<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, 2000.
[ ] 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)
DELAWARE
(State or other jurisdiction
of incorporation)
33-0827963
(I.R.S. Employer
Identification No.)
9171 TOWNE CENTRE DRIVE, SUITE 600
SAN DIEGO, CALIFORNIA 92122
(Address of principal executive offices)
(858) 404-5500
(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 November 1, 2000, there were
22,706,922 shares of the issuer's common stock 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, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements
Consolidated Balance Sheet as of September 30,
2000 (unaudited) and December 31, 1999 (audited) 3
Consolidated Statements of Operations - Nine
months and Three Months Ended September 30,
2000 and September 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows - Nine
months Ended September 30, 2000 and June 30,
1999 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements - September 30, 2000 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 17
ITEM 1. Legal Proceedings 17
ITEM 2. Change in Securities 17
ITEM 3. Defaults upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
TeraGlobal, TeraMedia, TeraConference and Unified Computing and
Communications Architecture are trademarks of TeraGlobal
Communications Corp.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $3,447,145 $ 7,893,036
Restricted cash for litigation settlement 1,200,000 --
Accounts receivable 80,478 208,115
Notes receivable-related parties 400,804 370,095
Inventory 219,764 171,940
Prepaid expenses and other current assets, including $17,593
and $19,173, respectively, to related parties 214,125 274,512
---------- -----------
Total current assets 5,562,316 8,917,698
FURNITURE AND EQUIPMENT, net 2,234,750 2,222,265
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED,
net of accumulated amortization of $5,200,304 at
September 30, 2000 (unaudited) and $1,494,374 at
December 31, 1999 142,287 2,329,715
OTHER ASSETS 680,000 500,000
---------- -----------
TOTAL ASSETS $8,619,353 $13,969,678
========== ===========
</TABLE>
3
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable, including $0 to related parties at
September 30, 2000 (unaudited) and $1,054 at
December 31, 1999 $ 1,186,274 $ 1,763,489
Short-term loans 66,358 67,865
Accrued vacation 149,530 124,604
Accrued expenses 384,044 102,009
Accrual for litigation settlement 1,200,000 --
Convertible promissory notes - current 475,000 475,000
Current portion of capitalized lease obligations -- 708,636
------------ ------------
Total current liabilities 3,461,206 3,241,603
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value, non-voting
1,000,000 shares authorized
no shares issued and outstanding -- --
Common stock, $0.001 par value
200,000,000 shares authorized
19,701,113 shares issued and outstanding at
December 31, 1999 and 22,695,922 shares issued
and outstanding at September 30, 2000 22,696 19,701
Additional paid-in capital 37,319,463 28,800,519
Common stock committed 15,000 --
Accumulated deficit (32,192,295) (18,063,886)
Other comprehensive loss (6,717) (28,259)
------------ ------------
Total shareholders' equity 5,158,147 10,728,075
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,619,353 $ 13,969,678
============ ============
</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 AND THE NINE MONTHS ENDING SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 37,020 $ 130,542 $ 261,748 $ 274,407
COST OF SALES 69,609 99,051 213,401 178,161
------------ ------------ ------------ ------------
GROSS PROFIT (32,589) 31,491 48,347 96,246
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 2,533,702 2,300,811 7,321,599 5,334,047
Sales and marketing 390,419 131,308 1,101,821 242,382
Research and development 752,198 1,517,597 2,812,164 4,558,264
Impairment of excess cost over 3,133,215 -- 3,133,215 --
fair value of net assets acquired
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total operating expenses 6,809,534 3,949,716 14,368,799 10,134,693
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (6,842,123) (3,918,225) (14,320,452) (10,038,447)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 112,614 171,024 239,033 252,706
Interest expense (22,483) (105,329) (46,989) (337,054)
------------ ------------ ------------ ------------
Total other income (expense) 90,131 65,695 192,044 (84,348)
------------ ------------ ------------ ------------
NET LOSS $ (6,751,992) $ (3,852,530) $(14,128,408) $(10,122,795)
============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.30) $ (0.20) $ (0.68) $ (0.56)
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 22,691,004 18,904,282 20,855,834 17,941,015
============ ============ ============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
2000 1999
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(14,128,408) $(10,122,795)
Adjustments to reconcile net loss to net cash used in
operating activities
Stock issued for services rendered 1,059,625 2,043,100
Options issued for services rendered -- 450,000
Depreciation 942,359 441,459
