** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-QSB**

 

| **ý****  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934.** |
|-----------------------------------------------------------------------------------------------------------|

 

 

**For the quarterlyperiod ended March 31, 2002.**

 

| **o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934.** |
|-------------------------------------------------------------------------------------------------------|

 

**For the transitionperiodfrom                 to                 .**

 

**Commission FileNumber 0-25115**

 

**TERAGLOBAL****COMMUNICATIONS CORP.**

(Exact name of small business issuer as specified in its charter)

 

| **Delaware**                                                           |   | **33-0827963**                       |
|------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation)                         |   | (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 befiled by Section 13 or 15(d) of the Securities Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports, and (2) has been subject to such filing requirements for the past90 days.

 

ý Yes oNo

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date: As of March 31, 2002,2,376,765 shares of the issuer’s common stock were issued and outstanding.

 

Transitional Small Business Disclosure Format(Check One): o  Yes  ý  No

 

 

----

 

**TERAGLOBAL COMMUNICATIONS CORP. AND SUBSIDIARIES**

##### **Form 10-QSB for the period ended March 31, 2002**

 
| COVER  PAGE                      |
|----------------------------------|
|                             |
| INDEX                            |
|                             |
| PART I. FINANCIAL INFORMATION    |
|                             |
|                             | ITEM 1. Financial Statements |
|                             |   |
|                             | Consolidated  Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001  (audited) |
|                             |   |
|                             | Consolidated Statement of Operations -  Three Months Ended March 31, 2002 and March 31, 2001 (unaudited) |
|                             |   |
|                             | Consolidated Statements of Cash Flows -  Three Months Ended March 31, 2002 and March 31, 2001 (unaudited) |
|                             |   |
|                             | Notes to Condensed Consolidated Financial  Statements - March 31, 2002 |
|                             |   |
|                             | ITEM 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                             |   |
| PART II.  OTHER INFORMATION |
|                             | ITEM 1. Legal Proceedings |
|                             | ITEM 2. Change in Securities |
|                             | ITEM 3. Defaults upon Senior Securities |
|                             | ITEM 4. Submission of Matters to a Vote of  Security Holders |
|                             | ITEM 5. Other Information |
|                             | ITEM 6. Exhibits and Reports on Form 8-K |
|                             |   |
| SIGNATURES                       |

** **

2

----

 

| **PART I****.**   | **FINANCIAL INFORMATION** |
|-------------------|---------------------------|
| **Item 1*****.*** | **Financial  Statements** |

 

**TERAGLOBALCOMMUNICATIONS CORP.AND SUBSIDIARIES**

#### **CONDENSED CONSOLIDATEDBALANCE SHEET**

#### **March31, 2002 (unaudited) and December 31, 2001**

 

**ASSETS**

 
|                                       |   | **March 31,  2002** |      | **December 31,  2001** |   |
|--------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                       |   |                |      |
|                                       |   | **(unaudited)**     |      |                   |   |
| **Current assets**                         |   |                |      |                   |   |
| Cash and cash equivalents                  |   | $                   | 319,322   |                   | $      | 133,175 |   |
| Accounts receivable                        |   | 93,337              |      | 30,925                 |   |
| Notes receivable - related parties         |   | —              |      | 236,095                |   |
| Prepaid expenses and other current assets, |   | 127,537             |      | 137,997                |   |
|                                       |   |                |      |                   |   |
| Total current assets                       |   | 540,195             |      | 538,192                |   |
|                                       |   |                |      |                   |   |
| **Furniture and equipment**, net           |   | 681,624             |      | 845,090                |   |
|                                       |   |                |      |                   |   |
| **Other asset**                            |   | 378,321             |      | 537,011                |   |
|                                       |   |                |      |                   |   |
| **Total assets**                           |   | $                   | 1,600,140 | ** **             | $      | 1,920,293 | ** ** |

 

3

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** **

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
|                                                                                                                                                                                  |   | **March 31,  2002** |       | **December 31,  2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                                                                  |   | **(Unaudited)**     |       |                   |       |
|                                                                                                                                                                                  |   |                | ** ** |                   | ** ** |
| **Current liabilities**                                                                                                                                                               |   |                |       |                   |       |
| Accounts payable                                                                                                                                                                      |   | $                   | 566,415    |                   | $          | 570,843 |   |
| Short-term loans                                                                                                                                                                      |   | —              |       | 62,790                 |       |
| Accrued expenses                                                                                                                                                                      |   | 220,859             |       | 195,903                |       |
| Accrued severance pay                                                                                                                                                                 |   | —              |       | 58,502                 |       |
| Accrued interest on convertible promissory  note                                                                                                                                      |   | 67,947              |       | 6,473                  |       |
| Accrued vacation                                                                                                                                                                      |   | 99,431              |       | 118,779                |       |
| Convertible promissory note                                                                                                                                                           |   | 2,465,286           |       | 216,193                |       |
| Deposit on sales                                                                                                                                                                      |   | 885                 |       | 1,062                  |       |
| **Total Liabilities**                                                                                                                                                                 |   |                | 3,420,823  |                   |       | 1,230,545 |   |
|                                                                                                                                                                                  |   |                |       |                   |       |
| **Series A Convertible Preferred Stock**                                                                                                                                              |   |                |       |                   |       |
|                                                                                                                                                                                  |   |                |       |                   |       |
| $0.001 par value, 13,000,000 shares  authorized 7,468,661 shares issued and outstanding (dividends of $307,492 in  arrears)                                                           |   | 3,106,555           |       | 3,021,154              |       |
|                                                                                                                                                                                  |   |                | ** ** |                   | ** ** |
| **Shareholders’  Deficit**                                                                                                                                                       |   |                | ** ** |                   | ** ** |
|                                                                                                                                                                                  |   |                |       |                   |       |
| Common stock, $0.001 par value 200,000,000  shares authorized 2,376,765 shares issued and outstanding on March 31, 2002  1,076,279 shares issued and outstanding on December 31, 2001 |   | 2,377               |       | 1,077                  |       |
| Additional paid-in capital                                                                                                                                                            |   | 42,023,189          |       | 41,857,059             |       |
| Cumulative foreign  currency translation adjustment                                                                                                                                   |   | 47,802              |       | 47,802                 |       |
| Accumulated deficit                                                                                                                                                                   |   | (47,000,606         | )          | (44,237,344            | )          |
|                                                                                                                                                                                  |   |                |       |                   |       |
| Total shareholders’ deficit                                                                                                                                                      |   | (4,927,237          | )          | (2,331,406             | )          |
|                                                                                                                                                                                  |   |                |       |                   |       |
| **Total liabilities and shareholders’ deficit**                                                                                                                                  |   | $                   | 1,600,140  |                   | $          | 1,920,293 |   |

