U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the Fiscal Year Ended December 31, 1998
Commission file number 333-61441
TELEHUB COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 36-413-6730
(Jurisdiction of incorporation) (I.R.S. Employer 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 of (Commission File (I.R.S. Employer
incorporation) Number) Identification Number)
1375 Tri-State Parkway, Suite 250
Gurnee, Illinois 60031
1 (800) TELEHUB
(Address, including zip code, & telephone number,
of Registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchanges on which registered
------------------- -------------------------------------
Not Applicable Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether Registrants (1) filed all reports required 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 Registrants were required
to file such reports), and (2) were subject to such filing requirements for the
past 90 days. Yes[ X ] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ].
The aggregate market value of TeleHub Communications Corporation ("TeleHub")
common shares held by non-affiliates as of February 28, 1999 was approximately
$42,836,725, based on a price of $14. 58 per common share.
There were 12,901,664 TeleHub common shares outstanding on February 28, 1999.
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TELEHUB COMMUNICATIONS CORPORATION & SUBSIDIARIES
(COMMISSION FILE NO. 333-61441)
ANNUAL REPORT ON SEC FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I............................................................................................................2
Item 1. Business.............................................................................................2
Item 2. Properties..........................................................................................18
Item 3. Legal Proceedings...................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders.................................................18
PART II..........................................................................................................19
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters..............................19
Item 6. Selected Consolidated Financial Data................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............20
Item 8. Financial Statements and Supplementary Data.........................................................28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................51
PART III.........................................................................................................51
Item 10. Directors and Executive Officers of Registrants...................................................51
Item 11. Executive Compensation............................................................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................58
Item 13. Certain Relationships and Related Transactions....................................................59
PART IV..........................................................................................................64
Item 14. Exhibits and Financial Statement Schedules........................................................64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................................28
POWER OF ATTORNEY
SIGNATURES
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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 Company's future
expectations; (2) contain projections of the Company's future results of
operations or of its financial condition; or (3) state other "forward-looking"
information. The Company believes that it is important to communicate such
future expectations to its investors. However, there may be events in the future
that the Company has not accurately predicted or over which the Company has no
control. These events may include the Company's limited operating history and
uncertainty as to the Company's future profitability; uncertainty as to the
Company's 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 Company's ability
to obtain financing on acceptable terms to finance its business strategy;
uncertainty as to the Company's 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 VASP(TM) (as
defined) and the Company's other products; unanticipated regulatory changes that
may change the competitive environment to the Company's detriment; the Company's
efforts to address Year 2000 issues. Cautionary language in this report provides
examples of risks, uncertainties and events that may cause the Company's 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 Company's business,
operating results and financial condition.
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PART I
Item 1. Business
General. TeleHub Communications Corporation (collectively with its subsidiaries,
"Company") believes it has the only universal ATM-based telecommunications
network in commercial operation that is capable of seamlessly interconnecting
with the PSTN. The Company's first-to-market proprietary software, VASP(TM),
will enable telecommunications service providers to (i) integrate the delivery
of voice, video and data over a single platform; (ii) seamlessly interconnect
with the PSTN; (iii) provide real-time monitoring of telecommunications traffic;
and (iv) facilitate the unbundling of the local loop. The Company's ATM managed
network, which began carrying commercial traffic in December 1997, acts as a
"proof of concept" for and generates revenues to support the Company's growth.
The Company believes the platform addresses significant needs
throughout the telecommunications industry for improved systems and less
reliance on legacy hardware. While the legacy network evolved principally for
voice transmission, demand for data, video and advanced voice services has grown
rapidly over the past ten years. The legacy network, designed to handle the
lower bandwidth requirements of voice traffic, has inherent service and cost
inefficiencies when carrying data and video transmissions. Incumbent Local
Exchange Carriers ("ILEC") granted access to the local loop only on a "bundled"
basis (where carriers must purchase an entire package of local service
elements), rather than offering access to individual local exchange service
elements. Recent regulatory changes have introduced competition in both local
and long distance telephone services. In particular, requirements that ILECs
"unbundle" the local loop and permit other carriers to purchase individual local
exchange elements should facilitate market entry. To be competitive in this new
environment and to meet growing demand for high speed data and video
transmission services, telecommunications carriers are seeking to enter new
markets rapidly and to introduce differentiated services in a cost-effective
manner. Three major carriers, Sprint, AT&T and Bell Atlantic, have recently
announced plans to deploy, over the next two years, voice-over-ATM services that
will interconnect with the PSTN, a service which TeleHub already offers. While
such networks would compete directly with the TeleHub ATM network, those
carriers are potential customers for VASP(TM). In addition, OEMs such as Lucent
Technologies Inc. and Nortel have recently announced major acquisitions
attempting to provide network solutions needed for transporting carrier-class
voice transmissions over more efficient data networks. The Company believes that
its VASP(TM) technology provides ILECs, CLECs, IXCs and OEMs with the ability to
accelerate the introduction of new products and services, to reduce costs and to
enter into new markets rapidly.
TeleHub operates two principal subsidiaries: TeleHub Technology
Corporation (TTC), which develops the commercial applications of VASP(TM), and
TeleHub Network Services Corporation (TNS), which operates the Company's ATM
network. TTC is marketing VASP(TM)-based voice and data products to potential
customers in the OEM segment, like Newbridge, Nortel and Tellabs, as well as in
the carrier market, including ILECs, CLECs and IXCs. The ability to carry voice
quality transmissions over an ATM backbone, and VASP(TM)'s ability to offer toll
and certain central office switching capabilities on a software basis, open the
multi-billion dollar voice switch market to ATM switch manufacturers. For
example, Newbridge has purchased a "right-to-use" perpetual license for a trial
system of VASP(TM) for $5.0 million. In addition, the Company has signed an OEM
agreement with Siemens Information and Communications Networks, Inc. (Siemens).
Moreover, with future enhancements, the Company expects VASP(TM) to allow LECs
to unbundle the local loop and offer local number portability ("LNP") using
existing facilities, while protecting LECs' proprietary customer databases, an
issue which management believes has significantly delayed the implementation of
local exchange competition.
TNS, which utilizes VASP(TM) technology, currently offers wholesale
long distance services to the switchless reseller market. Because of the
inherent efficiencies in carrying voice traffic over an ATM backbone and
VASP(TM)'s ability to seamlessly interconnect that traffic into the PSTN, TNS is
able to offer switched wholesale voice services at rates generally 10% - 40%
lower than those currently offered by competing wholesale service providers. As
a result, TeleHub's wholesale customer base has been expanding and, at December
31, 1998, includes twenty-six switchless resellers who have transitioned
approximately 200,000 presubscribed lines to TNS's network. The Company
estimates that these reseller customers will represent approximately 1.5 million
presubscribed long distance lines which can be transitioned onto TNS's network.
TNS also expects to offer wholesale long distance services to ILECs, CLECs, ITCs
and international carriers terminating traffic in the United States. TeleHub's
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network, interconnected via leased lines from WorldCom, reaches approximately
64% of the telephone exchanges in the United States directly and the remaining
36% through contractual relationships with other carriers.
Management believes that the integration of the VASP(TM) technology on
an ATM backbone provides the following competitive advantages:
o The Company believes that TeleHub's VASP(TM)-enhanced network is the only
publicly-switched ATM network in commercial operation which allows for
seamless interconnection with the PSTN without requiring additional
telephone equipment or modified dialing procedures. A VASP(TM)-enhanced ATM
network allows for increased capacity and efficiencies, thereby lowering
costs as compared to networks utilizing legacy technology.
o When fully deployed, VASP(TM) will allow for dynamic bandwidth allocation.
VASP(TM) will enable TeleHub to replace a customer's fixed leased-line data
network with one which (i) is variable, where the customer only pays for
capacity used, and (ii) can be publicly switched, and therefore connected
nearly anywhere in the United States, which management believes is an
improvement over competitors' existing service offerings.
o VASP(TM) enables certain call-processing instructions to be moved out of
the LECs' central office, thereby reducing the traditional dependence on
the local exchange switch. The synergy between an ATM-based network and
VASP(TM) enables the delivery of expanded telecommunications services on a
virtual basis without the need for an extensive switching network.
o VASP(TM) provides real-time monitoring of telecommunications traffic, a
feature which the Company believes no other carrier offers. VASP(TM) allows
real-time access to billing information and customer calling patterns and
also provides for electronic order entry and trouble ticketing. Management
believes these capabilities reduce network downtime, provisioning delays,
maintenance costs and operating expenses, and improve customer service.
o VASP(TM) distinct data analysis capabilities and open architecture will
enable carriers to develop and implement new products and services, such as
millisecond billing. The open architecture design of the VASP(TM) software
allows carriers to program and deploy these new services more quickly than
legacy systems, which are dependent on time-consuming hardware vendor
modifications.
Industry Overview
According to 1996 industry data released by the FCC, the U.S.
telecommunications industry served more than 90 million households and 25
million businesses (approximately 158 million access lines), and generated
revenues approaching $196.3 billion. Telecommunications wireline services are
provided in three principal markets: long distance, local exchange and data
products and services. While VASP(TM)'s technology is applicable to nearly all
aspects of telecommunications services, as well as OEMs who sell their products
to carriers, TNS markets its products and services to customers principally in
the wholesale long distance services market.
The Long Distance Market. The FCC's Statistics of Common Carriers
reports that the domestic long distance industry generated revenue of
approximately $88.6 billion in 1997. The long distance market is comprised of
three tiers. The first tier consists of facilities-based long distance carriers,
such as AT&T, MCI, WorldCom and Sprint, who provide long distance communications
services using their own equipment to transmit telephone calls. These carriers
collectively accounted for approximately 80% of all toll revenues in 1997.
"Second tier" carriers, consisting primarily of switched resellers such as Excel
Communications Inc., Cable and Wireless, plc., LCI International Inc. and
Frontier Corporation ("Frontier"), accounted for approximately 6.0% of toll
revenue in 1997. The remaining market share, or "third tier," is held by smaller
companies primarily consisting of switchless resellers.
TNS is marketing wholesale long distance services, which consist of
providing bulk transmission capacity to resellers. According to the Yankee
Group, wholesale long distance services constitute a market with estimated 1997
revenues of $5.4 billion, growing at a rate approximately between 10% and 15%
annually. The Company estimates that the market for the wholesale "switchless"
resale segment of the wholesale long distance resale market was approximately
$2.4 billion in 1997 and continues to grow at a rate of 10% to 12% annually.
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The Local Exchange Market. According to FCC data, total revenue from
local telecommunications services in 1997 was approximately $103.0 billion. The
Telecommunications Act was enacted in large part to increase competition in the
local telecommunications industry and provide a framework for other carriers to
compete with LECs by reselling local telephone service, leasing unbundled
elements of the ILECs' networks or building new local service facilities. The
Telecommunications Act has created many opportunities for alternative providers
in the local services market. The Company believes that large telecommunications
users will increasingly demand diversity in local telecommunications providers,
as has been the case in long distance and private-line telecommunications
services, and that VASP(TM) will facilitate other carriers' entrance into the
local exchange market and their utilization of unbundled network elements.
The Data Products and Services Market. Data products and services have
been the highest growth segment of the telecommunications industry in the 1990s.
According to Data Communications, data-related products and services accounted
for revenues of almost $79.0 billion in 1997--a growth rate of approximately 17%
from 1996. According to the Yankee Group, current trends suggest that data
revenues will double over the next three years and will grow five times faster
than voice revenues. TNS is targeting the data market through both private line
and bandwidth-on-demand products, which will be integrated on TeleHub's
VASP(TM)-managed ATM network.
Technology
Circuit, Packet and Cell Switching Technologies
There are three switching technologies used in communications networks:
circuit-switched systems, packet-switched systems and cell-switched systems.
Circuit-switched systems establish a dedicated channel for each communication
(such as a telephone call for voice or facsimile), maintain the channel for the
duration of the call, and disconnect the channel at the conclusion of the call.
Packet-switched communications systems, including voice-over-Internet Protocol
networks, format the information to be transmitted (such as e-mail, voice,
facsimile or data) into a series of shorter digital messages called "packets."
Packet-switched systems offer several advantages over circuit-switched systems,
particularly the ability to commingle packets from several communications
sources simultaneously onto a single channel. Cell-switched technology, which
includes ATM, combines elements of both circuit and packet switching. ATM
closely resembles packet switching in that it breaks a communication
transmission into cells, which are packets of a fixed size, which are then
placed on channels that are shared by several data streams. ATM resembles
circuit switching in that it provides connection-oriented service. Each
connection has a set-up phase, during which a "virtual circuit" is created.
There are many Internet Protocol ("IP") networks currently in
operation. While generally adequate for data transmission needs, these networks
usually are not configured to provide the voice quality of a traditional
telephone call. With current technology, this quality can only be achieved by a
combination of a substantial cushion of communications capacity, customized
end-user equipment, dial-up "access codes," and/or other special procedures to
initiate a call.
There are also concerns about the quality, reliability and security of
packet-switched systems. Packets are transported on a first-come, first-served
basis with no guarantee of success. Some packets may experience severe delays,
while others may be dropped and never arrive. Certain data communications, such
as e-mail and file transfers, require 100% accuracy, but can easily tolerate
delay. Real-time voice transmissions can tolerate only minor delays, but can
tolerate some distortion. Real-time video broadcasts have very low tolerance for
both delay and distortion.
Cell switching can resolve most of the problems inherent in
packet-switched networks: (i) a cell will not be delayed behind an unusually
large packet and (ii) the addressing information contained in the cell can
include prioritizing and sequencing data, which eliminates delays and
distortion. Thus, an ATM carrier can offer quality of service performance
guarantees.
The fact that the ATM circuit is virtual, not physical, provides two
major advantages. First, it is not necessary to reserve exclusive network
resources for a given connection, and thus the economic efficiencies of
statistical multiplexing of several simultaneous data transmissions can be
realized. Second, once a virtual circuit path is established, switching time is
minimized, allowing much higher network throughput. TeleHub decided to deploy
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VASP(TM) over an ATM network because of ATM's superior capabilities as compared
to alternative circuit and packet switching systems.
Voice Switching Over ATM
With the development of voice switching over ATM, efficiencies can be
achieved through integrated, consolidated networks for voice, data and video
connected via leased lines or public networks. ATM delivers operational
simplicity equivalent to that of the virtual private network ("VPN") and adds
the superior bandwidth economics of multiplexing. Voice calls may be efficiently
transported via virtual circuits, with voice quality assured due to
sophisticated voice adaptation techniques and quality of service support. The
Company believes the communications industry is moving rapidly towards
consolidated networks based on ATM switching because these networks offer the
advantages of speed, economy, and interoperability for the spectrum of
networking applications.
Signaling System Number 7
Technology has changed the architecture of telephone switching systems.
The Signaling System Number 7 ("SS7") is the current telecommunications
industry-accepted system of protocols and procedures used to control telephone
communication and provide routing information. SS7 is also used to provide
vertical calling features such as calling card validation, 800 number
portability (i.e., the routing of 800 numbers to a new location) and calling
name delivery. By storing information, such as routing data, billing information
and technical system data and controls at the Signal Control Point ("SCP"), an
SS7 network allows call set-up and routing to be accomplished independent of the
voice circuits.
SS7 is characterized by high-speed packet data and out-of-band
signaling (signaling that does not take place over the same path as the
transmission itself, such as a voice conversation). Traditional telephony was
in-band, where the signals to set up a call between one switch and another
always took place over the same trunk that would eventually carry the call.
Out-of-band signaling establishes a separate digital channel for the exchange of
signaling information. This channel is called a signaling link. When a call is
placed, the dialed digits, trunk selected and other pertinent information are
sent between switches using their signaling links, rather than the trunks.
Out-of-band signaling has several advantages over traditional in-band
signaling: (i) it allows for the transport of more data at higher speeds; (ii)
it allows for signaling at any time during the call, not only at the beginning;
(iii) it enables signaling to network elements to which there is no direct trunk
connection; and (iv) it provides both error correction and retransmission
capabilities to allow continued service in the event of signaling point or link
failures. However, under traditional circuit-switched systems, SS7 signaling
identifies the trunk to which a call must be routed to and that trunk must be
present and available at all times. Therefore, the bandwidth is reserved and
paid for whether it is used or not. Moreover, that leased line is engineered for
the busy hour model, so that little or no call blocking occurs. In contrast,
VASP(TM) has features of SS7 imbedded within it and, therefore, transactions
which are sent over a VASP(TM)-managed network can be switched directly into the
PSTN. TeleHub improves upon the traditional SS7 call model because VASP(TM)
interprets the SS7 messages on a dynamic basis, so that ATM connections are
created "on-demand." On the ATM backbone, only a portion of the busy hour
capacity is permanently connected.
Operational Support Systems
OSS encompass a broad array of software and systems that perform
critical functions for telecommunications carriers, including ordering,
provisioning, service assurance and billing. Ordering systems allow carriers to
collect customer information, retrieve current service information, capture and
validate new service requests, verify availability of selected services and
transmit completed orders to one or more provisioning operational supporting
systems. Carriers use provisioning systems to install services for new customers
and to change or add services for existing customers. Service assurance systems
allow carriers to perform testing, monitoring and reporting necessary to
maintain network availability and feed operational data to other business
systems. Carriers use billing systems to collect, collate, manage and report
billing information.
Historically, as carriers have added new services, such as wireless or
Internet-based services, they have developed multiple, distinct operational
supporting systems. These legacy, proprietary OSS have typically been
mainframe-based systems that in many cases utilize incompatible software and
technologies, making communication among systems difficult. These OSS are
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further strained by the many incremental changes that have been made in order to
accommodate new technologies, such as client/server technology and advancements
in data networking, and the proliferation of value-added services, such as call
waiting, call forwarding and voice mail. Despite these difficulties, carriers
are unable to replace completely existing OSS due to the large investments and
vast amounts of historical data contained in these systems. As a result,
carriers continue to make incremental modifications to these OSS, further
increasing their complexity and interoperability difficulties. In contrast to
the current telecommunications environment in which carriers use disparate OSS
systems for each aspect of a call transaction (e.g., call processing, billing,
traffic monitoring and decision support systems), TeleHub's VASP(TM) integrates
all of these functions into one system that is compatible with legacy systems.
VASP(TM) is capable of processing all information regarding a call in real-time,
is scalable to a carrier-class level, and has the flexibility to integrate new
services and products quickly and seamlessly.
The TeleHub Solution
TeleHub was formed to capitalize on the demand for advanced network
features and capabilities resulting from the telecommunications industry's
changing competitive and regulatory environment. Existing carriers must develop
new OSS that are interoperable with their legacy systems, not only to support
initiatives like LNP and the unbundling requirements of the Telecommunications
Act, but also to enable carriers to respond to increasing competitive
challenges.
VASP(TM) addresses several shortcomings of legacy networks including:
(i) the inability to switch packet- and cell-based traffic into the PSTN; (ii)
the lack of real-time management, billing and monitoring capabilities; (iii) the
inflexibility of hardware-based network architectures; and (iv) the lack of
integrated OSS capabilities. VASP(TM) creates virtual switching capabilities,
permits real-time network supervision and facilitates the introduction of new
service offerings. When fully deployed, VASP(TM) will integrate voice, video and
data on a single switched network and enable the provisioning of
bandwidth-on-demand services.
Key benefits of the Company's solution include:
New Market Opportunities. VASP(TM) allows customers to overcome some of
the traditional barriers to entry in the telecommunications service markets such
as hardware limitations and the high cost of facilities. Management expects
VASP(TM)-enhanced carriers to be able to enter the local, long distance, voice,
video and data transmission markets using one integrated network. Utilizing
TeleHub's ATM network, switchless resellers soon will be able to offer video and
data services in addition to their customary voice services. Similarly, by
incorporating VASP(TM) into their products, ATM switch manufacturers can enter
the voice switch market.
Flexible and Scalable Architecture. VASP(TM) is a software solution in
contrast to the hardware-based configuration of legacy networks. The Company
believes that VASP(TM)'s open architecture and integrated OSS capabilities can
be adapted to most existing vendor hardware and are easily and readily scalable,
so that carriers, both small and large, can quickly and inexpensively develop
and implement new products and services. Existing switching platforms do not
have this flexibility and often require costly and time consuming hardware
modifications to add or change services.
Rapid Market Entry and Cost Avoidance. Management believes that
VASP(TM) offers the capabilities of a facilities-based network on a virtual
basis and therefore will allow carriers to enter markets quickly and avoid the
time and expense associated with procuring and installing costly central office,
tandem and distribution facilities. Also, OEMs could readily adapt their
existing products for multiple markets rather than incur significant expense to
develop separate products for each market.
Improved Time-to-Market for New Products and Services. Historically,
new product and service offerings required extensive testing to insure
compatibility with existing network configurations. VASP(TM) allows such testing
to be completed in less time than with the legacy-based systems and allows new
products and services to be rolled out electronically to the entire network from
one central location.
Improved Network Management. VASP(TM) allows real-time access to
billing information and customer calling patterns, and also provides for
electronic order entry and trouble ticketing. With real-time supervision of
network activity, VASP(TM)-managed networks can monitor customer traffic, and
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the specific network elements involved in carrying a particular call while the
call is in-process. Such networks can also recover from line errors,
transmission faults and even catastrophic failures much more quickly than legacy
systems allow currently. Network maintenance and repair personnel can use this
data to build more efficient routing and restoration functions. These
capabilities should reduce network downtime, provisioning delays, maintenance
costs and operating expenses, as well as enable carriers to improve the quality
of their services and to offer more responsive customer care.
Increased Revenue from Existing Customers. VASP(TM)-equipped carriers
are able to store, maintain and access relevant information about customers and
their calling patterns on-line. The Company believes that such real-time market
research could be harnessed to generate additional revenues or identify new
marketing opportunities.
Increased Value to Resellers. VASP(TM) enhances the competitive
position of resellers. TNS offers voice-over-ATM services at rates generally
lower than traditional circuit-based voice rates or other point-to-point
advanced voice services. TNS's reseller customers will also soon be able to
expand their service offerings to include video and data services without the
need to procure high cost private data networks. With bandwidth-on-demand
pricing, end-user customers are charged only for actual bandwidth used, which
makes video and data services affordable for small end-user customers (a
reseller's principal market). Using VASP(TM)'s advanced information management
capabilities, TNS can electronically provision new customers and diagnose delays
much more quickly than legacy systems, so new customers can quickly start
generating revenue for the reseller.
Business Strategy
The Company's objective is to become a leading provider of next
generation services and software solutions to the telecommunications industry.
Key elements of the Company's strategy include:
Leverage its First-to-Market Advantage. The Company will continue
leveraging its proprietary technology to influence industry standards, build
market share quickly and develop innovative packaging and pricing plans.