Amortization of goodwill 572,714 572,714
Impairment of excess cost over fair value of 3,133,215 --
net assets acquired
(Increase) decrease in
Accounts receivable 127,662 (127,157)
Notes receivable - related party -- (283,595)
Prepaid expenses and other current assets 60,386 (423,952)
Inventory (47,825) (79,757)
Increase (decrease) in
Accounts payable (577,215) 522,140
Accrued expenses 282,035 203,665
Accrued vacation 24,926 --
Customer deposits -- 30,560
------------ ------------
Net cash used in operating activities (8,550,526) (6,773,618)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit (180,000) (500,000)
Notes receivable - related parties (30,708) --
Purchase of furniture and equipment (954,844) (660,775)
------------ ------------
Net cash used in investing activities (1,165,552) (1,160,775)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (708,636) (17,088)
Proceeds (payments) on short-term loans (1,508) 2,124
Payments on note payable - related party -- (243,846)
Payments on convertible promissory notes -- (650,000)
Proceeds from common stock committed 15,000 (74,375)
Proceeds from issuance of common stock, net of fees 6,852,559 20,739,439
Proceeds from exercise of stock options 291,232 147,520
------------ ------------
Net cash provided by financing activities 6,448,647 19,903,774
------------ ------------
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
2000 1999
----------------- -------------
<S> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT 21,540 (31,122)
Net increase (decrease) in cash and cash equivalents (3,245,891) 11,938,258
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,893,036 48,524
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,647,145 $11,986,782
=========== ===========
CASH PAID FOR INCOME TAXES $ 1,600 $ 1,600
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended September 30, 2000, the Company issued 18,500
shares of common stock valued at $18,500 as payment for the acquisition of
additional shares of TechnoVision Communications, Inc. The TechnoVision
Communications, Inc. shares were tendered pursuant to the Company's exchange
offer which was consummated on August 10,1998; however, the Company's shares
were never issued at the time of the exchange offer.
During the nine months ended September 30, 2000, the Company issued 106,603
warrants valued at $23,122 as compensation to placement agents in connection
with a private placement that was completed June 22, 2000. The warrants confer
upon the holder the right to purchase one share of common stock at $4.00 per
share, expire on December 23, 2001, and can be redeemed by the Company for $0.01
per warrant in the event the Company's stock trades at a price in excess of
$7.00 for twenty consecutive trading days.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
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 nine-month period ended September
30, 2000, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2000. These condensed
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, 1999.
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 99.2% 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, 2000,
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, 2000, and nine months ended September 30, 1999, 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 - RESTRICTED CASH FOR LITIGATION SETTLEMENT
During the three months ended September 30, 2000, the Company
entered into negotiated agreements to settle all material
litigation pending against it and its TechnoVision subsidiary. See
Legal Proceedings, Part II, Item 1 below. In connection with these
agreements, the Company placed into escrow $1,200,000 pursuant to
the settlement of certain litigation on behalf of it's TechnoVision
subsidiary. As part of those agreements the Company has entered into
an agreement with Mr. Anthony Yohe to pay $150,000 on or before
December 31, 2001. The agreement to pay is supported by a judgment
in the amount of $450,000. The Company will account for any payments
of this amount as and when they are paid. The Company has no
material litigation pending against it at this time.
NOTE 4 - NOTE RECEIVABLE - RELATED PARTY
During the six months ended June 30, 2000, the Company loaned $118,115
to certain officers and directors of the Company. The promissory notes
are unsecured, payable on demand, and bear interest at the minimum
applicable rate.
During the three months ended September 30, 2000, the Company forgave
notes receivable and interest in the amount of $110,000 in connection
with the severance of an employment agreement with a certain officer of
the Company.
8
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Furniture and Fixtures $446,635 $ 358,886
Office Equipment 1,123,271 910,119
Computer Equipment 2,698,966 2,045,023
---------- ----------
4,268,872 3,314,028
Less Accumulated Depreciation 2,034,122 1,091,764
---------- ----------
TOTAL $2,234,750 $2,222,265
========== ==========
</TABLE>
Depreciation expense for nine months ended September 30, 2000, and the
year ended December 31, 1999 was $942,359 and $669,553, respectively.