 

4

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** **

**TERAGLOBALCOMMUNICATIONS CORP.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**For the three monthsending March 31, 2002 and 2001 (Unaudited)**

 
|                                              |     | **Three  months ended March 31,** |           |
|---------------------------------------------------|----------|-----------------------------------|----------------|
|                                              | **2002** |                              | **2001**       |   |
|                                              |     |                              | ** **     |   | ** ** |
| **Net Sales**                                     |     | $                                 | 88,084         |   | $ | 174,853 |   |
|                                              |     |                              |           |   |   |
| **Cost of sales**                                 |     | 25,775                            |           | 116,795 |   |
|                                              |     |                              | ** **     |   | ** ** |
| **Gross profit**                                  |     | 62,309                            |           | 58,058 |   |
|                                              |     |                              | ** **     |   | ** ** |
| **Operating expenses**                            |     |                              |           |   |   |
| General and administrative                        |     | 1,260,713                         |           | 1,426,243 |   |
| Selling                                           |     | 273,257                           |           | 306,044 |   |
| Research and development                          |     | 519,213                           |           | 437,621 |   |
| Total operating expenses                          |     | 2,053,183                         |           | 2,169,908 |   |
|                                              |     |                              |           |   |   |
| **Loss from operations**                          |     | (1,990,874                        | )              | (2,111,850 | ) |
|                                              |     |                              |           |   |   |
| **Other income (expenses)**                       |     |                              |           |   |   |
| Interest income                                   |     | 38,103                            |           | 14,985 |   |
| Interest expense                                  |     | (908,250                          | )              | (7,073 | ) |
| Other income                                      |     | 97,761                            |           | 2,103 |   |
|                                              |     |                              |           |   |   |
| Total other income (expense)                      |     | (772,387                          | )              | 10,015 |   |
|                                              |     |                              |           |   |   |
| **Net Loss**                                      |     | **$**                             | **(2,763,261** | **)** | **$** | **(2,101,835** | **)** |
|                                              |     |                              |           |   |   |
| **Basic and fully diluted loss per common share** |     | **$**                             | **(1.49**      | **)** | **$** | **(2.24** | **)** |
|                                              |     |                              |           |   |   |
| **Weighted-average common shares outstanding**    |     | **1,855,756**                     | ** **     | **940,155** | ** ** |

 

5

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**TERAGLOBALCOMMUNICATIONS CORP.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**For the Three Monthsended March 31, 2002 and 2001 (Unaudited)**

 
|                                                                        |   | **Three  months ended March 31,** |       |
|-----------------------------------------------------------------------------|--------|-----------------------------------|------------|
| **2002**                                                                    |   | **2001**                          |
| **Cash flows from operating activities**                                    |   |                              |       |   |   |
| Net loss                                                                    |   | $                                 | (2,763,261 | ) | $ | (2,101,835 | ) |
| Adjustments to reconcile net loss to net  cash used in Operating activities |   |                              |       |   |   |
| Stock issued for services rendered                                          |   | —                            |       | 15,625 |   |
| Loss on sale of property and equipment                                      |   | —                            |       | 48,858 |   |
| Depreciation                                                                |   | 186,962                           |       | 390,982 |   |
| Interest charges on fixed conversion  features                              |   | 846,925                           |       | — |   |
| Settlement of Note Receivable                                               |   | 176,095                           |       | — |   |
| (Increase) decrease in                                                      |   |                              |       |   |   |
| Accounts receivable                                                         |   | (68,412                           | )          | (58,433 | ) |
| Prepaid expenses and other current assets                                   |   | 10,460                            |       | 141,753 |   |
| Inventory                                                                   |   | —                            |       | 113,471 |   |
| Increase (decrease) in                                                      |   |                              |       |   |   |
| Accounts payable                                                            |   | (4,428                            | )          | (100,897 | ) |
| Accrued expenses                                                            |   | 24,956                            |       | (53,294 | ) |
| Accrued severance                                                           |   | (58,502                           | )          | (59,627 | ) |
| Accrued interest (non-cash interest  expense)                               |   | 61,474                            |       | 4,999 |   |
| Accrued vacation                                                            |   | (19,348                           | )          | (38,355 | ) |
| Customer deposits                                                           |   | (177                              | )          | — |   |
| Net cash provided by (used in) operating  activities                        |   | (1,601,256                        | )          | (1,696,753 | ) |
|                                                                        |   |                              |       |   |   |
| **Cash flows from investing activities**                                    |   |                              |       |   |   |
| Proceeds from redemption of Certificate of  Deposit                         |   | 158,690                           |       | 113,000 |   |
| Proceeds from sale of (purchase of)  furniture and equipment                |   | (23,497                           | )          | 79,086 |   |
|                                                                        |   |                              |       |   |   |
| Net cash provided by (used in) investing  activities                        |   | $                                 | 135,193    |   | $ | 193,153 |   |
|                                                                             |        |                                   |            |  |  |  |  |  |  |

 

**                Supplemental schedule of non-cash investingand financing activities.**

 

During the three month periodended March 31, 2002, the Company accepted the return of 30,000 shares of theCompany's outstanding Common Stock as partial repayment of an outstanding notereceivable. The 30,000 shares were valued at an aggregate price of $60,000which was the closing bid price on the date of the transaction.

 

6

----

 
|                                                  |   | **Three  months ended March 31,** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **2002**                                              |   | **2001**                          |
| **Cash flows from financing activities**              |   |                              |    |   |   |
|                                                  |   |                              |    |   |   |
| Payment of short-term loans                           |   | $                                 | —  |   | $ | (3,262 | ) |
| Proceeds (payments) on short term loans               |   | (62,790                           | )       | — |   |
| Purchase and retirement of common stock               |   | (60,000                           | )       | — |   |
| Proceeds from issuance of common stock, net  of fees  |   | —                            |    | 1,501,000 |   |
| Proceeds from convertible promissory notes            |   | 1,750,000                         |    | — |   |
|                                                  |   |                              |    |   |   |
| Net cash provided by (used in) financing  activities  |   | 1,652,210                         |    | 1,497,738 |   |
|                                                  |   |                              |    |   |   |
| **Cumulative translation adjustment**                 |   | —                            |    | 49,741 |   |
|                                                  |   |                              |    |   |   |
| Net increase (decrease) in cash and cash  equivalents |   | 186,147                           |    | 43,879 |   |
|                                                  |   |                              |    |   |   |
| **Cash and cash equivalents, beginning of period**    |   | 133,175                           |    | 467,383 |   |
|                                                  |   |                              |    |   |   |
| **Cash and cash equivalents, end of period**          |   | $                                 | 319,322 |   | $ | 511,262 |   |
|                                                       |        |                                   |         |  |  |  |  |  |  |

 

7

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**TERAGLOBALCOMMUNICATIONS CORP.AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**March 31, 2002**

 

###### **NOTE 1 —**SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.  Operating results for thethree-month period ended March 31, 2002, are not necessarily indicative of theresults that may be expected for the fiscal year ending December 31, 2002.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes thereto included in the Company’s Annual Report onForm 10-KSB for the fiscal year ended December 31, 2001.