Build Market Share on the TNS Network. Company will continue to build
TNS's customer base by leveraging the competitive advantages of its
VASP(TM)-managed ATM network. TNS expects to continue offering its enhanced
services at rates generally lower than competing carriers while also providing
superior services, including real-time access to billing and customer
information, electronic provisioning and trouble ticketing, and soon, to offer
switched video and data services.
Expand Strategic Alliances. The Company will continue to enhance its
joint marketing and technology development efforts through strategic alliances
with leading equipment manufacturers and carriers. The Company has formed
strategic alliances with manufacturers, such as Newbridge, to assist the Company
in introducing its VASP(TM) technology into the next generation of
telecommunications equipment. Further the Company has signed an OEM licensing
agreement with Siemens to sell its VASP(TM) software bundled with Siemens' ATM
switches to next generation carriers. In addition, the Company has formed a
strategic relationship with Comdisco, a network services provider, to accelerate
entry into targeted corporate markets and to stimulate growth of the Company's
customer base. The Company continues to pursue additional relationships with
other telecommunications industry participants.
Operate and Enhance the Next Generation Platform. The Company will
continue to enhance VASP(TM) to offer a broader range of products and services
to carriers and OEMs. Further enhancements of VASP(TM) are also directed toward
the continued integration of the Company's long distance ATM network with the
local services market. Because TNS is currently utilizing VASP(TM), potential
TTC customers can witness the benefits of a VASP(TM)-based platform in
operation, as well as utilize the TNS network for developing and testing new
products.
Attract Experienced Management. The Company will continue to attract
highly qualified individuals with proven expertise from various segments of the
telecommunications and related industries. The Company's management team has
extensive and diverse experience. Management has demonstrated its expertise by
deploying and operating TeleHub's ATM network and by developing a growing
customer base for its wholesale services, as well as by developing, enhancing
and licensing the VASP(TM) technology.
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Products and Services
TeleHub Technologies Corporation
VASP(TM) applications are designed to administer, operate, control and
manage switching devices and network elements in the public carrier services
market. The Company believes that VASP(TM) provides telecommunications carriers
with superior billing, management and control capabilities. VASP(TM) has been
designed to be integrated with any carrier's customer care, billing,
provisioning and network management applications. VASP(TM) accumulates
information about network events for each phone call and generates a Transaction
Detail Record ("TDR"). The TDR can be converted into the standard industry call
detail record or into customized information that allows service providers to
bill innovatively (e.g., millisecond billing). In addition, service providers
can access their databases containing customer information and individual call
records in real-time to trouble shoot problems and identify customer calling
patterns. This information can be obtained by simple dial-up access from a
personal computer, as opposed to the current network process of downloading
information from each switch in the network, which can take more than a day to
complete. The carrier can use such information as a strategic advantage for
pricing and offering targeted products based upon real-time market feedback. The
Company's software can also be used as a network surveillance monitoring device.
The software has the ability to track phone calls from end-to-end and,
therefore, can locate the specific network element that may be causing a
problem. These advantages, coupled with the capability to provision circuits
electronically, will significantly reduce carriers' operating costs.
The Company expects that future releases of VASP(TM) will allow for the
replacement of the Class 4/tandem switch and eventually the Class 5/end-office
switch. Based upon engineering studies, the Company believes that by using ATM
and VASP(TM) in place of traditional switch fabrics, the reduction in tandem
switching investment will lower the overall cost of multi-city interconnections
by 45% to 60%. The open system architecture is scalable from small sizes up to
hundreds of phone calls per second, and its underlying hardware platforms and
control center designs are selected to meet the operating objectives by
accumulating no more than one hour of downtime during each twenty year period of
service (99.999% uptime service level objective). VASP(TM) is also adaptable to
other transmission mediums such as IP, cable and wireless.
TTC's products and services include the following:
Virtual Class 4/Tandem Switching (available today). The Company expects
that its software, combined with an ATM switching platform, will be capable of
replacing the traditional Class 4/tandem switch. This capability will enable
data service providers to offer voice products over their existing networks.
VASP(TM), running on a Sun Microsystems server and controlling ATM switches,
offers a 30% to 40% savings over the cost of purchasing and installing
traditional tandem switches. In addition, TeleHub's VASP(TM)-based software
solution offers other benefits, including cost effective scalability,
customization to specific customer requirements and applications, and faster
introduction of new products.
Local Switch Bypass (available today). TTC is engineering solutions to
identify Internet data and other long-holding time calls (e.g., voice mail) and
route them directly to called parties, thereby bypassing end-office and tandem
switches. The Company expects this technology to address carriers' growing
problem of congestion at end-office and tandem switches caused by Internet
traffic. TTC's solution allows carriers to manage existing traffic levels and
flow without purchasing additional switch capacity.
Virtual Class 5/End-Office Switching (expected to be available in
second quarter of 1999). TeleHub is enhancing its VASP(TM) solution to duplicate
the basic functionality of a Class 5/end-office switch. TeleHub expects its
virtual Class 5 solution to provide carriers with the capability to enter the
local market with a voice product at a fraction of the cost of buying and
installing a conventional Class 5/end-office switch. The same advantages offered
by TeleHub's Class 4/tandem switch solution apply here--reduced capital
expenditures, customization and faster time-to-market for new products. As an
example, many CLECs have data Points of Presence ("POPs") which currently
utilize ATM switches. TeleHub expects its solution to allow CLECs to carry and
switch voice traffic using their existing ATM networks without purchasing Class
5/end-office switches.
8
<PAGE>
Virtual STP/SCP Signaling (available today). Signal Transfer Points
("STPs") and SCPs are key elements of the underlying SS7 network. Messages, such
as telephone number, calling card validation, 800 number routing, and calling
name delivery are transmitted to STPs that route the messages to the proper SCPs
where call processing information is stored. Embodied within the VASP(TM) design
today are both SCP and STP functionality, thereby allowing carriers to perform
their own SS7 signaling, without purchasing signaling services or expensive
equipment. VASP(TM) contains translation and routing instructions needed to
deliver advanced network services and can be further enhanced as new services or
requirements are identified. The necessary STP functions are also incorporated
in the VASP(TM) design to handle the signaling and management of "on-net"
traffic. The conventional STP is deployed in the TeleHub design as an interface
to the other carriers in the PSTN and to act as a firewall to protect both
parties proprietary information from compromise.
Mediated Access Services ("MAS") (expected to be available in 1999).
The Telecommunications Act and subsequent FCC mandates will require service
inter-operability between the various proprietary systems of existing
telecommunications carriers. Local and long distance carriers and their current
software vendors are therefore expending significant design and software
development resources trying to create the inter- operability solutions that can
be achieved through VASP(TM). TeleHub expects many carriers to select TeleHub as
a service supplier and VASP(TM) as a standard product to integrate the various
operating overlays.
TeleHub expects its MAS capability to provide neutral "third-party"
access to service management system and OSS databases throughout the industry.
Any service provider (virtual or facilities-based) will be able to obtain the
key call treatment information necessary to process customer calls, while the
proprietary information of the database owner is protected from compromise. The
first requirement for mediation results from the FCC's mandated LNP that
requires the RBOCs and GTE Corporation ("GTE") to permit their customers to
switch to another competing LEC and still retain their same telephone number.
The Company believes its MAS will encourage the LECs to offer unbundled local
service elements to other carriers as required by the Telecommunications Act.
Management believes this is currently the greatest hurdle for the RBOCs to
overcome in achieving their long standing goal of entry into the long distance
business within their regions.
Switched Virtual Circuit ("SVC") (expected to be available in first
quarter 2000). The Company is in the process of developing a SVC product
expected to provide carriers with a cheaper alternative to permanent virtual
circuit (i.e., point-to-point) products offered today. The advantage of a SVC is
that when the circuit is not utilized, the capacity can be allocated for another
use. A permanent virtual circuit must allocate bandwidth to the user regardless
of whether there is traffic flowing over the circuit.
TTC Customer Relationships
Since the initial release of VASP(TM), the Company has actively pursued
OEMs, CLECs and other network service providers to license its proprietary
technology. As of December 31, 1998, the Company has signed an OEM licensing
agreement, which provides for the sale of two VASP(TM) licenses. In addition,
TTC has submitted proposals to two CLECs. In the OEM market, The Company and
Newbridge have signed an agreement whereby Newbridge has purchased a
"right-to-use" license for a trial system of VASP(TM) for $5.0 million for use
in its laboratory and has proposed a VASP(TM)-enhanced solution to several
RBOC's. TTC anticipates entering definitive contracts during 1999.
The Company has formed a joint venture that will use VASP(TM) to manage
satellite telecommunications delivery in the Australasian region (Australia, New
Zealand, Southeast Asia, India, and the Philippines). The Company will
contributed a non-exclusive VASP(TM) license and associated technical support
and received a 49% interest, while the joint venture partner will contribute
$5.0 million for operating funds and is initially managing the joint venture.
The Company believes that the joint venture will introduce the VASP(TM)
technology into a new geographic market and demonstrate VASP(TM)'s benefit for
satellite networks just as TNS demonstrates VASP(TM)'s ability for wireline
networks.
TeleHub Network Services Corporation
Network. TeleHub's VASP(TM) solution has been developed to converge
voice, data and video on its single network. TNS's backbone is centered on three
ATM switching platforms located in Chicago, New York and Los Angeles. The three
sites are connected via DS-3 (growing to OC-12) fiber optic lines leased from
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WorldCom. TNS's network, utilizing WorldCom's backbone circuits to connect TNS's
planned POPs, is designed to ultimately reach over 90% of U.S. telephone
exchanges (currently at 64%). The use of TNS's ATM backbone between its
switches, as compared to conventional legacy technologies, is estimated to yield
a 3:1 (or more) increase in traffic carrying capacity and significant savings.
TeleHub believes that its savings on the backbone are achieved via an ability to
use available contracted permanent bandwidth in an "on-demand" fashion.
TeleHub's backbone bandwidth allocation strategy assumes that only a portion of
the busy hour bandwidth needs to be permanently connected, an assumption based
upon standard industry traffic engineering models. The rest of the bandwidth can
be used to handle busy hour traffic between other signaling service providers.
It is VASP(TM)'s ability to create or tear down network connections remotely
"on-demand" that enables TeleHub to most efficiently utilize available
bandwidth. For example, in a network with cross-country switches, busy hour
bandwidth would be allocated on the East Coast at a different time than it would
be required on the West Coast. Available bandwidth could be shifted to follow
the traffic peaks, resulting in a lower overall bandwidth requirement than would
be necessary in a fixed facility network.
Long Distance. TNS provides wholesale long distance services to ILECs,
CLECs and international telephone companies that terminate telephone calls in
the United States. TNS offers its customers competitive pricing yet maintains
margins higher than its competitors because of the efficiencies of its ATM
backbone. The inherent advantages of ATM coupled with VASP(TM) enables TNS to
better manage and control its network, therefore further enhancing its cost
advantage. In addition, TNS provides its carrier customers with real-time access
to end user billing information and calling patterns, thereby allowing them to
market enhanced services to their customer bases.
Bandwidth-on-Demand (expected to be available in 2000). TNS expects to
provide a bandwidth-on-demand product utilizing a VASP(TM) SVC product. With
bandwidth-on-demand, end-user customers are charged only for actual bandwidth
used, which makes video and data services affordable for small end-user
customers (resellers' principal market).
The following table summarizes the manner in which the Company expects
TNS's services to meet industry needs:
<TABLE>
<CAPTION>
Services Segment Current Industry Environment TNS Offering
- ------------------------ ---------------------------------- ---------------------------------------
<S> <C> <C>
Wholesale Long Distance o Predominately voice offering o Integrated voice, video and data
o Fixed capacity pricing o Bandwidth on demand pricing
o Limited and delayed access to o Real-time access to customer
customer information (including information (calling patterns and
calling patterns) billing)
</TABLE>
TNS Customer Relationships
TNS has targeted the switchless reseller segment, which in 1997,
consisted of approximately 500 service providers with annual revenues estimated
at $2.1 billion. Additionally, TNS is targeting ILECs, CLECs and international
telephone companies that terminate traffic in the United States. TNS is also
marketing its data services to large Fortune 1000 companies. TNS has entered
into a memorandum of understanding with Comdisco, whereby the companies will
jointly market long distance services to Comdisco's existing customer base.
As of December 31, 1998, the Company had entered into twenty six
contracts to provide long distance services to switchless resellers who have
transitioned approximately 200,000 end-user lines onto TNS's network. The
Company estimates that these reseller customers represents approximately 1.5
million end-user telephone lines which can be transitioned onto TNS's network.
In addition, the Company is currently in active contract negotiations with
multiple other service carriers.
Sales and Marketing
TeleHub Technologies Corporation
TTC utilizes a small and experienced internal sales force, strategic
alliances, and co-marketing agreements to market its VASP(TM) software. In
addition, TeleHub leverages the sales forces of its strategic partners and OEM
vendors to further penetrate its targeted markets. The TeleHub sales force
focuses its selling efforts on potential customers in the OEM segment, such as
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<PAGE>
Newbridge, Ascend, General Datacom Industries Inc., World Access, Fore Systems
Inc., Coyote Network Systems Inc., Lucent, Siemens, Telefonekitieboleset LM
Ericsson ("Tekelec") and Nortel. TTC markets custom platform services to RBOCs
and CLECs, and to network service providers such as Comdisco.
TeleHub Network Services Corporation
TNS has an experienced internal sales department that works with
several experienced external sales agents. TNS's sales effort is directed at
many of the same carrier customers as TTC, but offers transport and switching
services as opposed to software solutions. TNS markets the capability of its
VASP(TM)-enhanced ATM network, thereby allowing its customers to offer a broader
range of services than current product offerings encompass. For example, TNS has
been able to market voice services to Comdisco's existing customers, to whom it
previously only offered data services.
Competition
The telecommunications industry is highly competitive, rapidly evolving
and subject to constant technological change. In particular, there are numerous
companies offering long distance products and services, and the Company expects
competition to increase in the future. The Company believes that existing
competitors are likely to continue to expand their product and service offerings
to appeal to existing or potential customers of the Company. Moreover, the
Company expects that new competitors are likely to enter the communications
market and some of these new competitors may market communications services
similar to the Company's products and services, which would result in greater
competition. However, increased competition also creates additional
opportunities for the Company to market its VASP(TM)-based products to current
and future participants in the local exchange, long distance, data and video
markets.
Many competitors (such as AT&T, MCI, Sprint, WorldCom, Qwest
Communications International Inc. and others) and potential competitors have
substantially greater financial, personnel, technical, marketing and other
resources than the Company. The Telecommunications Act allows the RBOCs and
others (such as electric utilities and cable television companies) to enter the
long distance market. A continuing trend toward consolidation, mergers,
acquisitions and strategic alliances in the telecommunications industry could
give rise to significant new competitors to TeleHub or its customers. TeleHub
anticipates that certain entrants will be strong competitors because, among
other reasons, they may (i) be well capitalized; (ii) already have substantial
end-user customer bases and brand name recognition; and/or (iii) enjoy cost
advantages relating to local loops and access charges. The introduction of
additional strong competitors into the switched long distance business could
mean that TeleHub and its customers would face substantially increased
competition. As a new entrant, TeleHub will compete primarily by providing
superior service and support and on price.
In addition, the regulatory environment in which the Company operates
is undergoing significant change. As this regulatory environment evolves,
changes may occur which could create greater or unique competitive advantages
for all or some of the Company's current or potential competitors, or could make
it easier for additional parties to provide services.
In the United States, price competition in the long distance business
has generally been intensive. AT&T, the leading long distance carrier, was
reclassified as a non-dominant carrier, which allows AT&T substantial pricing
flexibility. Long distance carriers, including AT&T as well as other
non-dominant carriers such as TNS, currently must file tariffs at the FCC for
domestic interstate services and for international services. However, such
tariffs can be amended on one day's notice; therefore, price changes by one
carrier can be matched readily by the others. The long distance communications
industry is significantly influenced by the marketing and pricing decisions of
larger industry participants such as AT&T, MCI, Sprint and WorldCom. TNS
believes that its wholesale customers generally price their service offerings at
or below the prices charged by AT&T for its long distance reseller services.
Rate reductions by AT&T and other first-tier carriers may necessitate similar
price decreases by the Company.
Under the Telecommunications Act, RBOCs have the opportunity to provide
out-of-region long distance services immediately and in-region long distance
services if certain conditions are met. RBOC entry into the domestic and
international long distance business and the emergence of other new local
competitors could result in substantial competition to the Company and may have
a material adverse effect on the financial condition, results of operations or
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<PAGE>
cash flow of the Company. In December 1997, a federal court ruled that the
Telecommunications Act's pre-conditions to the RBOCs' entry into the in-region
long distance telecommunications services are unconstitutional (the "SBC
Decision"). Other federal courts have reached contrary decisions, and the SBC
Decision has been stayed pending appellate review. The result of the appellate
review cannot be predicted. If the SBC Decision were upheld on appeal, it could
have an adverse effect on the Company and other carriers because it would speed
the entry of the RBOCs into the in-region long distance market and would reduce
the primary incentive for RBOCs to open their local markets to competition.
The long distance industry is undergoing significant consolidation that
has created and will continue to create numerous other entities with substantial
resources to compete for long distance business. New technologies could also
give rise to new regulation or new competition. The Company's larger competitors
have significantly greater name recognition, financial, technical, network and
marketing resources. They also may offer a broader portfolio of services and
have long standing relationships with customers targeted by the Company.
The Company has entered into telecommunications services agreements
with its wholesale long distance customers which do not contain minimum usage
commitments and which are cancelable upon short notice without penalties. If
these services agreements are canceled or are not renewed upon expiration, the
loss of customers could have a material adverse effect on the Company's
business, operating results and financial condition. Prices for domestic and
international long distance calls have decreased in recent years and are likely
to continue to decrease. There can be no assurance that the Company will be able
to compete effectively in the domestic or international long distance markets.
TTC faces competition from some of the most experienced companies
engaged in the development of telecommunications equipment and related software.
Examples include switch vendors (Lucent, Nortel and Siemens), ATM vendors
(Nortel, Siemens, Alcatel NA Cable Systems Inc. ("Alcatel"), Cisco and Ascend),
signaling products vendors (Nortel and Tekelec), and OSS providers
(Hewlett-Packard Inc. and Applied Digital Access Inc.). The Company believes
that existing competitors are likely to continue to expand their product
offerings to appeal to existing or potential customers of the Company. Many of
the Company's existing competitors have financial, personnel and other
resources, including brand name recognition, substantially greater than the
Company. TTC may well find itself both a strategic partner and a competitor with
some of these companies.
In the future, the Company may be subject to intense competition due to
the development of new technologies, such as ATM and wave division multiplexing,
resulting in an increased supply of domestic and international transmission
capacity. The telecommunications industry is experiencing a period of rapid and
significant technological evolution marked by the introduction of new product
and service offerings. The introduction of new products or emergence of new
technologies may cause capacity to greatly exceed the demand, reducing the
pricing of certain services to be provided by the Company. The effect on the
Company's operations of technological changes cannot be predicted, and if the
Company is unable to keep pace with advances, it could have a material adverse
effect on the financial condition, results of operations and cash flow of the
Company.
The Company believes that its proprietary software is unique in that it
provides for the only ATM service in commercial operation that can be switched
into the PSTN. Other telecommunications carriers can provide their own networks
and can provide those networks to other carriers. Numerous established and
start-up national and regional fiber optic networks are owned by IXCs, ILECs and
CLECs, including AT&T, MCI and Sprint, each of whom has greater name
recognition, financial, personnel, technical and marketing resources than the
Company. Other companies have announced or may be planning the construction of
additional networks.
Regulation
The following summary of regulatory developments and legislation does
not purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal, state and local legislation and regulations are currently the
subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which this
industry operates. Neither the outcome of these proceedings, nor their impact
upon the telecommunications industry or the Company, can be predicted at this
time. This section also briefly describes regulatory and tariff issues
pertaining to the operation of the Company.
12
<PAGE>
TeleHub's services are subject to federal, state, and local regulation.
The Company's business strategy is to continue to operate TNS as a wholesale
telecommunications service provider. To the extent the Company's business
strategy changes, the Company could become subject to additional regulatory
requirements. Pursuant to the Communications Act of 1934, as amended (the
"Communications Act") including as amended by the Telecommunications Act, the
FCC exercises jurisdiction over all of TNS's facilities and services used to
provide, originate, or terminate interstate or international communications.
State regulatory agencies have jurisdiction over all of TNS's facilities and
services used for intrastate communications. Local governments often require
communications carriers to obtain licenses or franchises to utilize public
rights-of-way necessary to install and to operate networks, equipment, and other
facilities. In addition to regulation by multiple government agencies, different
regulatory requirements apply to long distance services than apply to local
exchange services. For example, long distance carriers must pay regulatorily
determined access charges to LECs. Communications carriers must also contribute
to universal service support mechanisms, which are being developed by federal
and state agencies. The jurisdictional reach of federal, state and local
regulatory authorities is subject to continuous change, controversy and judicial
review. TNS is unable to predict the effect or outcome of such changes,
controversy or judicial review.
The Telecommunications Act eliminates many of the pre-existing barriers
to competition in telecommunications markets, preempts state and local barriers
to entry into the local exchange and other telecommunications markets, and
establishes relationships between and among telecommunications carriers and
providers. The Telecommunications Act delegates to the FCC and state regulatory
agencies broad authority to implement the law.
The Company is subject to the authority of the FCC and the state
regulatory agencies to enforce applicable regulatory requirements. The FCC and
state regulatory agencies may address regulatory non-compliance with a variety
of enforcement mechanisms, including monetary forfeitures, refund orders,
injunctive relief, license conditions and/or license revocation.
The regulation of the telecommunications industry is changing rapidly
and the regulatory environment varies substantially from state to state. There
can be no assurance that future regulatory, judicial or legislative activities
will not have a material adverse effect on the financial condition, results of
operation, or cash flow of the Company or that domestic or international
regulators or third parties will not raise material issues with regard to the
Company's compliance or non-compliance with applicable laws and regulations.
Long Distance Services. TNS's wholesale long distance services are
subject to federal regulation governing interstate and international
telecommunications services. As a communications common carrier, TNS must comply
with the requirements of the Communications Act, as well as the FCC's
regulations promulgated under the Communications Act.
Pursuant to the Communications Act, among other things, common carriers
such as TNS must offer service on a non-discriminatory basis at just and
reasonable rates. Such carriers are also subject to the FCC's complaint
jurisdiction. IXCs providing international services are required to obtain
authority under Section 214 of the Communications Act and to file a tariff
containing the rates, terms and conditions applicable to their services prior to
initiating their international telecommunications services. The Company holds a
Section 214 certificate from the FCC for global facilities-based and global
resale authority. The Company is a non-dominant international carrier and also
must comply with the federal statutory and regulatory requirements of common
carriage in the offering of its international services. International
telecommunications service providers are also required to file copies of their
contracts with other carriers, including foreign carrier agreements, and a
variety of reports regarding their international revenue, traffic flows and use
of international facilities. Carriers holding Section 214 authority are subject
to FCC rules requiring, among other things, prior approval for transfers of
control and assignments, and notifications or approvals of certain foreign
carrier investments.
