UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 29, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period ____________to____________
Commission File Number 0-25002
TELEHUBLINK CORPORATION
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(Name of small business issuer as specified in its charter)
DELAWARE 59-3200879
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 NEW ENGLAND EXECUTIVE PARK
BURLINGTON, MA 01803
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (781) 229-1102
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
TITLE OF EACH CLASS REGISTERED: Common Stock, par value $.01:
------------------------------ Redeemable Warrants, each to purchase
one share of Common Stock
Check whether the issuer (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,151,827
The aggregate market value of the voting stock
held by non-affiliates of the Registrant
(based on the price the stock closed at on July 18, 2000)
was approximately $120,000,000.
The number of shares outstanding of the registrant's Common Stock,
par value $.01 per share, as of July 18, 2000 were 26,585,106.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TELEHUBLINK CORPORATION
ANNUAL REPORT ON FORM 10-KSB
for the
FISCAL YEAR ENDED JANUARY 29, 2000
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 17
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 18
ITEM 7 FINANCIAL STATEMENTS 25
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 27
ITEM 10 EXECUTIVE COMPENSATION 29
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 33
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 35
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K 36
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
TeleHubLink Corporation, formerly known as What A World!, Inc., ("WAW")
(the "Company") was incorporated under the laws of the State of Delaware in July
1993. Until May 1997, we operated as a mall-based specialty retailer. In May
1997, we sold substantially all of our assets to Natural Wonders, Inc. for cash
in the amount of $517,795 plus the assumption by Natural Wonders, Inc. of
specified liabilities. The completion of this sale terminated our active
operations, and for the period May 1997 through February 3, 1999, we sought to
serve as a vehicle to effect an acquisition, whether by merger, exchange of
capital stock, acquisition of assets or other similar business combination.
In February 1999, we acquired the outstanding capital stock of Tele Hub
Link Corporation (TeleHub), a privately held company organized under the laws of
the Province of Ontario, Canada. TeleHub was engaged in the business of
providing teleservices to business clients. We acquired all the outstanding
capital stock of TeleHub from the TeleHub shareholders in exchange for an
aggregate of 13,011,339 shares of our common stock. As a result of this
transaction, TeleHub became a branch or operating entity of the Company. In
connection with the TeleHub transaction, we changed our corporate name to
TeleHubLink Corporation.
For accounting purposes, this transaction has been treated as a reverse
acquisition. TeleHub has been deemed the acquiring enterprise for financial
statement purposes, as it received a majority of the voting interests in the
combined enterprise. The Securities and Exchange Commission ("SEC") staff has
taken the position that a business combination between an operating enterprise
and a "shell company" in which the shell company is the issuer of securities and
the operating enterprise is determined to be the acquiring enterprise for
financial statement purposes, the transaction should be treated for financial
statement purposes as an issuance of securities by the operating enterprise.
Therefore, the tangible net liabilities of WAW at the date of the transaction of
approximately $207,288 have been recorded at their fair market value with an
offset credit to paid-in capital and the operations of WAW are reflected in the
operations of combined enterprise from the date of acquisition. In addition, the
1999 financial statements have been retroactively restated to reflect the number
of shares TeleHub received in the business combination. Costs related to this
transaction of approximately $362,163 have been charged directly to paid-in
capital. As a result of this and other transactions, the Company will restate
its quarterly financial statements, for the year ended on January 29, 2000. The
majority of these transactions are not cash related valuation items and do not
affect the Company's liquidity, cash and operating capabilities (See MD&A)
As a result of the 1997 sale of our assets, the TeleHub transaction and
other recent acquisitions, we currently operate as a holding company.
Substantially all of our assets consist of our ownership of the capital stock of
our subsidiaries and we conduct our operations through our branches or
subsidiaries. Consequently, references to "we" "us", "our" "THLC" or the
"Company" are to TeleHubLink Corporation and our subsidiaries, taken as a whole,
unless the text requires otherwise.
OVERVIEW
We separate our company's function into the following business areas:
Secure Wireless Encryption Technology, Internet Customer Contact Service Center
and Telecom Services.
