TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
Quarterly Report pursuant to Section 13 of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 1999
TELEHUB COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 333-61441 36-413-6730
(Jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification Number)
CO-REGISTRANTS
TeleHub Network Services Corporation
TeleHub Technologies Corporation
TeleHub Leasing Corporation
(Exact Name of Co-Registrants as Specified in their Charters)
Illinois 333-61441 36-406-6622
Nevada 333-61441 36-421-3797
Nevada 333-61441 36-335-3108
(Jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
John R. Lawson, Chief Financial Officer
TeleHub Communications Corporation
1175 Tri-State Parkway, Suite 250
Gurnee, Illinois 60031
1 (800) TELEHUB
(Address, including zip code, & telephone number,
of Registrants' principal executive offices)
Indicate by check mark whether the Registrants: Yes X No
------ -------
(1) have filed all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS Indicate by check mark whether the Registrants have
filed all documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes X No
--- ---
On September 30, 1999, the Registrant had 13,059,191 issued and outstanding
common shares.
<PAGE>
TABLE OF CONTENTS FOR FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Consolidated Balance Sheets........................................4
Consolidated Statements of Operations..............................5
Consolidated Statements of Cash Flows..............................6
Notes to Consolidated Financial Statements.........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................21
Item 2. Changes in Securities.............................................22
Item 3. Defaults Upon Senior Securities...................................22
Item 4. Submission of Matters to a Vote of Security Holders...............23
Item 5. Other Information.................................................23
Item 6. Exhibits and Reports on Form 8-K..................................23
SIGNATURE....................................................................24
2
<PAGE>
NOTE CONCERNING FORWARD-LOOKING INFORMATION. Some of the information in this
Report contains forward-looking statements that involve substantial risks and
uncertainties that constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Forward-looking words such as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words identify such statements. Investors should read statements that contain
these words carefully because they: (1) discuss the Registrants' future
expectations; (2) contain projections of the Registrants' future results of
operations or of its financial condition; or (3) state other "forward-looking"
information. The Registrants believe that it is important to communicate such
future expectations to its investors. However, there may be events in the future
that the Registrants have not accurately predicted or over which the Registrants
have no control. These events may include the Registrants' limited operating
history and uncertainty as to the Registrants' future profitability; uncertainty
about the outcome of the bankruptcy case; uncertainty as to the Registrants'
ability to meet business targets and budgets and to develop and implement
operational, sales and marketing and financial systems to manage rapidly growing
operations; competition from other participants in the highly competitive
telecommunications industry; uncertainty as to the Registrants' ability to
obtain financing on acceptable terms to finance its business strategy;
uncertainty as to the Registrants' ability to obtain and protect intellectual
property rights or to develop proprietary products that will receive
intellectual property protection; the possibility that technological
developments may adversely affect the commercial viability of the Registrants'
VASP(TM) technology and the Registrants' other products; unanticipated
regulatory changes that may change the competitive environment to the
Registrants' detriment; the Registrants' efforts to address Year 2000 issues.
Cautionary language in this report provides examples of risks, uncertainties and
events that may cause the Registrants' actual results to differ materially from
the expectations described in the forward-looking statements of this Report.
Occurrence of the events described in this Report could have a material adverse
effect on the Registrants' business, operating results and financial condition.
3
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- -------------
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,727,589 $ 1,713,825
Restricted cash 416,321 289,628
Accounts receivable, net of allowance for
doubtful accounts of $1,093,594 and
$11,590,675 in 1998 and 1999, respectively 3,114,053 628,577
Due from TeraBridge -- 136,729
Prepayments on leases 905,268 828,682
Debt issuance costs 874,338 868,767
Other assets 983,516 955,711
------------- -------------
Total current assets 43,021,085 5,421,919
Property and equipment, net 21,062,255 28,676,348
Prepayments on leases 1,044,085 723,458
Debt issuance costs 4,874,105 4,191,888
Other assets 408,246 298,740
------------- -------------
Total assets $ 70,409,776 $ 39,312,353
============= =============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable $ 5,802,730 $ 18,308,482
Accrued liabilities 4,500,579 5,267,744
Current portion--capital lease obligations 2,393,015 9,587,520
Current portion--long-term debt 281,116 79,317,399
Deferred gain on sale/leaseback 24,477 13,605
Deferred Revenue -- 7,865,730
------------- -------------
Total current liabilities 13,001,917 120,360,480
Capital lease obligations 8,274,635 --
Other long-term debt 67,885,960 --
Accrued liabilities 2,893,850 651,428
Deferred gain on sale/leaseback 29,630 2,860
------------- -------------
Total liabilities 92,085,992 121,014,768
------------- -------------
Stockholders' (deficit):
Convertible preferred stock, $.001 par value;
100,000,000 shares authorized;
4,000,000 shares designated as Series A;
3,500,000 shares issued and outstanding
at December 31, 1998 andS eptember 30, 1999;
liquidation preference $17,500,000 3,500 3,500
Common stock, $.001 par value;
100,000,000 shares authorized;
12,703,537 and 13,059,191 shares issued
and outstanding at December 31, 1998 and
September 30, 1999, respectively 12,704 13,059
Common stock warrants 27,246,651 27,727,849
Additional paid-in capital 40,105,733 42,184,398
Note receivable--stockholder (400,000) (2,062,170)
Deferred compensation (118,422) (29,606)
Accumulated deficit (88,526,382) (149,539,445)
------------- -------------
Total stockholders' (deficit) (21,676,216) (81,702,415)
------------- -------------
Total liabilities and stockholders' (deficit) $ 70,409,776 $ 39,312,353
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Telecommunications services $ 1,454,103 $ 7,691,683 $ 1,613,368 $ 20,700,281
Licenses -- -- 3,000,000 --
------------ ------------ ------------ ------------
1,454,103 7,691,683 4,613,368 20,700,281
------------ ------------ ------------ ------------
Operating expenses:
Operations 10,468,413 21,234,192 25,040,951 61,882,287
General and administrative 2,129,606 386,030 5,337,888 5,301,238
Research and development 2,317,299 (733,616) 5,985,404 4,939,108
Sales and marketing 1,160,985 11,480,874 2,103,503 17,264,520
Depreciation and amortization 1,173,337 1,390,415 3,270,855 4,309,492
------------ ------------ ------------ ------------
Total operating expenses 17,249,640 33,757,895 41,738,601 93,696,645
------------ ------------ ------------ ------------
Operating loss (15,795,537) (26,066,212) (37,125,233) (72,996,364)
------------ ------------ ------------ ------------
Other income (expense):
Amortization of debt discount (1,025,612) (806,629) (1,999,137) (2,396,677)
Interest expense (2,715,366) (3,721,357) (4,012,602) (10,792,923)
Interest income 602,804 91,875 789,883 570,867
Other income 6,131 105,954 16,889 239,627
Net gain on joint venture transaction -- -- -- 24,362,406
------------ ------------ ------------ ------------
Net loss $(18,927,580) $(30,396,369) $(42,330,200) $(61,013,064)
============ ============ ============ ============
Basic and diluted loss per share $ (1.49) $ (2.33) $ (3.35) $ (4.69)
============ ============ ============ ============
Weighted average shares outstanding used in
per share calculations basic and diluted 12,683,654 13,057,633 12,651,034 13,001,224
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1999
------------ ------------
Cash flows from operations
<S> <C> <C>
Net Loss $(42,330,200) $(61,013,064)
Adjustments to reconcile net loss to net cash
used in operating activities
Gain on joint venture transaction (note 4) -- (24,362,406)
Depreciation and amortization 3,270,855 4,309,492
Revenue recognized from Star Telecom agreement (note 5) -- (134,270)
Provisions for bad debts 48,401 10,532,279
Amortization of debt issuance costs -- 651,580
Amortization of deferred compensation 575,701 88,816
Amortization of debt discount 1,999,137 2,396,677
Accretion of debt 1,964,449 9,377,876
Items settled through issuance of stock and
other equity transactions 1,694,452 63,429
Other non-cash credits (99,821) 46,105
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,383,259) (8,046,804)
Due from TeraBridge -- (136,729)
Prepayments on leases 518,169 233,211
Other assets (375,121) (259,036)
Increase (decrease) in liabilities:
Accounts payable 1,441,956 13,851,053
Accrued liabilities 4,056,504 (257,259)
Deferred gain from sale and lease-back 48,628 (13,588)
------------ ------------
Net cash used in operating activities (28,570,149) (52,672,638)
Cash flows from investing activities:
Payments for property and equipment (4,387,757) (7,629,410)
Proceeds from sale and lease-back of equipment 1,220,697 --
Proceeds received on joint venture transaction (note 3) -- 26,812,136
Restricted cash 1,137,498 126,693
------------ ------------
Net cash provided by (used in) investing activities (2,029,562) 19,309,419
Cash flows from financing activities:
Proceeds from debt issue 77,727,084 36,208
Proceeds from exercise of common stock options 1,000,000 416,849
Payment on note receivable - related party (635,340) --
Repayment on note receivable - related party 250,000 --
Payments on capital lease obligations and loans (1,706,225) (2,103,602)
Proceed from loans 12,000,000 --
Repayment of loan (12,000,000) --
------------ ------------
Net cash provided by (used in) financing activities 76,635,519 (1,650,545)
------------ ------------
Net decrease in cash and cash equivalents 46,035,808 (35,013,764)
Cash and cash equivalents balance - beginning of period 9,380,320 36,727,589
------------ ------------
Cash and cash equivalents balance - end of period $ 55,416,128 $ 1,713,825
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and relating to the three and nine months ended
September 30, 1998 and 1999, is unaudited)
1. Basis of Presentation:
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the annual report on the
Form 10-K of TeleHub Communications Corporation ("TCC"or "the Company") for the
year ended December 31, 1998. The results for the three-month and nine-month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
2. Stock Options:
Under variable stock option accounting rules, the Company recorded a
compensation charge of $1,711,342 in the first quarter of 1999 due to two
employees exercising stock options through the issuance of notes receivable to
the Company when the Company's shares were priced at $14.58 per share. Based on
the decline in the Company's stock price from the issuance date to September 30,
1999, the Company reversed the compensation charge. The compensation charge and
subsequent reversal was recorded in research and development and general and
administration expenses in the amounts of $872,635 and $838,707, receptively.
3. Segment Information:
The Company had operated in two business segments: (i) telecommunications
software products; and (ii) telecommunications network services. On May 19,
1999, the Company formed a new venture with Newbridge Networks Corporation
("Newbridge"). The joint venture entity is named TeraBridge Technology
Corporation ("TeraBridge"). At closing, TeleHub Technologies Corporation
("TTC"), which comprised the company software products segment, contributed all
of its assets and liabilities to the joint venture. The joint venture is
accounted for under the equity method of accounting. As a result of the joint
venture, the software products segment ceased operations as of May 19, 1999, and
after that date, is no longer an operating segment of the Company.
7
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
<TABLE>
<CAPTION>
Software Network
Products Services Consolidated
----------- ----------- -----------
THREE MONTHS ENDED SEPTEMBER 30, 1999
<S> <C> <C>
Revenues -- $ 7,691,683 $ 7,691,683
Operating loss -- 26,066,212 26,066,212
Identifiable assets -- 39,312,353 39,312,353
Depreciation and amortization -- 1,390,415 1,390,415
Capital expenditures -- 2,980,413 2,980,413
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues -- $ 1,454,103 $ 1,454,103
Operating loss $ 4,915,645 10,879,892 15,795,537
Identifiable assets 19,271,369 67,791,433 87,062,802
Depreciation and amortization 240,652 932,685 1,173,337
Capital expenditures 562,758 1,835,766 2,398,524
Software Network
Products Services Consolidated
----------- ----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues -- 20,700,281 20,700,281
Operating loss 12,094,935 60,901,429 72,996,364
Identifiable assets -- 39,312,353 39,312,353
Depreciation and amortization 572,183 3,737,309 4,309,492
Capital expenditures 1,360,574 7,168,836 8,529,410
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues 3,000,000 1,613,368 4,613,368
Operating loss 9,019,565 28,105,668 37,125,233
Identifiable assets 19,271,369 67,791,433 87,062,802
Depreciation and amortization 608,084 2,662,771 3,270,855
Capital expenditures 1,250,578 4,025,358 5,275,936
</TABLE>
Identifiable assets are those assets used exclusively in the operations of each
business segment, or which are allocated when used jointly. All of the Software
Products revenues were generated from one customer.
