<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 MARCH 31, 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 April 30, 1999,
17,933,093 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 MARCH 31, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets March 31, 1999 (unaudited) and
December 31, 1998 (audited) 3
Consolidated Statement of Operations - Three Months Ended
March 31, 1999 and March 31, 1998 (unaudited) 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1999 and March 31, 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements
- March 31, 1999 and March 31, 1998 (unaudited) 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
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 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
TERAGLOBAL, TERACONFERENCE, TERASCAN, TERAMEDIA 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
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,690,484 $ 48,524
Accounts receivable 61,468 -
Note receivable related party 76,500 56,500
Inventory 11,820 20,073
Prepaid expenses and other current assets, including $4,200
from related parties 148,244 21,831
----------- -----------
Total current assets 3,988,516 146,928
FURNITURE AND EQUIPMENT, net 1,037,005 1,094,350
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $509,080 and $318,174,
respectively 3,314,011 3,499,917
OTHER ASSETS 157,422 157,422
----------- -----------
TOTAL ASSETS $ 8,496,954 $ 4,898,617
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, including $109,704 to a related party $ 719,949 $ 786,569
Short-term loans 65,359 65,986
Accrued expenses, including $0 and $26,144, respectively, 122,127 142,464
to a related party
Current portion of notes payable - related parties 247,338 343,846
Current portion of capitalized lease obligations 881,069 706,055
------------ ------------
Total current liabilities 2,035,842 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 423,052 603,405
------------ ------------
Total liabilities 2,933,894 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
17,933,093 shares issued and outstanding March 31, 1999 17,934 15,189
Additional paid-in capital 12,215,565 5,310,516
Common stock subscribed 244,460 74,375
Accumulated deficit (6,914,745) (4,469,096)
Cumulative foreign currency translation adjustment (155) (155)
------------ ------------
Total shareholders' equity 5,563,058 930,832
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,496,953 $ 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 THREE MONTHS ENDING MARCH 31, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 87,485 $ -
COST OF SALES 40,959 -
GROSS PROFIT 46,526 -
------------ ------------
OPERATING EXPENSES
Legal 136,142 2,813
General and administrative 886,535 98,402
Selling 26,760 395
Research and development 1,332,172 72,190
Consulting - related parties - 62,847
------------ ------------
Total operating expenses 2,381,609 236,647
------------ ------------
LOSS FROM OPERATIONS (2,335,083) (236,647)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 6,438 71
Interest expense (117,004) -
------------ ------------
Total other income (expense) (110,566) 71
------------ ------------
NET LOSS $(2,445,649) $ (236,576)
------------ ------------
------------ ------------
BASIC LOSS PER SHARE $ (0.14) $ (0.02)
------------ ------------
------------ ------------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 16,874,065 10,344,444
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,445,649) $(236,576)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 127,701 809
Amortization of goodwill 190,905 -
(Increase) decrease in
Accounts receivable (61,466) (11,587)
Note receivable - related parties (20,000) -
Prepaid expenses and other current assets (87,038) (1,061)
Inventory 8,253 -
Increase (decrease) in
Accounts payable (66,619) 46,066
Accrued expenses (20,337) (2,896)
------------ ----------
Net cash used in operating activities (2,374,252) (205,245)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (70,356) (1,106)
------------ ----------
Net cash used in investing activities (70,356) (1,106)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable - related party (96,508) -
Proceeds from note payable - related party 50,000 120,345
Payments on short-term loan (627) -
Proceeds from common stock subscription - 82,000
Payments on capital leases (5,339) -
Proceeds from common stock issuance 6,748,394 -
Proceeds from stock option exercise 40,650 -
Payments of convertible promissory notes (650,000) -
------------ ----------
Net cash provided by financing activities 6,086,570 202,345
------------ ----------
</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 THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT
Net increase in cash and cash equivalents 3,641,962 (4,006)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,524 27,705
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,690,486 $ 23,699
------------ ----------
------------ ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1999, the Company issued 15,000
shares valued at $39,375 for payment of software license fees.
During the three months ended March 31, 1999, the Company converted a
$244,460 related party promissory note into a common stock subscription for
47,049 shares.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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.
Operation results for the three-month period ended March 31, 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
intercompany balances and transactions have been eliminated in the
consolidation.
NOTE 3 - NOTE RECEIVABLE - RELATED PARTY
During the three months ended March 31, 1999 the Company loaned $20,000
to an officer and director of the Company. The note is unsecured, payable
on demand and bears interest at the minimum applicable federal rate.