Depreciation for the nine months ended September 30, 2000, includes
amounts related to network infrastructure equipment and computers that
are revenue generating. As such, depreciation related to those assets
in the amount of $95,526 has been charged to cost of sales. The
remaining $846,832 is expensed as a general and administrative expense.
NOTE 6 - EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
In August 1998 the Company completed the acquisition of 99% of the
outstanding stock of TechnoVision. It accounted for that acquisition
on a purchase method of accounting, and recognized Goodwill in
connection with that acquisition. During the three months ended
September 30, 2000, the Company recognized additional Goodwill
(Excess of cost over fair value of assets acquired) of $1,500,000
resulting from the settlement of a class action lawsuit pending
against the Company and TechnoVision. Another defendant in the
action has contributed $300,000 of the $1,500,000 to settle claims
against it.
During and after the TechnoVision acquisition, the Company has been
actively developing new software-based technology for providing
advanced communication solutions. TechnoVision is no longer selling
product in the marketplace. All of the Company's resources are aimed
at supporting its new technologies and solutions. Further, all
revenues going forward are expected to come from sales of its new
technology.
Consistent with Generally Accepted Accounting Principles, the
Company reviews its long-lived assets to identify whether the
carrying amount of its assets may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows expected to
be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount exceeds the fair value of the assets.
During the three months ended September 30, 2000, the Company
reviewed the excess of cost over fair value of net assets acquired
in the purchase of TechnoVision Communications, Inc. for impairment.
The Company has determined the fair value of the assets to be zero,
as the future net cash flows from the wholly owned subsidiary is
expected to be zero, and recorded a loss on impairment of $3,133,215
for the unamortized balance.
NOTE 7 - ACCRUAL FOR LITIGATION SETTLEMENT
During the three months ended September 30, 2000, the Company
reached negotiated agreements to settle all material litigation
pending against it and its TechnoVision subsidiary. In connection
with those agreements, the Company recorded an accrued liability for
$1,200,000 for the settlement of certain class action litigation on
behalf of it's TechnoVision subsidiary.
9
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
The Company's TechnoVision subsidiary had entered into certain
non-cancelable capital leases for computers and software. The Company
entered into an agreement with the bankruptcy trustee for the leasing
company to purchase those assets in December 1999. The Company paid
$700,000 in January 2000 to consummate that purchase.
NOTE 9 - SHAREHOLDERS' EQUITY
Common Stock
During the three months ended March 31, 2000, the Company issued
127,000 shares of common stock for services rendered by employees and
an officer of the Company valued at $1,051,125. During the same period
the Company received $45,533 in connection with the exercise of stock
options for an aggregate of 19,050 shares of common stock. The Company
also issued 7,500 shares of common stock valued at $7,500 as payment
for the acquisition of additional shares of TechnoVision. The
TechnoVision shares were tendered pursuant to the Company's exchange
offer, which was consummated on August 10, 1998; however, the shares
were never issued at the time of the exchange offer.
During the three months ended June 30, 2000, the Company issued 2000
shares of common stock for services rendered by an employee valued at
$8,500. During the same period the Company received $205,424 in
connection with the exercise of stock options for an aggregate of
135,930 shares of common stock. The Company also issued 11,000 shares
of common stock valued at $11,000 as payment for additional shares of
TechnoVision Communications, Inc. The TechnoVision shares were tendered
pursuant to the Company's exchange offer, which was consummated on
August 10, 1998; however, the shares were never issued at the time of
the exchange offer.
In conjunction with the Unit Offering during the three months ended
June 30, 2000, the Company also sold 2,665,079 units of shares of
common stock and warrants, for a total of $6,852,584, net of
offering costs of $499,505. Each unit sold for $2.75 and consisted
of one share of common stock and a warrant conferring to the holder
the right to purchase an additional one-half share of common stock
at $4.00 per share. The warrants expire on December 23, 2001, and
are redeemable for $0.01 per warrant by the Company in the event
that the Company's common stock trades at a price in excess of $7.00
per share for twenty consecutive trading days. Using the
Black-Scholes pricing model, the warrants have a value of $0.2169
per warrant, or a total of $289,023.