8
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
4. Joint Venture Agreement:
On May 19, 1999, the Company formed a new joint venture with Newbridge
to further develop the Company's Virtual Access Services Platform ("VASP(TM)")
technology and related products that are essential to world-wide, end-to-end,
service-rich communications ("Newbridge Transaction"). Under the terms of the
agreement, the Company's wholly owned subsidiary, TTC, formed a wholly owned
subsidiary, TeraBridge, incorporated in the State of Nevada. TTC contributed all
of its assets and liabilities and TCC contributed all of its assets relating to
its VASP(TM) technology, including all intellectual property rights, to
TeraBridge. Assets contributed by TCC had a book value of zero on the date of
the transfer. The following is a summary of the assets and liabilities TTC
contributed to TeraBridge.
<TABLE>
<CAPTION>
Assets Liabilities
------------------------------------------------------- --------------------------------------------------
<S> <C> <C>
Accounts Receivable 35,198 Accounts Payable (1,345,301)
Allowance for Doubtful Accounts (35,198) Accrued Liabilities (1,054,529)
Prepayments on Leases Current 132,625 Current Portion Capital Lease (26,734)
Other Assets 323,444 Deferred Gain (24,054)
Fixed Assets 6,134,559 Long Term Capital Lease (56,255)
Accumulated Depreciation (1,574,838) Long Term Accrued Liabilities (163,469)
Prepayments on Leases Long Term 31,377
Other Long Term Assets 72,905
---------------- ----------------
Total Assets 5,120,072 Total Liabilities (2,670,342)
================ ================
</TABLE>
Newbridge contributed $52 million directly to TeraBridge. TeraBridge
immediately remitted $22 million of this amount to TTC. TTC then remitted this
$22 million to the Company as a partial payment against an intercompany
liability. Newbridge also remitted $8 million directly to the Company in
exchange for 19% of the common stock of TeraBridge. Under terms of the
Agreement, Newbridge has an option to purchase up to a 50% ownership interest in
TeraBridge in exchange for a $10 million contribution to TeraBridge ("Newbridge
Option"). The Newbridge Option expires on May 19, 2000. The net proceeds
received by the Company were $26.8 million, which represents $30 million of
payment remitted by Newbridge less $3.2 million of costs associated with the
transaction. The Company recorded a total gain on the transaction of $24.4
million, which is equal to the total amount of cash received of $26.8 million
less the net assets contributed by TTC to TeraBridge of $2.4 million.
The Company and Newbridge each have the right to appoint three individuals
to the Board of Directors of TeraBridge. A seventh board member is to be
appointed by mutual agreement between the Company and Newbridge. Accordingly,
TCC is accounting for TeraBridge under the equity method of accounting. The
Company has recorded a full valuation allowance against their equity interest in
the net assets of TeraBridge due to the uncertainty of realization of this
investment amount. Accordingly, the investment is recorded at zero on the
September 30, 1999 financial statements. Further, the Company's equity interest
9
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
in the net loss of TeraBridge for the period from May 19, 1999 (commencement of
operations) to September 30, 1999 is not reflected in the statement of
operations for the quarter ended and nine months ended September 30, 1999.
Recognition of these losses would reduce the Company's investment in TeraBridge
below zero, and the Company has no obligation to fund TeraBridge losses or a
TeraBridge deficit.
The Company provides management and accounting services to TeraBridge. In
exchange for these services TeraBridge pays the Company a monthly fee of
$75,000. Additionally, Newbridge provides management services to TeraBridge for
a monthly fee of $25,000.
The following is a summary of TeraBridge's financial statement amounts as of
September 30, 1999 and for the period from May 19, 1999 (commencement of
operations) to September 30, 1999.
Revenues $ 0
Assets $24,912,459
Liabilities $ 4,073,739
Stockholders' equity $20,838,720
Operating loss $12,016,891
Net loss $11,611,011
5. Star Telecom Agreement:
On June 30, 1999, the Company entered into an agreement with Star Telecom
Network Inc. ("Star Telecom") whereby Star Telecom will use the Company as their
primary domestic carrier for the purpose of terminating domestic and
international traffic into the United States. In connection with this agreement,
Star Telecom has agreed to pay a minimum of $8 million over a two-year period
ending August 2001. The Company began terminating long-distance minutes under
this agreement in August 1999. The Company recorded $8 million as deferred
revenue and has realized revenue of $134,270 as of September 30, 1999.
Under a separate agreement, the Company has obtained an indefeasible right
of usage ("IRU"), pursuant to a twenty-year lease with Star Telecom, to backbone
facilities provided through Star Telecom. Star Telecom will provide 4,800 OS-3
miles of fiber capacity between the Company's switch sites and its points of
presence (`POP's"). The total cost of the contract is estimated to be
approximately $8 million, which was recorded as a fixed asset.
10
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
6. Supplemental Cash Flow Disclosure:
Pursuant to the Initial Note Offering dated July 30,1998, the Company was
required to issue to existing bondholders an additional 1,084,756 common stock
warrants with an exercise of $.01. These warrants were required to be issued
since the Company did not undertake an initial public offering by July 30, 1999.
The Company valued these warrants under the Black-Scholes Valuation model at
$417,769. This amount was capitalized as debt issuance costs at July 30, 1999.
7. Subsequent Events:
On October 27, 1999 ("Petition Date"), co-Registrant TeleHub Network
Services Corporation ("TNS") filed a voluntary petition ("Petition") for
reorganization under the federal bankruptcy laws. In re TeleHub Network Services
Corporation, No. 99-B-33272 (N.D. Ill., filed October 27, 1999) (the "Bankruptcy
Case"). TNS is currently operating its business as debtor-in-possession pursuant
to Bankruptcy Code sections 1107 and 1108. The Bankruptcy Court approved a few
preliminary matters but the Bankruptcy Case is still in the initial stages. A
creditors committee has been appointed, but a trustee and receiver have not been
appointed.