Because the interstate long distance services market has become
sufficiently competitive, the FCC has streamlined the regulation of interstate
carriers. Thus, the FCC has ordered that non-dominant IXCs do not need to file
tariffs offering their services. While the Order is being reviewed by a Federal
appeals court, the court has stayed the FCC's de-tariffing decision. As a
result, IXCs must continue to file interstate tariffs (as well as international
13
<PAGE>
tariffs). TNS has filed tariffs with the FCC. In addition, TNS can install and
operate non-radio facilities for the transmission of interstate communications
without prior FCC authorization.
TNS's intrastate long-distance services are also subject to state
regulations. TNS has obtained or applied for authority to provide intrastate
services from various state regulatory agencies and has filed and is in the
process of filing tariffs specifying the rates, terms and conditions for its
wholesale intrastate services.
Local Exchange Services. Although TeleHub does not intend to provide
local exchange services directly to end users, certain of TNS's proposed
services will make local exchange features and capabilities available to other
carriers. To offer its local exchange-related services, TNS may need to obtain
certifications to provide local exchange services from and file tariffs with
state regulatory agencies, and negotiate agreements with the ILECs for
interconnection, co-location and unbundled access.
State Requirements. Most states require a certification or other
authorization to offer local exchange and long distance intrastate services.
These certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services in
a manner consistent with the public interest. In addition to tariff
requirements, most states require that common carriers charge just and
reasonable rates and not discriminate among similarly situated customers. Some
states also require the filing of periodic reports, the payment of various
regulatory fees and surcharges, and compliance with service standards and
consumer protection rules. States also often require prior approvals or
notifications for certain transfers of assets, customers or ownership and for
the issuance of stock, bonds or other forms of indebtedness. As a result, in
certain states TNS requested approvals, made notifications or took other actions
relating to its issuance of a guarantee pursuant to the Initial Note Offering.
While TNS expects to obtain all necessary approvals for the Exchange Offer,
there can be no assurance that such approvals will be obtained, or that they
will be obtained on a timely basis. States generally retain the right to
sanction a carrier or to revoke certifications if a carrier violates relevant
laws and/or regulations. If any state regulatory agency were to conclude that
the Company is or was providing intrastate service without the appropriate
authority, the agency could initiate enforcement actions, which could include
the imposition of fines, the disgorging of revenues, or the refusal to grant the
regulatory authority necessary for the future provision of intrastate
telecommunications services.
State regulatory agencies also regulate access charges and other
pricing for telecommunications services within each state. If regulations are
changed to allow variable pricing of access charges based on volume, the Company
could be placed at a competitive disadvantage over larger long distance
carriers.
The Communications Act was substantially amended by the
Telecommunications Act, which provides for comprehensive reform of the United
States' telecommunications laws. The Telecommunications Act may have potentially
significant effects on the financial condition, results of operations or cash
flow of the Company. The Telecommunications Act is designed to enhance
competition in, among other markets, the local telecommunications marketplace
by, among other things: (i) removing state and local entry barriers, (ii)
requiring ILECs to provide interconnection to their facilities, (iii)
facilitating the end users' choice to switch service providers from ILECs to
CLECs, and (iv) requiring access to rights-of-way. The legislation is also
designed to increase local competition by newer competitors such as long
distance carriers, cable companies and public utility companies. In addition,
the Telecommunications Act imposes certain conditions upon all LECs, including
CLECs. To the extent the Company is required to obtain certifications as a CLEC,
these obligations would apply to the Company. Among these requirements are the
duties to establish number portability, dialing parity and reciprocal
compensation arrangements. These requirements may cause the Company to incur
additional administrative and regulatory expenses.
On August 8, 1996, the FCC released the Interconnection Decision, which
established a framework of minimum, national rules enabling state commissions
and the FCC to begin implementing many of the local competition provisions of
the Telecommunications Act. Among other things, the Interconnection Decision
prescribed certain minimum points of interconnection, adopted a minimum list of
unbundled network elements that ILECs must make available to competitors, and
adopted a methodology for states to use when setting wholesale prices for retail
services. The U.S. Court of Appeals for the Eighth Circuit issued a decision
vacating certain portions of the Interconnection Decision and the United States
Supreme Court has agreed to consider the challenges to the Eighth Circuit's
14
<PAGE>
decision filed by the FCC and interested carriers. Whether the Eighth Circuit's
decision will stand, or what further actions the FCC may or may not take in
response to these decisions cannot be predicted.
Local Government Authorizations. Because TNS is selling wholesale
services to other carriers, permitting and franchising requirements are usually
handled by those carriers. However, TNS has obtained necessary local government
authorizations for the installation and operation of facilities that it owns.
The termination of the existing local government authorizations prior to their
expiration dates or failure to renew such authorizations where applicable could
have a material adverse effect on the financial condition, results of operations
and cash flow of the Company. In some municipalities, carriers must pay license
or franchise fees.
Universal Service Charges. In 1997, the FCC released an order
establishing a significantly expanded federal universal service subsidy regime
to be funded by interstate carriers and certain other entities. The FCC
established new universal service funds to support telecommunications and
information service provided to qualifying schools, libraries and rural health
care providers, and expanded the federal subsidies for local telephone service
provided to low-income consumers. In accordance with the Telecommunications Act,
the FCC adopted plans to implement the recommendations of a Federal-State Joint
Board to preserve universal service, including a definition of services to be
supported, and defining carriers eligible for contributing to and receiving from
universal service subsidies. The FCC plans to revise its rules of subsidizing
service provided to consumers in high cost areas, which may result in further
substantial increase in the overall cost of the subsidy program. The FCC issued
a public notice in April 1998 seeking comment on proposals to revise the
methodology for determining universal service support. The outcome of the FCC's
pending and future proceedings relating to universal service or their effect on
the Company cannot be predicted. Several parties have appealed the FCC's order
and those appeals are pending before a federal appeals court. The outcome of the
further FCC proceedings or of the pending judicial appeals or petitions for FCC
reconsideration on the Company's operations cannot be predicted.
Employees
The Company employed 252 full time personnel as of December 31, 1998. TeleHub
has an employment contract with its Chief Executive Officer ("CEO") and
President, key executives denoted under "Management-Executive Employment
Agreements" and other executives. For employees without employment contracts,
the Company has arranged for a third party contractor to hire those employees
and handle payroll and benefits. None of TeleHub's employees are members of any
labor unions. TeleHub also utilizes independent contractors and consultants.
Glossary
Ancillary Services Options available to an enhanced
service provider, which support and
complement the provision of enhanced
services. Examples include protocol
conversion and DID with third number
billing inhibited.
Asynchronous Transfer Mode (ATM) Asynchronous Transfer Mode-A fast
cell-switched technology based on a
fixed-length 53-byte cell. ATM is
capable of handling voice, data, and
video transmissions over the same
facility.
Client End user computer on a network (local
or Internet).
Competitive Access Provider (CAP) A new term coined by the FCC to
describe a facilities-based local
carrier (such as MFS, MCI, Metro,
etc.) competing directly with the
incumbent carrier. A CAP can also be
referred to as a CLEC.
Competitive Local Exchange
Carrier (CLEC) A new term coined by the FCC to
describe a facilities-based local
carrier (defined in 1996 FCC
Interconnection Order). Such carriers
may also be called CAPs.
DS-3 Digital service, Level 3. Equipment of
28 T-1 channels, and operating at
44.736 Mbps. Also called T-3.
15
<PAGE>
End-Office A Central Office to which a telephone
subscriber is connected--frequently
referred to as a Class 5 office--that
actually delivers dial tone to the
subscriber.
Incumbent LEC (ILEC) With respect to an area, the local
exchange carrier that, on February 8,
1996, provided telephone exchange
service in such area and on that date
was deemed to be a member of the
exchange carrier association or is a
person or entity that, on or after
February 8, 1996, became a successor
or assign of a member of the
foregoing. RBOCs are considered ILECs.
Independent Telephone Company (ITC) A telephone company not affiliated
with one of the former RBOCs.
Interexchange Carrier (IXC) These are carriers providing
connections between Local Access and
Transport Areas (LATAs) and serving
areas where the calling and called
customers are located in different
LATAs.
Internet Protocol (IP) Part of the TCP/IP family of protocols
describing software that tracks the
Internet address of nodes, routes,
outgoing message, and recognizes
incoming messages.
InterLATA Telecommunications services that
originate in one LATA and terminate in
another.
Leased Lines A carrier or reseller leases T3, T1,
or OC-level trunks for use between
switching facilities. The carrier or
reseller is responsible for ensuring
that there is enough capacity to
support the requisite traffic.
LEC Local Exchange Carrier-any company
that is engaged in the provision of
local telephone exchange service or
exchange access.
Network Element A facility or the equipment used in
the provision of a telecommunications
service. The term includes subscriber
numbers, databases, signaling systems,
and information sufficient for billing
and collection or used in the
transmission, routing, or other
provision of a telecommunications
service.
Number Portability The technology that will allow a
telephone number to travel with a
customer from place to place and, for
800 numbers, from one long distance
carrier to another.
Operational Support Systems (OSS) Methods and procedures (generally
mechanized) that directly support the
daily operation of the
telecommunications provider's
infrastructure, e.g., order
processing, equipment assignment, etc.
A typical LEC will have hundreds of
OSSs.
Public Switch Telephone
Network (PSTN) Usually refers to the worldwide voice
telephone network accessible to all
those with telephones and access
privileges (i.e., in the United
States, it was formerly called Bell
System Network or the AT&T long
distance network).
Regional Bell Operating
Company(RBOC) Originally seven regional telephone
companies created by the divestiture
of AT&T in 1984. Each company consists
of two or more Bell Operating
Companies.
16
<PAGE>
Reseller Company that uses and buys the
transmission facilities and capacity
of another carrier. The price at which
it buys services is the wholesale
rate.
Service Control Point (SCP) Also called Signal Control Point. A
remote database within the SS7
network.
Server The main computer on a network,
including local area networks (LANs)
and hosts on the Internet. So called
because it "serves" software or
information to the "client" computers
on the network.
Service Provider A carrier or other organization that
provides dial tone, access lines,
transport, e-mail or Internet
connectivity, typically for a fee.
Signaling System 7 (SS7) An internationally standardized,
general purpose signaling system. It
is a dedicated signaling network that
is separate from the regular message
network. The message network still
carries the voice and/or data between
the calling and called parties.
Signal Transfer Points (STP) Highly reliable packet switches that
route signaling messages between
signaling end points on the network.
STPs are the "signaling tandems" of
the signaling network. STPs provide
translation and routing functions for
signaling messages received from the
network. Synchronous Optical Network
(SONET) A family of fiber-optic
transmission rates from 51.84 Mbps to
13.22 Gbps. SONET is an optical
interface standard that allows
internetworking of transmission
products from multiple vendors.
Switchless Resellers Like aggregators, these companies have
no facilities, but they assume their
own identity through billing and
customer care services-earning their
revenues on the difference between
wholesale and retail rates.
Telecommunications The transmission between or among
points specified by the user, of
information of the user's choosing
(including voice, data, image,
graphics, and video) without change in
the form or content of the
information.
Telecommunication Carrier Any provider of telecommunications
services.
Third-Tier Carriers Also known as switch-based resellers
or carriers. These companies lease
networks to interconnect one or more
of their own switches. Revenues vary
dramatically-from under $1 million to
over $100 million annually.
Virtual Access Services
Platform(VASP)(TM) The Company's proprietary software and
database which provide an Advanced
Intelligence Network platform
front-end database integrator for
billing, management and control
interfacing adjuncts.
17
<PAGE>
Item 2. Properties
Real Property. The Company leases 97,647 square feet of office space in Gurnee,
Illinois, for its corporate offices, technology development and network
operations center pursuant to leases expiring at various times from 2000 to
2006. TNS leases 15,341 square feet in downtown Chicago for its Chicago
telecommunications switches, pursuant to a lease expiring in 2001, another
14,705 square feet in downtown Los Angeles, California for its Los Angeles
telecommunications switch pursuant to a lease expiring in 2007, and conduit and
co-location space in downtown Los Angeles pursuant to a lease agreement expiring
in 2007. TNS leases 15,217 square feet in downtown New York City for its New
York telecommunications switches, pursuant to a lease expiring in 2007. TTC
leases office space in Kansas City, Missouri pursuant to a lease expiring in
September 2000. TeleHub Leasing Corporation leases office space in Bedford, New
Hampshire on a month-to-month lease.
In March 1999, the Company closed its corporate office in Walnut Creek,
California. The Company leases 4,771 square feet of office space at that
location pursuant to a lease expiring in 2002; the Company has subleased that
space for the remainder of the lease term.
Intellectual Property. The VASP(TM) software is one of the Company's primary
assets. Management is seeking to protect the Company's intellectual property
rights in the VASP(TM) software under applicable law including using, when and
as appropriate, trade secret and patent protections. Specifically the Company
has several patents pending relating to the VASP(TM) technology. There can be no
assurances that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that competitors will not
independently develop similar technologies. The Company's future success will
depend in part on its ability to protect its proprietary rights to the
technologies used by VASP(TM).
Item 3. Legal Proceedings
The Company is not currently engaged in any legal proceedings. The
Company is, however, subject to state commission, FCC and court decisions as
they relate to the interpretation and implementation of the applicable federal
and state laws and regulations, such as the Communications Act, and the
Telecommunications Act. In some cases, the Company may be bound by the results
of on-going proceedings before these bodies.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1998 Annual General Shareholders Meeting ("AGM")
on Monday, August 24, 1998, in Lincolnshire, Illinois. Management solicited
proxies for this meeting. Holders of both Company common shares and Series A
Preferred Shares participated in the AGM, with each Series A Preferred Share
having the same voting power as one common share. At the AGM, the Company's
shareholders:
1. Elected the following Class B Directors to serve until the 2001 Annual
General Meeting:
Shares Shares Shares
Name in Favor Against Not Voting
---- ----------- ------- ----------
Michael G. McLaughlin 11,299,450 0 0
John F. Slevin 11,299,450 0 0
John R. Snedegar 11,299,450 0 0
No proxies were solicited in opposition to management's nominees, who
were all elected unopposed.
2. Increased the common shares reserved for issuance under the Company's
1997 Stock Option Plan (11,239,450 Shares in favor, 15,000 Shares
opposed and 45,000 Shares abstaining).
3. Appointed PricewaterhouseCoopers, LLP (the successor firm to Coopers &
Lybrand LLP), as the Company's independent auditors for 1998 fiscal
year (11,299,450 Shares in favor, no Shares opposed and no Shares
abstaining).
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<PAGE>
4. Ratified the actions of the Board of Directors since the 1997 AGM
(11,239,450 Shares in favor, 15,000 Shares opposed and 45,000 Shares
abstaining).
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.
There is no established public trading market for the Company's equity
securities. On February 28, 1999, there were 247 record holders of TeleHub
common shares and 178 record holders of TeleHub Series A Preferred Shares.
TeleHub has not paid dividends on its common shares and Preferred Shares, and
the Board intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes. Moreover, the indenture ("Indenture")
governing the Corporation's 13.875% Series B Senior Discount Notes due 2005
("Notes") limits Company's ability to pay cash dividends. In addition, future
loan agreements also might limit Company's ability to pay cash dividends. The
Company does not anticipate paying any dividends in the foreseeable future.
Issuance of Unregistered Securities. The following tables summarize all
securities that the Company issued or sold during the fiscal year ended December
31, 1998 that were not sold in registered offerings:
<TABLE>
<CAPTION>
Equity Securities
-----------------
Date Title Amount Underwriter Consideration Exemption
- ---- ----- ------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
7/30/98 Common Shares 68,599 FSC Corporation 1,000,000($14.5775 per Share) Sec. 4(2)
(Wholly owned subsidiary of BancBoston Corporation)
Debt Securities
---------------
Date Title Amount Underwriter Consideration Exemption
- ---- ----- ------ ------------ ------------- ---------
7/30/98 Units* 125 BancBoston Securities Inc. $83,553,750 Rule 506
- -----------------
<FN>
* consisting of $1,000 principal amount at maturity of Series A 13.875%
Senior Discount Notes due 2005 plus a warrant to purchase 16.667 common
shares for $0.01 per common share
</FN>
</TABLE>
<TABLE>
<CAPTION>
Options & Warrants
to purchase common shares Per Share
Date Title Shares Purchasable Class of Holder Exercise Price Exemption
- ---- ----- ------------------ --------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
1/01/98 Options 386,500 Employees $10.00 Sec 4(2)
1/01/98 Options 100,000 Directors $10.00 Sec 4(2)
1/01/98 Warrant 150,000 Executive Officer $10.00 Sec 4(2)
3/04/98 Warrant 15,000 Consultant $10.00 Sec 4(2)
3/16/98 Warrant 40,000 Consultant $10.00 Sec 4(2)
3/17/98 Option 409,500 Employees $10.00 Sec 4(2)
3/18/98 Option 80,000 Directors $10.00 Sec 4(2)
3/18/98 Option 97,378 Employees $5.00 Sec 4(2)
3/24/98 Warrant 10,000 Vendor $10.00 Sec 4(2)
5/01/98 Warrant 75,000 Broker $10.00 Sec 4(2)
5/20/98 Warrant 240,000 Lender/Affiliate $10.00 Sec 4(2)
6/02/98 Warrant 900,000 Executive Officer & Director $12.50 Sec 4(2)
7/01/98 Warrant 2,082,732 Broker $0.01 Sec 4(2)
8/31/98 Warrant 157,000 Consultant $14.58 Sec 4(2)
8/24/98 Option 1,105,000 Employees $14.58 Sec 4(2)
9/16/98 Option 53,000 Employees $14.58 Sec 4(2)
10/1/98 Option 206,100 Employees $14.58 Sec 4(2)
12/16/98 Option 140,000 Employees $14.58 Sec 4(2)
12/31/98 Option 15,000 Employees $14.58 Sec 4(2)
</TABLE>
19
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated financial data for the period from
inception (January 18, 1996) to December 31, 1996 and for the years ended
December 31, 1997 and 1998 have been derived from the Consolidated Financial
Statements which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The following selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
<TABLE>
<CAPTION>
Inception to Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C>
Statement of Operations Data:
Revenue -- $ 2,901,280 $ 8,407,087
Operating expenses other than depreciation
And amortization 3,667,319 19,483,912 61,030,188
Depreciation and amortization 68,556 784,548 4,574,368
------------ ------------ ------------
Total operating expenses 3,735,875 20,268,460 65,604,556
Operating loss (3,735,875) (17,367,180) (57,197,469)
Amortization of debt discount (85,375) (546,875) (2,794,161)
Interest expense, net (66,973) (213,658) (5,947,669)
Other income (expense) (599,950) 34,889 (6,086)
------------ ------------ ------------
Net loss $ (4,488,173) $(18,092,824) $(65,945,385)
============ ============ ============
Basic and diluted loss per share $ (.52) $ (1.70) $ (5.21)
Weighted average shares outstanding used in
per share calculations -- basic and diluted 8,614,815 10,624,251 12,664,260
Balance Sheet Data:
Working Capital $ (1,370,554) $ 6,445,243 $ 30,019,168
Total assets 4,029,254 34,258,400 70,409,776
Total debt, including current portions 160,107 12,599,299 78,834,726
Stockholders' equity (deficit) (2,975,254) 17,393,445 (21,676,216)
Number of Employees
9 88 252
</TABLE>
Item 7. 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.
20
<PAGE>
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 twenty
six contracts, ranging from one to three year terms, to provide interstate and
intrastate long distance services to switchless resellers. As customers
transition their traffic onto TeleHub's network, the Company expects significant
growth in revenues. The Company expects that as revenues increase, the variable
costs associated with operating the TeleHub network should decline as a
percentage of total revenues, and accordingly margins will improve. The Company
believes that the TeleHub network should have positive EBITDA at approximately
$15 million a month of on-net revenues, although there is no assurance that the
Company will be able to achieve such revenues. Additionally, the Company has
signed several memoranda of understanding and has distributed several proposals
to license its VASP(TM) services. The Company expects to license its technology
to multiple carriers and OEMs by the end of 1999. The Company expects
significant growth in revenues from the licensing of VASP over the next two
years. The foregoing expectations are forward-looking statements that involve
risks and uncertainties, and actual results could vary as a result of a number
of factors including the Company's operating results, the results and timing of
the Company's launch of new products and services, governmental, legislative or
regulatory changes, the ability of the Company to meet product and project
demands, the success of the Company's marketing efforts, competition and
acquisitions of complementary businesses, technologies or products.
Since inception, the Company has incurred net losses and experienced
negative cash flow from operations and expects to continue to operate at a net
loss and to experience negative cash flow at least through 1999. However, the
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenues and achieve other operating efficiencies. The Company experienced net
losses of approximately $65.9 million and $18.1 million for the year ended
December 31, 1998 and December 31, 1997, respectively. At December 31, 1998, the
Company had approximately $31.1 million of net deferred tax assets comprised
primarily of start up costs which are capitalized for tax purposes and net
operating loss carry-forwards. Due to uncertainty of realization, a valuation
allowance has been provided to eliminate the net deferred tax asset at both
December 31, 1998 and 1997. Pursuant to the provisions of the Tax Reform Act of
1986 (the "Tax Reform Act"), utilization of the net operating loss carryforwards
may be subject to an annual limitation as defined in the Tax Reform Act.
Furthermore, the Company believes that it is more likely than not that it will
not generate taxable income through 1999, and possibly beyond, and accordingly
will not realize the Company's deferred tax assets through 1999, and possibly
beyond. The Company will continue to assess the realizability of the deferred
tax assets based on actual and forecasted operating results. See Note 5 to the
Consolidated Financial Statements.
To fund its operations, the Company has raised gross proceeds of
approximately $43.5 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 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.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue
Revenue increased $5.5 million to $8.4 million from $2.9 million for
years ended December 31, 1998 and 1997, respectively. TTC licensed VASP(TM) to
Newbridge for $5.0 million, $3.0 million of which was recorded the year December
31, 1998, and TNS generated $5.4 million of revenue from network operations
during the year ended December 31, 1998.
Operating expenses
Operating expenses increased $45.3 million to $65.6 million from $20.3
for the years ended December 31, 1998 and 1997, respectively. Monthly recurring
network circuit costs, personnel costs, network equipment lease payments,
depreciation expense, and facility costs increased by $15,020,000, $13,075,000,
$8,195,000, $3,790,000, $1,035,000, respectively. Significant operating cost
21
<PAGE>
increases were necessary to expand the network to efficiently handle anticipated
subscriber traffic, and to manage the financial and administrative aspects of
the business. Increased personnel costs reflect an increase in employees from 88
as of December 31, 1997 to 252 as of December 31, 1998. All operating expenses
are primarily variable and are expected to increase in future periods as revenue
increases. Research and development expenses increased by $3,999,000 to
$8,244,000 from $4,245,000 for the year ended December 31, 1998 and 1997,
respectively. Research and development costs will increase in future periods to
continue the development of the Company's product and service offerings.