The offering costs of the Unit Offering consisted of cash
commissions of $476,373, or 6.5 percent of the gross offering, and
106,603 warrants, or 4 percent of the units subscribed, valued at
$23,122.
During the three months ended September 30, 2000, the Company received
$40,275 in connection with the exercise of stock options for an
aggregate of 27,250 shares of common stock.
10
<PAGE>
TERAGLOBAL COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
Stock Option Plan
During the three months ended March 31, 2000, the Company granted
13,500 options under its 1997 Stock Option Plan (the "1997 Plan") at
exercise prices ranging from $8.87 to $10.94 per share to certain
employees.
Additionally, the Company granted 225,000 options under its 1999 Stock
Option Plan (the "1999 Plan") at exercise prices ranging from $7.13 to
$8.56 per share to certain employees, and an additional 75,000 options
were granted to certain Directors of the Company at an exercise price
of $8.56. Employees exercised 19,050 options during the same time
period.
During the three months ended June 30, 2000, the Company granted 38,500
stock options under the 1997 Plan and 1,200 stock options under the
1999 Plan at exercise prices ranging from $7.86 to $8.67. Employees
exercised 135,930 options during the same time period.
During the three months ended September 30, 2000, the Company granted
certain employees 36,730 options under the 1997 Plan at exercise prices
ranging from $2.50 to $3.31 per share and 153,520 options under the
1999 Plan at exercise prices ranging from $1.91 to $3.31 per share.
Employees exercised 27,250 options during the same time period
The following schedule summarizes the stock options transactions:
<TABLE>
<CAPTION>
Stock Options Weighted Average
Outstanding Exercise Price
---------------------------------
<S> <C> <C>
Outstanding, December 31, 1999 2,635,610 $7.82
Granted 543,450 $5.84
Forfeited (512,790) $8.85
Exercised (182,230) $1.60
--------- -----
Outstanding, September 30, 2000 2,484,040 $3.74
========= =====
Exercisable, September 30, 2000 1,662,190
=========
</TABLE>
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company granted certain employees
18,500 options under the 1997 Plan at exercise prices ranging from
$1.90 to $2.38 per share
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, 1999. 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
The third quarter was a transitional period for the Company as it
enters a new phase in its development. During this period the Company
resolved all issues related to its acquisition of TechnoVision and resolved
all major litigation pending against it. The TechnoVision product line is no
longer in the marketplace. Accordingly, the Company's financial statements
reflect a write off of all Goodwill associated with the TechnoVision
acquisition. The Company has initiated marketing of its commercial version of
TeraMedia, and all of its resources are supporting the new technology. The
Company's development efforts for TeraMedia have led to support for Ethernet
and other IP based networks expanding its potential market. As discussed
below, the Company is taking active steps to bring its new technology and
solutions to each of the end user, service provider and technology provider
markets with an expanded business plan.
The Company develops advanced networking software that enables both
advanced real-time communications of voice, video and data as well as media
streaming over standard broadband networks. In delivering its solutions, the
Company takes advantage of recent paradigms in technology:
* Moore's law continues to prove true, delivering increasing processing power
in endpoint devices.
* The server is becoming the network workhorse, as the use of local and
network-based servers for hosting networking functionality and applications
continues to grow.
* High-speed networks continue to proliferate using standardized transport
protocols such as Internet Protocol ("IP") and Asynchronous Transfer Mode
("ATM").
Capitalizing on these paradigms, the Company has developed network
designs, network enabling software and applications that deliver in flexible
software the features and functions that were traditionally delivered in
expensive, specialized hardware. The Company's networking software maximizes the
performance of the network, delivering true end to end Quality of Service over
ATM networks or policy-based Class of Service over CoS enabled Ethernet or other
IP-based networks. That performance lets the Company deliver voice, video and
data communications as well as media streaming with precise quality and
extremely low latency.