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SECURE WIRELESS ENCRYPTION TECHNOLOGY
In January 2000, we acquired all the issued and outstanding shares of
capital stock of wirelessEncryption.com, Inc. ("WEC") in exchange for 5,000,000
shares of our unregistered common stock with a value of $14.5 million. The
Company's former Chairman, Stanley Young, who co-founded WEC, is a principal
shareholder of the Company and of WEC. WEC is developing, under its trademark,
iNSECT(TM), a technology which we believe may, if successfully developed, permit
ultra-secure communication signal protection and enhanced communication signal
recovery iNSECT(TM) is based on advanced cryptographic and mathematical
principles and sophisticated signal processing techniques, for wireless and
Internet communications and other data transmission methods. We believe that
this technology, if successfully developed, can be embedded in low-cost
microchip devices known as application specific integrated circuits, or ASICs,
which are used in mobile and hard wired telephones, computers, fax machines,
fiber optic transmission devices, and smart cards. The simulation of our
iNSECT(TM) technology is conducted using two computers that represent sending
and receiving parties. The simulation produces a transmission of data, in an
advanced compressed, encrypted and "smeared" form, on one computer, and
decompresses or "de-smears" on the other computer after authentication. The
simulator is expected to be used to analyze what the characteristics and
detailed behavior of the ASIC will be and how the technology may perform between
communication devices. Communications devices may include cellular phones and
other wireless products in real time. We believe that our technology may offer a
cost effective solution to wireless device manufacturers such as cellular phones
manufacturers. Some competitive technology solutions are not from transmission
to reception. They may be secured from the signal to the nearest tower but may
be unsecured from any point in the transmission thereafter or to the receiver.
In March 2000, we acquired all the outstanding equity of COMSEC Solutions,
LLC, a technology-consulting firm with expertise in the fields of encryption,
authentication and Web and e-commerce security. We believe that the acquisition
of COMSEC and the hiring of its founder and sole stockholder, as our Vice
President of Cryptography, will enhance our internal technical team developing
our iNSECT(TM) technology. We believe that this acquisition brings additional
talent with the technical expertise needed for our secured wireless encryption
technology business.
In April 2000, we announced the completion of the iNSECT(TM) simulator. Our
simulator is intended to be used as an engineering and business development tool
to demonstrate the secured wireless encryption technology iNSECT(TM). We believe
if this technology is developed, tested, and accepted by the industry, we may be
able to offer original equipment manufacturers (OEM's) and others a family of
low-cost ASICs that may provide security or enhanced signal recovery or both.
This may also allow us to license this technology to others on a per-unit
royalty basis. The Company intends to subcontract the manufacture of ASICs to
existing manufacturing companies. This microchip may allow us to license the use
of the iNSECT(TM) technology to third parties.
We cannot assure you that we will successfully complete the development
and testing of our technology, obtain any patent protection for our technology
or that our technology will not infringe the intellectual property rights of
others or that we will achieve commercial acceptance of our technology.
INTERNET CUSTOMER CONTACT SERVICE CENTER AND TELECOM SERVICES
INTERNET CUSTOMER CONTACT SERVICE CENTER
We are in the process of developing our Internet Customer Contact Center
in which we plan to consolidate existing technology offering traditional voice,
voice over Internet Protocol (IP), video over IP, chat, e-mail and fax. The
Company plans to offer business clients the opportunity to outsource their
customer care functions in a cost-effective manner. Our customer contact center
may utilize an integrated mix of traditional call center and e-commerce customer
services for our clients that require "customer care." In the past online
consumers were obliged to communicate by phone or e-mail with a Web-based
company
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to obtain responses to inquiries concerning a company's products. New computer
telephony integration and Internet telephony technologies allow consumers to
have live interactions via the Internet with sales and technical support
personnel. We envision that our customer contact center will be a support
facility in which our customer contact representatives will interact with our
clients' customers over multiple communications channels, including traditional
telephone, fax, e-mail and online voice and data exchange via the Internet.