TNS determined that a financial restructuring was necessary for its
long-term survival because the ATM network did not generate sufficient revenue
to fund its operations at a sustainable level. TNS's backbone network leased
telecommunications capacity from MCI Worldcom. Partly due to problems with the
adequacy and timeliness of telecommunications services provided by MCI Worldcom,
TNS could not provision sufficient customers onto its network to generate the
revenue necessary to sustain operations and to pay the monthly charges from MCI
Worldcom. The average monthly charges of approximately $3.5 million were
purportedly secured by TNS's accounts receivables and related collateral. At
September 30, 1999, the outstanding amounts billed by MCI Worldcom reached
approximately $9.5 million, which TNS disputes. On September 30, 1999, TNS
terminated the agreement with MCI Worldcom for cause; MCI Worldcom terminated
service to TNS when TNS did not provide adequate assurances of its ability to
pay the disputed balance. TNS accordingly ceased network operations on September
30, 1999. Given this situation, TeleHub Communication Corporation ("Registrant")
could not obtain additional financing to fund TNS's operations. The Company had
received inquiries about selling TNS, but potential buyers were concerned about
TNS's outstanding obligations. After unsuccessful attempts to renegotiate its
principal obligations, TNS concluded that the petition was necessary to preserve
the value of its assets while it attempted to restructure.
11
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Until a plan of reorganization is approved by creditors and confirmed
by the Bankruptcy Court, the Company's long term business plan, liquidity and
adequacy of capital resources cannot be determined. TNS cannot predict when a
plan will be approved and confirmed due to the preliminary stage of the
Bankruptcy Case. In particular, the creditors' committee has the right to review
and object to certain business transactions and will participate in the
negotiation of TNS's reorganization plan.
TNS's Petition constitutes a default under Section 6.1(8) of the
Indenture governing the Company's 13.875% Senior Secured Notes ("Bonds").
Indenture section 6.2 further provided that the Bonds automatically became
immediately due and payable when TNS filed the Petition. The Company is pursuing
a bondholders waiver to rescind acceleration of indebtedness. As of November 15,
1999, the Company has not obtained this waiver. Additionally, as a result of
non-payment on the company's capital lease and other long-term debt obligations,
this indebtedness also became immediately due and payable.
As a result of TNS's Petition, the Company has reclassed all long-term
and capital lease obligations as current on the Balance Sheet as of September
30, 1999. Since TNS's network was shutdown as of September 30, 1999, the Company
was unable to continue to provide service to its customers, and accordingly the
Company has reserved against substantially all of the of account receivables at
September 30, 1999.
On November 4, 1999, the Company and FDN, Inc. ("FDN") executed an
Agreement and Plan of Share Exchange ("Plan") to transfer all TNS capital stock
to FDN in exchange for FDN capital stock. Closing of the Plan is subject to
customary conditions, especially obtaining all regulatory approvals, receiving
the consent of the holders of Company's 13.875% Senior Secured Notes due 2005
("Bonds"), and approval from the Bankruptcy Court. The Bond Indenture would
require the Company to redeem the Bonds if it sells TNS; since the Registrant
will not receive cash consideration in the Plan, the Company will request the
Bondholders to waive the redemption obligation. The Company and FDN closing
would occur after the Bankruptcy court approves the Plan.
Pending closing, FDN intends to supervise TNS's operations pursuant to
a Management and Operating Agreement ("TNS Management Agreement"); this
arrangement requires approval from the Bankruptcy Court. TNS has applied for
such approval on November 5, 1999. If the Bankruptcy Court approves the TNS
Management Agreement, FDN will contribute working capital to TNS, which should
permit TNS to recommence operations.
The liquidity and capital resources of the Company and TNS may also be
affected by decisions made in the Bankruptcy Case with respect to its equipment
and real property leases, and expenses incurred in the Bankruptcy Case. For
example, TNS must pay legal and other advisory fees and expenses associated with
the Bankruptcy Case. In order for TNS to reorganize and emerge from the
Bankruptcy Case, the court must confirm a plan of reorganization. If TNS cannot
obtain confirmation of a reorganization plan, its creditors or equity security
holders may seek a liquidation of the Company by conversion to a liquidation
proceeding. In that event, TNS expects the assertion of additional liabilities
and claims which are not presently reflected in the Company's condensed
consolidated financial statements. In the event of a liquidation, the amounts
reflected in the condensed consolidated financial statements would be subject to
adverse adjustments in amounts which, while not presently determinable, could be
material.
12
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this report. The results shown herein are not necessarily indicative of the
results to be expected in any future periods. This discussion contains
forward-looking statements based on current expectations, which involve risks
and uncertainties. Actual results and timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in this report.
Overview
After three years of research and development, the Company was formed
in January 1996. The Company has developed what it believes is the first
universal ATM-based network with the potential to integrate the delivery of
voice, data and video on one network. The Company launched commercial voice
services on its network in December 1997 and since then has entered into
thirty-nine contracts, ranging from one to three year terms, to provide long
distance services. As customers transition their traffic onto TeleHub's network,
the Company expected significant growth in revenues. However, on September 30,
1999, TNS terminated the agreement with MCI Worldcom for cause. MCI Worldcom
terminated service to TNS when TNS did not provide adequate assurances of its
ability to pay the disputed balance. TNS accordingly ceased network operations
on September 30, 1999. On October 27, 1999, TNS filed a voluntary petition for
reorganization under the federal bankruptcy laws. TNS determined that a
financial restructuring was necessary for its long-term survival because the ATM
network did not generate sufficient revenue to fund its operations at a
sustainable level.
On November 4, 1999, the Company and FDN, Inc. ("FDN") executed an
Agreement and Plan of Share Exchange ("Plan") to transfer all TNS capital stock
to FDN in exchange for FDN capital stock. Closing of the Plan is subject to
customary conditions, especially obtaining all regulatory approvals, receiving
the consent of the holders of Company's 13.875% Senior Secured Notes due 2005
("Bonds"), and approval from the Bankruptcy Court. The Bond Indenture would
require the Company to redeem the Bonds if it sells TNS; since the Registrant
will not receive cash consideration in the Plan, the Company will request the
Bondholders to waive the redemption obligation. The Company and FDN closing
would occur after the Bankruptcy court approves the Plan.
