U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
Quarterly Report pursuant to Section 13 of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 1999
TELEHUB COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 333-61441 36-413-6730
(Jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification Number)
CO-REGISTRANTS
TeleHub Network Services Corporation
TeleHub Technologies Corporation
TeleHub Leasing Corporation
(Exact Name of Co-Registrants as Specified in their Charters)
Illinois 333-61441 36-406-6622
Nevada 333-61441 36-421-3797
Nevada 333-61441 36-335-3108
(Jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
John R. Lawson, Chief Financial Officer
TeleHub Communications Corporation
1375 Tri-State Parkway, Suite 250
Gurnee, Illinois 60031
1 (800) TELEHUB
(Address, including zip code, & telephone number,
of Registrants' principal executive offices)
Indicate by check mark whether the Registrants: Yes X No
------ ------
(1) have filed all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90 days.
On June 30, 1999, the Registrant had 13,055,831 issued and outstanding common
shares.
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
TABLE OF CONTENTS FOR FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Consolidated Balance Sheets.......................................3
Consolidated Statements of Operations.............................4
Consolidated Statements of Cash Flows.............................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................18
Item 2. Changes in Securities............................................18
Item 3. Defaults Upon Senior Securities..................................19
Item 4. Submission of Matters to a Vote of Security Holders..............19
Item 5. Other Information................................................19
Item 6. Exhibits and Reports on Form 8-K.................................19
SIGNATURE...................................................................20
<PAGE>
NOTE CONCERNING FORWARD-LOOKING INFORMATION. Some of the information in this
Report contains forward-looking statements that involve substantial risks and
uncertainties that constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Forward-looking words such as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words identify such statements. Investors should read statements that contain
these words carefully because they: (1) discuss the Registrants' future
expectations; (2) contain projections of the Registrants' future results of
operations or of its financial condition; or (3) state other "forward-looking"
information. The Registrants believe that it is important to communicate such
future expectations to its investors. However, there may be events in the future
that the Registrants have not accurately predicted or over which the Registrants
have no control. These events may include the Registrants' limited operating
history and uncertainty as to the Registrants' future profitability; uncertainty
as to the Registrants' ability to meet business targets and budgets and to
develop and implement operational, sales and marketing and financial systems to
manage rapidly growing operations; competition from other participants in the
highly competitive telecommunications industry; uncertainty as to the
Registrants' ability to obtain financing on acceptable terms to finance its
business strategy; uncertainty as to the Registrants' ability to obtain and
protect intellectual property rights or to develop proprietary products that
will receive intellectual property protection; the possibility that
technological developments may adversely affect the commercial viability of the
Registrants' VASP(TM) technology and the Registrants' other products;
unanticipated regulatory changes that may change the competitive environment to
the Registrants' detriment; the Registrants' efforts to address Year 2000
issues. Cautionary language in this report provides examples of risks,
uncertainties and events that may cause the Registrants' actual results to
differ materially from the expectations described in the forward-looking
statements of this Report. Occurrence of the events described in this Report
could have a material adverse effect on the Registrants' business, operating
results and financial condition.