The customer contact center's services are planned to consist of
traditional outbound teleservices, such as customer satisfaction and preference
surveys; direct selling marketing, client relationship programs and traditional
Internet-related inbound telecommunications services. Other services involve
responses to a variety of customer requests, including inquiries, billing
questions, complaints, direct mail response, order processing and technical
support.
TELECOM SERVICES
Our Telecom Services business is a multi-station call center located in
Montreal, Canada. Telecom services are provided through facilities known as call
centers. Call centers establish the direct communication by telephone of
information to, and from, current and prospective customers of the call center's
business clients. Generally, the teleservices provided by call centers provide
call center-initiated, or "outbound," teleservices and responding to, and
managing, customer-initiated, or "inbound," calls. Outbound teleservices consist
primarily of direct marketing and sales activities initiated on behalf of a call
center's business clients. Inbound teleservices consist of the processing of
incoming phone calls, often placed by customers using toll-free telephone
numbers, for product or service orders, customer inquiries, processing of credit
and other consumer applications and customer and technical service. Call
campaigns provided by call centers involve outbound and/or inbound calling
programs that follow prepared scripts targeted at specific markets or customers
previously determined by the call center business clients.
We believe the telecom services business can expand by further providing
"content" products to the industry. We plan to develop and sell group discount
packages through teleservices companies that will, if successful, permit
consumers to buy goods and services at reduced prices over traditional providers
of brick and mortar retailers throughout North America.
BUSINESS STRATEGY
SECURE WIRELESS ENCRYPTION TECHNOLOGY
Our long-term strategy is to achieve broad market acceptance in North America
and worldwide for our iNSECT(TM) secured wireless encryption technology, as a
distributed trust platform for most wireless devices, computers, data storage
devices (magnetic, optical disk and tape drives), related high-speed Internet
access devices (excluding DSL and cable modems), personal digital assistants and
the entertainment industry. We intend to do this for live voice, audio, video
and data applications. To achieve this goal, we plan to complete the development
of our iNSECT(TM) technology and begin testing our simulator of this technology
in certain areas of the marketplace. We may pursue strategic relationships with
wireless hardware manufacturers and companies involved in the development of
secured wireless encryption technologies. We may also pursue strategic alliances
with manufacturers and other companies through a licensing program using the
iNSECT(TM) technology. We have focused on the research and development of the
iNSECT(TM) technology that allowed us to develop a set of working simulator
models of the technology. These simulators may be used to analyze what
characteristics and detailed behavior of our ASICs will be and how the
technology may perform between communication devices. Communications devices may
include cellular phones and other wireless products in real time.
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However, in order to be able to make end-to-end communications security
ubiquitous, we may also work closely with land-based telephony equipment
manufacturers, whether these offer traditional circuit-switched based devices,
or more recent packet-switched solutions, like voice-over-IP (Internet
Protocol). We cannot assure you that the technology will achieve any significant
market acceptance.
INTERNET CUSTOMER CARE SERVICES AND TELECOM SERVICES
We expect to provide comprehensive client solutions using
telecommunications to facilitate our business clients' objectives. We will focus
on developing relationships with clients and strategic partners. Through the
combination of our inbound teleservices and traditional outbound teleservices
and developing Internet-related telecommunication channels, we intend to provide
our clients with a multi-service customer contact center or "HUB" that will link
clients with their ultimate customers and other organizations across various
complementary industries. The success of our "HUB" concept will be largely
dependent on our ability to secure contracts and relationships with
complementary customers and strategic partners, including marketing, sales and
financial organizations
Another part of our strategy is to expand our telecom services by providing
content products to consumers through selected telecom call center clients. We
plan on restructuring the existing call center in Montreal to support our
existing business clients, new customers and expand into providing content to
traditional North American teleservicing companies. We plan to transition from
the traditional call center approach to an Internet Customer Contact Center,
which will service Internet clients. We are in the early stages of developing
the process of establishing a Web-based customer contact center which may
provide these Internet-related inbound/outbound communications services.
MARKETS AND INDUSTRY BACKGROUND
SECURE WIRELESS ENCRYPTION TECHNOLOGY
The traditional circuit-switched communications infrastructure over which
business, government and individuals have been conducting their affairs and
transactions has given way to a revolutionary change whereby most communications
start being handled over the packet-switched realm. This packet-switched realm
is a natural offspring of the Internet revolution and we believe it is here to
stay. It allows for fast, mobile and above all inexpensive communications.