 

Principles of Consolidation

 

Theconsolidated financial statements include the accounts of TeraGlobalCommunications Corp. and its wholly owned subsidiary TGC Acquisition, Inc.  All inter-company accounts and transactionshave been eliminated.

 

Stock Split

 

On March 15,2002, the Company effected a one-for-25 reverse split of its common stock.  All share and per share data have beenretroactively restated to reflect this reverse stock split.

 

8

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**NOTE 2 —FURNITURE AND EQUIPMENT**

 

Furniture and equipment consisted of the following:

 
|                           |   | **March 31, 2002** |        | **December 31, 2001** |   |
|--------------------------------|--------|--------------------|-------------|-----------------------|--------|
|                           |   | **(Unaudited)**    |        |                  |   |
|                           |   |               |        |                  |   |
| Furniture and fixtures         |   | $                  | 446,635     |                  | $      | 446,635 |   |
| Office equipment               |   | 1,078,967          |        | 1,078,967             |   |
| Computers and software         |   | 2,339,190          |        | 2,322,568             |   |
| TeraMedia® networks       |   | 152,283            |        | 145,409               |   |
|                           |   | 4,017,075          |        | 3,993,579             |   |
| Less accumulated  depreciation |   | 3,335,451          |        | 3,148,489             |   |
| **Total**                      |   | **$**              | **681,624** | ** **            | **$**  | **845,090** | ** ** |

 

Depreciation expense for the three months ended March31, 2002 and 2001, and the year ended December 31, 2001, was $186,962, $390,982and $1,019,444, respectively.

 

**NOTE 3 - OTHER ASSET- DEPOSITS**

 

During the year ended December 31, 1999, the Company entered into astandby letter of credit agreement with a bank for $500,000, which bearsinterest at the prime rate (4.75% at December 31, 2001) and matures in June2004. This deposit is used as collateral for the lease of the office space atthe Company’s headquarters in San Diego, California.  The Company has released a portion of this deposit during eachyear of the term of the lease.  TheCompany reduced the letter of credit by $113,603 during the three months endedMarch 31, 2002.  The balance held underthis standby letter of credit agreement at March 31, 2002 amounted to $273,397.

 

During the year ended December 31, 2000, theCompany placed $180,000 into a long-term certificate of deposit, which bearsinterest at the prime rate.  Thecertificate of deposit was used as collateral for the Company’s corporatecredit card program.  During the yearended December 31, 2001, $33,912 of this balance held was released.  During the three months ended March 31, 2002an additional $46,479 was released. Amounts held under this certificate of deposit at March 31, 2002amounted to $101,001.

 

9

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**NOTE 4 - CONVERTIBLEPROMISSORY NOTES**

 

On January 22, 2002, theCompany received $250,286 in exchange for two secured convertible promissorynotes and warrants.  During the periodended March 31, 2002, the Company received an additional $1,465,000 in exchangefor five secured convertible promissory notes. The notes bear interest at 20% per annum, payable at maturity, and aresecured by a first lien on all of the Company’s assets. Unless converted, thenotes mature at the earlier of June 10 2002, the consummation of a corporatetransaction, or an event of default as defined in the terms of the noteagreements, with the loan to be repaid in cash.

 

The notes automaticallyconvert into the securities issued in the next round of qualified financing ifthe gross proceeds received from the next round of qualified financing exceeds$6,600,000 at a conversion rate equal to the offering price in the future roundof financing. However, if the gross proceeds received from the next round ofqualified financing exceed $9,900,000, the holder has the right to convert thenotes into either cash or the securities issued in the next round of qualifiedfinancing, with the amount to be received in cash not to exceed the amount bywhich the gross proceeds received from the next round of qualified financingexceed $9,900,000.

 

An event of default occurred under the noteson January 6, 2002 and they are now due and payable.  The default triggered the issuance of additional warrants to theholders of the notes (the “Default Warrants”). The number of Default Warrantsissued was equal to 50% of the outstanding shares of Common Stock on the dateof the default. A total of 1,482,425 Default Warrants were issued. The warrantshave an exercise price of $0.025 per share and expire on December 10,2004.  A total of 1,338,482 DefaultWarrants were exercised on a net issue based for 1,332,503 shares of CommonStock at March 31, 2002.

 

The Company allocates the proceeds received from debt or convertibledebt with detachable warrants using the relative fair value of the individualelements at the time of issuance. The amount allocated to the bridge andDefault Warrants as a debt discount was calculated at $227,430 using theBlack-Scholes option-pricing model and will be recognized as interest expenseover the period until the notes mature or are converted. The Company recognizedinterest expense of $534,093 and $227,430 during the three months ended March31, 2002 related to the amortization of the debt discount related to thewarrants issued with the Convertible Promissory Notes issued in December 2001and January 2002, respectively. 

 

In accordance with generally accepted accounting principles, thedifference between the conversion price of the notes and the Company’s stockprice on the date of issuance of the notes is considered to be interestexpense. It will be recognized in the statement of operations during the periodfrom the issuance of the debt to the time at which the debt first becomesconvertible.

 

10

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**NOTE 5 - COMMITMENTSAND CONTINGENCIES**

 

## ***Litigation***

 

The Company was among the defendants in the class action civillitigation Norinne Lam & Clifton Kees et al. v. Video StreamInternational, Inc. et al.  That litigation arose out of a securitiesoffering conducted by Grey Venture Capital, Inc. on behalf of the Company’sTechnoVision Communications, Inc. subsidiary prior to its acquisition by theCompany.  The suit was brought against Grey Venture Capital, Inc.,TechnoVision Communications, the Company and certain officers and directors ofeach.  The Company voluntarily settled all civil claims in connection withthe litigation in August 2000, and that lawsuit was dismissed.  Inaddition, the Company sued Grey Venture Capital, Inc. and received a negotiatedsettlement in connection with that litigation.  For additional informationconcerning the litigation, see the Company’s annual reports on form 10-KSB forthe years ended December 31, 2000 and 1999.

