,018,212
-------------------- ----------------------
1,920,460 1,516,560
Less accumulated depreciation 696,744 422,210
-------------------- ----------------------
TOTAL $1,223,716 $1,094,350
-------------------- ----------------------
-------------------- ----------------------
</TABLE>
Depreciation expense for the six months ended June 30, 1999 and the year
ended December 31, 1998 was $274,534 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 Communications, Inc. and current
shareholder of the Company to settle debt totaling $244,460 through the
issuance of 47,059 shares of common stock.
During the three months ending June 30, 1999, the Company paid $197,338
in related party notes with accrued interest.
Notes payable - related parties at June 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a former employee of TechnoVision Communications,
Inc. is unsecured, non-interest bearing with no repayment terms. 50,000
Less current portion 50,000
--------
LONG-TERM PORTION $ -
========
</TABLE>
Future principal payments required under such notes are
summarized as follows
<TABLE>
<S> <C>
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 received
$12,514,800 in share subscriptions for the issuance of 1,251,480 shares
of common stock. The Company also received $21,900 in connection with
the exercise of stock options for an aggregate of 8,600 shares of
common stock. The Company also issued 100,000 shares of common stock,
as payment for services rendered valued at $1,000,000 pursuant to an
employment agreement.
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 35,700
options and forfeited 14,400 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.
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.
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 1,225,675 $2.17
Granted 1,311,875 $9.36
Exercised (35,700) $1.75
Forfeited (14,400) $4.00
-------- -----
Outstanding, June 30, 1999 2,487,650 $5.96
========== ======
Exercisable, June 30, 1999 1,739,860
==========
</TABLE>
10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company loaned an aggregate of $40,000
to certain officers and directors of the Company. The notes are payable
on demand and bear interest at the minimum applicable rate.
Subsequent to June 30, 1999, the Company received $1,568,000 in common
stock subscriptions for the issuance of 156,800 shares of unregistered
common stock.
Subsequent to June 30, 1999, the Company entered into a lease agreement
to occupy new office space. The agreement calls for a security deposit
of $500,000 and commitment of $434,148, $449,940, $465,720, $481,512
and $497,292 in annual payments from the commencement date during the
five year term.
Subsequent to June 30, 1999, the Company issued 10,000 stock options
under the 1997 Plan at an exercise price of $16.03. Options were also
exercised for 43,500 shares of common stock under the 1997 Plan for
aggregate proceeds of $68,220.
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 information and communications
network utility converging voice/video/data and oriented to fulfill broad
market needs. The Company is introducing a suite of services that integrate
the hardware, software, network, and advanced compression technology
necessary to deliver real-time, point-to-point and point-to-multipoint,
interactive communications and collaboration solutions 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.
During the second quarter of 1999, the Company focused on development and
early stage marketing of its TeraMEDIA communications and collaboration
service. Development efforts centered on the actions necessary to deliver
pilot systems to early adopter clients, including improvement of video
quality, the addition of content development features and authoring tools,
and development of a proprietary communications accelerator card. The Company
is targeting the fourth quarter of 1999 for the introduction of the first
implementation version of the TeraMEDIA service.
TeraGLOBAL is marketing to early adopter clients in the corporate, distance
education, medical, entertainment and government sectors, among others. The
Company continued service demonstrations in the second quarter of 1999 and
entered into its first Service Agreement with Cinetech Labs, Inc. The
agreement with Cinetech Labs., Inc. provides for payments of $1.1 million
over three years. Cinetech Labs, Inc. is a film restoration company that
works with several of the largest film production companies in Hollywood.
TeraGLOBAL is in various stages of negotiation with additional early adopters
in the corporate, distance education and government sectors. 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 third and fourth quarters of 1999; however, no assurances can be made
as to the scope or timing of any additional agreements.
12
<PAGE>
The Company recently completed a private placement of unregistered common
stock, which resulted in subscription proceeds of $12.5 million in the second
quarter. Principally as a result of this financing, the Company's total
assets rose from $4,898,617 at December 31, 1998 to $18,660,980 at June 30,
1999. The Company intends to use the proceeds from this offering to complete
enhancements to TeraMEDIA's feature set to move it from pilot to deliverable
service, launch additional sales and marketing activity and to accelerate the
TeraMEDIA network deployment. The funding will also provide TeraGLOBAL with
additional working capital reserves.
With the expanded resources, TeraGLOBAL intends to hire additional key staff,
including research and development engineers to work on hardware design and
improvement, digital imaging, and the accelerated communications card, as well
as software engineers to enhance the network software coordinating communication
among networked computer servers. The Company also intends to begin staffing a
new customer service and support unit to service early adopter clients and early
stage customers.
RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for the six months ending June 30, 1999 and 1998, as well as the audited
results of operations for the year ended December 31, 1998.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
------------------- -------------------- ----------------
<S> <C> <C> <C>
Cash and cash equivalents $13,668,219 $ 535,494 $ 48,524
Furniture and equipment, net 1,223,716 1,221,426 1,094,350
Total assets 18,660,980 5,943,249 4,898,617
Current liabilities 2,370,016 1,361,400 2,044,920
Total Shareholders' Equity 15,710,354 3,347,534 930,832
</TABLE>
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDING ENDING YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Sales $ 143,865 -- $ 284,515
Cost of Sales 79,110 -- 270,132
General and administrative 2,801,810 622,022 1,802,048
Research and development 3,040,667 139,037 1,484,886
Net Loss $(6,270,265) $ (876,344) $(4,077,616)
Basic loss per common share $(0.36) $(0.08) $ (0.33)
Weighted average common shares outstanding
17,409,468 10,424,586 12,300,908
</TABLE>
13
<PAGE>
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998.
SALES. Sales for the three months ended June 30, 1999 were $56,380
compared to no sales in the three months ended June 30, 1998. This figure
included $12,000 for an initial TeraMEDIA network with one of the Company's
early adopters in the corporate training area. The balance of the sales is
attributable to contract engineering revenues earned from the Company's
hardware development division. This figure does not include any revenue from
the Cinetech Labs, Inc. agreement, which is expected to contribute to revenue
in the third quarter of 1999.
Based on the status of the development of TeraMEDIA 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 for
early adopters in the distance learning, corporate, film, and government
industries in the third and fourth quarter of 1999.
COST OF SALES. Costs of sales in the three months ended June 30,
1999 were $38,151, compared to no cost of sales in the three months ended
June 30, 1998. The second quarter gross profit margin of 32% reduced the year
to date gross profit margin to 45%.
Substantially all of the cost of sales were associated with sales of
the TERACONFERENCE product by the Company's TechnoVision Communications, Inc.
subsidiary and are not indicative of gross profit margins the Company expects
to experience on sales of its TeraMEDIA service.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,465,275 in three months ended June 30, 1999, compared to $520,689 in the
three months ended June 30, 1998, an increase of 280%.
For the six months ended June 30, 1999 general and administrative
expenses totaled $2,351,810, including: (i) $381,809 in amortized goodwill
resulting from the acquisition of TechnoVision Communications, Inc., ISG
Acquisition LLC and Design Analysis Associates, Inc. (ii) $274,534 in
depreciation of fixed assets and (iii) approximately $700,000 in salaries.
The Company expects to continue to add infrastructure to support the
completion and roll out of TeraMEDIA in 1999. In connection with the
anticipated increase in staffing, the Company signed a lease on new office
space that will continue to add to the growth in these expenditures. The
lease is expected to commence in the fourth quarter of 1999.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$1,708,495 in the three months ended June 30, 1999, as compared to $66,847 in
the three months ended June 30, 1998. Of this amount $1,000,000 was a
one-time non-cash charge for a stock grant to an engineer pursuant to his
employment agreement. Of the remaining expenditures 30% was expended on
telecommunications lines for the TeraMEDIA network connecting employees and
early adopters with the balance going to salaries and related costs. These
initial network communications have aided the Company's marketing of
TeraMEDIA by allowing early adopters to have a point of presence on the
network for product evaluation and product demonstrations.
The balance of the year will continue to see increases in research
and development spending due to hiring additional personnel and purchasing
additional equipment for testing. The Company will continue to devote
substantial resources to research and development in 1999 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.
SELLING. Selling expenditures were $84,315 in the three months ended
June 30, 1999, as compared to $14,627 in the three months ended June 30,
1998. This increase is a result of the Company's addition of personnel to
market the TeraMEDIA service.
Selling expenses are expected to increase significantly in
connection with the rollout of the TeraMEDIA service.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents
totaling $13,668,219 and a working capital surplus of $11,786,718.
For the three months ended June 30, 1999, net cash used in operating
activities was $2,008,793 as compared to $2,374,252 for the three months
ended March 31, 1999. In addition, the Company made capital expenditures of
$70,356 and $333,544 for new equipment in the first and second quarters of
this year. The substantial increase in cash from the December 31, 1998
balance of $48,524 was a direct result of financing transactions completed in
January and February 1999 and those started in May of 1999 and completed
subsequent to the quarter end, raising in the aggregate over $20 million. 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 and in May and June
received subscriptions of $12,514,800 for the issuance of 1,251,480 shares of
unregistered common stock.
During the three months ended June 30, 1999 the Company repaid
related party notes totaling $197,338 with accrued interest as compared to
the $46,508 repaid in the three months ended March 31, 1999.
The Company has had discussions with commercial lenders to establish
equipment lease financing and working capital line of credit arrangements.
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 enforcement proceeding against Alliance
Leasing and its principals alleging securities fraud in connection with the
sale of investment contracts. TechnoVision 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 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 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 15 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 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 connection with a review of this
software the Company intends to replace its accounting software before
December 31, 1999. The Company has executed a Lease Agreement to relocate its
corporate headquarters before December 31, 1999. The landlord for the new
facilities has represented that its general business are Y2K compliant.
