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 March 31, 1999
TELEHUB COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 333-61441 36-413-6730
(Jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) 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 March 31, 1999, the Registrant had 13,033,712 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..................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 2. Changes in Securities...........................................14
Item 3. Defaults Upon Senior Securities.................................14
Item 4. Submission of Matters to a Vote of Security Holders.............15
Item 5. Other Information...............................................15
Item 6. Exhibits and Reports on Form 8-K................................15
SIGNATURE..................................................................16
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
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
(Commission File No. 333-61441)
CONSOLIDATED BALANCE SHEETS
(Information as of and relating to the three months ended
March 31, 1998 and 1999, is unaudited)
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------------- ---------------
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,727,589 $ 10,563,457
Restricted cash 416,321 314,951
Accounts receivable, net of allowance for
doubtful accounts of $1,093,594 and
$1,266,623 in 1998 and 1999, respectively 3,114,053 6,286,645
Prepayments on leases 905,268 905,268
Debt issuance costs 874,338 868,767
Other assets 983,516 1,610,024
--------------- ---------------
Total current assets 43,021,085 20,549,112
Property and equipment, net 21,062,255 23,656,952
Prepayments on leases 1,044,085 807,469
Debt issuance costs 4,874,105 4,626,272
Other assets 408,246 405,945
--------------- ---------------
Total assets $ 70,409,776 $ 50,045,750
=============== ===============
Liabilities and Stockholders (Deficit)
Current liabilities:
Accounts payable $ 5,802,730 $ 7,522,389
Accrued liabilities 4,500,579 5,319,065
Current portion--capital lease obligations 2,393,015 2,620,367
Current portion--long-term debt 281,116 292,872
Deferred gain on sale/leaseback 24,477 29,630
--------------- ---------------
Total current liabilities 13,001,917 15,784,323
Capital lease obligations 8,274,635 8,335,353
Other long-term debt 67,885,960 71,636,670
Accrued liabilities 2,893,850 2,877,955
Deferred gain on sale/leaseback 29,630 18,358
--------------- ---------------
Total liabilities 92,085,992 98,652,659
--------------- ---------------
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, 1998
and March 31, 1999
liquidation preference $17,500,000 3,500 3,500
Common stock, $.001 par value;
100,000,000 shares authorized;
12,703,537 and 13,033,712 shares
issued and outstanding at
December 31, 1998 and
March 31, 1999 respectively 12,704 13,034
Common stock warrants 27,246,651 27,246,651
Additional paid-in capital 40,105,733 43,741,370
Note receivable--stockholder (400,000) (2,062,170)
Deferred compensation (118,422) (88,817)
Accumulated deficit (88,526,382) (117,460,477)
--------------- ---------------
Total stockholders' (deficit) (21,676,216) (48,606,909)
--------------- ---------------
Total liabilities and stockholders' equity $ 70,409,776 $ 50,045,750
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Information as of and relating to the three months ended
March 31, 1998 and 1999, is unaudited)
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
March 31, March 31,
1998 1999
--------------- ---------------
Revenues:
<S> <C> <C>
Telecommunications services $ 6,601 $ 5,767,631
Licenses 3,000,000 -
--------------- ---------------
3,006,601 5,767,631
--------------- ---------------
Operating expenses:
Operations 5,925,704 19,160,325
General and administrative 1,268,449 3,337,023
Research and development 1,734,994 4,095,265
Sales and marketing 244,680 2,725,542
Depreciation and amortization 1,025,356 1,476,662
--------------- ---------------
Total operating expenses 10,199,183 30,794,817
--------------- ---------------
Operating loss (7,192,582) (25,027,186)
--------------- ---------------
Other income (expense):
Amortization of debt discount - (795,024)
Interest expense (299,480) (3,500,810)
Interest income 97,132 335,269
Other income 1,005 53,656
--------------- ---------------
Net loss $ (7,393,925) $ (28,934,095)
=============== ===============
Basic and diluted loss per share $ (0.59) $ (2.24)
=============== ===============
Weighted average shares outstanding used in
per share calculations basic and diluted 12,634,450 12,892,614
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Information as of and relating to the three months ended
March 31, 1997, 1998 and 1999, and the period from
January 18, 1996 (inception) to March 31, 1996, is unaudited)
TELEHUB COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, March 31,
1998 1999
------------- --------------
Cash flows from operations
<S> <C> <C>
Net Loss $ (7,393,925) $ (28,934,095)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,025,356 1,476,662
Provisions for bad debts - 173,029
Amortization of debt issuance costs - 217,196
Amortization of deferred compensation 29,603 1,740,947
Amortization of debt discount - 795,024
Accretion of debt - 3,033,461
Other non-cash credits (96,582) -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts Receivable - (3,345,621)
Prepayments on leases 229,805 236,616
Other Assets (66,253) (624,207)