 

The Company isaware of a pending investigation by the criminal division of the United StatesAttorney’s office, which likely concerns Grey Venture Capital, Inc.’s offeringof TechnoVision Communications, Inc.’s securities.  The Company has andwill continue to fully cooperate with and support the United States Attorney’sinvestigation.  The Company does not know at this time whether it is asubject of the investigation or what liabilities it may incur, if any, inconnection with the investigation.

 

**NOTE 6 - SERIES A CONVERTIBLE REDEEMABLEPREFERRED STOCK**

 

The Companyrecognized interest expense of $85,401 during the three months ended March 31,2002 related to the amortization of the debt discount related to the warrantsissued with the Series A Convertible Redeemable Preferred Stock issued in June2001.

 

**NOTE 7 -SHAREHOLDERS’ DEFICIT**

 

Common Stock

 

On February 5,2002, WallerSutton exercised its Default Warrants issued in connection with theBridge Financing on a cashless basis in exchange for 1,332,503 shares of commonstock.  After the exercise of thewarrants, WallerSutton owned 56% of the outstanding common stock and 75% of theSeries A Convertible Redeemable Preferred Stock outstanding.

 

Preferred Stock

 

On March 15, 2002, in conjunction with the 1-for-25 reverse stock split,the Board of Directors authorized 1,000,000 shares of $0.001 par value, “blankcheck” preferred stock.

 

11

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Stock Options

 

During the three months ended March 31, 2002,the Company did not grant employees any options under its 1997 or 1999 StockOption Plan. However, a number of options were forfeited under the plans, basedupon termination of employment.

 

The following schedule summarizes the stockoptions transactions:

 
|                           |   | **Stock  Options  Outstanding** |   | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|---------------------------------|--------|---------------------------------------|--------|
|                           |   |                            |   |                                  |   |
| Outstanding, December 31, 2001 |   | 136,010                         |   | $                                     | 76.25  |   |
|                           |   |                            |   |                                  |   |
| Granted                        |   | —                          |   | $                                     | — |   |
| Forfeited                      |   | 31,202                          |   | $                                     | 110.50 |   |
| Exercised                      |   | —                          |   | $                                     | — |   |
|                           |   |                            |   |                                  |   |
| Outstanding, March 31, 2002    |   | 104,808                         |   | $                                     | 66.25  |   |
|                           |   |                            |   |                                  |   |
| Exercisable, March 31, 2002    |   | 44,830                          |   |                                  |   |

 

**NOTE 8 — SUBSEQUENTEVENTS**

 

Additional Convertible Promissory Notes

 

Following the end of the quarter, the Company received $320,000 inexchange for two additional Convertible Promissory Notes.  The notes had the same terms as the othernotes issued during the three months ended March 31, 2002.

 

12

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Going Private Transaction

 

The Company has announced a plan of reorganization as part of a goingprivate transaction.  Effective May 14,2002, the Company assigned substantially all of its operating assets andcertain of its liablities to a subsidiary corporation in exchange for CommonStock of that corporation and the assumption of certain liablities.  Also on May 14, 2002, the Company announcedplans to effect a 1-for-1,000 reverse split of its outstanding CommonStock.  The Company will not issuefractional shares in connection with the reverse split.  The Company has stated that the purpose ofthe split is to reduce the number of holders of its Common Stock to a levelwhere the Company can discontinue its public reporting obligations under theSecurities Exchange Act of 1934, as amended and avoid the possibility of havingto register as an investment company under the Investment Company Act of 1940.

 

13

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*On March 15, 2002, the Company effected a one-for-25 reverse split ofits common stock.  All share and pershare data have been retroactively restated to reflect this reverse stocksplit.*

 

*Following the period ended March 31, 2002, the Company approved areorganization as part of a “going private” transaction.  The initial step of that reorganizationincluded an assignment of assets and liabilities into an operating subsidiary,which took place on May 14, 2002.   See“Subsequent Events” below.*

 

*With the exception of historical matters, the matters discussed in thisAnnual Report are forward-looking statements that involve risks anduncertainties. Forward-looking statements include, but are not limited to,statements concerning anticipated trends in the Company’s sales, costs ofsales, legal expenses, general and administrative expenses, selling expenses,and liquidity and capital resources. The Company’s actual results could differmaterially from the results discussed in such forward-looking statements. Thefollowing discussion of the Company’s financial condition and results ofoperations should be read in conjunction with the Company’s financialstatements and the related notes thereto appearing elsewhere in this Report.*

 

###### **Overview**

 

TeraGlobal CommunicationsCorp., a Delaware corporation (the “Company”) develops real-time collaborationsoftware for standard computer networks, including the Internet.  The Company entered 2002 with two primarygoals: (i) release the initial version of SessionTM collaboration software forthe Windows 2000 and Windows XP operating systems, and (ii) secureapproximately $6 million to finance operations during the year.

 

In an effort to increase its operatingrevenues, the Company focused on broadening the addressable market for itsproducts.  In 2001 it devotedsubstantially all its research and development efforts to delivering a versionof its software that would operate on the Windows 2000 and Windows XP operatingsystems. The initial version of SessionTM, providing point to point voice overIP, video over IP, application sharing and shared workspace applications, wasreleased in February 2002.  Additionaldevelopment work during 2002 is expected to yield a cross-platform version ofSessionTM that operates on the Macintosh OS X operating system, group ormulti-point calling and improvements to network address translation andfirewall traversal.  The Company hasbeen selling initial copies of SessionTM to customers on a license basis.  It is also working with potential channelpartners to establish distribution channels for the resale of SessionTMlicenses.

 

Securingadditional capital to finance operations has proved to be substantially moredifficult.  The Company began evaluatingits financing options in the fourth quarter of 2001. In October 2001, theCompany entered into a term sheet with an investment banker to sell $6.6 to$9.9 million of Convertible Promissory Notes and Warrants in a “best efforts”private placement offering that was to take place in January and February 2002(the “Convertible Note Financing”).  InDecember 2001, the Company entered into agreements to provide financing of upto $2 million through the sale of Convertible Promissory Notes and Warrants(the “Bridge Financing”) that was intended to finance its operations pendingcompletion of the Convertible Note Financing. The notes issued under the Bridge Financing were to be converted into,or repaid from the proceeds of, the Convertible Note Financing.