The Company's first application suite to take advantage of this network
design and network enabling software is TeraMedia. Originally written for Apple
Computer's Power Macintosh line of desktop computers, TeraMedia is
industry-leading technology for voice, video and data communication in an
integrated solution. TeraMedia delivers simultaneous full-screen, high quality
video at 30 frames per second with the lowest latency in the industry; audio
that exceeds telephone quality; extensive collaboration over standard media
types including text, graphics, audio, video, 3-D and virtual reality. It is
clearly the next best thing to being there, letting users see and talk to one
another, individually and in groups, and simultaneously interact over documents,
spreadsheets, audio, video and print media, all from the desktop.
The Company is now taking its current technology and solutions to
market in three approaches. It is selling its TeraMedia software suite to end
users, capitalizing on the exploding demand among large organizations for
private network solutions to enhance communication. The majority of the
Company's initial marketing efforts have been geared toward this market.
In addition, the Company is now actively pursuing relationships with the
service provider market, including broadband suppliers, telephone carriers,
Internet Service Providers, and Application Service Providers. Sales to
service providers provide them with a means to increase demand for their
existing network infrastructure, while giving the Company the benefit of the
service provider's existing customer base and expertise in network
operations. Finally, the Company's solutions are comprised of a number of
independent elements. The Company is beginning to actively market and sell
its technology and solutions to those entities that provide technology and
infrastructure to the service provider market.
12
<PAGE>
The Company is focusing its technology development in three areas. The
first area is to increase the operating systems and platforms that TeraMedia
supports to include additional common platforms. The second area is to increase
the number of access methodologies that the Company's network solutions will
support. During the second quarter the Company announced Class of Service
support for its solutions over Ethernet and other IP based networks. The Company
is actively evaluating the solutions that it can deliver over wireless networks
as well as DSL. The third area is incorporating additional endpoint devices into
the network. Working with the Session Initiation Protocol standard, the Company
is evaluating ways to enable additional endpoint devices, such as cell phones
and wireless PDAs to access communication sessions. Each of these areas is in
the evaluation stage and represents the Company's intent at this time. The
Company has not firmly committed to specific deliverables or timeframes. The
priority of these efforts and the precise timing will depend upon customer
demand as well as the development of partner relationships.
TeraGlobal Communications Corp. commenced operations in February 1997.
In August 1998, the Company acquired 99% of the outstanding stock of
TechnoVision Communications, Inc., a Georgia corporation ("TechnoVision"). At
the time of the acquisition, TechnoVision was generating revenue from the sale
of hardware-based video conferencing equipment. During this period, the Company
continued development of its TeraMedia product. Commencing in late 1998 and
early 1999, the Company worked with a group of early adopters on beta versions
of the TeraMedia service. The first commercial version of service was launched
in September 1999 at Motorola's Horizons '99 Analyst Conference. The Company
released version 2.0 of the TeraMedia service in May 2000, with enhanced
reliability, robustness and market oriented features and is bringing its 2.5
release to market in the fourth quarter.
The Company's financial statements consolidate the information relating
to its subsidiaries, including TechnoVision. The financial statements for 1999
include revenue from TechnoVision relating to sales of its TeraConference
product. Conversely substantially all of the revenues and costs of goods sold in
2000 relate to sales of the Company's TeraMedia service.
The Company entered into negotiated agreements during the quarter to
settle all material litigation pending against it and its TechnoVision
subsidiary. See Legal Proceedings, Part II, Item 1 below. The financial
statements reflect all payments made and to be made in connection with the
resolution of those lawsuits. In addition, the Company has written down the
goodwill associated with the TechnoVision acquisition. TechnoVision has not
sold any product during 2000, and Management believes that TechnoVision will
not significantly contribute to operations going forward
During the third quarter of 2000, the Company continued its sales
efforts on direct and indirect sales focusing on the government, education and
entertainment markets. To that end, it secured contracts with an additional VAR
and other customers. However, those contracts will not generate revenue until
the fourth quarter. The Company is generating significant leads in each of the
end user, service provider and technology provider markets. It is actively
recruiting experienced sales personnel to augment its direct sales staff, and
will continue to do so for the foreseeable future. It is also focused on hiring
additional personnel to address the service provider and technology provider
market
RESULTS OF OPERATIONS
The following table sets forth the selected unaudited results of
operations for the nine months ending September 30, 2000, and September 30,
1999.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA: NINE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
Sales $261,748 $274,407
Cost of Sales 213,401 178,161
General and administrative 7,321,599 5,334,046
Sales and marketing 1,101,821 242,382
Research and development 2,812,164 4,558,264
Net Loss $(14,128,408) $(10,122,795)
Basic loss per common share $(0.68) $(0.56)
Weighted average common shares 20,855,834 17,941,015
Outstanding
</TABLE>
13
<PAGE>
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999.