2
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Information as of and relating to the six months
ended June 30, 1999, is unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------- -------------
(UNAUDITED)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,727,589 $ 13,745,787
Restricted cash 416,321 289,628
Accounts receivable, net of allowance for
doubtful accounts of $1,093,594 and
$1,764,724 in 1998 and 1999, respectively 3,114,053 7,889,654
Due from TeraBridge -- 1,490,258
Prepayments on leases 905,268 733,111
Debt issuance costs 874,338 868,767
Other assets 983,516 1,229,982
------------- -------------
Total current assets 43,021,085 26,247,187
Property and equipment, net 21,062,255 19,116,476
Prepayments on leases 1,044,085 615,698
Debt issuance costs 4,874,105 4,409,080
Other assets 408,246 311,341
------------- -------------
Total assets $ 70,409,776 $ 50,699,782
============= =============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable $ 5,802,730 $ 5,102,322
Accrued liabilities 4,500,579 7,352,633
Current portion--capital lease obligations 2,393,015 2,630,770
Current portion--long-term debt 281,116 305,119
Deferred gain on sale/leaseback 24,477 13,605
------------- -------------
Total current liabilities 13,001,917 15,404,449
Capital lease obligations 8,274,635 7,598,566
Other long-term debt 67,885,960 75,451,173
Accrued liabilities 2,893,850 2,362,182
Deferred gain on sale/leaseback 29,630 5,720
------------- -------------
Total liabilities 92,085,992 100,822,090
------------- -------------
Stockholders' (deficit):
Convertible preferred stock, $.001 par value;
100,000,000 shares authorized;
4,000,000 shares designated as Series A;
3,500,000 shares issued and
outstanding at December 31, 1998 and
June 30, 1999; liquidation preference $17,500,000 3,500 3,500
Common stock, $.001 par value; 100,000,000 shares authorized;
12,703,537 and 13,055,831 shares issued and outstanding at
December 31, 1998 and June 30, 1999, respectively 12,704 13,056
Common stock warrants 27,246,651 27,246,651
Additional paid-in capital 40,105,733 43,878,943
Note receivable--stockholder (400,000) (2,062,170)
Deferred compensation (118,422) (59,211)
Accumulated deficit (88,526,382) (119,143,077)
------------- -------------
Total stockholders' (deficit) (21,676,216) (50,122,308)
------------- -------------
Total liabilities and stockholders' (deficit) $ 70,409,776 $ 50,699,782
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information as of and relating to the three and six months ended
June 30, 1998 and 1999, is unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Telecommunications services $ 152,664 $ 7,240,967 $ 159,265 $13,008,598
Licenses -- -- 3,000,000 --
------------ ------------ ------------ ------------
152,664 7,240,967 3,159,265 13,008,598
------------ ------------ ------------ ------------
Operating expenses:
Operations 8,646,834 21,487,770 14,572,538 40,648,095
General and administrative 1,939,833 1,578,185 3,208,282 4,915,208
Research and development 1,933,111 1,577,459 3,668,105 5,672,724
Sales and marketing 697,838 3,058,104 942,518 5,783,646
Depreciation and amortization 1,072,162 1,442,415 2,097,518 2,919,077
------------ ------------ ------------ ------------
Total operating expenses 14,289,778 29,143,933 24,488,961 59,938,750
------------ ------------ ------------ ------------
Operating loss (14,137,114) (21,902,966) (21,329,696) (46,930,152)
------------ ------------ ------------ ------------
Other income (expense):
Amortization of debt discount (973,525) (795,024) (973,525) (1,590,048)
Interest expense (997,756) (3,570,756) (1,297,236) (7,071,566)
Interest income 89,947 143,723 187,079 478,992
Other income 9,753 80,017 10,758 133,673
Net gain on joint venture transaction -- 24,362,406 -- 24,362,406
------------ ------------ ------------ ------------
($16,008,695) ($ 1,682,600) ($23,402,620) ($30,616,695)
============ ============ ============ ============
Basic and diluted loss per share ($1.27) ($0.13) ($1.85) ($2.36)
============ ============ ============ ============
Weighted average shares outstanding used in
per share calculations basic and diluted 12,634,450 13,051,562 12,634,450 12,972,552
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Information as of and relating to the six months ended
June 30, 1998 and 1999, is unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1999
------------ ------------
Cash flows from operations
<S> <C> <C>
Net Loss ($23,402,620) ($30,616,695)
Adjustments to reconcile net loss to net cash
used in operating activities