 

On December10, 2001, the Company sold $750,000 of Convertible Promissory Notes andWarrants to certain institutional investors, including WallerSutton 2000, L.P.,a Delaware limited partnership (“WallerSutton”) and holder of a majority of theCompany’s outstanding Series A Convertible Preferred Stock, as part of theinitial round of funding under the Bridge Financing.  The Convertible Promissory Notes were to be due and payable onJune 10, 2002, but because of an event of default they are currently due andpayable. Their repayment is secured by a first priority lien on all of the

 

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Company’s assets.  The agreements for the Bridge Financingspecified that the withdrawal of the investment banker from the ConvertibleNote Financing would be an event of default under the Bridge Financing. TheCompany continued to finance its operations through first quarter of 2002through the sale of an additional $1.7 million of Convertible Promissory Notesto WallerSutton under the Bridge Financing.

 

In earlyJanuary 2002, the Company was notified that the investment banker waswithdrawing from the Convertible Note Financing. The Bridge Financing providedfor additional warrants (the “Default Warrants”) to be issued to the bridgeinvestors as a result of the default. The Default Warrants vested immediately,and are exercisable for $.025 per share of Common Stock.  They were issued among all of the investorsin the Bridge Financing in an aggregate amount that would, upon exercisethereof, provide the investors in the Bridge Financing with 50% ownership ofthe Company’s outstanding Common Stock (including, for purposes of thecalculation, all derivative securities convertible into Common Stock at orbelow 120% of the market price) as of February 1, 2002.

 

In February 2002, WallerSutton exercised 1,338,482Default Warrants on a net issue basis for 1,332,503 shares of the Company’sCommon Stock, effecting a change in control of the Company. After giving effectto the exercise of those Default Warrants, the Company has approximately2,376,289 shares of Common Stock and 7,468,661 shares of Series A ConvertiblePreferred Stock outstanding. WallerSutton presently owns 1,332,503 shares or56% of the outstanding Common Stock and 5,597,016 shares or 75% of theoutstanding Series A Convertible Preferred Stock.  In addition to the Common Stock and Series A ConvertiblePreferred Stock, WallerSutton purchased in the Bridge Financing: (i) $2,663,858in Convertible Promissory Notes, which are convertible automatically upon theCompany’s next qualified financing which raises $6.6 million, of which $878,858are also convertible at the holder’s election at maturity into the Company’sCommon Stock at the lesser of $5.00 per share or 75% of the 10 day trailingaverage closing bid price; and (ii) 179,476 Bridge Warrants to purchase CommonStock at exercise prices ranging from $4.625 to $5.00 per share.

 

In response tothe need for additional capital, the Company took several actions with theintent to increase its opportunity to secure the capital it required.  After receiving notice of the investmentbanker’s withdrawal from the Convertible Note Financing, the Company reducedits workforce and reduced other operating expenses and the amount of capitalrequired to sustain its operations.  Itthen took several actions to provide the Company with the flexibility to offersecurities that will appeal to different types of prospective investors. TheCompany’s Board of Directors and stockholders approved: (1) an amendment to theCompany’s Certificate of Incorporation to authorize 1,000,000 shares of “blankcheck” Preferred Stock; (2) an amendment to the Company’s Certificate ofIncorporation to effect a 1 for 25 reverse split of the Company’s issued andoutstanding Common Stock; and (3) approval of the formation of a subsidiarycorporation, and the authorization to transfer all of the Company’s operatingassets and certain of its liabilities to the new subsidiary.  The authorization of the blank checkPreferred Stock and the 1 for 25 reverse stock split were effected on March 15,2002.  All of the per share informationcontained in this Report has been adjusted to reflect the impact of the reversesplit. Each of these activities is aimed to increase the Company’s options for,and the likelihood of, a future financing.

 

Despite its efforts theCompany was unsuccessful in securing any interest in the sale of itssecurities, either with an investment banker or with a strategic alliancepartner. TeraGlobal found few investment banking firms that were interested inraising capital for communications software companies. Those that wereinterested in the communications market were investing only in companies withsubstantial revenues and strategic distribution agreements with significantchannel partners.

 

The Companyexpects to need approximately $6 million of additional capital in 2002 in orderto sustain its operations.  In theaggregate the Company has borrowed $2.8 million under the Bridge Financingwhich was secured by a first lien on all of TeraGlobal’s assets, and the Notesissued in connection therewith have become due and payable.  The holders of those Notes have the right toforeclose on the Company’s assets and force a liquidation of the Company on anevent of default (which has occurred).

 

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While the Company was unsuccessful in attractinginterest for investment in a publicly traded entity, it did secure indicationsof interest from venture capitalists and early stage investors for aninvestment in a privately held entity. On the strength of that interest, theCompany was able to secure a term sheet for investment in the Company’stechnology, if it were owned by a privately held entity.

 

Following the end of the quarter, the Companyestablished an operating subsidiary under the name Wave Three Software, Inc., aDelaware corporation (“Wave Three”). The Company assigned substantially all of its assets and liabilities toWave Three, in exchange for the assumption of certain liabilities and 55,000 sharesof Wave Three’s Series B Common Stock. In addition, the holders of the $2.8million of Convertible Promissory Notes agreed to the assignment of thoseConvertible Promissory Notes to Wave Three and to convert the principal andaccrued interest under those Convertible Promissory Notes into shares of WaveThree Series A Convertible Preferred Stock.

 

The initial financing inWave Three is not expected to fill all of that entity’s capitalrequirements.  However, TeraGlobalbelieves, based on its size and current state of business development, that aprivately held entity will be more attractive to the venture capital markets,and more likely to secure any additional funding it requires.  The venture capital investors thatTeraGlobal has approached have stated that they do not invest in publicly tradedentities and that they would be interested in investing only in WaveThree.  The reorganization is thereforethe best available alternative to provide liquidity to some of TeraGlobal’sinvestors, and preserve the opportunity for a going concern value for others.