SALES. Sales for the three months ended September 30, 2000, and
September 30, 1999, were $37,020 and $130,542, respectively, a reduction of 72
percent. Sales for the nine months ended September 30, 2000, and September 30,
1999, were $261,748 and $274,407, respectively, a reduction of 5 percent. Sales
during the three and nine months ended September 30, 2000, were primarily
attributable to existing service contracts with early adopters of the Company's
TeraMedia service. Sales during the three and nine months ended September 30,
1999 were primarily generated from the Company's TechnoVision subsidiary.
The Company has entered into negotiations with certain early
adopters to restructure the existing service contracts. The Company has not
yet finalized these agreements and therefore did not recognize revenue in the
three months ended September 30, 2000, under these agreements. The Company
expects to recover the related revenue in the fourth quarter.
Sales for the fourth quarter of 2000 are expected to increase
significantly over the third quarter, based on purchase orders the Company has
received to date, and the number of proposals requested from potential
customers. The Company is undertaking a number of initiatives to increase its
sales and marketing exposure, including additions to its sales and marketing
staffs, increased advertising and trade show participation, active solicitation
of VARs for TeraMedia, and the active pursuit of strategic alliances with
service providers and technology providers. All of these efforts are designed to
increase sales for the fourth quarter and into 2001.
COST OF SALES. Cost of sales for the three months ended September 30,
2000, and September 30, 1999, were $69,609, resulting in a negative gross
margin, and $99,051, or a 24% gross margin, respectively. Cost of sales for the
nine months ended September 30, 2000, and September 30, 1999, were $213,401, a
gross margin of 18%, and $99,051, a gross margin of 24%, respectively. Cost of
sales for the nine months ended September 30, 2000, is comprised primarily of
depreciation of network equipment and the cost of bandwidth related to service
contracts. Cost of sales for the three and nine months ended 1999, was primarily
hardware costs.
Cost of sales is expected to vary from period to period based on a
number of factors. First, the Company sells products and services under several
pricing models: software licenses, service contracts, service with network
included, and service with network and hardware included. Cost of sales will
vary widely depending upon the mix of products and services sold in any period.
Second, the Company deploys network infrastructure at the inception of a service
contract. To the extent that the infrastructure is not fully saturated at
inception, cost of sales will decline as more users are placed on the network.
Third, the Company's software solutions include licensed software from third
parties. Those licenses generally carry a royalty fee, which is front end
loaded. The fee per unit declines as additional units are sold. As a result cost
of sales associated with licensing fees will decline as additional units are
sold.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,533,702 for the three months ended September 30, 2000, compared to $2,300,811
for the three months ended September 30, 1999, an increase of $232,891, or 10
percent. General and administrative expenses for the nine months ended September
30, 2000, were $7,321,599, compared to $5,334,047 for the nine months ended
September 30, 1999, an increase of $1,987,552, or 37 percent.
Legal expenses increased from $176,125 for the three months ended
September 30, 1999, to $251,643 for the three months ended September 30, 2000,
an increase of 43 percent. Legal expenses increased from $407,551 for the nine
months ended September 30, 1999, to $536,637 for the nine months ended September
30, 2000, an increase of 32 percent. Non-cash charges include depreciation
expense of $476,797 for the three months ended September 30, 2000, compared to
$166,925 for the three months ended September 30, 1999. Depreciation for the
nine months ended September 30, 2000, was $846,832, compared to $441,459 for the
nine months ended September 30, 1999, an increase of 92 percent.
During the three months ended September 30, 2000, the Company
recognized a one time charge of $356,343 in connection with a severance
agreement with a certain officer of the Company.
During the three months ended September 30, 2000, the Company concluded
that the Goodwill (Excess cost over fair value of net assets acquired)
recognized in the purchase of its TechnoVision subsidiary was impaired. As such,
it recognized the loss and recorded an expense of $3,133,215.