NOTE 5 - SHORT-TERM LOANS
Principal is due on demand and is unsecured. Amounts do not accrue
interest.
8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
NOTE 6 - 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 47,049 shares of common stock.
Notes payable - related parties at March 31, 1999 consisted of the
following:
<TABLE>
<S> <C>
Note payable to a former officer and Director of
TechnoVision Communications, Inc. and
current shareholder of the Company dated
April 27, 1998 and amended March 30, 1999,
is non-interest bearing, and unsecured.
Due on or before May 1, 1999. 20,000
Note payable to a former employee of
TechnoVision Communications, Inc. is
unsecured, non-interest bearing with no
repayment terms. 50,000
Note payable to current shareholder of
the Company, dated February 6, 1998,
bears interest at 15%, is unsecured, and
is payable upon demand. 127,338
Note payable to current shareholder of
the Company, dated January 20, 1999,
bears interest at 15%, is unsecured, and
is payable upon demand. 50,000
Less current portion 247,338
--------
LONG-TERM PORTION $ -
--------
--------
Future principal payments required under
such notes are summarized as follows
Year Ending December 31, 1999 $247,338
</TABLE>
NOTE 7 - CONVERTIBLE PROMISSORY NOTES
During February 1999, the Company repaid convertible promissory notes
totaling $650,000 with accrued interest.
9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. The Company received $40,650 in connection with the
exercise of stock options for 27,100 shares of common stock. The Company
converted a note payable to a related party for $244,460, into a share
subscription for 47,049 shares of common stock.
The Company also issued 15,000 shares of common stock as payment for
services rendered valued at $39,375. In addition, the Company issued
5,000 shares of common stock to purchase additional shares in
TechnoVision Communications, Inc.
STOCK OPTION PLAN
The Company issued 84,000 options under its 1997 Amended Stock Option Plan
at prices ranging from $10.00 to $10.56 per share.
In February 1999 the Company adopted, subject to shareholder approval,
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 period ended March 31, 1999, the Company granted 800,000
stock options under the 1999 Plan at prices ranging from $8.88 to $10.00
per share. In the event that the adoption of the 1999 Plan is not
ratified by the shareholders of the Company the outstanding options will
be cancelled.
The following summarizes the stock options transactions under the 1997
and 1999 Plans:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Options Exercise
Outstanding Price
------------- ---------
<S> <C> <C>
Outstanding, December 31, 1998 1,225,675 $2.17
Granted 884,000 $8.97
Forfeited (14,400) $4.00
--------- -----
Outstanding, March 31, 1999 2,095,275 $4.06
--------- -----
--------- -----
Exercisable, March 31, 1999 1,662,225
---------
---------
</TABLE>
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company loaned an aggregate of $125,000
to certain officers and directors of the Company.
10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
- --------------------------------------------------------------------------------
The notes are payable on demand and bear interest at the minimum
applicable rate.
Subsequent to March 31, 1999, the Company entered into an employment
agreement with a software engineer that requires an issuance of 100,000
shares of common stock.
Subsequent to March 31, 1999, the Company issued 30,000 stock options
under the 1997 Plan at prices ranging from $10.00 to $10.56.
Subsequent to March 31, 1999, the Company issued 310,000 stock options
under the 1999 Plan at prices ranging from $8.25 to $10.13.
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
Key milestones for the Company during the first quarter of 1999 include
the completion of its first substantial equity financing for $6.8 million and
the achievement of full reporting status with the Securities and Exchange
Commission. In addition, shortly after the end of the quarter the Company
added two outside directors and an advisory board of four individuals.
Comparing the Company's Results of operations from the first quarter of
1999 to the first quarter of 1998 demonstrates the Company's dramatic growth.
During this time period, the Company acquired three companies, ISG
Acquisition L.L.C., TechnoVision Communications, Inc., and Design Analysis
Associates, Inc., growing total assets from $67,774 to $8,496,954. Also in
this time period, the Company retained over 30 employees, substantially
increased operations and added a facility in Logan, Utah.
Nearly all of these new employees were engineers associated with the
Company's research and development efforts in connection with its multimedia
communication service code named TeraCOM. The Company is continuing to
progress with the development and early stage marketing of the TERACOM. The
Company shipped initial units of the TERACOM to an early adopter in March
1999. The early adopter acquired the units to begin to develop course content
for distance learning applications.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth-unaudited quarterly results of operations
for the three months ending March 31, 1999 and 1998, as well as the audited
results of operations for the year ended December 31, 1998.