Consumers, government agencies and corporations are increasingly relying upon
the Internet and Internet protocol-based networks and other modalities of voice
and data transmission to conduct electronic commerce, ordinary, and sensitive
and secure communications. The increasing proliferation of, and reliance upon,
shared electronic information has caused voice and data security to become a
concern of business, governments, educational institutions and consumers.
This simple observation, in conjunction with the fact that in a typical
communication session nowadays the source of transmission or its destination or
both, may be actually moving from place to place, makes the security concern of
pressing urgency and relevance. The personal computer (PC) in the early 1980's
liberated the typical information technology user from the traditional
enterprise mainframe-powered data-information center. The explosive growth of
the cellular telephone industry and the Internet have liberated the many
consumers from being obliged to operate from the vicinity of the telephone-jack
and from a specific location next to the wall. People now can move around and
conduct their businesses or lives with unprecedented mobility, ease and comfort.
We believe mobility is established but communications security remains of the
highest concern, except for the most mundane of applications like securing a
credit card number when ordering something, or when issuing an instruction to
one's broker to sell or buy specific shares. This amounts to security for
communications of only a few sent bits and bytes of information. On
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the other side, we believe that our iNSECT(TM) secured wireless technology may
provide a powerful solution for businesses, government, and consumers seeking
security for their real-life heavy-content voice, audio, video and data
transmissions.
If we successful complete our iNSECT(TM) secured wireless technology, we
plan to have a variety of microchips (ASICs) which may be designed to
specifically offer four fundamental advantages simultaneously. These four
characteristics are the cornerstone of our iNSECT(TM) technology.
1. end-to-end security based on encryption and authentication,
2. capabilities of operation at very high (broadband) speeds,
3. significantly improved quality of reception and
4. low-cost.
Our ASIC's are planned to provide security by implementing among other
things some mathematically very robust and fast encryption techniques, which are
realized over two different layers of powerful cryptography. First, our
iNSECT(TM) ASICs are planned to use symmetric key cryptography to actually
encrypt the communications content. Second, these ASICs may be designed to
utilize two different techniques; one is known as Diffie-Hellman and another one
is the elliptic curve cryptography (ECC) realm, and more specifically the ECC-DH
and EC-DSA algorithms.
Before explaining what the iNSECT(TM) technology's unique characteristics
are though, some fundamental descriptions are necessary.
Cryptography is the process of encoding and decoding electronic messages
using ciphers. Ciphers are sophisticated mathematical codes and algorithms used
to enable the confidential transmission of electronic messages only to
authorized persons. Digital cryptography is performed using a combination of
symmetric ciphers and asymmetric ciphers. These ciphers achieve each of the
basic data security elements of identification and of authentication to each
other of the communicating parties, confidentiality, integrity and
non-repudiation of the communication. Symmetric ciphers are commonly referred to
as symmetric-key or secret-key cryptography and asymmetric ciphers are commonly
referred to as asymmetric-key or more commonly public-key cryptography.
Both symmetric-key and asymmetric-key cryptography use an encrypting and a
decrypting key. The key in general is a unique, long and complex to memorize
number that is input to the mathematical algorithm, or the cipher, used to
encrypt or decrypt the message. In a symmetric-key cryptography the encrypting
key and the decrypting key, which is secret, are identical. To transmit a
message, a secure key exchange must first be performed so that the key can be
shared with the intended recipient of the message. In asymmetric-key
cryptography the encrypting key, which is a public key, and the decrypting key,
a secret key, are different numbers but they work together in a unique
combination. One specific public key only works with one and only one specific
private key and vice versa. The public key can be publicly distributed to
authorized recipients without risk of security breach. The private key must
always remain secret with the owner of the key. The owner of the private key can
only decipher messages encrypted by anybody in possession of the public key. The
reverse operation of encrypting a message with the private key makes it possible
to anybody who has the public key, easily obtainable from public directories, to
decipher the message that only the owner of the private key could obtain. This
is the definition of a digital signature.