Amortization of debt discount
Amortization of debt discount for the year ended December 31, 1998
amounted to $2,794,000. Warrants issued in connection with the Comdisco Bridge
Loan accounted for $1,460,000. The remaining $1,334,000 related to the
amortization of warrants associated with the debt offering. For the year ended
December 31, 1997, amortization of debt discount was $547,000, which related to
premiums paid to Hartford Holdings Ltd. ("HHL") in connection with the
settlement of all outstanding bridge loans and notes issued to the Company.
Interest income (expense), net
Net interest expense for the year ended December 31, 1998 was
$5,948,000 as compared to $214,000 for the year ended December 31, 1997. Gross
interest expense increased approximately $6,863,000 as a result of the Initial
Note Offering and Comdisco Bridge Loan agreement. The total interest and debt
discount amortization expense relating to the Comdisco Bridge Loan, which
originated in early May 1998 and was repaid in late July 1998, amounted to
approximately $2,550,000. Interest income increased $1,129,000 as a result of
increased cash and equivalent balances available for short term investments.
Net loss
The Company reported a net loss of $65.9 million and $18.1 million for
the year ended December 31, 1998 and December 31, 1997, 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.
Year ended December 31, 1997 compared to period from January 18, 1996
(inception) to December 31, 1996
Revenues
The Company commercially introduced its services in December 1997.
Revenue was first recognized in 1997 for licensing fees, consulting services and
network services. Revenue for the year ended December 31, 1997 was $2.9 million.
TTC recorded $2.0 million in November 1997 under a licensing agreement with
Newbridge. TNS recognized $900,000 for consulting services and generated $1,300
of network revenue in December 1997. No revenue was generated during the period
from January 18, 1996 (inception) to December 31, 1996.
Operating expenses
Total operating expenses increased approximately $16.6 million to $20.3
million from $3.7 million for the year ended December 31, 1997 and the period
from January 18, 1996 (inception) to December 31, 1996, respectively. Personnel
costs, consulting services, network equipment lease payments, monthly recurring
network circuit costs, facility costs, and depreciation expense increased by
$5,616,000, $2,216,000, $2,193,000, $2,164,000, $1,087,000, and $716,000,
respectively. The significant increase reflects the implementation of the
Company's business plan which resulted in accelerated development efforts and
network expansion and build-out, as well as infrastructure growth of the
Company. Research and development expenses increased $2,638,000 to $4,245,000
from $1,607,000 for the year ended December 31, 1997 and 1996, respectively.
Research and development costs will increase in future periods reflecting the
continuing development of the Company's product and service offerings.
Total TNS operating expenses increased approximately $11.7 million to
$13.8 million from $2.1 million for the year ended December 31, 1997 and the
period from January 18, 1996 (inception) to December 31, 1996, respectively.
This increase was due to the network expansion, as well as infrastructure growth
for the segment. Total TTC operating expenses increased approximately $4.9
million to $6.5 million from $1.6 million for the year ended December 31, 1997
22
<PAGE>
and the period from January 18, 1996 (inception) to December 31, 1996,
respectively. This increase related primarily to the accelerated research and
development efforts discussed previously.
Amortization of debt discount
Amortization of debt discount increased approximately $462,000 to
$547,000 from $85,000 for the year ended December 31, 1997 and the period from
January 18, 1996 (inception) to December 31, 1996, respectively. Amortization of
debt discount is related to premiums paid to HHL in connection with the
settlement of all outstanding bridge loans and notes issued to the Company. The
Company began amortizing the total premiums of $632,000 during the fourth
quarter of 1996. The remaining unamortized balance of the debt discount was paid
during the first quarter of 1997 when these obligations were settled.
Interest expense, net
Net interest expense increased approximately $147,000 to $214,000 from
$67,000 for the year ended December 31, 1997 and the period from January 18,
1996 (inception) to December 31, 1996, respectively. Gross interest expense
increased approximately $453,000 primarily due to increased capital lease
balances associated with the purchase of three switching platforms. This
increase was partially offset by interest income during the year ended December
31, 1997 of $306,000 related to higher cash and equivalents balances.
Other income (expense)
Other income was $35,000 for the year ended December 31, 1997 as
compared to other expense of $600,000 for the period from January 18, 1996
(inception) to December 31, 1996. In 1996, other expense related to the
termination of a proposed merger whereby the Company indemnified HHL from
certain claims and liabilities. The Company issued a note payable to HHL for
$600,000 which was later settled through the issuance of Preferred Stock. See
"Certain Relationships and Related Transactions."
Net loss
Net loss increased approximately $13.6 million to $18.1 million from
$4.5 million for the year ended December 31, 1997 and the period from January
18, 1996 (inception) to December 31, 1996, respectively.
The TNS net loss increased approximately $10.8 million to $13.7 million
from $2.9 million for the year ended December 31, 1997 and the period from
January 18, 1996 (inception) to December 31, 1996, respectively. The TTC net
loss increased approximately $2.8 million to $4.4 million from $1.6 million for
the year ended December 31, 1997 and the period from January 18, 1996,
respectively.
Liquidity and Capital Resources
To date the Company has satisfied its cash requirements primarily
through lease financing, the sale of capital stock, the Initial Note Offering
and loans from affiliates. The Company's principal uses of cash are to fund
working capital requirements and capital expenditures and to service its lease
financing obligations.
For the year ended December 31, 1998, net cash used in operations was
$44,837,000 primarily related to net losses, offset by increases in accounts
payable and accrued expenses. Net cash used in investing activities was
$3,787,000 for the year ended December 31, 1998. This related to capital
expenditures for network equipment, offset by proceeds from the sale and
lease-back of equipment and a decrease in restricted cash. Net cash provided by
financing activities was $75,972,000 for the year ended December 31, 1998 and
related primarily to proceeds from Initial Note Offering offset by payments on
capital leases and debt obligations. The Company obtained additional capital
lease financing of $1,080,000 during the year ended December 31, 1998. Total
payments on capital lease obligations and long-term debt were approximately
$1,706,000 during the year ended December 31, 1998. The Company is committed to
make payments under various operating leases. See Note 6 to the Consolidated
Financial Statements.
On July 30, 1998, the Company completed the Initial Note Offering
yielding approximately $65,900,000 in net proceeds after offering expenses and
repaying the Bridge Loan. Additionally, BancBoston Securities Inc. made a $1
million equity investment in the Company.
23
<PAGE>
For the twelve month period ended December 31, 1997, net cash used for
operating activities was $16,625,000 primarily related to net losses, offset by
increases in accounts payable and accrued liabilities. Net cash used for
investing activities was $9,629,000. This related to capital expenditures for
network equipment, leasehold improvements and an increase in restricted cash.
Net cash provided by financing activities was $35,449,000 relating to proceeds
received from two private placements of equity securities during 1997.
Approximately 80% of the cash requirements were utilized by TNS as compared to
20% by TTC in 1997. The cash requirements related to funding working capital
needs as well as capital expenditures.
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 terms of the agreement, the
Company's wholly owned subsidiary TeleHub Technologies Corporation ("TTC"), will
form a wholly owned subsidiary ("NewCo") to be incorporated in the State of
Nevada. At closing, TTC will contribute all of its assets and liabilities, the
Company will contribute all of it assets relating to its VASP(TM) technology,
including all intellectual property rights, to NewCo. Newbridge will contribute
$52 million directly into NewCo. NewCo will immediately remit $22 million to TTC
to pay off an intercompany liability. Newbridge will also remit $8 million
directly to the Company. In exchange, NewCo and the Company will issue 19% of
the common stock of NewCo to Newbridge. Under terms of the Agreement, Newbridge
has an option to purchase up to a 50% interest in NewCo for $10 million dollars
("Newbridge Option"). The Newbridge Option expires in one year.
The Company expects to incur additional operating losses through 1999.
The Company believes that the net proceeds from the joint venture will be
sufficient to meet anticipated cash needs for working capital and for the
acquisition of capital equipment until the fourth quarter of 1999. Based upon
anticipated sales terms and projections, the Company may be required to raise
additional funds through a public or private financing, strategic relationships
or other arrangements. There can be no assurance that such additional funding,
if needed, will be available on terms attractive to the Company, or at all. The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary materially as a
result of a number of factors, including those set forth below under the caption
"Risk Factors--Future Capital Needs; Uncertainty of Additional Financing."
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 incompatibility of its own computer systems and
equipment as well as that of third parties with whom the Company conducts
business.
Readiness Task Force
Since the Company'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. The Company has created a task force to evaluate its Year 2000
readiness as it may affect the Company'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 is inventorying all technologies used in
the Companys business. These technologies include hardware, software and
embedded microchips. The task force will review both internal systems (including
24
<PAGE>
VASPJ(TM), information technology assets, equipment and other systems); and
external systems (i.e., third-party manufactured products used by the Company,
and issues with customers, vendors and suppliers).
The task force has identified eight major areas (involving 71 different
products) in which utilizes third party hardware and software but has not
completed such identification for the TNS network or its administrative and
management systems.
Assessment. As the inventory discloses different technologies used by
the Company, the task force is assessing the Year 2000 compatibility of each
inventoried item. The task force will verify Year 2000 compatibility through
testing or from the manufacturer's documentation. To obtain such manufacturer
documentation, the task force is searching 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 the Company's critical vendors and customers. The Company does not yet have
enough information to evaluate whether potential Year 2000 issues with
third-parties might have a material adverse effect on operations.
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 (22.5%) 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 estimates the cost for
acquiring the Year 2000 compliant versions of such products could be up to
$100,000. The task force has not yet tested under Year 2000 scenarios, has not
identified the extent of any non-compliance and has not assessed the possible
financial consequences.
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. The Company anticipates that remedial actions will require use
of the Company's 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.
Implementation. After successfully completing remediation and testing,
the Company will implement the Year 2000 ready technology. The Company expects
to complete all implementations and be fully Year 2000 ready by June 30, 1999.
However, the Company could encounter a significant internal or external Year
2000 issue which, if not remediated in a timely manner, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Maintenance. To maintain Year 2000 compatibility after completion of
the compliance plan, the task force is drafting Year 2000 business rules. These
rules will cover both internally created applications and purchases of
technologies. Company employees will be required to ensure the applications they
create are Year 2000 compatible, with the assistance of the Company's
information systems department. All future purchases of hardware, software and
other technologies will require Year 2000 compatibility certification or similar
documentation. The Company expects to circulate these rules internally during
the third quarter of 1999.
Contingency Planning.
The Company will address contingency planning in the second quarter of
1999. The Company currently does not foresee extensive contingency planning
efforts. Principal activities will include backing up all data bases, keeping
the information systems department's schedule clear in January of 2000.
Costs.
Other than time spent by the task force personnel which could be spent
on other matters, the Company has not yet incurred any significant costs in
identifying Year 2000 issues. The Company does not anticipate any significant
further costs in the Identification or Assessment stages by the task force. The
25
<PAGE>
Company believes that total costs for becoming 100% Year 2000 compatible will
not be significant. Hardware upgrades will come out of the normal capital budget
and software changes should not involve material amounts. However, since no
material Year 2000 issues have yet been identified or assessed and therefore no
contingency plans have been finalized, the costs for remediation of any Year
2000 issues might be significant. As the Company continues to gather information
on its Year 2000 issues, the Company will re-evaluate its ability to estimate
costs associated with the Year 2000 issue. There can be no assurance that as
additional Year 2000 issues are addressed, the Company's costs to correct such
issues will be consistent with historical costs.
The Company 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 the Company 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.
Failure to achieve Year 2000 compatibility could disrupt operation of the
network, or impact the Company's ability to bill or collect revenues. The
expenses of the Company's efforts to address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could materially adversely affect the Company's business, prospects,
operating results, financial condition and its ability to service and repay
indebtedness, including the Notes. The revenue stream and financial stability of
existing customers may be adversely impacted by Year 2000 issues, which could
cause fluctuations in the Company's revenues and operating profitability.
Quarterly Results of Operations
The following tables set forth statement of operations data for each of
the Company's last eight calendar quarters and the percentage of the Company's
revenues represented by each line reflected therein. This information has been
prepared on the same basis as the audited financial statements contained herein
and, in management's opinion, reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED:
---------------
March 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,006,601 $ 152,664 $ 1,454,103 $ 3,793,719
Operating expenses other than depreciation
and amortization 9,173,827 13,217,616 16,076,303 22,562,442
Depreciation and amortization 1,025,356 1,072,162 1,173,337 1,303,513
------------ ------------ ------------ ------------
Total operating expenses 10,199,183 14,289,778 17,249,640 23,865,955
------------ ------------ ------------ ------------
Operating loss (7,192,582) (14,137,114) (15,795,537) (20,072,236)
------------ ------------ ------------ ------------
Amortization of debt discount -- 973,525 1,025,612 795,024
Interest expense, net 202,348 907,809 2,112,562 2,724,950
Other income (expense) 1,005 9,753 6,131 (22,975)
------------ ------------ ------------ ------------
Net loss $ (7,393,925) $(16,008,695) $(18,927,580) $(23,615,185)
============ ============ ============ ============
Basic and diluted loss per share $ (.59) $ (1.27) $ (1.49) $ (1.86)
============ ============ ============ ============
Weighted average share outstanding used
in share calculation - basic and diluted 12,634,450 12,634,450 12,683,654 12,703,515
============ ============ ============ ============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED:
---------------
March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues -- -- -- $ 2,901,280
Operating expenses other than depreciation
and amortization 1,680,621 3,428,047 6,279,995 8,095,249
Depreciation and amortization 54,618 71,888 136,912 521,130
------------ ------------ ------------ ------------
Total operating expenses 1,735,239 3,499,935 6,416,907 8,616,379
------------ ------------ ------------ ------------
Operating loss (1,735,239) (3,499,935) (6,416,907) (5,715,099)
------------ ------------ ------------ ------------
Amortization of debt discount 546,875 -- -- --
Interest expense, net 14,375 (50,211) (2,333) 251,827
Other income (expense) 38 38 38 34,775
------------ ------------ ------------ ------------
Net loss $ (2,296,451) $ (3,449,686) $ (6,414,536) $ (5,932,151)
============ ============ ============ ============
Basic and diluted loss per share $ (.23) $ (.34) $ (.62) $ (.50)
============ ============ ============ ============
Weighted average share outstanding used
in share calculation - basic and diluted 10,022,413 10,134,450 10,356,135 11,965,754
============ ============ ============ ============
</TABLE>
Results of Operations as a percentage of revenues
December 31, December 31,
Statement of Operations Data: 1997 1998
----------------------------- ---- ----
Revenue 100% 100%
Operating expenses other than depreciation
And amortization 672% 726%
Depreciation and amortization 27% 54%
----------- ---------
Total operating expenses 699% 780%
----------- ---------
Operating loss 599% 680%
----------- ---------
Amortization of debt discount 19% 33%
Interest expense, net 7% 71%
Other income (expense) 1% 0%
----------- ---------
Net loss 624% 784%
=========== =========
Note: From the period inception to December 31, 1996 is excluded from the above
table due to the Company generating no revenues.
27
<PAGE>
Item 8. Financial Statements and Financial Statement Schedule
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..................................... 29
Consolidated Balance Sheets........................................... 30
Consolidated Statements of Operations................................. 31
Consolidated Statement of Stockholders' Equity (Deficit).............. 32
Consolidated Statements of Cash Flows................................. 36
Notes to Consolidated Financial Statements............................ 37
Financial Statement Schedule..........................................E-2
Schedule II - Valuation and qualifying accounts.......................E-2
The following consolidated financial statements do not include separate
financial statements of the Company's Subsidiaries (TeleHub Network Services,
TeleHub Technology Corporation and TeleHub Leasing Corporation) as management
has determined that they would not be material to investors. This determination
is based on the fact that (I) the parent company has no operations or
significant assets other than its investments in its subsidiaries, (ii) the
guarantor subsidiaries are wholly owned, (iii) the subsidiaries' guarantee of
the parent company's debt are full, unconditional, joint and several, (iv) the
operations of the sole non-guarantor in which the Company holds a minority
interest are immaterial to the consolidated financial statements; and (v)
segment information is presented in note 16 to the following consolidated
financial statements.