 

Also duringthe first quarter of 2002, the Company ended its relationship with Mr. GrantHolcomb.  Mr. Holcomb served as theCompany’s Chief Technology Officer and had acted as a member of the Company’sBoard of Directors from 1998 to 2000.  Atthe time of the separation, Mr. Holcomb owed the Company $236,000 instockholder loans, plus accumulated interest. In connection with the separation of employment, the Company acceptedfrom Mr. Holcomb: (i) the return of 30,000 shares of outstanding Common Stock,(ii) a cancellation of 24,000 stock options issued to Mr. Holcomb under theCompany’s 1997 and 1999 Stock Option Plans, (iii) a release of any severanceobligations owed to Mr. Holcomb under his employment agreement, and (iv) ageneral release of claims, as repayment of the outstanding loan.

 

**Results of Operations**

 

The following table sets forth the selected unaudited quarterly resultsof operations for the three months ending March 31, 2002, and March 31, 2001.

 
| **Statements of Operations Data:**         |   | **Three  Months  Ending  March 31, 2002** |       | **Three  Months  Ending  March 31, 2001** |   |
|--------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|--------|
|                                       |   |                                      |       |
|                                       |   |                                      |       |
|                                       |   | **(Unaudited)**                           |       | **(Unaudited)**                           |   |
|                                       |   |                                      |       |                                      |   |
| Sales                                      |   | $                                         | 88,084     |                                      | $      | 174,853 |   |
| Cost of Sales                              |   | 25,775                                    |       | 116,795                                   |   |
|                                       |   |                                      |       |                                      |   |
| General and administrative                 |   | 1,260,713                                 |       | 1,426,242                                 |   |
| Research and development                   |   | 519,212                                   |       | 437,621                                   |   |
| Selling                                    |   | 273,257                                   |       | 306,044                                   |   |
|                                       |   |                                      |       |                                      |   |
| Interest income (expense)                  |   | (870,147                                  | )          | 7,912                                     |   |
|                                       |   |                                      |       |                                      |   |
| Net Loss                                   |   | $                                         | (2,763,261 | )                                         | $      | (2,101,835 | ) |
|                                       |   |                                      |       |                                      |   |
| Basic loss per common share                |   | $                                         | 1.49       |                                      | $      | (2.24 | ) |
|                                       |   |                                      |       |                                      |   |
| Weighted average common shares Outstanding |   | 1,855,756                                 |       | 940,155                                   |   |

 

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**First Quarter 2002 Compared to First Quarter2001.**

 

*Sales*.  Sales for the three months ended March 31, 2002, were $88,084compared to $174,853 in the three months ended March 31, 2001, a decrease of 49percent. Sales for the three months ended March 31, 2002 were predominantlypayments received under a contract with the Naval Research Laboratory toperform development services on a research project.  In addition, the Company sold some initial licenses for itsSessionTM collaboration software.  Salesfor the three months ended March 31, 2001, related to the sale of TeraMedia®software and the resale of hardware to support TeraMedia® software.  The lower sales for the first quarter areattributed to the reduction in the Company’s sales force at the beginning of2002, which reduced prospective sales of the TeraMedia® product.  In addition, the Company’s SessionTM productwas released for sale in mid February. Sales efforts for the balance of the quarter focused on building initialinterest for the SessionTM product,

 

*Cost of Sales*.Cost of sales for the period ended March 31, 2002, was $25,775, with aresulting gross margin of 71 percent. Cost of sales for the period ended March31, 2001, was $116,795, with a resulting gross margin of 33 percent. Cost ofsales for the period ended March 31, 2002 was primarily attributable to payrolland overhead expenses that the Company incurred under the software developmentcontract with the Naval Research Laboratory. Cost of sales for the prior periodwas primarily associated with the resale of hardware components, such ascomputers, cameras, speakers and microphones in support of TeraMedia® productsales.

 

*General and Administrative*.General and administrative expenses were $1,260,713 for the three months endedMarch 31, 2002, compared to $1,426,243 for the three months ended March 31,2001, a decrease of $165,530, or 12 percent. The Company took substantialmeasures to reduce general and administrative personnel and spending early inthe first quarter of 2001, which included a 60 percent reduction in staff.During the first quarter of 2002 the Company again found itself in a cashconstrained position.  The Companyreduced its work force to approximately 35 full-time employees.  It also took other aggressive steps toreduce general and administrative expenses to their lowest practical levelsduring the quarter.

 

*Research andDevelopment*. Research and Developmentexpenses were $519,212 for the three months ended March 31, 2002, as comparedto $437,621 for the three months ended March 31, 2001, an increase of $81,591,or 19 percent. Substantially all of the research and development expenses forthe period ended March 31, 2002 related to payroll for software engineers.

 

*Selling*.Sales and marketing expenditures were $273,257 in the three months ended March31, 2002, as compared to $306,044 in the three months ended March 31, 2001, adecrease of $32,787, or 11 percent. Selling and marketing expenses for the period ended March 31, 2002included primarily salary and expenses in support of the Company’s salesemployees.  As the quarter began, theCompany employed approximately 14 full-time employees in sales and salessupport positions.  Nine of those employeeswere laid off in February 2002 as the Company reduced operating expenses.Selling and marketing expenses were reduced significantly in the second half ofthe period. Conversely, the Company did not have a significant sales team inthe period ended March 31, 2001. Approximately 30 percent of sales and marketing expenses for that wererelated to one event—the attendance of Macworld, a tradeshow showcasingproducts associated with Apple computers.

* *

*Interest Expense. *Interest expense was $908,250 for theperiod ended March 31, 2002, compared to interest expense of $7,073 for thesame period last year. The interest expense was primarily attributed to imputedinterest charges incurred in connection with the Bridge Financing, whichinvolved the sale of

 

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Convertible Promissory Notesand Warrants.  In accordance withgenerally accepted accounting principals, the Company allocated a portion ofproceeds to the Bridge Warrants and Default Warrants issued with theConvertible Promissory Notes issued in December 2001 and January 2002.  This value is then recognized as an interestexpense during the term of the Convertible Promissory Note. When the defaultoccurred in January 2002 the Company was required under generally acceptedaccounting principles to accelerate and recognize in full the imputed interestexpense that arose from the discount. For additional information on the calculation of the interest chargessee the Notes to the Financial Statements included in this Report.

 

**Liquidity and Capital Resources**

 

As of March31, 2002, the Company had cash and cash equivalents totaling $319,322, with aworking capital deficit of $(2,880,628), as compared to a cash balance totaling$511,264 with a working capital surplus of $176,949 at March 31, 2001.