Gain on joint venture transaction (note 3) -- (24,362,406)
Depreciation and amortization 2,097,518 2,919,077
Provisions for bad debts 5,043 706,328
Amortization of debt issuance costs -- 434,388
Amortization of deferred compensation 546,096 1,770,553
Amortization of debt discount -- 1,590,048
Accretion of debt -- 6,133,970
Items settled through issuance of stock and
other equity transactions 2,517,464 --
Other non-cash credits (102,758) 15,978
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (145,351) (5,481,929)
Due from TeraBridge -- (1,490,258)
Prepayments on leases 452,634 436,542
Other assets (931,877) (545,910)
Increase (decrease) in liabilities:
Accounts payable 1,385,045 644,893
Accrued liabilities 2,016,700 3,538,384
Deferred gain from sale and lease-back 54,747 (10,728)
------------ ------------
Net cash used in operating activities (15,507,359) (44,317,765)
Cash flows from investing activities:
Payments for property and equipment (2,774,529) (4,648,997)
Proceeds from sale and lease-back of equipment 1,220,697 --
Proceeds received on joint venture transaction (note 3) -- 26,812,136
Restricted cash 1,031,133 126,693
------------ ------------
Net cash provided by (used in) investing activities (522,699) 22,289,832
Cash flows from financing activities:
Proceeds from debt issue -- 36,208
Proceeds from issuance of common stock -- 400,050
Repayment on note receivable - related party 250,000 --
Payments on capital lease obligations and loans (1,670,501) (1,390,127)
Repayment of loan 12,000,000 --
------------ ------------
Net cash provided by (used in) financing activities 10,579,499 (953,869)
------------ ------------
Net decrease in cash and cash equivalents (5,450,559) (22,981,802)
Cash and cash equivalents balance - beginning of period 9,380,320 36,727,589
------------ ------------
Cash and cash equivalents balance - end of period $ 3,929,761 $ 13,745,787
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and relating to the three and six months ended June 30, 1998
and 1999, is unaudited)
1. Basis of Presentation:
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the annual report on the
Form 10-K of TeleHub Communications Corporation for the year ended December 31,
1998. The results for the three-month and six-month periods ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. Segment information:
The Company had operated in two business segments: (i)
telecommunications software products; and (ii) telecommunications network
services. On May 19, 1999, the Company formed a new venture with Newbridge
Networks Corporation ("Newbridge"). The joint venture entity is named
TeraBridge. At closing, TTC contributed all of its assets and liabilities to the
joint venture. The joint venture will be accounted for under the equity method
of accounting. As a result of the joint venture, the software products segment
ceased operations as of May 19, 1999, and after that date, is no longer an
operating segment of the Company.
6
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
<TABLE>
<CAPTION>
Software Products Network Services Consolidated
----------------- ---------------- ------------
THREE MONTHS ENDED JUNE 30, 1999
<S> <C> <C> <C>
Revenues - $7,240,968 $7,240,968
Operating loss $3,749,087 18,153,879 21,902,966
Identifiable assets - 50,699,782 50,699,782
Depreciation and amortization 225,912 1,216,503 1,442,415
Capital expenditures 281,161 1,196,476 1,477,637
THREE MONTHS ENDED JUNE 30, 1998
Revenues - $152,664 $152,664
Operating loss $4,099,622 10,037,492 14,137,114
Identifiable assets 2,904,267 24,667,185 27,571,452
Depreciation and amortization 198,527 873,634 1,072,162
Capital expenditures 306,841 1,290,270 1,597,111
Software Products Network Services Consolidated
----------------- ---------------- ------------
SIX MONTHS ENDED JUNE 30, 1999
Revenues - 13,008,598 13,008,598
Operating loss 12,094,935 34,835,217 46,930,152
Identifiable assets - 50,699,782 50,699,782
Depreciation and amortization 572,183 2,346,894 2,919,077
Capital expenditures 1,360,574 4,188,423 5,548,997
SIX MONTHS ENDED JUNE 30, 1998
Revenues 3,000,000 159,265 3,159,265
Operating loss 4,103,920 17,225,776 21,329,696
Identifiable assets 2,904,267 24,667,185 27,571,452
Depreciation and amortization 367,432 1,730,086 2,097,518
Capital expenditures 687,820 2,189,592 2,877,412
</TABLE>
Identifiable assets are those assets used exclusively in the operations
of each business segment, or which are allocated when used jointly. All of the
Software Products revenues were generated from one customer.