28
<PAGE>
Report of Independent Accountants
March 5, 1999, except for Note 17
as to which the date is March 31, 1999
To the Board of Directors and Stockholders of
TeleHub Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders'equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
TeleHub Communications Corporation and its subsidiaries (the "Company") at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for the period from January 18, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has accumulated losses from the development of
its products and services and must obtain substantial additional financings to
execute its business plan. These factors raise substantial doubt regarding the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
29
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 9,380,320 $36,727,589
Restricted cash 1,730,382 416,321
Accounts receivable, net of allowance for
doubtful accounts of $1,093,594 in 1998 -- 3,114,053
Prepayments on leases 905,268 905,268
Debt issuance costs -- 874,338
Other assets 505,333 983,516
----------- -----------
Total current assets 12,521,303 43,021,085
Property and equipment, net 19,446,322 21,062,255
Prepayments on leases 1,939,054 1,044,085
Debt issuance costs -- 4,874,105
Other assets 351,721 408,246
----------- -----------
Total assets $34,258,400 $70,409,776
=========== ===========
Liabilities and Stockholders (Deficit)
Current liabilities:
Accounts payable $ 1,995,639 $ 5,802,730
Accrued liabilities 1,809,032 4,500,579
Current portion--capital lease obligations 2,028,898 2,393,015
Current portion--long-term debt 238,624 281,116
Deferred gain on sale/leaseback 3,867 24,477
----------- -----------
Total current liabilities 6,076,060 13,001,917
Capital lease obligations 9,655,461 8,274,635
Other long-term debt 676,316 67,885,960
Accrued liabilities 449,385 2,893,850
Deferred gain on sale/leaseback 7,733 29,630
----------- -----------
Total liabilities 16,864,955 92,085,992
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' equity (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, 1997 and 1998;
liquidation preference $17,500,000 3,500 3,500
Common stock, $.001 par value;
100,000,000 shares authorized; 12,634,450, and
12,703,537 shares issued and outstanding at
December 31, 1997 and 1998 respectively 12,634 12,704
Common stock warrants 1,831,234 27,246,651
Additional paid-in capital 38,613,919 40,105,733
Note receivable--stockholder (250,000) (400,000)
Deferred compensation (236,845) (118,422)
Accumulated deficit (22,580,997) (88,526,382)
----------- -----------
Total stockholders' equity (deficit) 17,393,445 (21,676,216)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $34,258,400 $70,409,776
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 18,
1996
(inception) to Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Telecommunications services $ -- $ 1,280 $ 5,371,889
Licenses -- 2,000,000 3,000,000
Consulting services -- 900,000 35,198
------------ ------------ ------------
-- 2,901,280 8,407,087
------------ ------------ ------------
Operating expenses:
Operations 401,878 9,676,095 40,215,031
General and administrative 1,616,265 4,606,776 7,558,079
Research and development 1,606,608 4,245,347 8,244,274
Sales and marketing 42,568 955,694 5,012,804
Depreciation and amortization 68,556 784,548 4,574,368
------------ ------------ ------------
Total operating expenses (1) 3,735,875 20,268,460 65,604,556
------------ ------------ ------------
Operating loss (3,735,875) (17,367,180) (57,197,469)
------------ ------------ ------------
Other income (expense):
Amortization of debt discount (85,375) (546,875) (2,794,161)
Interest expense (66,973) (520,148) (7,383,366)
Indemnification expense (600,000) -- --
Interest income -- 306,490 1,435,697
Other income 50 34,889 (6,086)
------------ ------------ ------------
Net loss $ (4,488,173) $(18,092,824) $(65,945,385)
============ ============ ============
Basic and diluted loss per share $ (0.52) $ (1.70) $ (5.21)
============ ============ ============
Weighted average shares outstanding
used in per share calculations
basic and diluted 8,614,815 10,624,251 12,664,260
============ ============ ============
(1) The following related party balances are included in the operating expenses:
Related party $ 1,926,027 $ 415,000 $ 633,261
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock
Preferred Stock Common Stock Common Stock Additional Committed Note
--------------- ------------ ------------ Paid-In To Be Receivable
Shares Amount Shares Amount Warrants Capital Issued Stockholder
------ ------ ------ ------ -------- ------- ------ -----------
<S> <C> <C> <C>
Balances at
January 18, 1996 (inception):
Common stock issued
in exchange for 1,510,000 $1,510 $(1,510)
contributed software
Common stock issued
in exchange for
cash and note receivable 1,500,000 1,500 (500) $(500)
Common stock issued
in exchange for
contribution of
VASP software 2,740,000 2,740 (2,740)
Common stock
issued for cash 4,250,000 4,250 995,750
Common stock committed
to be issued per
Bridge Loan Agreement $512,250
Net Loss
------ ------ ---------- ------ -------- ------- ------- ----------
Balances,
December 31, 1996 10,000,000 10,000 991,000 512,250 (500)
note receivable 500
Common stock committed
to be issued per
Bridge Loan Agreement 120,000
Common Stock issued per
Bridge Loan Agreement
and in exchange
for note receivable 134,450 134 672,116 (632,250) (40,000)
Series A convertible
preferred stock and
warrant to purchase
Common Stock issued
conversion of notes payable 490,000 490 2,449,510
Series A convertible
preferred stock and
warrant to purchas
Common Stock issued
for cash, net of
cash issuance
costs of $2,005,921 3,010,000 3,010 72,240 13,041,069
Forgiveness of
note receivabl
in exchange for
consulting services 40,000
Private placement of
Common Stock and
warrant to purchase
additional Common Stock
for cash, net of issuance
cost of $1,848,720 1,000,000 1,000 501,000 8,150,263
Supplemental private placement
of Common Stock for cash,
net of issuance costs
of $2,198,286
1,490,000 1,490 746,490 12,700,224
</TABLE>
32
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------ ------- ---------
<S> <C>
Balances at
January 18, 1996 (inception):
Common stock issued
in exchange for
contributed software -
Common stock issued
in exchange for
cash and note receivable $500
Common stock issued
in exchange for
contribution of
VASP software
Common stock
issued for cash 1,000,000
Common stock committed
to be issued per
Bridge Loan Agreement 512,250
Net Loss $(4,488,173) (4,488,173)
------------ ----------- ----------
Balances,
December 31, 1996 (4,488,173) (2,975,423)
Repayment of shareholder
note receivable 500
Common stock committed
to be issued per
Bridge Loan Agreement 120,000
Common Stock issued per
Bridge Loan Agreement
and in exchange
for note receivable -
Series A convertible
preferred stock and
warrant to purchase
Common Stock issued
conversion of notes payable 2,450,000
Series A convertible
preferred stock and
warrant to purchas
Common Stock issued
for cash, net of
cash issuance
costs of $2,005,921 13,116,319
Forgiveness of
note receivabl
in exchange for
consulting services 40,000
Private placement of
Common Stock and
warrant to purchase
additional Common Stock
for cash, net of issuance
cost of $1,848,720 8,652,263
Supplemental private placement
of Common Stock for cash,
net of issuance costs
of $2,198,286 13,448,204
</TABLE>
33
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - (Continued)
<TABLE>
<CAPTION>
Stock
Preferred Stock Common Stock Common Stock Additional Committed Note
--------------- ------------ ------------ Paid-In To Be Receivable
Shares Amount Shares Amount Warrants Capital Issued Stockholder
------ ------ ------ ------ -------- ------- ------ -----------
<S> <C> <C> <C>
Common Stock issued
for payment of
note payable net of
issuance cost of $14,010 10,000 10 5,010 85,980
Issuance of stock options
at below fair value
and related
deferred compensation 523,757
Amortization of deferred
compensation related
to stock options
Issuance of stock warrants
in return for services
and related
deferred compensation 506,494
Amortization of deferred
compensation related
to stock warrants
Issuance of note receivable
to employee in
December 1997 (250,000)
Net loss
------ ------ --------- ------ -------- ------- ------ -----------
Balances,
December 31, 1997 3,500,000 3,500 12,634,450 12,634 1,831,234 38,613,919 - (250,000)
Amortization of deferred
compensation related
to stock options
Issuance of fully vested
employee stock options
in lieu of bonus 486,884
Issuance of stock warrants
relating to the
debt issuance and
services provided 3,154,739
Common stock issued
for cash 68,587 69 999,931
Issuance of stock warrants
related to notes issued 22,260,678
Issuance of note
receivable to employees (635,340)
Repayment of note
receivable from employee 485,340
Common stock issued
upon exercise of
stock options 500 1 4,999
Net Loss
---------- ----- ---------- ------- ----------- ---------- ------ ---------
Balances
December 31, 1998 $3,500,000 3,500 12,703,537 $12,704 $27,246,651 $40,105,733 - (400,000)
========== ===== ========== ======= =========== ========== ====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Stockholders'
Deferred Accumulated Equity
Compensation Deficit (Deficit)
------------ ------- ---------
<S> <C> <C> <C>
Common Stock issued
for payment of
note payable net of
issuance cost of $14,010 91,000
Issuance of stock options
at below fair value
and related
deferred compensation (523,757) -
Amortization of deferred
compensation related
to stock options 286,912 286,912
Issuance of stock warrants
in return for services
and related
deferred compensation (14,450) 492,044
Amortization of deferred
compensation related
to stock warrants 14,450 14,450
Issuance of note receivable
to employee in
December 1997 (250,000)
Net loss (18,092,824) (18,092,824)
------------ ---------- ----------
Balances,
December 31, 1997 (236,845) (22,580,997) 17,393,445
Amortization of deferred
compensation related
to stock options 118,423 118,423
Issuance of fully vested
employee stock options
in lieu of bonus 486,884
Issuance of stock warrants
relating to the
debt issuance and
services provided 3,154,739
Common stock issued
for cash 1,000,000
Issuance of stock warrants
related to notes issued 22,260,678
Issuance of note
receivable to employees (635,340)
Repayment of note
receivable from employee 485,340
Common stock issued
upon exercise of
stock options 5,000
Net Loss (65,945,385) (65,945,385)
------------ ---------- ----------
Balances
December 31, 1998 $(118,422) $(88,526,382) $(21,676,216)
============ ========== ===========
</TABLE>
35
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 18,
1996
(inception) to Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operations
Net Loss $ (4,488,173) $(18,092,824) $(65,945,385)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation & amortization 68,556 784,548 4,574,368
Provisions for bad debts -- -- 1,093,594
Amortization of debt issuance costs -- -- 352,898
Amortization of deferred compensation -- 301,362 605,307
Amortization of debt discount 85,375 546,875 2,794,161
Accretion of debt -- -- 4,863,814
Indemnification expense financed and settled
through issuance of stock 600,000 -- --
Expenses financed through notes payable 161,243 -- --
Items settled through issuance of stock and
other equity transactions -- 820,801 1,694,452
Other non-cash credits -- (47,734) (8,757)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts Receivable -- -- (4,207,647)
Prepayments on leases -- (2,844,322) 894,969
Other Assets (884,159) 27,105 (534,708)
Increase (decrease) in liabilities:
Deferred revenue 1,350,000 (1,350,000) --
Accounts Payable 791,107 1,204,532 3,807,091
Accrued liabilities 7,742 2,250,675 5,136,012
Accounts payable - related parties 179,085 (179,085) --
Accrued interest 58,296 (58,296) --
Deferred gain from sale and lease-back -- 11,600 42,507
------------ ------------ ------------
Net cash used in operating activities (2,070,928) (16,624,763) (44,837,324)
Cash flows from investing activities:
Payments for property and equipment (572,672) (8,897,005) (6,321,930)
Proceeds from sale and lease-back of equipment -- 998,352 1,220,692
Restricted cash -- (1,730,382) 1,314,061
------------ ------------ ------------
Net cash used in investing activities (572,672) (9,629,035) (3,787,177)
Cash flows from financing activities activities:
Proceeds from debt issue -- -- 77,452,409
Proceeds from issuance of common stock 1,000,500 22,091,467 1,005,000
Proceeds from issuance of preferred stock -- 13,116,319 --
Receipt of payment on shareholder notes receivable -- 500 --
Proceeds from notes payable to shareholders 1,850,000 650,000 --
Repayment of shareholder notes -- (1,000,000) --
Payment on note receivable - related party -- -- (635,340)
Repayment on note receivable - related party -- (250,000) 485,340
Payments on capital lease obligations & loans (21,964) (159,309) (2,335,639)
Proceed from loans -- 1,000,205 12,000,000
Repayment of loan -- -- (12,000,000)
------------ ------------ ------------
Net cash provided by financing activities 2,828,536 35,449,182 75,971,770
------------ ------------ ------------
Net increase in cash and cash equivalents 184,936 9,195,384 27,347,269
Cash and cash equivalents balance - beginning of period -- 184,936 9,380,320
------------ ------------ ------------
Cash and cash equivalents balance - end of period $ 184,936 $ 9,380,320 $ 36,727,589
============ ============ ============
</TABLE>
See Note 14 for Supplemental Disclosure of Cash Flow Information.
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
1. Organization and Basis of Presentation:
Organization:
TeleHub Communications Corporation was formed in January 1996 to develop a
wholesale long distance communications carrier network deploying its proprietary
technology. In September 1996, the name of TeleHub Communications was changed to
TeleHub Network Services ("TNS"). In addition, a new holding company, TeleHub
Communications Corporation (the "Company" or "TeleHub") was formed. TeleHub
initiated an exchange offer in which TNS stockholders received ten thousand
shares of TeleHub common stock for each share of TNS common stock on like terms.
This exchange offer closed on January 1, 1997. All of the shares in TNS were
exchanged in this manner. The Company possesses proprietary software and systems
known as the Virtual Access Services Platform ("VASP(TM)"), which have been
under development to allow the management, billing and control of voice, data
and video content using cell-based efficiencies of asynchronous transfer mode
("ATM"). The Company's wholly-owned subsidiary, TeleHub Technology Corporation
("TTC"), markets and enhances the VASP(TM) technology. The Company has installed
equipment in three switching centers located in Chicago, New York, and Los
Angeles. The Company's activities to date have consisted of product development,
raising capital, acquiring property and equipment, and marketing its products.
These financial statements reflect the financial position and results of
operations for TeleHub and its consolidated subsidiaries, TNS, TTC and TeleHub
Leasing Corporation ("TLC"). The capital structure of the new holding company,
TeleHub has been reflected on a retroactive basis for all periods presented.
Additionally, the name of the new holding company, TeleHub Communications
Corporation, has been applied on a retroactive basis.
At December 31, 1998, TLC was incorporated but had no activity. TeleHub
owns all of TLC's common stock.
The telecommunications industry is highly competitive, as is the specific
wholesale long distance market the Company is entering. The success of the
Company in the wholesale long distance business is dependent upon the Company's
ability to generate significant customer traffic, to manage an efficient long
distance network and related customer service, and future enhancements of
VASP(TM). The Company has not previously managed a long distance network and
there can be no assurance that its long distance services can be sold at a
profit. Furthermore, the VASP(TM) platform is subject to substantial
technological uncertainty and there can be no assurance that the VASP(TM)
platform can be commercially successful.
Basis of Presentation:
During 1998, the company emerged from the development stages.
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has accumulated losses since its
inception in 1996, related primarily to the development of its software and
construction of its network sites. Management has developed an operations plan
that requires substantial additional debt and equity financing to complete
product development and to successfully launch and market products in
development. The Company's continued existence is dependent upon obtaining
sufficient additional financing and achieving profitable operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The Company raised additional proceeds through various financing
(See Notes 9 and 17). The Company will require additional funds to sustain
operations for the next twelve months. The Company is planning to fund
operations with proceeds from the sale of equity or debt instruments or from
entering into a joint venture agreements such as the one discussed in Note 17.
However, there can be no assurance that the Company's efforts to achieve
profitable operations or raise additional capital will be successful. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
37
<PAGE>
2. Significant Accounting Policies:
Principles of Consolidation:
These consolidated financial statements of the Company include the accounts
of TeleHub Communications Corporation and its wholly owned subsidiaries. All
significant inter-company balances and transactions were eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Revenue Recognition:
Telecommunications Services:
Revenues from telecommunications services provided to customers are
recognized as services are rendered.
Licenses:
Revenues from licenses are recognized when the user installs the
product, if there are no significant post-delivery obligations and
collection of the receivables is probable. Revenue from maintenance is
recognized ratably over the product's life cycle, which may exceed one
year. Costs related to insignificant obligations are accrued.
One customer accounted for all of the Company's licensing revenues
during fiscal year 1997 and 1998.
Consulting Services:
The Company's policy is to recognize revenue from consulting services
as such services are performed.
Software Development Costs:
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, requires
that software development costs be capitalized once the technological
feasibility of the software product has been established. As of December 31,
1998 all software development costs have been charged to expense in the periods
incurred as internally generated capitalizable software development costs have
not been material.
Research and Development Costs:
Costs related to research and development activities are expensed when
incurred.
Property and Equipment:
Depreciation and amortization are computed on the straight-line basis over
the estimated useful lives of the assets or the length of the capital lease,
whichever is shorter. Estimated useful lives are as follows:
Computer equipment........................ 3 years
Network equipment......................... 5 years
Office furniture..........................10 years
Expenditures incurred for assets under construction are capitalized.
Leasehold improvements are amortized on a straight-line basis over the term of
the lease, or the useful life of the assets; whichever is shorter.
Maintenance and repairs are expensed as incurred. When assets are sold or
retired, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in operations.
The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate the carrying value of an asset may not be
recoverable. No such events have occurred to date. In performing the review for
recoverability, the Company would estimate the future cash flows expected to
38
<PAGE>
result from the use of the asset and its eventual disposition. The amount of the
impairment loss, if an impairment exists, would be calculated based on the
excess of the carrying amount of the asset over its fair value.
Cash and Cash Equivalents:
All cash and cash equivalents are held in checking, money market accounts
or short-term investments with original maturities of 90 days or less, with two
banks. Cash equivalents are recorded at cost, which approximates fair value. As
of December 31, 1998, these balances exceeded existing federally insured limits.
Issuance of Equity Instruments to Non-Employees
The Company issues equity instruments to non-employees in consideration for
goods or services. Such transactions are accounted for based on the fair value
of the consideration received by the Company or the fair value of the equity
instrument issued, whichever is more reliably measurable, as required under the
provisions of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Accordingly, deferred tax assets and liabilities arise from
the differences between the tax basis of an asset or liability and its reported
amount in the financial statements and net operating loss carryforwards.
Deferred tax amounts are determined by using the tax rates expected to be in
effect when the taxes will actually be paid or refunds received, as provided
under currently enacted tax law. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense or benefit is the tax payable or refundable, respectively,
for the period plus or minus the change in deferred tax assets and liabilities
during the period.
Net Loss Per Share:
The Company computes loss per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings per Share.
Recently Issued Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The Company does not have any comprehensive
income items. Therefore, SFAS No. 130 is not applicable to the Company.
During 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," effective for the year ended September 30,
1999. The Company implemented the disclosure requirements of SFAS No. 131 in
1998 (See note 16).
In March 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 significantly changes
current financial statement disclosure requirements from those that were
required under SFAS 87. The Company does not have a pension or other
postretirement benefit plan. Therefore, SFAS No. 132 will not be applicable to
the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Because the Company has not entered into derivative financial instruments, the
implementation of SFAS No. 133 will not have an impact on the Company's
consolidated results of operations, financial position or cash flows.
39
<PAGE>
Reclassifications:
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation.
3. Property and Equipment:
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Equipment under capital lease:
Network equipment $ 12,740,048 $ 13,940,388
Computer equipment 182,072 182,072
Furniture 151,787 132,252
Network equipment 1,744,888 3,779,410
Computer and production equipment 2,026,160 3,947,129
Furniture 758,078 1,104,944
Leasehold improvements 2,648,658 3,239,644
------------ ------------
Total property and equipment 20,251,691 26,325,839
Less accumulated depreciation and amortization (805,369) (5,263,584)
------------ ------------
Property and equipment, net $ 19,446,322 $ 21,062,255
============ ============
</TABLE>
Included in accumulated depreciation and amortization is $312,737, and
$3,001,892 of accumulated amortization as of December 31, 1997 and 1998,
respectively, related to leased furniture and equipment.
Depreciation and amortization expense was $784,548 and $4,574,368 for the
year ended December 31, 1997 and 1998, respectively.
4. Accrued Liabilities:
The primary components of accrued liabilities are as follows:
December 31, December 31,
1997 1998
---------- ----------
Employee bonuses $ 708,362 $1,114,464
Sales tax on purchased equipment 694,153 694,153
Accrued lease payments 6,109 1,500,461
Other accrued expenses 400,408 1,191,501
---------- ----------
Total Accrued Liabilities $1,809,032 $4,500,579
========== ==========
40
<PAGE>
5. Income Taxes:
The primary components of temporary differences that give rise to deferred
taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
Federal State Federal State
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Capitalized R&D for tax purposes $ 4,800,000 $ 820,000 $ 3,600,000 $ 620,000
Net operating loss 2,200,000 400,000 23,740,000 4,140,000
Other, including nondeductible accruals 1,000,000 230,000 2,230,000 660,000
------------ ------------ ------------ ------------
Total deferred tax assets 8,000,000 1,450,000 29,570,000 5,420,000
Depreciable assets (200,000) 30,000 (720,000) (130,000)
------------ ------------ ------------ ------------
Net deferred tax asset 7,800,000 1,420,000 28,850,000 5,290,000
Valuation allowance (7,800,000) (1,420,000) (28,850,000) (5,290,000)
------------ ------------ ------------ ------------
Net deferred tax asset $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
Due to uncertainty of realization, a valuation allowance was provided to
eliminate the net deferred tax asset at both December 31, 1998 and 1997. The
valuation allowance increased $24,920,000 and $8,580,000 during the year ended
December 31, 1998 and December 31, 1997, respectively.
At December 31, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $69,420,000 and $69,580,000 for federal and state
income tax purposes, respectively. These carryforwards expire:
NOL Expiring in Year
Year ended December 31, Carryforwards Ending December 31,
----------------------- ------------- -------------------
Federal
1996......................... $1,650,000 2011
1997......................... 4,850,000 2012
1998......................... 62,920,000 2018
State
1996......................... 1,650,000 2002
1997......................... 5,000,000 2002
1998......................... 62,930,000 2003
The effective income tax rate differs from the statutory federal income tax
rate primarily due to the inability to recognize the benefit of net operating
losses.
Pursuant to the provisions of the Tax Reform Act of 1986, utilization of
the NOL carryforwards may be subject to an annual limitation if the Company
experienced a greater than 50% change in ownership of the Company within a
three-year period.
41
<PAGE>
6. Commitments and Contingencies:
Lease Obligations:
The Company is obligated under the terms of operating leases with various
parties for office space, switch room facilities, office equipment and vehicles.
These contracts may provide for adjustments or escalations based upon changes in
consumer price indices or operating expenses. A summary of such fixed
commitments at December 31, 1998 for the next five succeeding years and
thereafter is as follows:
Capital Operating
Years Leases Leases
------------------------------------------------ ----------- -----------
1999 $ 3,167,370 $15,083,532
2000 3,121,621 14,861,158
2001 3,121,621 9,108,965
2002 3,092,275 2,837,515
2003 -- 2,804,341
Thereafter -- 8,292,352
----------- -----------
Total minimum lease payments 12,502,887 $52,987,863
===========
Less amount representing interest 1,835,237
-----------
Present value of minimum lease payments
under capital leases 10,667,650
Less current portion 2,393,015
-----------
Noncurrent portion $ 8,274,635
===========
Rent expense is recorded on a straight line basis over the life of the
lease. Rent expense under all operating lease agreements was $133,553,
$3,397,635, and $12,624,406 for the period from January 18, 1996 (inception) to
December 31, 1996, the years ended December 31, 1997 and 1998, respectively.
In January 1999, the Company entered into a 46 month equipment capital
lease under which the Company has committed to make approximately $900,000 in
payments.
Purchase Commitments:
During 1996 and 1997, the Company entered into equipment financing
arrangements with an equipment vendor to purchase equipment. At December 31,
1996, $2,273,972 was payable to the vendor. In January 1998, the Company
renegotiated the terms of its arrangements into a capital lease. The amounts
owed at December 31, 1997 and 1998 are reflected in the capital lease balances.
Employment Agreements:
The Company has entered into employment agreements with certain of its
executives. These agreements generally provide for two to four-year initial
terms and thereafter one-year renewal terms until either party provides 30 days
notice of termination prior to the end of a term. If the Company terminates the
employment without cause, or if the employment is terminated upon the occurrence
of a major transaction, as defined, involving the Company, then the executive
shall receive a termination fee equal to 50% to 200% of the executive's annual
salary plus benefits plus a specified bonus. Payments shall only be made upon
execution of a standard release waiving all claims against the Company. The
Company's total potential obligation under these employment agreements was
$3,579,397 at December 31, 1998. Subsequent to December 31, 1998, the Company
made several severance payments which reduced this obligation by $465,250.
Litigation:
On April 15, 1997, Cam-Net Communications Network, Inc. ("Cam-Net") filed
an action against the Company in the United States District Court for the
Northern District of Illinois (Cam-Net Communications Network, Inc. v. TeleHub
Communications Corp. and TeleHub Network Services Corp., Cause No. 97 C 2578).
Cam-Net alleged, among other complaints, the breach of a September 1996
agreement under which TeleHub was to create a new network, billing, and
accounting system for Cam-Net's operations. Cam-Net further alleged that it paid
TeleHub a consulting fee of $1,350,000, but that TeleHub failed to complete the
system. The Company recorded the $1,350,000 it received from Cam-Net as deferred
42
<PAGE>
revenue at December 31, 1996 pending resolution of this complaint. During 1997,
the Company settled its litigation with Cam-Net out of court. The terms of the
settlement required the Company to return $450,000 of the consulting fees it had
received to Cam-Net. The Company retained $900,000 in fees related to the
consulting services and recognized such fees as revenue during 1997.
7. Related Party Transactions:
Hartford Holdings, Ltd. ("Hartford"), a substantial shareholder of the
Company, is controlled by the Chairman of the Board of Directors of the Company.
The Vice-chairman, President and Chief Executive Officer of the Company holds a
beneficial interest in the Sledge Family Trust which is a shareholder of the
Company. Hartford and the Sledge Family Trust advanced funds to further the
Company's growth and development in amounts further described in Note 9. The
Company has also indemnified Hartford from certain losses incurred in connection
with the matter discussed in Note 8.
During 1996, the Company paid the President of the Company $110,500 for
consulting services associated with the Cam-Net merger negotiations which were
subsequently abandoned (Note 8). The Company also incurred $169,304 in expenses
for consulting services provided by the Chairman of the Board of Directors. This
amount was payable to Hartford at December 31, 1996 and was settled on March 7,
1997 through the issuance of 33,800 shares of Series A Convertible Preferred
Stock.
In January 1996, Roseville Computer Projects Limited ("Roseville")
contributed certain software in exchange for shares of common stock in TNS which
were later converted into 1,510,000 shares of the Company's common stock. As a
result of this transaction, Roseville and the Company became entities under
common control. In March 1996, Roseville assigned all rights, title and interest
in the VASP(TM) to the Company in exchange for additional shares of common stock
in TNS which were later converted into 2,740,000 shares of the Company's common
stock. No value was assigned to the contributed software.
During 1997, Roseville sold certain network databases and libraries to the
Company for $485,000. Under a 1997 consulting agreement with the Company, a
Roseville subsidiary provided consulting services and maintained those network
databases and libraries for the Company for a fee of $20,000 per month.
Roseville's subsidiary received a total of $325,000 under this consulting
agreement prior to being terminated on January 1, 1998.
During 1996, development efforts on the VASP(TM) were continued by
employees of the Company and programmers and system developers contracted by
Access Point Communications Corp. ("APCC"). APCC is controlled by the Chief
Technology Officer of the Company. APCC billed the Company $974,915 pursuant to
this arrangement during the period from January 18, 1996 (inception) to December
31, 1996. The Company began contracting directly with the programmers and
developers in January 1997. A subsidiary of Roseville received approximately
$300,000 in 1996 as a subcontractor of APCC. This fee also covered the 1996 use
of certain network databases and libraries owned by Roseville. During the year
ended December 31, 1997 and the period from January 18, 1996 (inception) to
December 31, 1996, the fees totaled $240,000 and $85,000, respectively, and were
paid directly to the Roseville subsidiary. The Company also reimbursed APCC
$36,308 for other operating expenses during 1996. During 1996, the Company also
paid APCC management fees and library maintenance fees of $550,000 of which
$14,535 remained outstanding at December 31, 1996.
The Company's Chief Technology Officer has extended, without additional
consideration, personal guarantees to further support lender requirements on one
operating and one capital lease obligation.
The Company loaned its Chief Financial Officer $250,000 due in 1999. The
interest rate for this note receivable is 1% over the prime rate. The executive
pledged a warrant exercisable for the purchase of 150,000 shares at $7.50 per
share as collateral. In May 1998, the executive repaid the principal of the loan
and the related accrued interest.
43
<PAGE>
During 1997, Company contracted with International Telecom for consulting
services. International Telecom is owned by the Chairman of the Board of
Directors. Fees to International Telecom during 1997 totaled $175,000.