 

For the threemonths ended March 31, 2002, net cash used in operating activities was$1,601,256 compared to $1,696,752 for the period ended March 30, 2001.  The Company has failed to generatesignificant sales to date.  During eachperiod the Company effected a lay off that reduced its staff to approximately30 to 35 employees to reduce expenses. In the period ended March 31, 2002, theCompany has reduced cash used in operating activities to approximately $400,000per month.  Nonetheless, the Companyanticipates that operations would continue to consume significant capitalduring fiscal 2002.

 

The Companygenerated positive cash flows from investing activities during the period endedMarch 31, 2002.  The Company received $113,000from the release of a portion of the security deposit on its facilities in SanDiego, as well as $46,000 from a release of a portion of the security depositsecuring its corporate credit card facility. These proceeds were offset by the purchase of approximately $24,000 incomputer related equipment.  The Companydoes not have substantial excess equipment or other assets from which it couldgenerate additional cash flow from investing activities.

 

The Companyhas funded substantially all of its operations to date from financingactivities.  Net cash provided byfinancing activities was $1,652,210 for the period ended March 31, 2002,compared to $1,497,738 for the period ended March 31, 2001.  The Company anticipated funding itsoperations for 2002 primarily from financing activities.  However, it found few investors willing toinvest in its technology as part of a publicly traded entity.

 

# **Subsequent Events**

 

Following theperiod ended March 31, 2002, the Company filed a Schedule 13E-3 TransactionStatement with the SEC, announcing its intention to reorganize in a “goingprivate” transaction. The reorganization is expected to take place in threesteps, including: (1) an assignment of assets and liabilities from TeraGlobalto Wave Three Software, Inc., a Delaware corporation (“Wave Three”) a whollyowned subsidiary of TeraGlobal (the “Assignment of Assets and Liabilities”),(2) a 1-for-1,000 reverse split of its outstanding Common Stock (the “ReverseSplit”), and (3) following the Reverse Split a merger of the Company into asubsidiary of Wave Three (the “Merger”).

 

The Assignmentof Assets and Liabilities occurred on May 14, 2002, and effected a transfer ofsubstantially all of the Company’s operating assets and liabilities to WaveThree in exchange for an assumption of those liabilities as well as shares ofWave Three’s Common Stock.  Theassumption of

 

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liabilities included assumptionof the $2.8 million of Convertible Promissory Notes from the Bridge Financingthat had matured on the occurrence of an event of default.

 

The Companyhas secured the approval of its Board of Directors and a majority of theholders of its Common Stock to effect the Reverse Split.  In the Reverse Split, the Company will notissue fractional shares.  Instead, theCompany will pay fractional stockholders a pro rata portion of $290 per share($0.29 per share on a pre-split basis) in cash. The Reverse Split is beingeffected with the specific intent to (i) reduce the number of stockholders ofTeraGlobal’s Common Stock to a level where the Company is no longer obligatedto file public reports under the Securities Act of 1934, as amended, and (ii)insure that the Company will not be subject to the regulatory requirements ofthe Investment Company Act of 1940.  Apreliminary information statement describing the Reverse Split was filed withthe SEC on May 14, 2002.  Followingreview, the Company intends to file a final information statement with the SECand mail the information statement to stockholders.  It is expected that the Reverse Split will be effected on orabout June 15, 2002.

 

Following the ReverseSplit, TeraGlobal intends to enter into the Merger.  WallerSutton controls a majority of the voting power of eachclass of TeraGlobal’s outstanding capital stock and will continue to do soafter the Reverse Split.  WallerSuttonplans to approve the Merger with the effect that each of the TeraGlobalstockholders remaining after the Reverse Split will receive shares of CommonStock of Wave Three, and TeraGlobal will become a wholly owned subsidiary ofWave Three.

 

The reorganization is being undertaken primarily because of the need toraise additional capital to fund operations. The Company has experienced increased interest in its SessionTMcollaboration software.  It demonstratedin the Intel trade show booth at the National Association of BroadcastersConvention in April, and is continuing to pursue both customer and channelopportunities.  The Company has alsoreceived preliminary notice of sales of TeraMedia® to two large educationaccounts that use the Apple operating sytem. Based on customer indications, the Company expects that sales for thebalance of 2002 will pick up substantially over the first quarter’s salesnumbers.

 

Nonetheless the Company expected to need approximately $6 million ofadditional capital in 2002 in order to sustain its operations. The Companyfound few investment banking firms that were interested in raising capital forcommunications software companies. Those that were interested in thecommunications market were investing only in companies with substantialrevenues and strategic distribution agreements with significant channelpartners.

 

On May 14, 2002,the Company entered into an Assignment and Assumption Agreement with WaveThree.  Under that agreement, TeraGlobalassigned substantially all of its operating assets to Wave Three.  Wave Three also assumed substantially all ofTeraGlobal’s liabilities, including the $2.8 million in short term ConvertiblePromissory Notes.  Concurrently withthat transaction, WallerSutton and a group of investors contributedapproximately $1.0 million of new capital into Wave Three for shares of WaveThree Series A Convertible Preferred Stock. The initial financing in Wave Three is not expected to fill all of thatentity’s capital requirements.  However,TeraGlobal believes, based on its size and current state of businessdevelopment, that a privately held entity will be more attractive to theventure capital markets, and more likely to attract the capital it requires.The reorganization is therefore the best available alternative to provideliquidity to some of its investors, and preserve the opportunity for goingconcern value for others.

 

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###### **PART II OTHERINFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

The Company hasbeen subject to legal proceedings in the past, and may become involved in newlegal proceedings in the future arising out of the ordinary course ofbusiness.  Additional details concerninglegal proceedings can be found in footnote 5 to the consolidated financialstatements included in this Report. There are no material legal proceedings pending against the Company atthis time.

 

**ITEM 2.  CHANGESIN SECURITIES**

 

On March 15, 2002, the Company effected aone-for-25 reverse split of its common stock. All share and per share data have been retroactively restated to reflectthis reverse stock split.

 

Since the beginning of fiscal 2002, theCompany has experienced a change in control. See the discussion under Item 3. Defaults Upon Senior Securities below.