Increase (decrease) in liabilities:
Accounts Payable 1,244,220 1,719,659
Accrued liabilities 340,646 802,592
Deferred gain from sale and lease-back 60,866 (6,119)
------------- --------------
Net cash used in operating activities (4,626,264) (22,714,856)
Cash flows from investing activities:
Payments for property and equipment (1,197,327) (3,171,360)
Proceeds from sale and lease-back of equipment 1,000,971 -
Restricted cash - 101,370
------------- --------------
Net cash used in investing activities (196,356) (3,069,990)
Cash flows from financing activities:
Proceeds from debt issue - 36,208
Proceeds from issuance of common stock - 262,455
Payments on capital lease obligations and loans (528,064) (677,949)
------------- --------------
Net cash used in financing activities (528,064) (379,286)
------------- --------------
Net decrease in cash and cash equivalents (5,350,684) (26,164,132)
Cash and cash equivalents balance - beginning of period 9,380,320 36,727,589
------------- --------------
Cash and cash equivalents balance - end of period $ 4,029,636 $ 10,563,457
============= ==============
</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 months ended
March 31, 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 period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
2. 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
the three months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Software Products Network Services Consolidated
----------------- ---------------- ------------
THREE MONTHS ENDED MARCH 31, 1999
<S> <C> <C> <C>
Revenues - $5,767,630 $5,767,630
Operating loss 8,345,848 16,681,338 25,027,186
Identifiable assets 7,698,652 42,347,098 50,045,750
Depreciation and amortization 346,271 1,130,391 1,476,662
Capital expenditures 1,079,413 2,991,947 4,071,360
THREE MONTHS ENDED MARCH 31, 1998
Revenues $3,000,000 $6,601 $3,006,601
Operating loss 4,298 7,188,284 7,192,582
Identifiable assets 2,502,090 25,592,630 28,094,720
Depreciation and amortization 168,905 856,452 1,025,356
Capital expenditures 380,979 899,322 1,280,301
</TABLE>
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.
6
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
3. Joint Venture Agreement:
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 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 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
7
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
costs associated with operating the TeleHub network should decline as a
percentage of total revenues, and accordingly margins will improve.
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.
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.
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,
-----------------------
March 31, March 31,
Statement of Operations Data: 1998 1999
----------------------------- --------- ---------
Revenue 100% 100%
Operating expenses other than depreciation
And amortization 305% 508%
Depreciation and amortization 34% 26%
--------- ---------
Total operating expenses 339% 534%
--------- ---------
Operating loss 239% 434%
--------- ---------
Amortization of debt discount 0% 13%
Interest expense, net 7% 54%
Other income (expense) 0% 1%
--------- ---------
Net loss 246% 502%
========= =========
8
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Comparison of Three Months Ended March 31, 1999 and March 31, 1998
Revenue
Revenue increased $2.8 million to $5.8 million from $3.0 million in the
three months ended March 31, 1999 compared to the three ended March 31, 1998,
respectively. TeleHub Network Services ("TNS") generated $5.8 million of revenue
from network operations during the three months ended March 31, 1999. TTC
recorded no revenue for the three months ended March 31, 1999. For the three
months ended March 31, 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.
Operating expenses
Operating expenses increased $20.6 million to $30.8 million from $10.2
million for the three months ended March 31, 1999 and 1998, respectively.
Monthly recurring network circuit costs, personnel costs, consulting fees,
network equipment lease payments and depreciation expense increased by
$8,858,000, $5,651,000, $2,284,000, $1,334,000 and $451,000, 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 125 as of March 31, 1998 to 257 as of March 31, 1999.
All operating expenses are primarily variable and are expected to increase in
future periods as revenue increases. Research and development expenses increased
by $2.4 million to $4.1 million from $1.7 million for the three months ended
March 31, 1999 and 1998, respectively. Research and development costs will
increase in future periods to continue the development of the Company's product
and service offerings.
Total TNS operating expenses increased approximately $15.2 million to
$22.4 million from $7.2 million for the three months ended March 31, 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 $5.3 million to $8.3 million from
$3.0 million for the three months ended March 31, 1999 and 1998, respectively.
This increase related to accelerated research and development efforts.
Amortization of debt discount
Amortization of debt discount for the three months ended March 31, 1999
amounted to $795,000 in connection with notes issued to the Company.
Interest income (expense), net
Net interest expense for the three months ended March 31, 1999 was $3.2
million as compared to $.2 million for the three months ended March 31, 1998.