Pending closing, FDN intends to supervise TNS's operations pursuant to
a Management and Operating Agreement ("TNS Management Agreement"); this
arrangement requires approval from the Bankruptcy Court. TNS has applied for
such approval on November 5, 1999. If the Bankruptcy Court approves the TNS
Management Agreement, FDN will contribute working capital to TNS, which should
permit TNS to recommence operations.
Results of Operations
The following table sets forth-certain unaudited financial information
from the Statements of Operations as a percentage of total revenues.
13
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Three Months Ended Nine Months Ended
September 30 September 30
Statement of Operations Data: 1998 1999 1998 1999
---- ---- ---- ----
Revenue 100% 100% 100% 100%
Operating expenses other than
depreciation and amortization 1105% 421% 834% 432%
Depreciation and amortization 81% 18% 71% 21%
---- ---- ---- ----
Total operating expenses 1186% 439% 905% 453%
---- ---- ---- ----
Operating loss (1086%) (339%) (805%) (353%)
---- ---- ---- ----
Amortization of debt discount (71%) (10%) (43%) (12%)
Interest expense, net (145%) (47%) (70%) (49%)
Other income 0% 1% 0% 119%
---- ---- ---- ----
Net Loss (1302%) (395%) (918%) (295%)
==== ==== ==== ====
Comparison of Three Months Ended September 30, 1999 and September 30, 1998
On March 31, 1999, the Company signed a definitive agreement with
Newbridge Networks Corporation ("Newbridge") to form a new venture to further
develop the Company's Virtual Access Services Platform ("VASP(TM)") technology
and related products that are essential to world-wide, end-to-end, service-rich
communications ("Newbridge Transaction"). Under the terms of the agreement, the
Company's wholly owned subsidiary TeleHub Technologies Corporation ("TTC"),
formed a wholly owned subsidiary ("TeraBridge"), incorporated in the State of
Nevada. At closing (May 19, 1999), TTC contributed all of its assets and
liabilities and TCC contributed all of it assets relating to its VASP(TM)
technology, including all intellectual property rights, to Terabridge. The new
joint venture is accounted for under the equity method, beginning May 19, 1999.
A comparison of the three and nine months ended September 30, 1999 and September
30, 1998 are affected by this transaction.
Revenue
Revenue increased $6.2 million to $7.7 million from $1.5 million in the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998, respectively. TeleHub Network Services ("TNS") generated all
of the revenue from network operations during the three months ended September
30, 1999. TNS had thirty-nine customers contracts as of September 30, 1999,
compared to eighteen as of September 30, 1998.
Operating expenses
Operating expenses increased $16.6 million to $33.8 million from $17.2
million for the three months ended September 30, 1999 and 1998, respectively.
Bad debt expense increased by $9,783,000. Bad debt expense increased
significantly since substantially all accounts receivables were fully reserved
as a result of TNS's network being shutdown and it was unable to continue to
provide service to its customers. Network circuit costs increased $9,501,000 for
the three months ended September 30, 1999 compared to the three months ended
September 30, 1998. Significant operating cost increases were necessary to
14
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
expand the network to efficiently handle anticipated subscriber traffic.
Slightly offsetting higher operating expenses was a $2,828,000 decrease in
personnel costs for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. Lower personnel costs reflect a decrease
in employees from 207 as of September 30, 1998 to 186 as of September 30, 1999.
On May 19, 1999, 112 employees were transferred from the Company to TeraBridge.
Operating expenses are primarily variable and are expected to increase in future
periods as revenue increases. Research and development decreased by $3.0 million
to ($0.7) million from $2.3 million for the three months ended September 30,
1999 and 1998, respectively. Research and development cost for the three months
ended September 30, 1999, reflect a reversal of a compensation charge recorded
in the first quarter of 1999, under variable option accounting rules (see
footnote 2). Research and development costs will be insignificant in the future
since these costs are primarily incurred by the TTC Software Products segment,
which ceased operations upon the closing of the Newbridge Transaction.
Total TNS operating expenses increased approximately $21.5 million to
$33.8 million from $12.3 million for the three months ended September 30, 1999
and 1998, respectively. This increase related to the network and infrastructure
expansion. Total TTC operating expenses decreased approximately $4.9 million
since TTC did not incur expenses after May 19, 1999, when all assets and
liabilities were contributed to TeraBridge as part of the Newbridge Transaction.
Amortization of debt discount
Amortization of debt discount for the three months ended September 30,
1999 amounted to $807,000 in connection with notes issued by the Company.
Interest income (expense), net
Net interest expense for the three months ended September 30, 1999 was
$3.6 million as compared to $2.1 million for the three months ended September
30, 1998. Gross interest expense increased approximately $1 million since the
Initial Note Offering was consummated on July 30, 1998. Interest income
decreased $511,000 as a result of decreased cash and equivalent balances
available for short-term investments.
Net loss
The Company reported a net loss of $30.4 million and a net loss of
$18.9 million for the three months ended September 30, 1999 and 1998,
respectively. The Company has not recorded any benefit for income taxes due to
the uncertainty surrounding the realization of the favorable tax attributes in
future tax returns. Accordingly, the Company has recorded a valuation allowance
against its total net deferred tax assets.
15
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Comparison of Nine Months Ended September 30, 1999 and September 30, 1998
Revenue
Revenue increased $16.1 million to $20.7 million from $4.6 million in
the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998, respectively. TeleHub Network Services ("TNS") generated all
of the revenue from network operations during the nine months ended September
30, 1999. TTC recorded no revenue for the nine months ended September 30, 1999.
For the nine months ended September 30, 1998, TTC accounted for the majority of
the revenue when they licensed VASP(TM) software to Newbridge for $5.0 million,
$3.0 million of which was recorded in 1998 while $2 million was recorded in
1997.