In February 1998, the Company loaned $112,029 to an executive in exchange
for an unsecured non-interest bearing promissory note. In May 1998, the
executive repaid this note.
In August 1998, the Company loaned $400,000 to an executive in exchange for
an interest bearing promissory note, which is collateralized by a second
mortgage on prime residential real estate, pursuant to executive's relocation
and employment contract. Also in August 1998, the Company loaned $235,340 to
another executive. This note was repaid in November 1998.
In 1998, the Company contracted Telemetrix Resource Group Limited (TRG) to
provide billing processing and consulting services. Hartford is the principal
owner of TRG and is controlled by the Chairman of the Board of Directors of the
Company. In 1998, TRG billed the Company approximately $458,000 for these
services. TRG continued to provide such services on an ongoing basis in 1999.
Additionally, in February 1999, the Company and TRG entered into a letter of
intent to purchase a billing software license for approximately $2.5 million. In
March 1999, the Company advanced $250,000 to TRG which represents 10% of the
software license fee.
This is refundable, less outstanding fees for any services rendered.
8. Indemnification Expense:
During 1996, the Company agreed to indemnify Hartford (see Note 7) from any
claims and liabilities that Hartford might incur in assisting with the placement
of securities of Cam-Net. Parties unrelated to Hartford had previously advanced
$600,000 to Cam-Net in connection with a private placement of Cam-Net
securities. When the proposed merger was terminated, the securities offering by
Cam-Net was also rescinded, and Hartford was required to repay $600,000 pursuant
to its arrangement with the advancing party. The Company recognized its
obligation to indemnify Hartford as an expense during the period ending December
31, 1996. The Company issued a note payable to Hartford for this $600,000
obligation which is included in notes payable at December 31, 1996. The note was
settled through the issuance of 120,000 shares of Series A Convertible Preferred
Stock and a warrant to purchase 60,000 shares of the Company's common stock on
March 7, 1997.
9. Long-Term Debt:
In May 1998, the company received a $12 million loan ("Bridge Loan") from a
financial institution. The Bridge Loan accrued interest at an annual rate of 12%
and was collateralized by all of the Company's intangible property. The
financial institution also received a warrant to purchase 240,000 share of
common Stock for $10.00 per share, exercisable until May 5, 2005 or two years
after an initial public offering. The Company recorded the loan at a discount of
approximately $1,460,000, which discount was allocated to the warrant. The fair
value of the warrant was estimated on the date of grant using the Black-Scholes
model with the following assumptions: expected volatility of 35%, risk-free
interest rate of 5.76%, expected life of 7 years and no dividends. The debt
discount has been recorded at the fair value of the warrant. The Company repaid
this Bridge Loan in July 1998.
On July 30, 1998, TeleHub completed the sale of 125,000 units consisting of
13.875% Senior Discount Notes due 2005. Included with this debt, the Company
issued warrants to purchase 2,082,732 shares of common stock at an exercise
price of $0.01 per share (hereafter "Units"). Each Unit consists of $1,000
principal amount at maturity of notes (hereafter "Notes") and one warrant
(hereafter " Warrant"), each Warrant representing the right to purchase 16.662
shares of common stock. The Company recorded the Notes at a discount of
approximately $22,261,000, which discount was allocated to the warrants. The
debt discount was calculated in accordance with the provisions of APB No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrant,
using a common stock price of $14.58 per share. The gross proceeds of the Notes
totaled $83,553,750.
44
<PAGE>
As of December 31, 1998, the long-term debt consists of:
13.875% Senior Notes Due 2005,
including accretion of $4,863,814 $ 88,417,564
Debt discount,
net of amortization of $1,333,874 (20,926,804)
Other long-term debt 676,316
-------------
Total 68,167,076
Less Current Portion 281,116
-------------
Long Term Portion $ 67,885,960
=============
Total long-term debt maturities in 1999, 2000 and 2001 are $281,116,
$269,384, $125,816, respectively. There is no long-term debt maturing in 2002 or
2003.
The Companies wholly owned subsidiaries (TNS, TTC and TLC) provided full
and unconditional guarantees of the Company's debt on a joint and several basis.
10. Letters of Credit:
At December 31, 1998, the Company has $411,000 available in standby letters
of credit with a financial institution. The letters of credit expire at various
times throughout 1999. The letters of credit are secured by $416,321 of
certificates of deposit, reflected as restricted cash in the accompanying
financial statements.
11. Common and Preferred Stock:
Preferred Stock:
The Company has authorized 100,000,000 shares of Preferred Stock, of which
4,000,000 are designated Series A Convertible Preferred Stock ("Series A
Stock"). At December 31, 1998, there were 3,500,000 shares of Series A Stock
outstanding.
Preferred stockholders receive one vote for each common share into which
such preferred shares are convertible. Each share of Series A Stock is
convertible at the option of the stockholder into one share of the Company's
common stock. Shares of the Series A Stock have a liquidation preference of
$5.00 per share. All shares of Series A Stock automatically convert into common
stock in the event that the Company completes an initial public offering or
becomes subject to the reporting requirements of the Securities Exchange Act of
1934. The Series A Stock is noncumulative.
Common Stock:
The Company has authorized 100,000,000 shares of common stock. At December
31, 1998, there were 12,703,537 shares of common stock outstanding.
Common Stock Warrants:
Issued in conjunction with equity and debt financings:
In February 1997, the Company issued warrants to purchase 1,750,000 shares
of Company common stock to certain shareholders in connection with the issuance
of Series A Preferred Stock for cash. These warrants are exercisable at any time
from February 20, 1998 to February 20, 2000.
In August 1997, the Company issued warrants to purchase 875,000 shares of
Company common stock to certain shareholders in connection with the issuance of
common stock for cash. These warrants are exercisable through August 26, 2000.
In July 1998, the Company issued warrants to purchase 2,082,732 shares of
common stock at an exercise price of $0.01 per share in conjunction with the
Initial Note Offering. These warrants are exercisable at any time through July
2005.
45
<PAGE>
Issued for services and financing:
The Company also issued warrants to purchase common stock to consultants
and equipment lease providers. At December 31, 1998, the following warrants to
purchase common stock were outstanding:
Number
Of Shares Aggregate
Under Warrant Exercise Price Exercise Period
----------------- -------------- ---------------
301,000 1,655,500 Exercisable at any time from April 30,
1998 to April 30, 2000
150,000 1,500,000 Exercisable at any time from April 30,
1998 to April 30, 2000
25,000 187,500 Exercisable at any time from August 15,
1997 to August 15, 2000
375,000 2,812,500 Exercisable at any time from December 8,
1998 to December 8, 2000
1,750 13,125 Exercisable at any time from December 25
1998 to December 25, 2000
5,500 55,000 Exercisable at any time from December 15,
1997 until the later of December 15, 2004
or second anniversary of an initial
public offering
4,667 35,000 Exercisable at any time from June 15,
1997 until the later of
June 15, 2007 or the fifth anniversary of
an initial public offering
45,000 337,500 Exercisable at any time from August 1,
1998 to November 14, 2000
60,000 450,000 Exercisable at any time from April 1,
1998 to April 1, 2000
10,000 100,000 Exercisable at any time from March 24,
1998 to March 24, 2000
75,000 750,000 Exercisable at any time from May 1, 1999
to May 1, 2001
240,000 2,400,000 Exercisable at any time from May 5, 1998
until the later of May 5, 2005
or the fifth anniversary of an initial
public offering
100,000 1,250,000 Exercisable at any time until the later
of June 2, 2008 or fifth anniversary of
an initial public offering
157,000 2,289,060 Exercisable at any time until August 31,
2001
----------- ------------
1,549,917 $13,835,185 Total
=========== ===========
The following table summarizes information with respect to stock warrants
issued to non-employees that were outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Weighted Average Exercise
Average Remaining Weighted Number Price of
Number Fair Value Contractual Average Exercisable Exercisable
Range of Outstanding of Options/ Life Exercise at Options/
Exercise Prices at 12/31/98 Warrant (Years) Price 12/31/98 Warrants
--------------- ----------- ------- ------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$5.50 - $7.50 812,417 $2.48 1.8 $6.76 802,417 $6.75
$10.00 480,500 $4.28 4.6 $10.00 395,500 $10.00
$12.50 - $14.58 257,000 $5.53 5.4 $13.77 257,000 $13.77
--------- ---------
1,549,917 1,454,917
========= =========
</TABLE>
The fair value of each non-employee grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions: expected
volatility of 35%, risk-free interest rate ranging from 6.62% to 5.20%, expected
lives ranging from 2 to 10 years and no dividends. The Company charges the
related compensation costs to expense at the time the services are provided or
over the life of the related financing arrangement. The compensation expense for
the year ended December 31, 1998, amounted to $3,154,739. Warrants issued during
the twelve month period ended December 31, 1998 were valued using the same
assumptions.
46
<PAGE>
Option Issued to Non-Employee:
The Company has issued an option to purchase 10,000 shares of the
Company's common stock at an exercise price of $5.00 per share to a consultant
in exchange for services rendered. As of December 31, 1998, this option was
exercisable until August 1, 2007. The Company estimated the fair value of this
option and charged such amount to expense at the time the services were
provided. The Company reserved 10,000 shares of common stock for the exercise of
this option and as of December 31, 1998, the option had not been exercised.
12. Employee Stock Option Plan:
In 1997, the Company created an Employee Stock Option Plan. Under this
plan, the Company may grant options for common stock to its employees,
directors, and consultants either as incentive stock options or nonstatutory
options. The exercise price of each option is determined by the Board of
Directors and an option's maximum term generally is 10 years. Options generally
vest 25% on the day of grant, and 25% annually on January 1st of each year
thereafter. At December 31, 1998, 4,600,000 shares of stock were reserved for
the exercise of stock options.
During 1997, the Company granted a warrant to purchase 150,000 shares at
$7.50 per share to an employee. This warrant expires on the fifth anniversary of
an initial public offering.
During 1998, the Company granted warrants to purchase 1,005,000 shares at
$10.00 - $12.50 per share to employees. These warrants expire on the fifth
anniversary of an initial public offering.
The following table summarizes activity under the Company's stock option
plan for the period ended December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
Option and Weighted
Number Warrant Price Aggregate Average
of Shares Per Share Price Exercise
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Options and warrants:
Granted 1,626,000 $5.00 - $7.50 $7,460,000 $5.28
Exercised - - - -
Forfeited (10,500) $5.00 (52,500) $5.00
Expired (1,500) $5.00 (7,500) $5.00
---------- -----------
Options and warrants outstanding at December 31, 1997 1,614,000 7,400,000 $4.58
Granted 3,597,478 $5.00 - $14.58 44,445,368 $12.35
Exercised (500) $10.00 (5,000) $10.00
Forfeited (112,000) $5.00 - $10.00 (1,173,715) $10.48
Expired (17,970) $5.00 - $10.00 (159,535) $8.88
---------- ----------
Options and warrants outstanding at December 31, 1998 5,081,008 $50,507,118 $9.94
========== ===========
</TABLE>
Employee options and warrants to purchase 512,500 and 2,517,371 shares of
common stock were exercisable at December 31, 1997 and 1998, respectively, and
1,441,000 and 663,492 shares remained available for issuance at December 31,
1997 and 1998, respectively.
47
<PAGE>
The following table summarizes information with respect to stock options
and warrants outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Exercise
Average Remaining Weighted Price of
Range of Number Fair Value Contractual Average Number Exercisable
On Grant Date Exercise Outstanding Of Options/ Life Exercise Exercisable Option/
Exercise Price was: Prices At 12/31/98 Warrant (Years) Price At 12/31/98 Warrants
------------------- ------ ----------- ------- ------- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Below fair value of
the stock $5.00 499,158 $3.96 8.67 $5.00 308,158 $5.00
Above fair value of
the stock $5.00 - 5.50 1,030,000 $0.06 8.66 $5.07 515,000 $5.07
Below fair value of
the stock $7.50 150,000 $3.73 8.66 $7.50 150,000 $7.50
Above fair value of
the stock $10.00 - 12.50 1,925,250 $4.97 9.05 $11.04 1,175,063 $11.70
Above fair value of
the stock $14.58 1,068,500 $5.91 9.66 $14.58 267,125 $14.58
At fair value of
the stock $14.58 408,100 $5.91 9.82 $14.58 102,025 $14.58
------------- ------------
5,081,008 2,517,371
============= ============
</TABLE>
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The Company accounts for the plan in accordance with APB No. 25
and related Interpretations. In accordance with APB No. 25, for the year ended
December 31, 1998, the Company incurred compensation expense in relation to
employee stock options and warrants totaling $605,307.
The fair value of each option and warrant grant is estimated on the date of
grant using the minimum value method with the following assumptions:
1997 1998
---- ----
Expected life 10 years 9.5 years
Risk free interest rate 5.7% 5.2%
Expected volatility - -
Expected dividends - -
As a result of the above assumptions, the weighted average fair value of
the options and the warrants granted for the years ended December 31, 1997 and
1998 was $1.24 and $5.45, respectively.
Had the Company accounted for compensation expense according to SFAS No.
123, the pro forma net loss would be as follows:
December 31, 1997 December 31, 1998
----------------- -----------------
Net loss - as reported $18,092,824 $65,945,385
Net loss - pro forma $18,939,602 $71,911,550
Net loss per share--as reported $ 1.70 $ 5.21
Net loss per share--pro forma $ 1.78 $ 5.68
Subsequent to December 31, 1998, the Company issued options to purchase
256,500 and 180,000 shares of common stock to employees and directors,
respectively, at an exercise price of $14.58 per share.
48
<PAGE>
During the first quarter 1999, the Company recorded notes receivable of
$1,018,900 relating to the exercise of stock options as prescribed in the
Company's employee stock option plan. These notes mature in two years and
carries interest at rates ranging from 4.8% to 5% per annum.
13. 401(k) Plan:
In June 1997, the Company established a 401(k) Plan (the "Plan"). All
employees of the Company are eligible to participate in the Plan. The Company is
not obligated to make contributions to the Plan and made no such contributions
during fiscal 1997 or 1998.
14. Supplemental Disclosure of Cash Flow Information:
<TABLE>
<CAPTION>
January 18, 1996
(inception) to Year Ended Year Ended
December 31 December 31 December 31
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash payment for interest $ 7,761 $ 487,379 $ 1,383,702
Noncash investing and financing activities:
Property and equipment financed by
capital lease obligations 182,071 10,018,475 1,080,306
Property and equipment financed
by equipment vendor 2,273,972 -- --
Settlement of accounts payable, related
shareholders, through issuance of
preferred stock -- 150,000 --
Settlement of accrued interest through
issuance of preferred stock -- 38,757 --
Settlement of notes payable
issuance of preferred stock -- 2,261,243 --
Common stock issued per Bridge
loan agreement -- 672,250 --
Issuance of stock options to employees -- 262,013 605,307
Issuance of stock options to nonemployees -- 24,900 --
Issuance of stock warrant to employees -- 151,500 --
Issuance of stock warrant to nonemployees -- 102,994 1,694,452
</TABLE>
49
<PAGE>
15. Net Loss Per Share:
In accordance with the requirements of Statement of Financial
Accounting Standards No. 128, Earnings Per Share, a reconciliation of the
numerator and denominator of basic and diluted EPS is provided as follows:
<TABLE>
<CAPTION>
January 18, 1996
(inception) to Year Ended Year Ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net loss $ (4,488,173) $ (18,092,824) $(65,945,385)
============= ============= ============
Denominator--Basic and Diluted EPS
Weighted average common stock outstanding 8,614,815 10,624,251 12,664,260
============= ============= ============
Basic and diluted loss per share $ (0.52) $ (1.70) $ (5.21)
============= ============= ============
</TABLE>
Options and warrants to purchase an additional 5,191,987 and 11,348,657
shares of common stock were outstanding as of December 31, 1997 and December 31,
1998, respectively, and were excluded from the loss per share calculation as
they have the effect of decreasing loss per share. In addition, the Company had
3,500,000, 3,500,000 and 3,500,000 shares of convertible preferred stock
outstanding as of December 31, 1997 and December 31, 1998. The effect of the
conversion of such shares of preferred stock was also excluded from the loss per
share calculation.
16. Segment information:
The Company operates in two business segments: (i) telecommunications
software products; and (ii) telecommunications network services. The following
table presents revenues and other financial information by business segment for
January 18, 1996 (inception) until year ended December 31, 1996 and year ended
December 31, 1997 and December 31, 1998:
Software Network
Products Services Consolidated
Year Ended December 13, 1998
----------------------------
Revenues $ 3,035,198 $ 5,371,889 $ 8,407,087
Operating loss 14,291,815 42,905,654 57,197,469
Identifiable assets 15,084,499 55,325,277 70,409,776
Depreciation and amortization 891,168 3,683,200 4,574,368
Capital expenditures 1,840,305 5,561,931 7,402,236
Year Ended December 31, 1997
----------------------------
Revenues $ 2,000,000 $ 901,280 $ 2,901,280
Operating loss 4,434,231 12,932,949 17,367,180
Identifiable assets 7,359,999 26,898,401 34,258,400
Depreciation and amortization 185,651 598,897 784,548
Capital expenditures 1,506,012 16,715,315 18,221,327
January 18, 1996 (inception) to
December 13, 1996
-----------------
Revenues -- -- --
Operating loss $ 1,606,607 $ 2,129,267 $ 3,735,875
Identifiable assets -- 4,029,254 4,029,254
Depreciation and amortization -- 68,556 68,556
Capital expenditures -- 3,028,715 3,028,715
Identifiable assets are those assets used exclusively in the operations
of each business segment, or which are allocated when used jointly. Virtually
all of the Software Products revenues were generated from one customer.
50
<PAGE>
17. Subsequent Event:
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 terms of the agreement, the
Company's wholly owned subsidiary TeleHub Technologies Corporation ("TTC"), will
form a wholly owned subsidiary ("NewCo") to be incorporated in the State of
Nevada. At closing, TTC will contribute all of its assets and liabilities, the
Company will contribute all of it assets relating to its VASP(TM) technology,
including all intellectual property rights, to NewCo. Newbridge will contribute
$52 million directly into NewCo. NewCo will immediately remit $22 million to TTC
to pay off an intercompany liability. Newbridge will also remit $8 million
directly to the Company. In exchange, NewCo and the Company will issue 19% of
the common stock of NewCo to Newbridge.
Under terms of the Agreement, Newbridge has an option to purchase up to a
50% interest in NewCo for $10 million dollars ("Newbridge Option"). The
Newbridge Option expires in one year.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Key Executive Officers of Registrant
Each Director holds office until the next meeting of shareholders for
election of such Director's class and until successors have been elected and
qualified or until such Director's death, resignation or removal. The Company's
officers are appointed by, and serve at the discretion of, the Board. Set forth
in the table below are the names, ages, and current positions of the Directors
and executive officers of the Company.
Name Age Positions
- ---- --- ---------
William W. Becker(1) 69 Chairman of the Board
Donald H. Sledge(2) 58 President, Vice Chairman,
Chief Executive Officer and Director
Michael G. McLaughlin(3) 36 Chief Technology Officer and Director
Herbert H. Swinburne 57 President of TNS
John A. Strand III 53 Acting President of TTC
Richard M. Harmon(2) 48 Chief Financial Officer, Treasurer,
Corporate Secretary and Director
(resigned effective January 22, 1999)
John R. Lawson 41 Chief Financial Officer, Treasurer, and
Corporate Secretary
(effective January 25, 1999)
Barry C. Lescher(2) 43 Assistant Secretary and Director
John F. Slevin(3) 62 Director
Oz Pedde(1) 56 Director
John R. Snedegar(3) 49 Director
Martin R. Walsh(1) 46 Director
(1) Class C Director--term expires 1999.
(2) Class A Director--term expires 2000.
(3) Class B Director--term expires 2001.
51
<PAGE>
William W. Becker joined TeleHub in March 1996 and serves as Chairman
of the Board. Mr. Becker is a principal of HHL, the Company's largest
shareholder. He also serves as Chairman of SkyConnect Inc., AirCell
Communications, Inc., Trans Digital Inc., VR-1 Inc., E-Star Inc. and Northern
Cable Inc. Prior to joining TeleHub, Mr. Becker founded a number of companies
involved in telecommunications, cable TV, oil and gas, real estate development,
and other industries. From 1993 to 1995, Mr. Becker was a principal of WWB Oil &
Gas Ltd. Mr. Becker was a significant investor in IntelCom Group, Inc. (now, ICG
Communications, Inc.) for which he served as chairman and CEO from 1987 to June
1995.
Donald H. Sledge joined the Company in January 1996 as President, Vice
Chairman, CEO and Director and is the CEO and a Director of TTC and TNS. From
1994 to 1995, Mr. Sledge served as President and Chief Operating Officer ("COO")
of West Coast Telecommunications, Inc., a NASDAQ listed long distance company
purchased by Frontier. From 1993 to 1994, Mr. Sledge served as Head of
Operations for New T&T, a Hong Kong-based start-up company. Mr. Sledge was
Chairman and CEO of Telecom New Zealand International from 1991 to 1992. Mr.
Sledge was a member of the board of advisors of Calex and is currently a
director of DataProse, CyWorld Talk, which currently trades on the Alberta Stock
Exchange, AirCell Communications Inc. and Executive Telecard, Inc., a
telecommunications company traded on NASDAQ, and serves as an advisor and board
member to several small technology-based start-up companies. In addition, Mr.
Sledge serves as the Chairman of United Digital Network Inc. ("United Digital"),
a long distance switch based reseller, which is under an agreement to be
acquired by Star Telecommunications, Inc.
Michael G. McLaughlin founded TeleHub in January 1996 and serves as
Chief Technology Officer ("CTO") and a Director of TeleHub, TTC and TNS. From
1994 to 1995, Mr. McLaughlin served as President and a director of Access Point
Communications Corporation. In 1992, he formed The McLaughlin Group, Inc. (now
"T.M.G.I., Inc.") which provided consulting services to large corporate clients
involving cost reduction and analysis, network configuration strategies and
negotiation of communication carrier contracts. From 1983 to 1991, Mr.
McLaughlin worked for ROLM, a business unit of IBM Corporation ("ROLM"), where
he was a communications engineer responsible for the design, development and
implementation of communications networks for ROLM's largest accounts, including
The Sears Network, General Electric Company, IBM and Baxter Laboratories Inc.
Herbert H. Swinburne joined TeleHub in January 1998 and serves as
President of TNS. From 1991 until he joined TeleHub, Mr. Swinburne was the
Director and General Manager of Major Account Network Design for AT&T Canada,
which provides long distance services. From 1989 to 1991, Mr. Swinburne was
Director of Proposal Engineering at Sprint, and from 1988 to 1989, Mr. Swinburne
was Director of the Technical Advisory Center at Sprint. Prior to joining
Sprint, Mr. Swinburne was a Program Manager for Telenet Communications
Corporation where he was responsible for managing the nationwide packet services
for the Department of Agriculture.