Gross interest expense increased approximately $3.5 million as a result of the
Initial Note Offering. Interest income increased $ .2 million as a result of
increased cash and equivalent balances available for short term investments.
9
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Net loss
The Company reported a net loss of $28.9 million and $7.4 million for
the three months ended March 31, 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 three months ended March 31, 1999, net cash used in operations was $22.7
million primarily related to net losses and accounts receivable growth, offset
by non-cash financing costs and increases in accounts payable and accrued
expenses. Net cash used in investing activities was $3.1 million for the three
months ended March 31, 1999. This related to capital expenditures for network
equipment, computer software and facility expansion. Net cash provided by
financing activities was $.4 million for the three months ended March 31, 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 three
months ended March 31, 1999. Total payments on capital lease obligations and
long-term debt were approximately $.7 million during the three months ended
March 31, 1999. The Company is committed to make payments under various
operating leases.
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.
10
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
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).
The task force has identified eight major areas (involving 71 different
products) in which the Company utilizes third party hardware and software.
Identification for the TNS network or its administrative and management systems
has not been completed but targeted for September 1999.
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.
11
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
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 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.
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 and keeping
the information systems department's schedule clear in January of 2000.
12
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
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.
13
<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) Not Applicable.
(b) Not Applicable.
(c) Issuance of Unregistered Securities. During the three months ended
March 31, 1999, the Registrant issued a total of 330,175 common
shares, options and warrants to purchase 732,500 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
March 31, 1999:
Equity Securities
Date Title Amount Type of Issuance Consideration Exemption
- ---- ----- ------ ---------------- ------------- ---------
1/03/99 Common Shares 101,246 Option Exercise $606,230 Sec. 4(2)
1/05/99 Common Shares 25,000 Option Exercise $125,000 Sec. 4(2)
1/12/99 Common Shares 1,000 Option Exercise $10,000 Sec. 4(2)
1/15/99 Common Shares 37,465 Option Exercise $218,575 Sec. 4(2)
1/15/99 Common Shares 31,319 Option Exercise $194,095 Sec. 4(2)
3/10/99 Common Shares 2,097 Option Exercise $10,485 Sec. 4(2)
3/10/99 Common Shares 22,500 Option Exercise $112,500 Sec. 4(2)
3/31/99 Common Shares 108,654 Option Exercise $643,270 Sec. 4(2)
3/31/99 Common Shares 894 Option Exercise $4,470 Sec. 4(2)
Options and Warrants to Purchase Common Shares
Shares Per Share
Date Title Purchasable Class of Holder Exercise Price Exemption
---- ----- ----------- --------------- -------------- ---------
1/01/99 Options 252,500 Employees $14.58 Sec. 4(2)
1/01/99 Options 180,000 Directors $14.58 Sec. 4(2)
3/31/99 Warrant 300,000 Employee $14.58 Sec. 4(2)
Item 3. Defaults Upon Senior Securities.
(a) Not Applicable.
(b) Not Applicable.
14
<PAGE>
TELEHUB COMMUNICATIONS CORPORATION
(Commission File No. 333-61441)
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted for a vote of Security Holders.
Item 5. Other Information
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 March 31, 1999,
Registrants filed the following Current Reports on SEC Form 8-K:
(1) February 2, 1999: Reported the following events under Item 5
(Other Events):
(i) Richard M. Harmon's resignation as a director of
TeleHub Communications Corporation ("TeleHub") and as
an officer of each Registrant.
(ii) John R. Lawson's appointment as the Chief Financial
Officer, Treasurer and corporate Secretary for each
Registrant.
(iii) TeleHub's completing the exchange of all outstanding
13.875% Series A Senior Discount Notes due 2005 for
13.875% Series B Senior Discount Notes due 2005.
No financial statements were filed with this Current Report
on SEC Form 8-K.
(2) March 31, 1999: Reported the following events under Item 5
(Other Events):
(i) The agreement to enter into strategic joint venture
with Newbridge Networks Corporation for the purpose of
developing and marketing the Registrants' call server
technology.
(ii) Barry C. Lescher's resignation as a director of TeleHub
and as an officer for Registrants.
No financial statements were filed with this Current Report
on SEC Form 8-K.
15
<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
May 14, 1999 By: /s/ DONALD H. SLEDGE
------------------------------------------
Donald H. Sledge, Chief Executive Officer
of Registrants
May 14, 1999 By: /s/ JOHN R. LAWSON
------------------------------------------
John R. Lawson, Chief Financial Officer
of Registrants
16
<TABLE> <S> <C>
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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>
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