7
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
3. Joint Venture Agreement:
On May 19, 1999, the Company formed a new joint venture with Newbridge
Networks Corporation ("Newbridge") to further develop the Company's Virtual
Access Services Platform ("VASP(TM)") technology and related products that are
essential to world-wide, end-to-end, service-rich communications ("Newbridge
Transaction"). Under the terms of the agreement, the Company's wholly owned
subsidiary, TeleHub Technologies Corporation ("TTC"), formed a wholly owned
subsidiary, ("TeraBridge Technologies Corporation"), incorporated in the State
of Nevada. TTC contributed all of its assets and liabilities and the Company
contributed all of it assets relating to its VASP(TM) technology, including all
intellectual property rights, to TeraBridge. The following is a summary of the
assets and liabilities TTC contributed to TeraBridge.
<TABLE>
<CAPTION>
Assets Liabilities
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts Receivable 35,198 Accounts Payable (1,345,301)
Allowance for Doubtful Accounts (35,198) Accrued Liabilities (1,054,529)
Prepayments on Leases Current 132,625 Current Portion Capital Lease (26,734)
Other Assets 323,444 Deferred Gain (24,054)
Fixed Assets 6,134,559 Long Term Capital Lease (56,255)
Accumulated Depreciation (1,574,838) Long Term Accrued Liabilities (163,469)
Prepayments on Leases Long Term 31,377
Other Long Term Assets 72,905
---------------
----------------
Total Assets 5,120,072 Total Liabilities (2,670,342)
================ ===============
</TABLE>
Newbridge contributed $52 million directly to TeraBridge. TeraBridge
immediately remitted $22 million of this amount to TTC. TTC then remitted this
$22 million to the Company as a partial payment against an intercompany
liability. Newbridge also remitted $8 million directly to the Company. In
exchange, the Company issued 19% of the common stock of TeraBridge to Newbridge.
Under terms of the Agreement, Newbridge has an option to purchase up to a 50%
ownership interest in TeraBridge for $10 million dollars ("Newbridge Option").
The Newbridge Option expires on May 19, 2000. The net proceeds received by the
Company was $26.8 million, which represents $30 million of payment remitted by
Newbridge less $3.2 million of costs associated with the transaction. The
Company recorded a total gain on the transaction of $24.4 million, which is
equal to the total amount of cash received of $26.8 million less the net assets
contributed by TTC to TeraBridge of $2.4 million.
The Company and Newbridge each have the right to appoint three
individuals to the Board of Directors of TeraBridge. A seventh board member is
to be appointed by mutual agreement between the Company and Newbridge.
8
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Accordingly, TCC is accounting for TeraBridge under the equity method of
accounting. The Company has recorded a full valuation allowance against their
equity interest in the net assets of TeraBridge due to the uncertainty of
realization of this investment amount. Accordingly, the investment is recorded
at zero on the June 30, 1999 financial statements. Further, the Company's equity
interest in the net loss of TeraBridge for the period from May 19, 1999
(commencement of operations) to June 30, 1999 is not reflected in the statement
of operations for the quarter ended June 30, 1999. Recognition of these losses
would reduce the Company's investment in TeraBridge below zero, and the Company
has no obligation to fund TeraBridge losses or a TeraBridge deficit.
The Company provides management and accounting services to TeraBridge.
In exchange for these services TeraBridge pays the Company a monthly fee of
$50,000. Additionally, Newbridge provides management services to TeraBridge for
a monthly fee of $25,000.
The following is a summary of TeraBridge's financial statement amounts
as of June 30, 1999 and for the period from May 19, 1999 (commencement of
operations) to June 30, 1999.
Revenues $ 0
Assets $ 33,736,440
Liabilities $ 5,016,317
Stockholders' equity $ 28,720,123
Operating loss $ 3,869,931
Net loss $ 3,729,607
4. Subsequent Event:
In its July 1998 offering of 13.875% Senior Discount Notes due 2005,
the Company also issued 125,000 warrants to purchase 16.662 common shares per
warrant (2,082,732 shares if fully exercised). These warrants also provided that
the number of shares purchasable would increase by 8.678048 shares per warrant,
(1,084,756 additional shares if fully exercised) unless the Company either: (i)
completed its initial public offering; (ii) repurchased the Notes; or (iii)
merged into a public company; before August 1, 1999. Since the Company did not
take any of those actions, the warrants were automatically adjusted on August 1,
1999. Each warrant now permits its holder to purchase 25.340048 shares, for a
total of 3,167,488 shares if all 125,000 warrants are fully exercised.