Further, the Company's existing products are all Y2K compliant and contain
four digit date codes. As a result, the Company believes it 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. 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. 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. 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 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 spending a nominal
amount for a new accounting software before the end of the year, but otherwise
does not anticipate any significant expenses in connection with Y2K remediation.
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 compliant. This Company anticipates that
this Phase will be completed during fourth quarter fiscal 1999.
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 product is based on a computer
supplied by Apple Computer, Inc. Apple Computer, Inc. has reported that its
computers and operating systems are Y2K 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 TeraMEDIA Service takes advantage of the PowerPC
microprocessor from Motorola, Inc. Motorola, Inc. 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, Inc. 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.
SPRINT COMMUNICATIONS. The Company has chosen Sprint Communications as
its preferred network supplier for TeraMEDIA. Sprint Communications has reported
that it has developed a plan to achieve Y2K compliance of its business systems
in 1999. However, Sprint Communications 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 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 TeraMEDIA.
Ingram Micro, Inc. 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, Inc. 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 Inc.'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. 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 September 1999.
17
<PAGE>
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 dependant
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.
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 ability to the Company
to deliver products and services at a certain price point in the market
place; 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.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, it's TechnoVision Communications, Inc. subsidiary and
certain of it's officers and directors are currently parties to lawsuits as
disclosed in the Company's Annual Report on Form 10-KSB, filed with the SEC
on March 30, 1999. There has been no material development in those matters
since that report. The Company believes it has defenses in each of those
lawsuits and is vigorously contesting those matters. The Company notes that
litigation can be expensive and disruptive to normal business operations, and
results of litigation are difficult to predict with any degree of certainty.
An adverse decision in the existing litigation or any future litigation the
Company may face could have a material adverse affect on the business,
results of operations or financial condition of the Company.
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. The Company received $40,650 in connection with the exercise of
stock options to purchase 27,100 shares of common stock. The Company also
issued 17,500 shares, which had been previously subscribed for in 1998.
USE OF PROCEEDS FROM FEBRUARY $6.8 MILLION FINANCING
<TABLE>
<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 2,040,667
Offering Costs 73,580
Working Capital 3,211,304
----------
$6,821,892
----------
</TABLE>
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 to an engineer pursuant to an employment agreement and issued
47,059 shares, settling debt of $244,460. In addition the Company received
$12,514,800 in share subscriptions for the issuance of 1,251,480 shares.
Subsequent to June 30, 1999 the Company completed the offering raising an
additional $1,568,000 in subscriptions for the issuance of 156,800 shares of
common stock
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholder on June 24, 1999. All
matters voted upon were approved. The results of those votes are as follows:
Proposal 1: Reincorporation into Delaware
The proposal to approve an Agreement of Merger to effect
the re-incorporation of the Company into Delaware was approved on the
following basis:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
11,403,785 15,550 24,700 1,132,097
</TABLE>
19
<PAGE>
Proposal 2: Adoption of 1999 Stock Option Plan
The proposal to approve and adopt the Company's 1999 Stock
Option Plan, which provides the right to grant options to purchase up to
1,500,000 shares of the Company's common stock was approved on the following
basis:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
11,387,926 32,919 23,192 1,132,097
</TABLE>
Proposal 3: Amendment of the 1997 Stock Option Plan
A proposal was introduced at the meeting to approve and
ratify an amendment to the Company's 1997 Stock Option Plan, giving the
Company the authority to grant options to purchase up to 1,500,000 shares of
the Company's common stock, and was approved on the following basis:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
12,596,611 0 0 0
</TABLE>
Proposal 4: Election of Directors
The following directors were elected at the meeting to
serve a one-year term:
<TABLE>
<CAPTION>
For Authority Withheld
----------------- --------------------
<S> <C> <C>
Paul Cox 12,587,377 16,734
David Fann 12,586,377 17,734
Grant K. Holcomb 12,589,377 14,734
John F.A.V. Cecil 12,589,377 14,734
William O. McCoy 12,589,377 14,734
</TABLE>
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: August 9, 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,668,219
<SECURITIES> 0
<RECEIVABLES> 74,752
<ALLOWANCES> 0
<INVENTORY> 76,931
<CURRENT-ASSETS> 14,156,734
<PP&E> 1,920,460
<DEPRECIATION> (696,744)
<TOTAL-ASSETS> 18,660,980
<CURRENT-LIABILITIES> 2,370,016
<BONDS> 0
0
0
<COMMON> 26,464,659
<OTHER-SE> (10,754,305)
<TOTAL-LIABILITY-AND-EQUITY> 18,660,980
<SALES> 56,380
<TOTAL-REVENUES> 56,380
<CGS> 38,151
<TOTAL-COSTS> 122,466
<OTHER-EXPENSES> 3,719,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,720
<INCOME-PRETAX> (3,824,616)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,824,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,824,616)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