The Company feels it has developed an infrastructure capable of
supporting significant increases in sales activity. General and administrative
expenses are expected to decline as an overall percentage of expenses.
Additionally, the Company expects legal expenses to decrease as it has
negotiated to settle all material litigation pending against its TechnoVision
subsidiary. Also, non-cash expenses will decrease as the Company has recognized
all expenses associated with the purchase of TechnoVision.
RESEARCH AND DEVELOPMENT. Research and Development expenses were
$752,198 for the three months ended September 30, 2000, as compared to
$1,517,597 for the three months ended September 30, 1999, a decrease of
$765,399,
14
<PAGE>
or 102 percent. Research and development expenses for the nine months ended
September 30, 2000, and September 30, 1999, were $2,812,164 and $4,558,264,
respectively, resulting in a reduction of $1,746,100, or 38 percent.
The Company views its technological strength as a key to its success
and will continue to pursue research and development efforts. However research
and development expenses as a percentage of total revenues or operating expenses
is expected to decline going forward because of the transition to a
product-oriented operating company. As TeraMedia and other products are
finalized, development efforts aimed at refining the product or supporting
access to specific vertical markets will be charged to general and
administrative expenses
SALES AND MARKETING. Sales and marketing expenditures were $390,419 in
the three months ended September 30, 2000, as compared to $131,308 in the three
months ended September 30, 1999, an increase of $259,111 or 197 percent. Sales
and marketing expense for the nine months ended September 30, 2000, and
September 30, 1999, were $1,101,821 and $242,382, respectively, or an increase
of 355 percent.
The Company will increase selling and marketing expenses over the near
term. The Company is actively seeking to double the number of dedicated sales
people on staff during the fourth quarter, with continued increases continuing
throughout 2001. The Company will also increase marketing expenses related to
lead generation, including expenses related to staff, advertising and trade show
participation.
INTEREST REVENUE AND INTEREST EXPENSE. Interest revenue for the three
months ended September 30, 2000, and September 30, 1999, was $112,614 and
$171,024, respectively, a decrease of $58,410, or 34 percent. Interest revenue
for the nine months ended September 30, 2000, and September 30, 1999 was
$239,033 and $252,706, respectively, a decrease of 5 percent. Interest revenue
is generated from short-term investments of available cash. Interest expense for
the three months ended September 30, 2000, and September 30, 1999, was $22,483
and $105,329 respectively, a reduction of 79 percent. Interest expense for the
nine months ended September 30, 2000, and September 30, 1999, was $46,989 and
$337,054, respectively, or a reduction of 86 percent. Interest expense for the
three and nine months ended September 30, 1999, was primarily due to interest
related to certain capital leases. The Company entered into an agreement to
purchase the leased equipment in December 1999 and completed the terms of that
agreement in January 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents
totaling $4,647,145, of which $1,200,000 was invested into an escrow account
pending the settlement of certain litigation. The Company had a working capital
surplus of $2,101,110.
For the three months ended September 30, 2000, and September 30, 1999,
net cash used in operating activities was $2,698,756 and $2,589,168,
respectively, an increase of 4 percent. Net cash used in operating activities
for the nine months ended September 30, 2000, and September 30, 1999, was
$8,880,526 and $6,773,618, respectively, an increase of 31 percent, due
primarily to increased operating losses.
During the three months ended September 30, 2000, and September 30, 1999,
the Company made capital expenditures of $127,644 and $256,875 respectively, a
reduction of 50 percent. During the nine months ended September 30, 2000, and
September 30, 1999, the Company made capital expenditures of $954,844 and
$660,775 respectively, an increase of 44 percent.
The Company expects cash flows from operating activities to be
negative over the foreseeable future. Available cash and anticipated revenues
from operations will be adequate to fund operations over the next three to
four months. Consistent with its business strategy, the Company's financing
plan involves near term and intermediate term financing. In the near term the
Company has initiated discussions with a number of potential financing
sources. It is actively negotiating term sheets with financial institutions
for a potential equity financing. However, no firm agreement or commitment to
provide such financing exists at this time, and no assurances can be given
with respect to the terms upon which such a financing will take place. In the
intermediate term, the Company will seek a strategic investment from a
potential channel or development partner.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
15
<PAGE>
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.