John A. Strand III joined TeleHub as TTC's Acting President in June
1998. From 1991 to 1998, Mr. Strand was the Director of Technology Planning and
Integration for Sprint. Prior to his position with Sprint, he was a regional
manager for SRI International, an international research institute.
Richard M. Harmon joined TeleHub in March 1997 as the Chief Financial
Officer ("CFO"), Treasurer and Corporate Secretary and became a Director in
March 1998. Mr. Harmon is the Treasurer and Corporate Secretary of TNS. From
1992 to 1996, Mr. Harmon was the CEO of Education Finance Corporation, a company
he founded to provide student loans to vocational trade students. From 1990 to
1992, Mr. Harmon served as President of Clean Air Transit. From 1985 to 1990,
Mr. Harmon founded and was President of Network Media Corporation, a cable
network advertising sales group. Between 1980 and 1985, Mr. Harmon was a
principal with Network Development Corporation, a consulting and investment
company emphasizing telecommunications and cable television. Prior to that, Mr.
Harmon served as CFO and COO for Franklin Supply. Mr. Harmon also worked for
Allstate Insurance Company, where he made private equity investments in early
stage companies. Effective January 22, 1999, Mr. Richard M. Harmon resigned his
positions with the Registrants in order to pursue other interests.
52
<PAGE>
John R. Lawson joined TeleHub in April 1997 as Controller and became
the Chief Financial Officer ("CFO"), Treasurer and Corporate Secretary in
January 25, 1999. Mr. Lawson has 18 years of financial management experience.
From 1990 to 1993, he was Vice President - Corporate Controller for TRO
Learning, a software development company, and, among his other activities,
managed that company's initial public offering consummated in 1992. Prior to
joining TRO Learning, Mr. Lawson served in various financial management
positions for AAR Corporation, a publicly traded aviation services and supply
company, including Controller of European Operations. Mr. Lawson began his
career as an auditor with Coopers & Lybrand LLP (now PricewaterhouseCoopers
LLP). He has a BS in accounting from Bradley University and is a Certified
Public Accountant.
Barry C. Lescher joined TeleHub as a Director in 1996 and serves as
Executive Vice President of TTC, a Director of TNS and Assistant Secretary. From
1994 to 1997, Mr. Lescher held engineering positions at telecommunications
companies which included American Teletronics, TMGI and Access Point
Communications Corporation. From 1989 to 1994, Mr. Lescher was a communications
engineer with ROLM. Prior to that, Mr. Lescher worked for a family-owned
business that was involved in the installation and operation of communication
systems.
John (Jack) F. Slevin is Chairman, President, and CEO of Comdisco, a
New York Stock Exchange ("NYSE") listed company and was appointed to the TeleHub
Board in July 1997. He has been Comdisco's Chairman of the Board since January
1996 and was named Comdisco's President and CEO in July 1994. Mr. Slevin served
as Comdisco's COO from 1993 through 1994 and was executive vice president of
Comdisco's North American Sales since 1992. He has been a member of Comdisco's
board of directors since 1979. Mr. Slevin is also a director of Media One, a
NYSE listed company, and Interworld Corp.
Oz (Oswald) Pedde, a Director of TeleHub since March 1998, has been
President and CEO of Watson & Associates, a Toronto based telecommunications
service and consulting firm since January 1, 1998. From 1995 to 1998, Mr. Pedde
was self-employed as a consultant. From 1991 to 1995, Mr. Pedde was President
and CEO of Manitoba Telephone Systems, a diversified Canadian telecommunications
company and was one of the founding members of the Council of CEOs that created
the "Stentor Alliance," an association of Canada's major telephone companies.
During such period, Mr. Pedde was also a director of Telesat, Canada's satellite
carrier.
John R. Snedegar joined TeleHub's Board in March 1998. He has been
President and CEO of United Digital, which trades on the Vancouver Stock
Exchange since 1990. He was also the President and CEO of AmeriTel Management,
Inc. ("AmeriTel"), a California based provider of long distance
telecommunications and management services from 1980 to 1992. In 1992, Mr.
Snedegar led AmeriTel through the acquisition of West Coast Telecommunications,
Inc., forming WCT Communications, Inc. Mr. Snedegar served on the board of
directors of this carrier until its sale to Frontier in early 1995. He is also a
director of StarBase Corporation, a California-based software development
company which trades on NASDAQ, Star Telecommunications, Inc., a long distance
carrier specializing in international services which trades on NASDAQ. Mr.
Snedegar also serves as President of Kendall Venture Funding, Ltd., a reporting
company based in Alberta, Canada.
Martin R. Walsh has been the President of Walsh & Associates, an
Illinois high technology consulting firm since January 1, 1998 and joined
TeleHub's Board in March 1998. Previously, Mr. Walsh had been a Comdisco
executive, serving as Executive Vice President of Marketing and a member of the
Office of the President of Comdisco since 1996, President of the Large Systems
Division from 1993 to 1996, and Senior Vice President - Trading between 1985 and
1993, and a Vice President from 1982 to 1985. Mr. Walsh originally joined
Comdisco in 1978.
53
<PAGE>
Item 11. Executive Compensation
Executive Compensation
The following table provides certain summary information concerning compensation
paid or accrued by Company and its subsidiaries to or on behalf of Donald H.
Sledge, President and CEO of the Company, and the five most highly compensated
executive officers of the Company (the "Named Officers") for the period from
January 18, 1996 (inception) to December 31, 1996 and for the fiscal years ended
December 31, 1997 and 1998. The Company has not granted stock appreciation
rights.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term All Other
Compensation Compensation Compensation
Fiscal ------------ Other Annual --------------- ------------
Name and Principal Position Year Salary Bonus Compensation ($) Warrants (#) Options (#) ($)
- --------------------------- ---- ------ ----- ---------------- ------------ ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Donald H. Sledge 1998 178,938 44,739 (1) 13,752 (3) - 28,750 6,572 (4)
President and Chief 1997 175,000 87,500 (2) 10,800 (3) - 150,000 9,804 (5)
Executive Officer
of TeleHub 1996 70,000 - - - - - - 110,500 (6)
Richard M. Harmon 1998 160,335 90,088 (7) 6,126 (3) 450,000 26,246 38,000 (8)
Chief Financial Officer 1997 106,250 62,466 (2) - - 150,000 100,000 61,859 (9)
and Secretary of TeleHub 1996 - - - - - - - - -
Michael G. McLaughlin 1998 178,938 44,739 (1) 16,240 (3) 500,000 28,750 - -
Chief Technology Officer 1997 175,000 87,500 (2) 17,645 (3) - 150,000 - -
of TeleHub 1996 - - - - - - - -
Barry C. Lescher 1998 153,375 38,348 (1) 9,526 (3) - 33,654 - -
Executive Vice President 1997 136,320 68,268 (2) 701 (3) 100,000 - -
of TTC 1996 - - - - - - - -
Timothy Carey Chandler 1998 153,375 38,348 (1) 500 (10) - 7,500 - -
Senior Vice President 1997 150,000 75,000 (2) 333(10) 50,000 - -
Software Development 1996 68,750 - - - - - - -
of TTC
Herbert H. Swinburne 1998 160,000 40,000 (1) 5,400 (2) - 100,000 - -
President of TNS
<FN>
(1) Related to 1998 accrued bonus to be paid in cash in 1999.
(2) Related to 1997 accrued bonus with an option to be paid either in cash
or by a combination of cash and stock options in 1998.
(3) Car allowance.
(4) Consists of $6,572 paid for life insurance premium.
(5) Consists of $5,000 set aside in a 401(k) plan by the Company and $4,804
paid for life insurance premium.
(6) Consulting fees for services prior to commencement of employment on
August 1, 1996.
(7) Consists of cash bonus payment of $50,000 and 1998 accrued bonus to be
paid in cash in 1999 of $40,088.
(8) Consists of reimbursement for country club membership.
(9) Consists of $29,359 for relocation expenses and $32,500 consulting fees
for services prior to executing Mr. Harmon's employment agreement.
(10) Allowance in lieu of certain employee benefits.
</FN>
</TABLE>
54
<PAGE>
Options Granted in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates
% of Total Of Stock Price
Options Market Appreciation
Granted to Exercise Price For Option Term
Options Employees in Or Base On Date Expiration ---------------
Name Granted (#) Fiscal Year Price ($/Sh) of Grant (1) Date 5% ($) 10% ($)
- ---- ----------- ----------- ------------ ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald H. Sledge 8,750 .34 5.00 9.82 3/18/2008 96,213 179,117
20,000 .77 10.00 8.87 1/1/2008 88,966 260,130
Richard M. Harmon 6,246 .24 5.00 9.82 3/18/2008 68,679 127,859
20,000 .77 10.00 9.82 3/18/2008 119,915 309,411
Michael G. McLaughlin 8,750 .34 5.00 9.82 3/18/2008 96,213 179,117
20,000 .77 10.00 8.87 1/1/2008 88,966 260,130
Barry C. Lescher 13,654 .53 5.00 9.82 3/18/2008 150,136 279,505
20,000 .77 10.00 8.87 1/1/2008 88,966 260,130
Timothy C. Chandler 7,500 .29 5.00 9.82 3/18/2008 28,468 153,529
Herbert H. Swinburne 100,000 3.86 10.00 8.87 1/1/2008 444,830 1,300,650
<FN>
(1) Market price as determined by the Company based certain third party
transactions
</FN>
</TABLE>
Aggregated Options Exercisable in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
In-the-money Options at
Value Realized FY-End (Market Price of
(Market Price at Number of Unexercised Shares at FY-End ($14.58)
Shares Acquired Exercise Less Options at FY-End (#) Less Exercise Price) (1)
Name on Exercise(#) Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald H. Sledge - - 83,750 95,000 $784,144 $791,919
Richard M. Harmon - - 56,246 70,000 $538,837 $570,600
Michael G. McLaughlin - - 83,750 95,000 $802,325 $810,100
Barry C. Lescher - - 63,654 70,000 $609,805 $570,600
Timothy C. Chandler - - 32,500 25,000 $311,350 $239,500
Herbert H. Swinburne - - 25,000 75,000 $114,500 $343,500
<FN>
(1) Market price as determined by the Company based certain third party
transactions.
</FN>
</TABLE>
55
<PAGE>
Compensation Plans
1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the
"Plan") was adopted by the Board and approved by the stockholders in May 1997. A
total of 4,600,000 shares of Common Stock have been reserved for issuance under
the Plan, as amended on March 18, 1998 by the Board. As of December 31, 1998,
options to purchase 3,926,008 shares of Common Stock were outstanding under the
Plan, and no shares had been issued upon exercise of previously granted options.
The Plan provides for grants to employees of the Company (including officers and
employee directors) of "incentive stock options" ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for grants of nonstatutory stock options to employees (including officers and
employee directors and non-employee directors) of the Company or any subsidiary
of the Company. The Plan is administered by the Board or a committee of the
Board (the "Administrator"). The Plan is currently being administered by the
Board. The Administrator may determine the terms of the options granted,
including the exercise price, the number of shares subject to each option and
the exercisability of the option. The Administrator also has the full power to
select the individuals to whom options will be granted and to make any
combination of grants to any participants.
Options granted generally vest immediately as to 25% of the shares
subject to the option and then at a rate of 25% of the shares subject to the
option on January 1st of the subsequent 3 years following the grant date. The
term of an option is determined by the specific option agreement. No option may
be exercised by any person after its term or the Plan expires.
Executive Employment Agreements
The Company has entered into employment agreements with Messrs. Sledge
and McLaughlin, commencing January 2, 1997, Mr. Lescher commencing on January 1,
1997, Mr. Harmon commencing on May 4, 1998, Mr. Swinburne commencing January 1,
1998. Mr. Chandler commencing April 17, 1997 and Mr. Strand commencing October
1, 1998. The Company also has employment agreements with certain other
executives.
The Company's employment agreements with Messrs. Sledge and McLaughlin
provide for an initial five year term and Mr. Lescher's employment agreement
provides for an initial two year term. After the initial term each agreement is
automatically renewed for an additional one-year term until either party
provides 30 days notice of termination prior to the end of a term. The
agreements provide for an annual base salary and an incentive bonus determined
by the Board. Messrs. Sledge and McLaughlin also receive stock options under the
Company's Plan. If the Company terminates any of the employment agreements
without cause or if the Company or the employee terminates the respective
employment agreement upon the occurrence of a major transaction involving the
Company, then Messrs. Sledge and McLaughlin will receive a termination fee equal
to 200% of their annual salaries plus benefits and specified bonuses and Mr.
Lescher will receive 100% of his annual salary plus benefits plus a specified
bonus. Each of Messrs. Lescher, Sledge and McLaughlin is subject to a
confidentiality covenant and Messrs. Sledge and McLaughlin are each subject to a
one-year non-competition commitment following the termination of his employment.
Mr. McLaughlin may also be reimbursed for the annual premiums that he incurs for
his disability and $5,000,000 term life insurance policies.
The Company has employment agreements with Messrs. Harmon and Swinburne
which provide for an initial four-year term and thereafter one-year terms until
either party provides 30 days notice of termination prior to the end of a term.
The agreements provide for an annual base salary and an incentive bonus
determined by the Board. Messrs. Swinburne and Harmon also receive stock options
under the Company's Plan. Mr. Swinburne receives performance options if certain
criteria are met. If the Company terminates the employment agreement without
cause or if the Company or the employee terminates the employment agreement upon
the occurrence of a major transaction involving the Company, then Messrs.
Swinburne and Harmon shall each receive a termination fee equal to 100% of his
annual salary plus benefits plus a specified bonus. Payments shall only be made
upon the employee's execution of a standard release waiving all claims against
the Company. Messrs. Swinburne and Harmon are each subject to a confidentiality
covenant. In addition, Mr. Harmon is subject to a one year non-competition
commitment following termination of his employment. The Company's employment
agreement with Mr. Harmon also provides that the Company would loan Mr. Harmon
up to $400,000 for the purchase of a home upon his permanent relocation to
Illinois. This loan, made in August 1998, is evidenced by a seven year
promissory note at 7% interest, collateralized by a second mortgage on Mr.
Harmon's home.
56
<PAGE>
The Company's employment agreement with Mr. Chandler provides for an
initial two-year term and thereafter one-year terms until either party provides
30 days notice of termination prior to the end of a term. The agreement provides
for an annual base salary and an incentive bonus determined by the Board. If the
Company terminates the employment agreement without cause, or if the Company or
Mr. Chandler terminates the employment agreement upon the occurrence of a major
transaction involving the Company, then Mr. Chandler shall receive a termination
fee equal to 50% of his annual salary plus benefits plus a specified bonus.
Payments shall only be made upon Mr. Chandler's execution of a standard release
waiving all claims against the Company. Mr. Chandler is subject to a
confidentiality covenant.
The Company has an employment agreement with John A. Strand with an
initial four-year term and thereafter one-year terms until either party provides
30 days notice of termination prior to the end of a term. The agreement provides
for an annual base salary and an incentive bonus determined by the Board. Mr.
Strand also receives stock options under the Company's Plan. If the Company
terminates the employment agreement without cause, or if the Company or Mr.
Strand terminates the employment agreement upon the occurrence of a major
transaction involving the Company, then Mr. Strand shall receive a termination
fee equal to 100% of his annual salary plus benefits plus a specified bonus.
Termination payments shall only be made upon Mr. Strand's execution of a
standard release waiving all claims against the Company. Mr. Strand is subject
to a confidentiality agreement.
The Company has employment agreements with certain other executives.
These agreements generally have a two-year initial term and thereafter one-year
renewal terms until either party provides 30 day notice of termination prior to
the end of a term. The agreements provide for an annual base salary and an
incentive bonus determined by the Board, plus eligibility for awards under the
Company's Plan. If the Company terminates the employment without cause or if the
employment is terminated upon the occurrence of a major transaction involving
the Company, then the executive shall receive a termination fee equal to 50% to
100% of his annual salary plus benefits plus a specified bonus. Payments shall
only be made upon execution of a standard release waiving all claims against the
Company. The agreements also contain a confidentiality covenant. Certain of
these employment agreements contain a one year non-competition covenant
Director Compensation
TeleHub currently does not provide cash compensation to its Directors
who are not also employees for attendance at Board or committee meetings, but
does reimburse expenses related to such attendance (e.g., airfare or telephone
charges). Directors annually receive options to purchase 20,000 shares of Common
Stock under the stock option plan; the exercise price is market price at the
time of grant and the options vest at the start of the next fiscal year.
Compensation Committee Interlocks; Audit Committee
During 1997 and until May 31, 1998, the entire Board served as the
Compensation Committee, which determines the compensation of the Company's
executive officers. Two executive officers, Messrs. Sledge and McLaughlin served
on the Board and therefore also the Compensation Committee during 1997, while
Messr. Harmon, the Company's CFO, joined the Board (and the Compensation
Committee) in March 1998. Since June 1998, Messrs. Slevin and Pedde have been
the only members of the Compensation Committee. Since February 1996, Mr. Sledge
has served as the Chairman of United Digital and as a member of its compensation
committee. Mr. Snedegar has served as the President and a director of United
Digital since 1990. The Board has also established an Audit Committee composed
of Messrs. Walsh, Snedegar and Slevin, which recommends to the Board the
selection of independent accountants, and reviews the scope and results of the
audit and other services provided by the independent accountants.
57
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of December 31, 1998 the number of
shares of Common Stock and Preferred Stock owned by (i) each executive officer
and Director and each person who owned of record, or was known to own
beneficially, more than five percent of the Company's outstanding Common Stock
or Preferred Stock, and (ii) executive officers and Directors as a group. Unless
otherwise indicated, the address for each of the following persons or entities
is c/o TeleHub Communications Corporation, 1375 Tri-State Parkway, Gurnee,
Illinois 60031.
Percent of
Number of Shares Outstanding
Name Beneficially Owned Shares(1)
- ---- ------------------ --------
5% Stockholders:
Hartford Holdings, Ltd 5,191,950 (2) 31.4%
Box 143, Cayman Islands
British West Indies
Roseville Computer Projects Limited 4,100,000 25.3%
P.O. Box 556, Charleston, Nevis
West Indies
Sledge Family Trust 1,494,167 (3) 9.2%
27 Cherry Hill Court
Alamo, California
Executive Officers and Directors:
William W. Becker 5,324,450 (4) 32.0%
Chairman of the Board of Directors
Donald H. Sledge 1,635,417 (5) 10.0%
Vice-Chairman of the Board, Chief
Executive Officer and President
Michael G. McLaughlin 641,250 (6) 3.8%
Chief Technology Officer and Director
Herbert H. Swinburne 50,000 (7) 0.3%
President of TNS
Richard M. Harmon 551,246 (8) 3.3%
Chief Financial Officer, Treasurer,
Secretary and Director
Barry C. Lescher 108,654 (9) 0.7%
Assistant Secretary and Director
John F. Slevin 764,000 (10) 4.6%
Director
John A. Strand III 175,000 (11) 1.1%
Acting President of TTC
Oz Pedde 20,000 (12) 0.1%
Director
John R. Snedegar 20,000 (12) 0.1%
Director
Martin R. Walsh 20,000 (12) 0.1%
Director
Executive officers and Directors
as a group (11 beneficial owners) 9,310,017 (13) 49.2%
58
<PAGE>
(1) Based on 16,203,537 shares of Common Stock outstanding as of December 31,
1998 (which includes full conversion of the 3,500,000 shares of Preferred
Stock outstanding as of December 31, 1998 at the rate of 1 for 1) plus
shares of Common Stock that may be acquired by the indicated person
pursuant to any options and warrants exercisable within 60 days.
Beneficial ownership is determined in accordance with the rules of the
SEC. Such shares, however, are not deemed outstanding for purposes of
computing the percentage ownership of the other stockholders or groups of
stockholders.
(2) Includes 4,384,450 shares of Common Stock, 480,000 shares of Preferred
Stock and 327,500 shares of Common Stock issuable upon the exercise of
warrants.
(3) Includes 1,479,167 shares of Common Stock, 10,000 shares of Preferred Stock
and 5,000 shares of Common Stock issuable upon exercise of warrants.
(4) Includes 132,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and all shares owned by HHL, of which Mr.
Becker, the Company's Chairman, is the principal shareholder.
(5) Includes 141,250 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and all shares owned by the Sledge Family Trust,
of which Mr. Sledge is trustee and a beneficiary.
(6) Includes 141,250 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days and 500,000 shares of Common Stock issuable upon
exercise of warrants.
(7) Includes 50,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(8) Includes 450,000 shares of Common Stock issuable upon exercise of warrants
and 101,246 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(9) Includes 108,654 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(10) Includes 10,000 shares of Common Stock, 30,000 shares of Preferred Stock,
168,500 shares of Common Stock issuable upon exercise of warrants, 40,000
shares of Common Stock issuable pursuant to stock options exercisable
within 60 days, all personally owned by Mr. Slevin. Also includes 200,000
shares of Common Stock and 315,500 shares of Common Stock issuable
pursuant to warrants that are owned by Comdisco, for which Mr. Slevin
serves as Chairman and CEO.
(11) Includes 175,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(12) Includes 20,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days.
(13) Includes 6,073,617 shares of Common Stock, 520,000 shares of Preferred
Stock, 1,766,500 shares issuable upon the exercise of warrants and 949,900
shares issuable pursuant to options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, the Company contracted Telemetrix Resource Group Limited (TRG)
to provide billing processing and consulting services. Hartford is the principal
owner of TRG and is controlled by the Chairman of the Board of Directors of the
Company. In 1998, TRG billed the Company approximately $458,000 for these
services. TRG continued to provide such services on an ongoing basis in 1999.
Additionally, in February 1999, the Company and TRG entered into a letter of
intent to purchase a billing software license for approximately $2.5 million. In
March 1999, the Company advanced $250,000 to TRG which represents 10% of the
software license fee. This is refundable, less outstanding fees for any services
rendered.
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<PAGE>
In August 1998, the Company loaned $400,000 to Mr. Harmon for the
purchase of a home upon his permanent relocation to Illinois, in accordance with
Mr. Harmon's employment agreement. Mr. Harmon gave the Company a seven year
promissory note at 7% interest, collateralized by a junior mortgage on Mr.
Harmon's home.
In August 1998, the Company also loaned $235,340 to Mr. McLaughlin, who
gave the Company a six month promissory note at 18% interest. Mr. McLaughlin
repaid this note in November 1998. If Mr. McLaughlin defaults on this note, then
the Company may setoff unpaid amounts against the amounts to be paid under Mr.
McLaughlin's employment contract. While this note is not secured, the Company
believes its potential setoff rights exceed the amount of the note.