9
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this report. The results shown herein are not necessarily indicative of the
results to be expected in any future periods. This discussion contains
forward-looking statements based on current expectations which involve risks and
uncertainties. Actual results and timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in this report.
Overview
After three years of research and development, the Company was formed
in January 1996. The Company has developed what it believes is the first
universal ATM-based network with the potential to integrate the delivery of
voice, data and video on one network. The Company launched commercial voice
services on its network in December 1997 and since then has entered into
thirty-nine contracts, ranging from one to three year terms, to provide long
distance services. As customers transition their traffic onto TeleHub's network,
the Company 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 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.
To fund its operations, the Company has raised gross proceeds of
approximately $42.5 million of equity capital through two private placements
(the "Spring 1997 Offering" and the "Fall 1997 Offering") and in July 1998, the
Company completed an initial note offering ("Initial Note Offering") yielding
$65.9 million in net proceeds after deducting offering expenses and repaying a
$11.4 million bridge loan. The Company also received a $1 million equity
investment from the initial purchaser.
On May 19, 1999, the Company received $26.8 million of net proceeds
from Newbridge in conjunction with the TeraBridge joint venture transaction.
10
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Results of Operations
The following table sets forth-certain unaudited financial information
from the Statements of Operations as a percentage of total revenues.
Three Months Ended Six Months Ended
June 30 June 30
Statement of Operations Data: 1998 1999 1998 1999
- ------------------------------ ------ ---- ---- ----
Revenue 100% 100% 100% 100%
Operating expenses other than depreciation
and amortization 8658% 382% 709% 439%
Depreciation and amortization 702% 20% 66% 22%
------ ---- ---- ----
Total operating expenses 9360% 402% 775% 461%
------ ---- ---- ----
Operating loss 9260% 302% 675% 361%
------ ---- ---- ----
Amortization of debt discount (638%) (11%) (31%) (12%)
Interest expense, net (595%) (48%) (35%) (50%)
Other income 6% 338% 0% 188%
------ ---- ---- ----
Net Loss (10487%) (23%) (741%) (235%)
====== ==== ==== ====
Comparison of Three Months Ended June 30, 1999 and June 30, 1998
On March 31, 1999, the Company signed a definitive agreement with
Newbridge Networks Corporation ("Newbridge") to form a new venture to further
develop the Company's Virtual Access Services Platform ("VASP(TM)") technology
and related products that are essential to world-wide, end-to-end, service-rich
communications ("Newbridge Transaction"). Under the terms of the agreement, the
Company's wholly owned subsidiary TeleHub Technologies Corporation ("TTC"),
formed a wholly owned subsidiary ("TeraBridge"), incorporated in the State of
Nevada. At closing (May 19, 1999), TTC contributed all of its assets and
liabilities and the Company contributed all of it assets relating to its
VASP(TM) technology, including all intellectual property rights, to Terabridge.
The new joint venture is accounted for under the equity method, beginning May
19, 1999. A comparison of the three and six months ended June 30, 1999 and June
30, 1998 are effected by this transaction.
Revenue
Revenue increased $7.0 million to $7.2 million from $0.2 million in the
three months ended June 30, 1999 compared to the three ended June 30, 1998,
respectively. TeleHub Network Services ("TNS") generated all of their revenue
from network operations during the three months ended June 30, 1999. TNS had an
increase of twenty-two contracts to thirty-nine from seventeen contracts, for
the three month period ending June 30, 1999 and 1998, respectively.
11
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Operating expenses
Operating expenses increased $14.8 million to $29.1 million from $14.3
million for the three months ended June 30, 1999 and 1998, respectively. Network
circuit costs, consulting fees, personnel costs and bad debt expense increased
by $10,145,000, $1,378,000, $1,000,000 and $528,000 respectively. Significant
operating cost increases were necessary to expand the network to efficiently
handle anticipated subscriber traffic, and to manage the financial and
administrative aspects of the business. Increased personnel costs reflect an
increase in employees from 162 as of June 30, 1998 to 197 as of June 30, 1999.