 

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

 

In October2001, the Company entered into a term sheet with an investment banker to sell$6.6 to $9.9 million of Convertible Promissory Notes and Warrants in a “bestefforts” private placement offering that was to take place in January andFebruary 2002 (the “Convertible Note Financing”).  In December 2001, the Company entered into agreements to providefinancing of up to $2 million through the sale of Convertible Promissory Notesand Warrants (the “Bridge Financing”) pending completion of the ConvertibleNote Financing.  The notes issued underthe Bridge Financing were to be converted into, or repaid from the proceeds of,the Convertible Note Financing.  OnDecember 10, 2001 the Company sold $750,000 of Convertible Promissory Notes andWarrants to certain institutional investors, including WallerSutton, in theinitial financing round under the Bridge Financing.  The Convertible Promissory Notes issued in the Bridge Financingwere to be due and payable on June 10, 2002, and their repayment is secured bya first priority lien on all of the Company’s assets.  As a result of the Company's default thereunder such notes arecurrently due and payable.  Theagreements for the Bridge Financing specified that the withdrawal of theinvestment banker from the Convertible Note Financing would be an event ofdefault under the Bridge Financing.

 

In earlyJanuary 2002, the Company was notified that the investment banker waswithdrawing from the Convertible Note Financing. As a result of the default,the Bridge Financing provided for additional warrants (the “Default Warrants”)to be issued to the bridge investors. The Default Warrants vested immediately,and are exercisable for $0.025 per share of Common Stock.  They were issued among all of the investorsin the Bridge Financing in an aggregate amount that would, upon exercisethereof, provide the investors in the Bridge Financing with 50% ownership ofthe Company’s outstanding Common Stock (including, for purposes of thecalculation, all derivative securities convertible into Common Stock at orbelow 120% of the market price) as of February 1, 2002.

 

In February 2002, WallerSutton exercised1,338,482 Default Warrants on a net issue basis for 1,332,503 shares of theCompany’s Common Stock, effecting a change in control. After giving effect tothe exercise of those Default Warrants, the Company had approximately 2,376,289shares of Common Stock and 7,468,661 shares of Series A Convertible PreferredStock outstanding. WallerSutton presently owns 1,332,503 shares or 56% of theoutstanding Common Stock and 5,597,016 shares or 75% of the outstanding SeriesA Convertible Preferred Stock.  Inaddition to the Common Stock and Series A Convertible Preferred Stock,WallerSutton purchased in the Bridge Financing: (i) $2,663,858 in ConvertiblePromissory Notes, which are convertible automatically upon the Company’s nextqualified financing which raises $6.6 million, of which $878,858 are alsoconvertible at the holder’s election at maturity into the Company’s Common

 

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Stock at the lesser of $5.00 per share or 75%of the 10 day trailing average closing bid price; and (ii) 179,476 BridgeWarrants to purchase Common Stock at exercise prices ranging from $4.625 to$5.00 per share.

 

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

During the period ended March 31, 2002, the Companysecured stockholder approval to certain transactions pursuant to Section 228 ofthe Delaware General Corporation Law by a written consent resolution (the“Consent Resolution”) signed by the owners of approximately fifty seven percent(57%) of the Company’s outstanding voting power.  The specific transactions approved by the Consent Resolutionwere:

 

(1) anamendment to the Company’s Certificate of Incorporation to authorize 1,000,000shares of  “blank check” PreferredStock;

 

(2) anamendment to the Company’s Certificate of Incorporation to effect a reversesplit of the Company’s issued and outstanding Common Stock (the “ReverseSplit”), in which each share of the Company’s Common Stock which is issued andoutstanding   on March 15, 2002  (the  “Existing   Common   Stock”) will automatically be convertedinto a number of new shares of Common Stock equal to 1 divided by 25; and

 

(3) theformation of a subsidiary corporation, and the authorization to transfer all ofthe Company’s operating assets and certain of its liabilities to the new subsidiary.

 

A Certificateof Amendment to the Company’s Certificate of Incorporation effecting items (1)and (2) above was filed with the Delaware Secretary of State on March 15,2002.  The Company formed Wave ThreeSoftware, Inc., a Delaware corporation, as a potential operating subsidiary onApril 2, 2002.  The Company transferredsubstantially all of its assets to Wave Three Software, Inc. on May 14, 2002.

 

**ITEM5.  OTHER INFORMATION**

 

None

 

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**ITEM 6.  EXHIBITSAND REPORTS ON FORM 8K**

 

(a) Exhibits

 
| **Number** |   | **Description**                                                                                                                                                                                |   | **Method of Filing**           |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|
| 2.1        |   | Assignment  and Assumption Agreement dated May 14, 2002,between the Company and Wave  Three.                                                                                                   |   | Filed  herewith.               |
|       |   |                                                                                                                                                                                           |   |                           |
| 2.2        |   | Agreement  dated as of May 14, 2002, between the Company and Wave Three with respect to  a covenant to effect a “going private” transaction.                                         |   | Filed  herewith                |
|       |   |                                                                                                                                                                                           |   |                           |
| 2.3        |   | Preliminary  Information Statement relating to a planned 1-for-1,000 reverse split of the  Company’s outstanding Common Stock                                                             |   | Incorporated  by reference(1)  |
|       |   |                                                                                                                                                                                           |   |                           |
| 2.4        |   | Schedule  13E-3 Transaction Statement                                                                                                                                                          |   | Incorporation  by reference(2) |
|       |   |                                                                                                                                                                                           |   |                           |
| 4.1        |   | Amendment of  Convertible Promissory Notes dated May 14, 2002 between the Company and the  holders of the Convertible Promissory Notes concerning conversion into Wave  Three Preferred Stock. |   | Filed  herewith                |

 

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(1)             Incorporated byreference to the Company’s preliminary Information Statement filed with the SECon May 15, 2002.

(2)             Incorporated byreference to the Company’s Schedule 13E-3 Transaction Statement filed with theSEC on May 15, 2002.

 

(b) Reports on Form 8-K.

 

On January 15, 2002, the Company filed a report on Form 8-K for theperiod ended March 31, 2002 to announce the withdrawal of the investment bankerfrom the Convertible Note Financing.

 

On January 24, 2002, the Company filed a report on Form 8-K to announcea restructuring of its work force to reduce expenses, and additional borrowingunder the terms of the Bridge Financing.

 

On February 7, 2002, the Company filed a report on Form 8-K to announceWallerSutton’s exercise of Default Warrants issued in connection with theBridge Financing, and the resulting change in control of the Company’s CommonStock.

 

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# **SIGNATURES**

 

In accordance with the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, the Registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| DATED:  May 14, 2002 | TERAGLOBAL  COMMUNICATIONS CORP. |
|---------------------------|----------------------------------|
|                      |                             |
|                      |                             | By: /S/  JAMES A MERCER III |
|                      |                             | James A  Mercer III, Chief Financial Officer |
|                      |                             |
|                      |                             | By: /S/  ROBERT RANDALL |
|                      |                             | Robert  Randall, President |

 

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