Potential risks and uncertainties that could affect the Company's
future results and financial condition include the following. The Company is an
early stage company moving from research and development to operations and as
such is subject to the uncertainties of any new enterprise such as the ability
to effectively establish a market for its products and services and competently
service and support its customers. Because the Company is dealing in high
technology and rapidly evolving markets, it is subject to risks associated with
uncertain market demand, intense competition, short product cycles and the
possibility of product defects. To date the Company has relied on external
financing activities to support its operations. If the Company does not
successfully generate adequate revenues to meet operating expenses in the
future, the Company will be forced to seek additional external financing or
curtail operations. The Company does not currently have any commitments for
additional financing at this time and is subject to the risk that such
financing, if needed, will not be available on terms favorable to the Company or
at all.
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, 1999.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a party to certain litigation matters as described in
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999 and
its quarterly reports on Form 10-QSB for the periods ended March 31, 2000 and
June 30, 2000. The Company has entered into negotiated agreements to resolve
each of those actions.
NORINE LAM AND CLIFTON KEES ET AL. V. VIDEO STREAM INTERNATIONAL,
INC. ET AL. The Company was named in a securities class action lawsuit filed
by two former TechnoVision shareholders on July 15, 1998 in Los Angeles
County Superior Court. The complaint named the Company, TechnoVision, Grey
Venture Capital, Inc., and certain present and former officers and employees
of each as defendants. The complaint alleged that the Company, TechnoVision,
and Grey Venture Capital, Inc. each conspired and engaged in fraudulent and
deceptive sales practices in connection with TechnoVision's private placement
of securities in an offering conducted by Grey Venture Capital, Inc. from
November 1997 through May 1998. The Complaint sought rescission of the $4
million offer, plus interest and attorneys' fees. The Company and its
affiliates reached a complete settlement with the plaintiff class in
September, 2000. In connection with the settlement, the Company paid
$1,200,000 into a fund for distribution to all class members. As a condition
of the settlement, each class member executed a complete release of all
claims in favor of the Company. The action was dismissed.
ANTHONY YOHE V. VIDEO STREAM INTERNATIONAL, INC., ET AL. This action
was filed in United States District Court, Central District of California in
July 1999 and purported to be a class action on behalf of certain
shareholders of the Company. Mr. Yohe, who was the only named plaintiff, was
the principal of Grey Venture Capital, which conducted a private placement
for the Company's TechnoVision subsidiary, and was the subject of the Lam &
Kees matter discussed above. In the lawsuit Mr. Yohe alleged various causes
of action against the Company, TechnoVision and certain officers and
directors of each, including: securities fraud; material misrepresentations;
negligent misrepresentation; and negligence. The Company filed a
counter-complaint against Mr. Yohe alleging breach of contract in connection
with his participation in TechnoVision's private placement. The Company and
its affiliates reached a complete settlement with Mr. Yohe in September,
2000. In connection with the settlement agreement Mr. Yohe has agreed to
dismiss his complaint and pay the Company $150,000 on its counter-complaint.
The obligation to repay that amount is secured by a $450,000 judgment against
Mr. Yohe if he fails to pay in full prior to December 31, 2001. As part of
the settlement, Mr. Yohe executed a complete release of claims in favor of
the Company. The complaint was dismissed. A $450,000 judgement was entered on
the counter-complaint.
There is currently no material litigation pending against the Company
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
17
<PAGE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits.
<TABLE>
<CAPTION>
Number Description Method of Filing
------ ----------- ----------------
<S> <C>
27 Financial Data Schedule Filed herewith
</TABLE>
b) Reports on Form 8-K
On October 4, 2000, the Company filed a report on Form 8-K
announcing a settlement to resolve certain litigation between
the Company and Anthony Yohe.
On September 20, 2000, the Company filed a report on Form 8-K
announcing the resignation of David Fann as Chief Executive
Officer and Chairman of the Board
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 14, 2000 TERAGLOBAL COMMUNICATIONS CORP.
By: /s/ FRED MCGEE
-----------------------------------
Fred McGee, Chief Financial Officer
By: /s/ PAUL COX
-----------------------------------
Paul Cox, President
18