On May 19, 1999 112 employees were transferred from the Company to TeraBridge.
Operating expenses are primarily variable and are expected to increase in future
periods as revenue increases. Research and development decreased by $0.3 million
to $1.6 million from $1.9 million for the three months ended June 30, 1999 and
1998, respectively. Research and development costs will decrease in the future
since these costs were primarily incurred by the TTC Software Products segment,
which ceased operations upon the closing of the Newbridge Transaction.
Total TNS operating expenses increased approximately $15.2 million to
$25.4 million from $10.2 million for the three months ended June 30, 1999 and
1998, respectively. This increase related to the network and infrastructure
expansion, which will allow for significant revenue growth in the future. Total
TTC operating expenses decreased approximately $0.4 million to $3.7 million from
$4.1 million for the three months ended June 30, 1999 and 1998, respectively.
TTC did not incur expenses after May 19, 1999, when all assets and liabilities
were contributed to TeraBridge as part of the Newbridge Transaction.
Amortization of debt discount
Amortization of debt discount for the three months ended June 30, 1999
amounted to $795,000 in connection with notes issued by the Company.
Interest income (expense), net
Net interest expense for the three months ended June 30, 1999 was $3.4
million as compared to $0.9 million for the three months ended June 30, 1998.
Gross interest expense increased approximately $2.6 million as a result of the
Initial Note Offering. Interest income increased $54,000 as a result of
increased cash and equivalent balances available for short term investments.
Net gain on the joint venture
In the three months ended June 30, 1999, the Company recorded a gain of
$24.4 million on the Newbridge Transaction.
Net loss
The Company reported a net loss of $1.7 million and a net loss of $16.0
million for the three months ended June 30, 1999 and 1998, respectively. The
Company has not recorded any benefit for income taxes due to the uncertainty
surrounding the realization of the favorable tax attributes in future tax
returns. Accordingly, the Company has recorded a valuation allowance against its
total net deferred tax assets.
12
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Comparison of Six Months Ended June 30, 1999 and June 30, 1998
Revenue
Revenue increased $9.8 million to $13.0 million from $3.2 million in
the six months ended June 30, 1999 compared to the six ended June 30, 1998,
respectively. TeleHub Network Services ("TNS") generated $13.0 million of
revenue from network operations during the six months ended June 30, 1999. TTC
recorded no revenue for the six months ended June 30, 1999. For the six months
ended June 30, 1998, TTC accounted for the majority of the revenue when they
licensed VASP(TM) software to Newbridge for $5.0 million, $3.0 million of which
was recorded in 1998 while $2 million was recorded in 1997.
Operating expenses
Operating expenses increased $35.5 million to $59.9 million from $24.4
million for the six months ended June 30, 1999 and 1998, respectively. Network
circuit costs, personnel costs, consulting fees, network equipment lease
payments and depreciation expense increased by $19,003,000, $6,650,000,
$3,662,000, $1,379,000 and $822,000, respectively. Significant operating cost
increases were necessary to expand the network to efficiently handle anticipated
subscriber traffic, and to manage the financial and administrative aspects of
the business. Increased personnel costs reflect an increase in employees from
162 as of June 30, 1998 to 197 as of June 30, 1999. On May 19, 1999 112
employees were transferred from the Company to TeraBridge. All operating
expenses are primarily variable and are expected to increase in future periods
as revenue increases. Research and development expenses increased by $2.0
million to $5.7 million from $3.7 million for the six months ended June 30, 1999
and 1998, respectively. Research and development costs will decrease in the
future since these costs were primarily incurred by the TTC Software Products
segment, which ceased operations upon the closing of the Newbridge Transaction.
Total TNS operating expenses increased approximately $30.5 million to
$47.8 million from $17.3 million for the six months ended June 30, 1999 and
1998, respectively. This increase related to the network and infrastructure
expansion, which will allow for significant revenue growth in the future. Total
TTC operating expenses increased approximately $5.0 million to $12.1 million
from $7.1 million for the six months ended June 30, 1999 and 1998, respectively.