Operating expenses
Operating expenses increased $52.0 million to $93.7 million from $41.7
million for the nine months ended September 30, 1999 and 1998, respectively. The
majority of the expense increase related to: network circuit costs, bad debt
expense, consulting fees, personnel costs, network equipment lease payments and
depreciation expense increased by $28,504,000, $10,484,000, $4,061,000,
$3,807,000, $1,629,000 and $1,039,000, respectively. Significant operating cost
increases were necessary to expand the network to efficiently handle anticipated
subscriber traffic and to manage the financial and administrative aspects of the
business. Bad debt expense increased significantly since substantially all
accounts receivables were fully reserved as of a result of TNS's network being
shutdown and it was unable to continue to provide service to its customers.
Increases in personnel costs were offset by the transfer of 112 employees to
TeraBridge, whose expenses are no longer consolidated with TCC subsequent to May
19, 1999. Research and development expenses decreased by $1.0 million to $4.9
million from $5.9 million for the nine months ended September 30, 1999 and 1998,
respectively. Research and development costs will decrease in the future since
these costs were primarily incurred by the TTC Software Products segment, which
ceased operations upon the closing of the Newbridge Transaction.
Total TNS operating expenses increased approximately $51.9 million to
$81.6 million from $29.7 million for the nine months ended September 30, 1999
and 1998, respectively. This increase related to the network and infrastructure
expansion. Total TTC operating expenses increased approximately $0.1 million to
$12.1 million from $12.0 million for the nine months ended September 30, 1999
and 1998, respectively. This increase primarily related to accelerated research
and development efforts. TTC did not incur expenses after May 19, 1999, when all
assets and liabilities were contributed to TeraBridge as part of the Newbridge
Transaction.
16
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Amortization of debt discount
Amortization of debt discount for the nine months ended September 30,
1999 amounted to $2.4 million in connection with notes issued by the Company.
Interest income (expense), net
Net interest expense for the nine months ended September 30, 1999 was
$10.2 million as compared to $3.2 million for the nine months ended September
30, 1998. Gross interest expense increased approximately $6.8 million as a
result of the Initial Note Offering on July 30, 1999. Interest income decreased
$0.2 million as a result of decreased cash and equivalent balances available for
short-term investments.
Net gain of the joint venture
In the nine months ended September 30, 1999, the Company recorded a
gain of $24.4 million on the Newbridge Transaction.
Net loss
The Company reported a net loss of $61.0 million and $42.3 million for
the nine months ended September 30, 1999 and 1998, respectively. The Company has
not recorded any benefit for income taxes due to the uncertainty surrounding the
realization of the favorable tax attributes in future tax returns. Accordingly,
the Company has recorded a valuation allowance against its total net deferred
tax assets.
Liquidity and Capital Resources
To fund its operations, the Company has raised gross proceeds of
approximately $42.5 million of equity capital through two private placements
(the "Spring 1997 Offering" and the "Fall 1997 Offering") and in July 1998, the
Company completed an initial note offering ("Initial Note Offering") yielding
$65.9 million in net proceeds after deducting offering expenses and repaying a
$11.4 million bridge loan. The Company also received a $1 million equity
investment from the initial purchaser.
On May 19, 1999, the Company received $26.8 million of net proceeds
from Newbridge in conjunction with the TeraBridge joint venture transaction.
To date the Company had satisfied its cash requirements primarily
through the sale of capital stock, the Initial Note Offering, lease financing
and loans from affiliates. The Company's principal uses of cash were to fund
working capital requirements and capital expenditures and to service its lease
financing obligations.
17
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
For the nine months ended September 30, 1999, net cash used in
operations was $52.7 million primarily related to net losses, accounts
receivable growth and deduction of the gain recognized on the Newbridge
transaction, and offset by bad debt expense, debt accretion and amortization of
debt discount which requires no cash outlay and increases in accounts payable.
Net cash provided by investing activities was $19.3 million for the nine months
ended September 30, 1999. This primarily related to proceeds received on the
Newbridge Transaction offset by capital expenditures for network equipment,
computer software and facility expansion. Net cash used in financing activities
was $1.7 million for the nine months ended September 30, 1999, primarily related
to payments on capital leases and proceeds received from the exercise of
employee stock options. The Company obtained additional capital lease financing
of approximately $1 million during the nine months ended September 30, 1999. The
Company is committed to make payments under various operating leases.
As a result of TSN's filing for reorganization under the Federal
Bankruptcy Laws, the Company can provide no assurance that it can satisfy its
creditors or fund its other liabilities as they come due. TNS's Petition
constitutes a default under Section 6.1(8) of the Indenture governing the
Company's 13.875% Senior Secured Notes ("Bonds"). Indenture section 6.2 further
provided that the Bonds automatically became immediately due and payable when
TNS filed the Petition. The Company is pursuing a bondholders waiver to rescind
acceleration of indebtedness. As of November 15, 1999, the Company has not
obtained this waiver. Additionally, as a result of non-payment on the company's
capital lease and other long-term debt obligations, this indebtedness also
became immediately due and payable.
The liquidity and capital resources of the Company and TNS may also be
affected by decisions made in the Bankruptcy Case with respect to its equipment
and real property leases, and expenses incurred in the Bankruptcy Case. For
example, TNS must pay legal and other advisory fees and expenses associated with
the Bankruptcy Case. In order for TNS to reorganize and emerge from the
Bankruptcy Case, the court must confirm a plan of reorganization. If TNS cannot
obtain confirmation of a reorganization plan, its creditors or equity security
holders may seek a liquidation of the Company by conversion to a liquidation
proceeding. In that event, TNS expects the assertion of additional liabilities
and claims which are not presently reflected in the Company's condensed
consolidated financial statements. In the event of a liquidation, the amounts
reflected in the condensed consolidated financial statements would be subject to
adverse adjustments in amounts which, while not presently determinable, could be
material.
On November 4, 1999, the Company and FDN Inc. ("FDN") executed an
Agreement and Plan of Share Exchange ("Plan") to transfer all TNS capital stock
to FDN in exchange for FDN capital stock. FDN would assume all the TNS assets
and liabilities and be responsible for providing all working capital on a going
forward basis. Upon completion of this transaction, the Company would own
approximately 40% of FDN's capital stock. Closing of the Plan is subject to
customary conditions, especially obtaining all regulatory approvals, receiving
the consent of the holders of Company's 13.875% Senior Secured Notes due 2005
("Bonds") and approval from the Bankruptcy Court.