On June 2, 1998, the Company issued to Mr. Slevin, a Director of
TeleHub and President and CEO of Comdisco, a warrant to purchase 100,000 shares
of Common Stock for $12.50 per share, exercisable until the later of ten years
after issuance or five years after an initial public offering.
On May 13, 1998, Mr. Harmon sold warrants to purchase 150,000 shares of
Common Stock, with an exercise price of $7.50, for $4.91 per warrant to three
individuals, including Mr. Slevin who purchased warrants for 50,000 shares of
Common Stock.
In May 1998, the Company received a $12 million Bridge Loan from
Comdisco. The Bridge Loan was collateralized by all of the Company's intangible
property, including VASP(TM). Comdisco also received a warrant to purchase
240,000 shares of Common Stock for $10.00 per share, exercisable until May 5,
2005. The Company repaid this Bridge Loan, including approximately $98,600 of
accrued interest, from the proceeds of the Initial Note Offering.
In March 1998, the Company granted to Mr. Martin Walsh, a Director, a
warrant to purchase 15,000 shares of Common Stock for $10.00 per share,
exercisable until March 4, 2001. Later in March 1998, Mr. Walsh joined TeleHub's
Board.
In February 1998, the Company loaned $112,029 to Mr. Swinburne, TNS's
President. Mr. Swinburne gave the Company an unsecured, non-interest bearing
promissory note in exchange for the loan. In May 1998 Mr. Swinburne repaid this
loan.
In December 1997, Comdisco received a warrant to purchase 5,500 shares
of Common Stock at a price of $10.00 per share, exercisable at the earlier of
seven years after issuance or two years after an initial public offering of the
Company's capital stock. Mr. Wheatley, a Comdisco executive, also received a
warrant to purchase 1,750 shares of Common Stock at a price of $7.50 per share.
In the Fall 1997 Offering, Mr. Slevin purchased one unit (10,000 shares
of Common Stock and warrants to purchase 3,500 shares of Common Stock) and
Comdisco purchased 20 units (200,000 shares of Common Stock and 70,000 warrants
to purchase Common Stock).
In November 1997, the Company loaned $250,000 to Mr. Harmon, its CFO
and a Director. Mr. Harmon gave the Company a promissory note bearing interest
at 1% over the prime rate, secured by warrants to purchase 150,000 shares of
Common Stock at $7.50 per share. Mr. Harmon repaid this loan in May 1998.
In the Spring 1997 Offering, Mr. Slevin purchased 1.5 units (30,000
shares of Preferred Stock and warrants to purchase 5,000 shares of Common
Stock). See "Security Ownership of Certain Beneficial Owners and Management."
In April 1997, the Company entered into an equipment lease financing
facility with Comdisco. As of March 31, 1998, the Company had utilized four
installments of this facility for a total of $6,156,407. These installments have
quarterly lease rate factors ranging from 8 1/2% to 9 1/2%, have terms of 3 to 4
years, have aggregate quarterly payments of approximately $460,000 and a
repurchase option for fair market value at the end of the term.
60
<PAGE>
In December 1996, HHL agreed to provide a bridge loan of up to $1.0
million to the Company with an interest rate of 17% per annum. The Company
repaid the principal and accrued interest on this loan in March 1997 from the
net proceeds of the Spring 1997 Offering. Concurrently, the Company issued to
HHL 134,450 additional shares of Common Stock pursuant to the terms of
obligations owed by the Company to HHL, including the bridge loan and the
Indemnification Obligation (as defined). In connection with the issuance of
these shares, the Company accepted a note from HHL for $40,000 which was
subsequently paid.
During 1996, HHL provided consulting services to the Company with a
value of $169,000, which the Company paid through the Spring 1997 Offering
issuance of 33,800 shares of Preferred Stock. HHL is the Company's largest
shareholder and Mr. William Becker, the Company's Chairman, is a principal and
the primary shareholder of HHL. The Company also has a consulting agreement with
International Telecommunications Consultants, an affiliate of HHL. This
agreement provides for a $175,000 annual consulting fee. The Company has been
informed that HHL is in preliminary negotiations for a business transaction
involving the Australasian joint venture partner. See "Business-TTC Customer
Relationships." HHL is also a client of Watson & Associates, an affiliate of
Director Oz Pedde.
During 1996, the Company agreed to indemnify HHL (the "Indemnification
Obligation") from any claims and liabilities that might be incurred by HHL
through its efforts to assist in the placement of $3.0 million of securities of
Cam-Net Communications Network Inc. ("Cam-Net"), a Canadian company which
proposed merging with the Company. Parties unrelated to HHL had advanced
$600,000 on a private placement of securities of Cam-Net. When the proposed
merger was terminated, the securities offering by Cam-Net was also canceled, and
HHL was required to repay $600,000 pursuant to its arrangement with the
advancing party. The Company fulfilled its Indemnification Obligation to HHL by
issuing 120,000 shares of Preferred Stock and 60,000 warrants to purchase Common
Stock at $7.50 per share in the Spring 1997 Offering.
In January 1996, Roseville Computer Projects Ltd. ("Roseville")
contributed software to the Company in exchange for 151 shares of capital stock
of TNS. In March 1996, Roseville assigned all right, title and interest in the
VASPJ software to TNS in exchange for an additional 274 shares of capital stock
of TNS. In January 1997, Roseville exchanged all of its TNS shares for 4,250,000
shares of TeleHub Common Stock. In July 1997, Roseville sold its network
databases and libraries and assigned all associated right, title and interest to
the Company for $485,000, of which $200,000 was paid in August 1997 and the
$285,000 balance of which, plus interest at the rate of 12% per annum, was paid
in January 1998. A Roseville subsidiary provided consulting services (primarily
maintenance of the network data bases and libraries) to the Company for a
$20,000 monthly fee. The Roseville subsidiary received a total of $325,000 under
this consulting arrangement, which was terminated on January 1, 1998.
During 1996, the Company contracted for software development services
with Access Point Communications Corporation ("APCC"), an entity controlled by
Mr. McLaughlin, a Director and the CTO of TTC. The Company paid APCC $974,915
for these services during 1996, and also reimbursed APCC $36,309 for operating
expenses advanced by APCC. The Company also incurred $550,000 in management fees
to APCC for services provided by Messrs. McLaughlin and Lescher and other TNS
principals and for network library maintenance fees. Of the $974,915 paid to
APCC, a subsidiary of Roseville received $300,000 as a subcontractor to APCC.
The Company's relationship with APCC terminated at the end of 1996, at which
time Messrs. McLaughlin and Lescher became full-time Company employees.
HHL and the Sledge Family Trust (the "Trust"), significant Company
shareholders, advanced initial funding for development of the Company's
business. Mr. Donald Sledge, the Company's Vice Chairman, CEO and President, is
a trustee and beneficiary of the Trust. During 1996, HHL loaned the Company
$1,350,000, evidenced by two 7.5% promissory notes, and $411,243, evidenced by a
12% promissory note, and the Trust made a $50,000 loan to the Company, evidenced
by a 7.5% promissory note. Concurrently with the Spring 1997 Offering, HHL
exchanged the promissory notes, related accrued interest, the Indemnification
Obligation and accounts payable balances totaling $2.4 million for 480,000
shares of Preferred Stock and the Trust exchanged its $50,000 promissory note
for 10,000 shares of Preferred Stock. In conjunction with the exchange, HHL and
the Trust also received warrants to purchase, respectively, 240,000 and 5,000
shares of Common Stock at $7.50 per share.
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<PAGE>
The Company believes that all of these transactions were on terms no
less favorable to the Company than it could have obtained in transactions with
unrelated third parties.
proceeding arising from such person's actions or inaction's as a
director, officer or agent. Such indemnification includes reimbursement of
expenses incurred by such person in advance of such legal proceeding.
The Company will report to the holders of the Notes and to the IRS the
amount of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to payments on the Notes.
62
<PAGE>
POWER OF ATTORNEY
The Registrants and each person whose signature to this Annual Report
on Form 10-K appears below hereby authorizes John R. Lawson, with full power of
substitution, to file one or more amendments, which amendments may make such
changes he deems appropriate, and the Registrants and each such person hereby
appoints John R. Lawson as attorney-in-fact with full power to act alone, to
execute, in the name and on behalf of the Registrants and each such person,
individually and in such capacity stated below, and any such amendments.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, Registrants have duly caused this Annual Report to be
signed on its behalf by the undersigned officer, thereunto duly authorized, in
the City of Gurnee, Illinois.
TELEHUB COMMUNICATIONS CORPORATION
TELEHUB NETWORK SERVICES CORPORATION
TELEHUB TECHNOLOGIES CORPORATION
TELEHUB LEASING CORPORATION
March 31, 1999 By: /s/ JOHN R. LAWSON
-----------------------------------
John R. Lawson, Chief Financial
Officer of each Registrant
Pursuant to the requirements of the Securities Act, this Annual Report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM W. BECKER Chairman of the Board of Directors of March 31, 1999
- ------------------------------ TeleHub Communications Corporation ("TeleHub"),
William W. Becker Director of TeleHub Network Services
Corporation ("TNS"), & Director of
TeleHub Technologies Corporation ("TTC")
/s/ DONALD H. SLEDGE Vice-Chairman, Chief Executive Officer of TeleHub, March 31, 1999
- ------------------------------ Director of TeleHub, TNS & TTC
Donald H. Sledge and sole director of TeleHub Leasing Corporation ("TLC")
/s/ JOHN R. LAWSON Chief Financial Officer, Treasurer, corporate Secretary March 31, 1999
- ------------------------------ & Principal Accounting Officer of each Registrant
John R. Lawson
/s/ MICHAEL G. MCLAUGHLIN Director of TeleHub & TNS March 31, 1999
- ------------------------------
Michael G. McLaughlin
/s/ BARRY C. LESCHER Director of TeleHub March 31, 1999
- ------------------------------
Barry C. Lescher
/s/ JOHN F. SLEVIN Director of TeleHub & TNS March 31, 1999
- ------------------------------
John F. Slevin
/s/ OZ PEDDE Director of TeleHub March 31, 1999
- ------------------------------
Oz Pedde
/s/ JOHN R. SNEDEGAR Director of TeleHub March 31, 1999
- ------------------------------
John R. Snedegar
/s/ MARTIN R. WALSH Director of TeleHub March 31, 1999
- ------------------------------
Martin R. Walsh
</TABLE>
63
<PAGE>
PART IV
Item 14. Exhibits and Financial Statement Schedules
14(a)(1) Financial Statements. The following consolidated financial
statements of the Company are filed under Item 8 of this Report,
beginning on page F-1 of this Report.
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following consolidated financial statements do not include
separate financial statements of the Company's Subsidiaries
(TeleHub Network Services, TeleHub Technology Corporation and
TeleHub Leasing Corporation) as management has determined that
they would not be material to investors. This determination is
based on the fact that (I) the parent company has no operations or
significant assets other than its investments in its subsidiaries,
(ii) the guarantor subsidiaries are wholly owned, (iii) the
subsidiaries' guarantee of the parent company's debt are full,
unconditional, joint and several, (iv) the operations of the sole
non-guarantor in which the Company holds a minority interest are
immaterial to the consolidated financial statements; and (v)
segment information is presented in note 16 to the following
consolidated financial statements.
14(a)(2) Financial Statement Schedules. The following financial statement
schedules of the Company for the period January 18, 1996
(inception) to December 31, 1996, and the two years ended December
31, 1997 and 1998, are included in this Annual Report on SEC Form
10-K, as required by Item 14(d):
Report of Independent Accountants on Financial Statement Schedule
Schedules not listed above were omitted because the information to
be set forth therein is not applicable or is shown in the
financial statements or accompanying notes.
14(a)(3) List of Exhibits
(1) Underwriting Agreement. No Exhibit Required.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession. None.
(3) Corporate Organization.
A. TeleHub Communications Corporation
(a) (3.A.1) Articles of Incorporation filed with the Nevada Secretary
of State on September 26, 1998.
(a) (3.A.2) Certificate of Designation for Series A Convertible
Preferred Shares filed with the Nevada Secretary of State
on January 31, 1997.
(a) (3.A.3) Bylaws
(4) Instruments defining the rights of security holders
(a) (4.1) Indenture dated July 30, 1998, between Registrant, Subsidiaries and
State Street Bank ("Bank").
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<PAGE>
(a) (4.2) Forms of Series A/B Senior Discount Note due 2008 (included in
Exhibit 4.1).
(a) (4.3) Form of Subsidiary Guarantees (included in Exhibit 4.1).
(a) (4.4) Registration Rights Agreement dated July 30, 1998, among the
Registrant, Subsidiaries and BancBoston Securities Inc.
("BSI")
(5)Letter regarding Legality. No Exhibit Required
(6)No Exhibit
(7) No Exhibit Required
(8)Opinion regarding Tax Matters. No Exhibit Required
(9) Voting Trust Agreement. None
(10) Material Contracts.
(a) (10.1) Purchase Agreement dated July 27, 1998, by and among Registrant,
Subsidiaries and BSI.
(a) (10.2) Warrant Agreement dated as of March 11, 1998 b etween the
Registrant, Subsidiaries and Bank.
(a) (10.3) Warrant Registration Rights Agreement dated July 30, 1998 among
Registrant, Subsidiaries & BSI.
(a) (10.4) Sales Agreement, dated as of October 31, 1997, by and between
Newbridge Networks Corporation and the TeleHub Network
Services Corporation.
(a) (10.5) Equipment Lease, dated as of November 11, 1996, by and between
DSC Finance Corporation and the Company.
(a) (10.6) Loan and Security Agreement, dated as of May 5, 1998, by and
between Comdisco, Inc. and the Company.
(a) (10.7) The Company's 1997 Stock Option Plan
(a) (10.8) Form of Incentive Stock Option Certificate
(a) (10.9) Form of Non-statutory Stock Option Certificate
(a) (10.10) Employment Agreement between Registrant and Donald H Sledge
dated January 2, 1997.
(a) (10.11) Employment Agreement between Registrant and Michael McLaughlin
dated January 2, 1997.
(a) (10.12) Employment Agreement between Registrant and Richard M. Harmon
dated May 4, 1998, as amended.
(a) (10.13) Employment Agreement between TNS and Herb Swinburne, dated
January 1, 1998.
(a) (10.14) Consulting Agreement, dated January 2, 1997, between Registrant
and International Telecom Consulting, Inc.
(a) (10.15) Loan Agreement, dated August 26, 1996 by and between TNS,
Hartford Holdings Ltd ("HHL"), and Donald H. Sledge.
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<PAGE>
(a) (10.16) Bridge Loan Agreement, dated December 10, 1996, by and between
TNS and HHL.
(a) (10.17) Reimbursement & Assignment of Recovery dated November 30, 1996,
among TNS, Hartford Holding Ltd. and Dovedale Investments Ltd.
(a) (10.18) Promissory Note dated February 13, 1998, for C$157,500
(US$112,029) by Mr. Swinburne to Registrant.
(a) (10.19) Secured Promissory Note, dated November 1997 by Richard M.
Harmon to Registrant for $250,000, due November 1999.
(a) (10.20) Employment Agreement between TNS and Timothy Chandler, dated
April 17, 1997.
(a) (10.21) Employment Agreement between TNS and Barry Lescher, dated
January 1, 1997.
(a) (10.22) Loan Agreement between Registrant and Richard M. Harmon,
dated August 7, 1998.
(a) (10.23) Promissory Note, dated August 7, 1998, by Richard M. Harmon to
Registrant for $400,000, due September 1, 2005.
(a) (10.24) Promissory Note, dated August 7, 1998, by Michael G. McLaughlin
to Registrant for $235,340, due February 19, 1999.
(a) (10.25) Telecommunications Service Agreement between TNS and Comtel
International Corporation, dated March 19, 1998.
(a) (10.26) Telecommunications Service Agreement between TNS and Global
Telephone Corporation, dated April 13, 1998.
(a) (10.27) Telecommunications Service Agreement between TNS and American
Telephone Network LLC, dated July 8, 1998.
(a) (10.28) Amendment I, dated October 8, 1997, to Agreement between
Registrant and Worldcom, Inc., together with Worldcom Agreement
for Worldcom ATM Services dated October 23, 1996 and with
Amendment II dated June 18, 1998. Certain portions of Amendment
I are omitted based upon the Commission's order granting
confidential treatment. The omitted portions were separately
filed with the U.S. Securities and Exchange Commission.
(a) (10.29)[Transcend] Telecommunications Services Agreement, dated July
14, 1997, between Registrant and Worldcom Network Services, Inc.
(a) (10.30) Transcend Program Enrollment Terms, dated August 8, 1997,
between Registrant and Worldcom Network Services, Inc. Certain
portions of this exhibit are omitted based upon the Commission's
order granting confidential treatment. The omitted portions were
separately filed with the U.S. Securities and Exchange
Commission.
(a) (10.31) Transcend Service Schedule, dated August 8, 1997, between
Registrant and Worldcom Network Services, Inc. Certain portions
of this exhibit are omitted based upon the Commission's order
granting confidential treatment. The omitted portions were
separately filed with the U.S. Securities and Exchange
Commission.
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<PAGE>
(a) (10.32) Amendment No. 2, dated April 1, 1998, to Transcend Program
Enrollment Terms. Certain portions of this exhibit are omitted
based upon the Commission's order granting confidential
treatment. The omitted portions were separately filed with the
U.S. Securities and Exchange Commission.
(a) (10.33) Collocate Agreement, dated April 3, 1998, between Registrant
and Worldcom Network Services, Inc.
(a) (10.34) License Agreement, dated December 24, 1997, between Registrant
and Newbridge Networks Corporation, together with Addendum #1
dated March 1, 1998.
(a) (10.35) Employment Agreement between TCC, TTC and John Strand,
effective October 1, 1998.
(a) (10.36) Employment Agreement between TCC, TNS and John R. Lawson, dated
July 3, 1997, with Addendum dated September 23, 1998, and
Amendment effective January 25, 1999.
(11) Statement regarding Computation of Per Share Earnings. None.
(c) (12) Statement regarding Computation of Ratios.
(13) Annual Report to Security Holders. None.
(14) Material Foreign Patents. None.
(15) Letter regarding Unaudited Interim Financial Information.
No Exhibit Required
(16) Letter regarding Change in Certifying Accountant. None.
(17) Letter regarding Director Resignation. None
(18) Letter regarding Change in Accounting Principles. None
(19) Report furnished to Security Holders. No Exhibit Required.
(20) Other Documents or Statements to Security Holders.
No Exhibit Required.
(a) (21) Subsidiaries of Registrant.
(22) Published Report regarding Matters Submitted to Vote of Security
Holders. None
(24) Power of Attorney.
(c) (24.1) Power of Attorney for Officers and Directors of Company
Signature Page to this Annual Report).
(b) (25) Statement of Eligibility of Trustee. No Exhibit Required
(26) Invitation for Competitive Bids. No Exhibit Required.
(c) (27) Financial Data Schedule.
(28) Information from Reports Furnished to State Insurance
Regulatory Authorities. None.
67
<PAGE>
(99) Other Exhibits.
(a) (99.1) Proposed Form of Letter of Transmittal with respect to
Exchange Offer.
(a) (99.2) Proposed Form of Notice of Guaranteed Delivery.
(a) (99.3) Proposed Form of Exchange Agent Agreement.
- -----------------------------
(a) Previously filed and incorporated by reference to Company's
Registration Statement on SEC Form S-4 (333-61441) as filed August 13,
1998, as amended October 13, 1998, as further amended November 12,
1998, and as further amended December 7, 1998.
(b) Filed with Company's Current Report on SEC Form 8-K as filed January
25, 1999.
(c) Filed with this Annual Report on SEC Form 10-K for the year ended
December 31, 1998.
14(b) Reports on Form 8-K. A Current Report on Form 8-K was filed January 25,
1999, reporting "Item 5: Other Events" (i.e., the resignation of the
Company's Chief Financial Officer and appointment of the Company's new
Chief Financial Officer). No financial statements were filed.
14(c) Exhibits. The exhibits required by this Item 14(c) are listed under
Item 14(a)(3).
14(d) Financial Statement Schedules. Schedules not listed above were omitted
because the information to be set forth therein is not applicable or is
shown in the financial statements or accompanying notes.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE EXCHANGE ACT.
(a) Annual Reports to Shareholders and Proxy Information
(1) Registrants have not sent to security holders any annual report
covering the Registrants' last fiscal year.
(2) Under separate covers, four copies of TeleHub's Notice of Annual
Meeting of Shareholders (held on August 24, 1998) and accompanying
form of proxy and proxy soliciting material are being furnished to
the Commission for its information.
(b) Copies furnished to Commission are not deemed "filed" with the
Commission.
(c) Annual Reports and Proxy Information subsequently sent to shareholders
Registrants will furnish the Commission with copies of any annual
report or proxy materials when such materials are security holders.
68
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION & SUBSIDIARIES
(COMMISSION FILE NO. 333-61441)
ANNUAL REPORT ON SEC FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX TO EXHIBITS FILED WITH THIS ANNUAL REPORT
Exhibt Page
- --------------------------------------------------------------------------------
(24) Power of Attorney.
(24.1) Power of Attorney for Officers and Directors
of Company (Signature Page to this Annual Report)......... 60
(27) Financial Data Schedule.............................................. E-1
69
<PAGE>
Schedule II
Valuation and qualifying Accounts for years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions
Beginning Costs and Accounts Balance at
Description of Period Expenses Written Off End of Period
- ----------- --------- -------- ----------- -------------
<S> <C> <C>
1998
Allowance for doubtful accounts: - $1,058,396 - $1,058,396
Valuation allowance against
net deferred tax assets 9,220,000 24,920,000 - 34,140,000
1997 -
Allowance for doubtful accounts: - - - -
Valuation allowance against
net deferred tax assets 640,000 8,580,000 - 9,220,000
</TABLE>
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-K.
</LEGEND>
<CIK> 0001035418
<NAME> TELEHUB COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 36,727,589
<SECURITIES> 0
<RECEIVABLES> 4,207,647
<ALLOWANCES> 1,093,594
<INVENTORY> 0
<CURRENT-ASSETS> 43,021,085
<PP&E> 26,325,839
<DEPRECIATION> 5,263,584
<TOTAL-ASSETS> 70,409,776
<CURRENT-LIABILITIES> 13,001,917
<BONDS> 67,490,760
0
3,500
<COMMON> 12,634
<OTHER-SE> 17,377,311
<TOTAL-LIABILITY-AND-EQUITY> 17,393,445
<SALES> 0
<TOTAL-REVENUES> 8,407,087
<CGS> 0
<TOTAL-COSTS> 40,215,031
<OTHER-EXPENSES> 23,959,914
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<INTEREST-EXPENSE> 10,177,527
<INCOME-PRETAX> (65,945,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (65,945,385)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,945,385)
<EPS-PRIMARY> (5.21)
<EPS-DILUTED> (5.21)
</TABLE>