This increase primarily related to accelerated research and development efforts.
TTC did not incur expenses after May 19, 1999, when all assets and liabilities
were contributed to TeraBridge as part of the Newbridge Transaction.
13
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Amortization of debt discount
Amortization of debt discount for the six months ended June 30, 1999
amounted to $1.6 million in connection with notes issued by the Company.
Interest income (expense), net
Net interest expense for the six months ended June 30, 1999 was $6.6
million as compared to $1.1 million for the six months ended June 30, 1998.
Gross interest expense increased approximately $5.8 million as a result of the
Initial Note Offering. Interest income increased $0.3 million as a result of
increased cash and equivalent balances available for short term investments.
Net gain of the joint venture
In the six months ended June 30, 1999, the Company recorded a gain of
$24.4 million on the Newbridge Transaction.
Net loss
The Company reported a net loss of $30.6 million and $23.4 million for
the six months ended June 30, 1999 and 1998, respectively. The Company has not
recorded any benefit for income taxes due to the uncertainty surrounding the
realization of the favorable tax attributes in future tax returns. Accordingly,
the Company has recorded a valuation allowance against its total net deferred
tax assets.
Liquidity and Capital Resources
To date the Company has satisfied its cash requirements primarily
through the sale of capital stock, the Initial Note Offering, lease financing
and loans from affiliates. The Company's principal uses of cash are to fund
working capital requirements and capital expenditures and to service its lease
financing obligations.
For the six months ended June 30, 1999, net cash used in operations was
$44.3 million primarily related to net losses, accounts receivable growth and
deduction of the gain recognized on the Newbridge transaction, and offset by
debt accretion and amortization of debt discount which requires no cash outlay
and increases in accounts payable and accrued expenses. Net cash provided by
investing activities was $22.3 million for the six months ended June 30, 1999.
This primarily related to proceeds received on the Newbridge Transaction and
capital expenditures for network equipment, computer software and facility
expansion. Net cash used in financing activities was $1.0 million for the six
months ended June 30, 1999, related to payments on capital leases and debt
obligations offset by proceeds received from the exercise of employee stock
options. The Company obtained additional capital lease financing of
approximately $1 million during the six months ended June 30, 1999. Total
payments on capital lease obligations and long-term debt were approximately $1.4
million during the six months ended June 30, 1999. The Company is committed to
make payments under various operating leases.
14
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
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 September 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.
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 Company's business. These technologies include hardware, software and
embedded microchips. The task force will review both internal systems (including
VASP(TM), information technology assets, equipment and other systems); and
external systems (i.e., third-party manufactured products used by the Company,
and issues with customers, vendors and suppliers).
15
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
The task force has identified eight major areas (involving 71 different
products) in which the Company utilizes third party hardware and software.
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 has compiled enough
information to evaluate whether potential Year 2000 issues with third-parties
might have a material adverse effect on operations. The conclusion is that it
will not.
The task force assessed the Year 2000 compliance of third party
hardware and software utilized in VASP(TM). Such assessment included contacting
the vendor's representatives and examining technical document for the products.
The task force has determined that, of the 71 different third party products, 43
products (60.6%) are Year 2000 compliant, 17 products (23.9%) are non-compliant,
7 products (9.9%) do not use date-sensitive data, and 4 products (5.6%) are
still being assessed. More recent Year 2000 compliant versions are available for
15 of the non-compliant products, and compliant versions are under development
for the other two non-compliant products. The task force expects to test under
Year 2000 scenarios, identify the extent of any non-compliance and assess the
possible financial consequences by October 1999.
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 September 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.
16
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Contingency Planning.
The Company will address contingency planning in the third quarter of
1999. The Company currently does not foresee extensive contingency planning
efforts. Principal activities will include backing up all data bases and keeping
the information systems department's schedule clear in January of 2000.
Costs.
The Company believes that total costs for becoming 100% Year 2000
compatible will not be significant, less than $100,000. 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.
17
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings against the Registrants.
Item 2. Changes in Securities.