Year 2000 Readiness
The term "Year 2000 Issue" generally describes the various problems
that might result from improper processing of dates and date-sensitive
calculations involving dates in the Year 2000 and beyond. The Year 2000 Issue
results from computer programs using two digits rather than four digits to
define the applicable year, so that all dates are interpreted as being between
1900 and 1999. Computers and other equipment using such programs will
incorrectly interpret dates after the year 1999. Such misinterpretation might
cause system failures or miscalculations and thereby disrupt operations, for
example, temporary inability to process transactions, to send invoices, or to
engage in other normal business activities. Year 2000 issues could affect the
Company through the Year 2000 as it relates to its own computer systems and
equipment as well as that of third parties with whom the Company conducts
business. On September 30, 1999, TNS ceased network operations and dismissed a
majority of its personnel. Although TNS's network was Year 2000 compliant as of
September 30, 1999, since the network is no longer operational no further
evaluation is being performed. TeraBridge is a joint venture with Newbridge, its
18
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
results are not c0nsolidated in TCC financial results. The Company accounts for
TeraBridge under the equity method of accounting. The remaining Year 2000
discussion solely pertains to TeraBridge.
Readiness Task Force
Since the TeraBridge's formation, management has been aware of Year
2000 issues and has sought Year 2000 compatibility in the development of
VASP(TM) and the TNS network. TeraBridge has created a task force to evaluate
its Year 2000 readiness as it may affect the TeraBridge's operations. The task
force has established a five-step process in order to achieve Year 2000
readiness. These steps are (1) identification, (2) assessment, (3) remediation,
(4) implementation and (5) maintenance.
Identification. The task force has inventoried all technologies used in
TeraBridge's business. These technologies include hardware, software and
embedded microchips. The task force reviewed both internal systems (including
VASP(TM), information technology assets, equipment and other systems); and
external systems (i.e., third-party manufactured products used by the
TeraBridge, and issues with customers, vendors and suppliers).
The task force identified eight major areas (involving 71 different
products) in which TearBridge utilizes third party hardware and software.
Assessment. The inventory disclosed different technologies used by
TeraBridge, the task force has assessed the Year 2000 compatibility of each
inventoried item. The task force verifed Year 2000 compatibility through testing
or from the manufacturer's documentation. To obtain such manufacturer
documentation, the task force searched the manufacturer's web site or soliciting
an official Year 2000 compatibility certificate. Of particular importance in
this assessment step is monitoring the Year 2000 readiness efforts of
TeraBridge's critical vendors and customers. TearBridge has compiled enough
information to evaluate whether potential Year 2000 issues with third-parties
might have a material adverse effect on operations. The conclusion is that it
will not.
The task force assessed the Year 2000 compliance of third party
hardware and software utilized in VASP(TM). Such assessment included contacting
the vendor's representatives and examining technical document for the products.
The task force has determined that, of the 71 different third party products, 43
products (60.6%) are Year 2000 compliant, 17 products (23.9%) are non-compliant,
7 products (9.9%) do not use date-sensitive data, and 4 products (5.6%) are
still being assessed. More recent Year 2000 compliant versions are available for
15 of the non-compliant products, and compliant versions are under development
for the other two non-compliant products. The task force expects to test under
Year 2000 scenarios, identify the extent of any non-compliance and assess the
possible financial consequences for the remainder of the year.
19
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Remediation. When finding systems that are Year 2000 incompatible, the
task force will then determine the appropriate remedial action for that system;
this determination will be performed on a case-by-case basis. Remedial actions
could involve replacement, upgrading, software patches, and substitution with
other products. TeraBridge anticipates that remedial actions will require use of
its internal resources, third-party manufacturers, suppliers and vendors and
potentially additional third-party consultants, as necessary. The remediation
will then be performed and thoroughly tested. The task force has not yet
encountered any items requiring a major remediation effort. Since TeraBridge has
issued only four VASP licenses and these licenses are not producing any
significant revenue to the licensee, TeraBridge does not anticipate any
emergency remediation expenses or liabilities.
Implementation. TeraBridge completed all implementations and is fully
Year 2000 ready. However, TeraBridge could encounter a significant internal or
external Year 2000 issues which, if not remediated in a timely manner, could
have a material adverse effect on Terabridge's business, financial condition and
results of operations.
Maintenance. To maintain Year 2000 compatibility after completion of
the compliance plan, the task force drafted Year 2000 business rules. These
rules covered both internally created applications and purchases of
technologies. TeraBridge's employees will be required to ensure the applications
they create are Year 2000 compatible, with the assistance of TeraBridge's
information systems department. All future purchases of hardware, software and
other technologies will require Year 2000 compatibility certification or similar
documentation.
Contingency Planning.
TeraBridge continues to address contingency planning as situations
arise during the remainder of the year. TeraBridge currently does not foresee
extensive contingency planning efforts. Principal activities will include
backing up all databases and keeping the information systems department's
schedule clear in January of 2000.
Costs.
The total costs for becoming 100% Year 2000 compatible for both
TeraBridge and TNS will not be significant, less than $100,000. TeraBridge
believes that adequate resources have been allocated for this purpose and does
not expect to incur significant expenditures to resolve Year 2000 issues.
However, there can be no assurance that TeraBridge will identify all Year 2000
problems in its systems in advance of their occurrence or that the Company can
successfully remedy any problems that are discovered. The expenses of
TeraBridge's efforts to address such problems, or the expenses or liabilities to
which TeraBridge may become subject as a result of such problems, could
materially adversely affect TeraBridge's business, prospects, operating results,
financial condition.
20
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
TNS Bankruptcy Filing. As reported in Registrants' November 10,
1999 Current Report on SEC Form 8-K, on October 27, 1999
("Petition Date") co-registrant TeleHub Network Services
Corporation ("TNS") filed a voluntary petition ("Petition") for
reorganization under the federal bankruptcy laws. In re TeleHub
Network Services Corporation, No. 99-B-33272 (N.D. Ill., filed
October 27, 1999) (the "Bankruptcy Case"). That case is still in
the preliminary stage.