<TABLE>
<CAPTION>
BALANCE SHEET DATA: MARCH 31, 1999 MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Cash and cash equivalents $ 3,690,484 $ 23,699 $ 48,524
Furniture and equipment, net 1,037,005 20,543 1,094,350
Total assets 8,496,954 67,774 4,898,617
Current liabilities 2,035,842 356,413 2,044,920
Total Shareholders' Equity (Deficit) 5,563,058 (288,639) 930,832
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA: THREE MONTHS THREE MONTHS
ENDING ENDING YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Sales $ 87,485 $ - $ 284,515
Cost of Sales 40,959 - 270,132
Operating Expenses:
Legal 136,142 2,813 472,248
General and administrative 886,535 98,402 1,802,048
Research and development 1,332,172 72,190 1,484,886
Consulting, related party - 62,847 62,847
Selling 26,760 395 114,068
Total operating expenses 2,381,609 236,647 3,936,097
------------ ---------- ------------
Loss from operations (2,335,083) (236,647) (3,921,174)
Other income(expenses):
Interest income 6,438 71 984
Interest expense (117,004) - (156,852)
------------ ---------- ------------
Total other income (expense) (110,566) 71 (155,868)
Net Loss $(2,445,649) $(236,576) $(4,077,616)
Basic loss per common share $ (0.14) $ (0.02) $ (0.33)
Weighted average common shares
outstanding 16,874,065 9,971,918 12,300,908
</TABLE>
13
<PAGE>
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998.
SALES. Sales of for the first quarter of 1999 were $84,485 compared to
no sales in the first quarter of 1998. All of these sales were attributable
sales of TeraCONFERENCE by the Company's TechnoVision subsidiary which was
acquired in August 1998. The Company has been disappointed with sales of the
existing TeraCONFERENCE and The POTS BOX products. From time to time the
Company has had interest which it believed would result in significant sales
for these products; however, no significant sales have been achieved. The
Company does not expect sales of the TeraCONFERENCE or The POTS BOX products
to contribute significantly to sales in 1999. The Company hopes that
declining sales of its existing products will be offset by an increase in
sales of TERACOM, TERASCAN and TERAMEDIA in 1999. The Company has scheduled
demonstrations of the TERACOM and TERAMEDIA solutions with early adopters in
corporate, distance learning, medical, film and government industries in the
second quarter of 1999. The Company hopes to secure initial orders from these
demonstrations, but no assurances can be given as to the nature, scope or
timing of any orders. Based on the status of the development of TERACOM and
an allocation of time for testing the systems with early adopters, the
Company hopes to secure sales in connection with the implementation of
systems for early adopters in the third and fourth quarter of 1999.
COST OF SALES. Costs of sales in the first quarter of 1999 were
$40,959, compared to no cost of sales in the first quarter of 1998. These
costs were associated with sales of the TeraCONFERENCE product by the
Company's TechnoVision Subsidiary.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$886,535 in the first quarter of 1999, compared to $98,402 in the first
quarter of 1998, an increase of 900%. General and administrative expenses in
the first quarter of 1999 include: (i) $190,904 in amortized goodwill
resulting from the acquisition of TechnoVision Communications, Inc. and ISG
Acquisition LLC, and (ii) $127,700 in depreciation of fixed assets. The
increase also reflects the additional overhead and personnel that has been
necessary to support the additional employees in research and development,
the achievement and maintenance of public reporting status, and offering
costs associated with a private placement that took place during the quarter.
The Company believes its existing administrative infrastructure is sufficient
to support the completion and roll out of TERACOM in 1999. Any changes in the
level of expenditures for General and Administrative expense will be
dependent upon the Company's cash and operating income position, and the
progress of development of the TeraCOM product.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$1,332,172 in the first quarter of 1999, as compared to $72,190 in the first
quarter of 1998, an increase of 1,745%. Of this amount nearly $800,000 was
expended to construct the first TERACOM network connecting the Company's
developers in remote locations in the United States. This substantial
increase is the result of management's focus in completing the development of
TERACOM. The construction of this initial network was necessary to accelerate
the development of TERACOM. In addition, this initial network has aided the
Company's marketing of TERACOM by allowing early adopters to have a point of
presence on the network for product evaluation and product demonstrations.
The balance of the increase is attributable to substantial additional staff
in the research and development area increasing from one person in the first
quarter of 1998 to 20 in the first quarter of 1999. 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
TERACOM, as well as the development of applications to tailor TERACOM to the
needs of specific industries.