(a) In its Current Report on SEC Form 8-K dated May 19, 1999 (see Item
6(b)), Registrant reported the execution of the First Supplemental
Indenture, which amended the Indenture governing its 13.875%
Senior Discount Notes due 2005. Registrants hereby incorporate by
reference Item 5 of that report, which summarized the amendments
to the Indenture. Those amendments, however, did not reduce the
principal amount at maturity of the Notes, did not reduce the
interest rate payable on the Notes and did not change the time for
payment of interest.
(b) Not Applicable.
(c) Issuance of Unregistered Securities. During the three months ended
June 30, 1999, the Registrant issued a total of 22,119 common
shares and options to purchase 821,500 common shares and no debt
securities. None of those securities were sold in registered
offerings and Registrant did not utilize an underwriter when
issuing those securities. The following tables summarize all
non-registered sales of securities during the three months ended
June 30, 1999:
Equity Securities
Date Title Amount Type of Issuance Consideration Exemption
- ---- ----- ------ ---------------- ------------- ---------
4/09/99 Common Shares 3,100 Option Exercise $15,500 Sec. 4(2)
4/14/99 Common Shares 6,700 Option Exercise $33,500 Sec. 4(2)
4/16/99 Common Shares 3,836 Option Exercise $19,180 Sec. 4(2)
4/21/99 Common Shares 5,400 Option Exercise $54,000 Sec. 4(2)
4/29/99 Common Shares 833 Option Exercise $4,165 Sec. 4(2)
5/04/99 Common Shares 750 Option Exercise $3,750 Sec. 4(2)
5/10/99 Common Shares 1,500 Option Exercise $7,500 Sec. 4(2)
Options and Warrants to Purchase Common Shares
Shares Per Share
Date Title Purchasable Class of Holder Exercise Price Exemption
- ---- ----- ----------- --------------- -------------- ---------
6/23/99 Options 500,000 Officers (a) Sec. 4(2)
6/23/99 Options 274,500 Employees $14.58 Sec. 4(2)
6/23/99 Options 47,000 Employees (a) Sec. 4(2)
(a) Exercise price will be the lower $14.58 per share or the next per share
price of the next equity raise.
18
<PAGE>
Item 3. Defaults Upon Senior Securities.
(a) Not Applicable.
(b) Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for a vote of Security Holders.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. No exhibits to are to be filed.
(b) Reports on Form 8-K. During the three months ended June 30, 1999,
Registrants filed the following Current Reports on SEC Form 8-K:
(1) May 19, 1999: Reported the following events under Item 5
(Other Events):
(i) Consummation of the TeraBridge joint venture between
Registrant and Newbridge Networks Corporation.
(ii) Execution of Supplemental Indenture.
No financial statements were filed with this Current
Report on SEC Form 8-K.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELEHUB COMMUNICATIONS CORPORATION
TELEHUB NETWORK SERVICES CORPORATION
TELEHUB TECHNOLOGIES CORPORATION
TELEHUB LEASING CORPORATION
August 6, 1999 By: /s/ KENNETH A MINIHAN
-------------------------------
Kenneth A. Minihan
Acting Chief Executive Officer of Registrants
August 6, 1999 By: /s/ JOHN R. LAWSON
-------------------------------
John R. Lawson,
Chief Financial Officer
of Registrants
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001035418
<NAME> TELEHUB COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 13,745,787
<SECURITIES> 0
<RECEIVABLES> 9,654,378
<ALLOWANCES> 1,764,724
<INVENTORY> 0
<CURRENT-ASSETS> 26,247,187
<PP&E> 25,738,236
<DEPRECIATION> 6,621,760
<TOTAL-ASSETS> 50,699,782
<CURRENT-LIABILITIES> 15,404,449
<BONDS> 75,451,173
0
3,500
<COMMON> 13,056
<OTHER-SE> (50,138,864)
<TOTAL-LIABILITY-AND-EQUITY> 50,699,782
<SALES> 0
<TOTAL-REVENUES> 13,008,598
<CGS> 0
<TOTAL-COSTS> 16,285,689
<OTHER-EXPENSES> 18,677,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,661,614
<INCOME-PRETAX> (30,616,695)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,616,695)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,616,695)
<EPS-BASIC> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