TNS is currently operating its business as
debtor-in-possession pursuant to Bankruptcy Code sections 1107 and
1108. On November 2, 1999, the Bankruptcy Court approved:
o TNS employing legal counsel; and
o an extension of time for TNS to file schedules, statement of
financial affairs and other required documents.
TNS has also requested the court's approval of the TNS Management
Agreement (see Current Report on SEC Form 8-K filed November 10,
1999).
MCI/Worldcom Dispute. TNS's telecommunications network leased
capacity from MCI/Worldcom. The average monthly charges of
approximately $3.5 million were secured by TNS's accounts
receivables and related collateral. Partly due to problems with
the adequacy and timeliness of MCI/Worldcom's service, TNS could
not provision sufficient customers onto its network to generate
the revenue necessary to pay the monthly charges to MCI/Worldcom.
At September 30, 1999, the outstanding amounts had reached
approximately $9.5 million. When TNS could not provide adequate
assurances of its ability to pay the outstanding balance,
MCI/Worldcom terminated service to TNS. TNS accordingly ceased
network operations on September 30, 1999.
MCI/Worldcom has not yet asserted any claims against TNS or
Registrant. Due to the automatic stay in the Bankruptcy Case,
MCI/Worldcom must initiate any litigation against TNS as part of
the Bankruptcy Case. TNS believes that it has meritorious defenses
to any claims by MCI/Worldcom, especially the inadequacy of the
services provided to TNS.
21
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Item 2. Changes in Securities.
(a) None of the constituent instruments defining the rights of the
holders of any class of registered securities was materially
modified.
(b) Not Applicable.
(c) Issuance of Unregistered Securities. During the three months ended
September 30, 1999, TeleHub Communications Corporation
("Registrant") issued a total of 3,360 common shares and warrants
to purchase 1,234,756 common shares and no debt securities. None
of those securities were sold in registered offerings and
Registrant did not utilize an underwriter when issuing those
securities. The following tables summarize all non-registered
sales of securities during the three months ended September 30,
1999:
<TABLE>
<CAPTION>
Equity Securities
Date Title Amount Type of Issuance Consideration Exemption
- ---- ----- ------ ---------------- ------------- ---------
<C> <S> <S>
8/15/99 Common Shares 1,020 Option Exercise $5,100 Sec. 4(2)
8/16/99 Common Shares 2,340 Option Exercise $11,700 Sec. 4(2)
</TABLE>
<TABLE>
<CAPTION>
Warrants to Purchase Common Shares
Per Share
Date Shares Purchasable Exercise Price Class of Holder Exemption
- ---- ------------------ -------------- --------------- ---------
<C> <S>
7/31/99 1,084,756* $0.01 Accredited Investors Sec. 4(2)
9/3/99 150,000 $0.01 Vendor Sec. 4(2)
</TABLE>
* Represents increase in number of shares purchasable under the warrants
issued July 30, 1998; those warrants required this increase if the
Company's common shares were not trading on a securities exchange by July
30, 1999.
Item 3. Defaults Upon Senior Securities.
(a) TNS's Petition constitutes a default under Section 6.1(8) of the
Indenture governing the Company's 13.875% Senior Secured Notes
("Bonds"). Indenture section 6.2 further provides that the Bonds
automatically became immediately due and payable when TNS filed
the Petition. On the Petition Date, the aggregate accreted value
of the Bonds was approximately $98.8 million [13.875% interest,
computed daily and compounded on January 31 and July 31].
Registrant has not yet repaid the Bond's accreted value, which
increases by approximately $37,000 per day, and reached
approximately $99.3 million by November 12, 1999.
(b) Not Applicable.
22
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for a vote of Security Holders.
Item 5. Other Information
Certain material matters were recently reported on Registrant's
Current Report on SEC Form 8-K dated November 10, 1999. These
matters included:
o The Bankruptcy Case;
o The proposed sale of TNS to FDN, Inc.; and
o Changes in the officers and directors for Registrant and
co-Registrants.
These events occurred after September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. No exhibits are filed with this Quarterly Report.
(b) Reports on Form 8-K. During the three months ended September 30,
1999, Registrants did not file any Current Reports on SEC Form
8-K.
23
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELEHUB COMMUNICATIONS CORPORATION
TELEHUB NETWORK SERVICES CORPORATION
TELEHUB TECHNOLOGIES CORPORATION
TELEHUB LEASING CORPORATION
November 12, 1999 By: /s/ CARL ALU
---------------------------------------------------
Carl Alu, President of:
TeleHub Communications Corporation
TeleHub Technologies Corporation
TeleHub Leasing Corporation
November 12, 1999 By: /s/ TERRY DIDARDICHUK
---------------------------------------------------
Terry Didardichuk
President of TeleHub Network Services Corporation
November 12, 1999 By: /s/ JOHN R. LAWSON
--------------------------------------------------
John R. Lawson, Chief Financial Officer
of Registrants
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001035418
<NAME> TELEHUB COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,713,825
<SECURITIES> 0
<RECEIVABLES> 12,219,252
<ALLOWANCES> 11,590,675
<INVENTORY> 0
<CURRENT-ASSETS> 5,421,919
<PP&E> 36,718,649
<DEPRECIATION> 8,042,301
<TOTAL-ASSETS> 39,312,353
<CURRENT-LIABILITIES> 120,360,480
<BONDS> 0
0
3,500
<COMMON> 13,059
<OTHER-SE> (81,685,856)
<TOTAL-LIABILITY-AND-EQUITY> 39,312,352
<SALES> 0
<TOTAL-REVENUES> 20,700,281
<CGS> 0
<TOTAL-COSTS> 37,519,881
<OTHER-EXPENSES> 31,574,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,618,733
<INCOME-PRETAX> (30,616,695)
<INCOME-TAX> 0
<INCOME-CONTINUING> (61,013,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,013,064)
<EPS-BASIC> (4.69)
<EPS-DILUTED> (4.69)
</TABLE>