14
<PAGE>
SELLING. Selling expenditures were $26,760 in the first quarter of
1999, as compared to $395 in the first quarter of 1998. This increase is a
result of the Company's acquisition of existing product lines in 1998.
Selling expenses are expected to increase significantly in connection with
the completion of the TERASCAN and the TERACOM service.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents totaling
$3,690,484 and a working capital surplus of $1,952,675.
For the three months ended March 31, 1999, net cash used in
operating activities was $(2,374,252). The Company made capital expenditures
$70,356 for new equipment. 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. The Company sold 2,679,987 shares of
common stock for an aggregate of $6,748,394, net of offering costs.
During the quarter ended March 31, 1999 the Company settled a $244,460
note payable to a former officer and director of its TechnoVision subsidiary
for 47,049 shares of common stock, eliminating its previous cash commitment
of $12,500 per month to retire the debt. The Company also repaid $650,000 of
convertible debentures.
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 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 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 intial introduction of TeraCOM 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 12 months.
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.
15
<PAGE>
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 on or before
June 30, 1999. The Company intends to relocate its corporate headquarters on
or before December 31, 1999, and is evaluating the compliance of general
business systems for prospective relocation sites. Further, the Company's
existing products are all 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. Any cost the Company incurs in connection with upgrading embedded
systems in new physical facilities will be dependent on the exact location
selected. The Company anticipates that this Phase will be completed during
the second quarter of fiscal 1999. Based on its assessment to date, the
Company believes that neither the costs associated with its 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 that
this Phase will be completed during the second quarter of fiscal 1999.
PHASE IV -- REMEDIATION TESTING. This Phase includes the future date
testing of all remediation efforts made in Phase III to confirm that the
changes made bring the affected systems into compliance, no new problems have
arisen as a result of the remediation and that all new systems which replaced
noncompliant systems are Y2K compliant regardless of whether vendors
represent that such systems are Y2K complaint. This Company anticipates that
this Phase will be completed during third quarter fiscal 1999.
THIRD PARTY RELATIONSHIPS. Even if the 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
TERACOM 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.
APPLE COMPUTER, INC. The TERACOM product is based on a computer
supplied by Apple Computer, Inc. Apple Computer, Inc. has reported that its
computers and operating systems are 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.
16
<PAGE>
MOTOROLA, INC. The TERACOM 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 TERACOM. 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 TERACOM.
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
TERACOM, any interruption in Ingram Micro Inc.'s assembly or distribution of
TERACOM could have a significant adverse effect on the Company's business.
RISK FACTORS. Based on current information, the Company believes the
Y2K issue will not have a material adverse effect on the Company, its
consolidated financial position, results of operations or cash flows.
However, there can be no assurance that the Company's Y2K remediation
efforts, or those of third parties will be properly and timely completed, and
the failure to do so could have a material adverse effect on the Company, its
business, results of operation, and its financial condition. In particular,
the Company has not yet completed its assessment of the Y2K readiness of its
significant third party service providers. Completion of this assessment may
result in the identification of additional issues, which could have a
material adverse effect on the Company's results of operations. In addition,
important factors that could cause results to differ materially include, but
are not limited to, the ability of the Company to successfully identify
systems which have a Y2K issue, the nature and amount of remediation effort
required to fix the affected system, and the costs and availability of labor
and resources to successfully address the Y2K issues.
CONTINGENCY PLANS. The Company is continuing to formulate its
contingency plans. The Company views its dependence on critical suppliers as
its primary exposure to potential Y2K concerns. The Company will continue to
evaluate potential alternatives to reduce its dependence on those suppliers,
and secure alternate supplies in the event that any supplier experiences
significant business interruption as a result of Y2K or other concerns.
Development of the Y2K contingency plans is expected to be substantially
complete by the end of September 1999.
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.
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 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 TeraCom
ServiceCell and timely delivery of future versions of the TeraCom
ServiceCell; 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
converted a note payable to a related party for $244,460, into a share
subscription for 47,049 shares of common stock. The Company also issued
17,500 shares, which had been previously subscribed for in 1998.
The Company also issued 15,000 shares of common stock, as payment
for services rendered valued at $39,375. In addition, the Company issued
5,000 shares of common stock to purchase additional shares in TechnoVision
Communications, Inc.
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.
19
<PAGE>
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: MAY 12, 1999 TERAGLOBAL COMMUNICATIONS CORP.
By: /S/ ISSA NAKHLEH
-------------------------------------
Issa Nakhleh, Chief Financial Officer
By: /S/ DAVID FANN
-------------------------------------
David Fann, Chief Executive Officer
20
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