Because asymmetric cryptography allows for wide distribution of the
encrypting key, it permits secure communications among a large group of people
without requiring manual distribution of the key. We believe the problem that it
traditionally suffers from is the potential lack of trust in the authenticity of
directories within which one finds public keys. Therefore, asymmetric-key
cryptography relies on the generation of so-called digital certificates, which
are small data structures attached to a message, signed digitally by somebody
one trusts, called a digital certification authority that can be used to provide
the user
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authentication, data integrity and non-repudiation elements of the information
security system.
Another major characteristic of public-key cryptography is that it is based
on the use of extremely complicated ciphers, so that encryption of large
messages is very slow when compared to encryption using secret-key cryptography.
In a communications realm, asymmetric-key cryptography is commonly used to
protect symmetric keys as a sort of secure envelope within which they are
transmitted to other parties. This is used for actual communications traffic
encryption and it is always symmetric-key cryptography that must be used for
bulk encryption of communications traffic.
We said earlier that we plan to develop our iNSECT(TM) technology that may
use two super posed layers of cryptography; symmetric key cryptography and
Diffie-Hellman or the elliptic curve cryptography (ECC).
(a) On the bottom layer, right at the traffic level, our iNSECT(TM) ASICs are
expected to use symmetric key cryptography to actually encrypt the
communications content, which for all practical purposes is considered as
digital data. This is so, because voice, audio and video communications
nowadays are nothing else than the transmission of bits from the digitized
voice, sound and video. The traffic encryption is done using actual data
encryption keys of 198 or 256 bits, and these encryption keys change
automatically and transparently for the user and in complete
synchronization between transmitter and receiver every few micro or
milliseconds. This may happen in a very randomized non-periodic sequence
and frequency, which is unique and different each and every time a user
initiates a new communications session with another party. These symmetric
encryption keys will be generated simultaneously by the transmitting and
receiving ASICs. This is based on industry tried and tested, powerful,
robust and essentially irreversible mathematical mechanisms like the secure
hashing function (SHA) which is designed by the National Security Agency
(NSA). We believe there is no known way that an attacker can use to reverse
the process, discover the actual keys and proceed with decrypting the
secured session. Even if accidentally an attacker happens to discover by
chance one of these keys they cannot discover any other key, as the key
will soon change and the attacker may only get a glimpse of a few
milliseconds or thousandths of a second of plaintext traffic. The attacker
may barely get enough information to even know what vowel or consonant was
being uttered if any at all, much less to decipher a meaningful part of a
communications session.
(b) On the top layer, our planned ASICs may be designed to use two different
techniques; one is known as Diffie-Hellman ("DH") and another is the
elliptic curve cryptography (ECC) realm, or more specifically the ECC-DH
and EC-DSA algorithms.
The Diffie-Hellman protocol allows communication devices to exchange among
them extremely large numbers, which once fed into an appropriate series of
intricate mathematical calculations on each side, allow the generation by the
two or more simultaneously communicating ASICs of a huge secret number that is
called the session key. This number is changed every time a new session is
established. We believe it is an established scientific fact that no way is
known for the session key to be calculated by an eavesdropping party. The
session key is the basis of the generation of the subsequent encryption keys and
it serves as a secure envelope for the transmitting ASIC to communicate to the
receiving ASIC its choice of the first actual traffic encryption key. From that
point and beyond, the communicating ASICs may be able to sustain the secure
session simultaneously and without any help from each other.
The ECC-DH is an optimized fast hardware implementation of the IEEE P1363
standard that also serves as the base of an elaborate PKI (public key
infrastructure). A powerful standardized PKI is the base for digital
certificates and it may in the future allow our planned ASICs to digitally sign
encrypted traffic using the standard EC-DSA algorithm. It may also guarantee the
authentication of communicating devices to each other based on a globally
acceptable legal framework that would enable and empower such digital
transactions.
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The elliptic curve cryptography field is a sophisticated area of advanced
mathematical techniques, which are based on third degree polynomials defined
over special groups of very large numbers, called finite fields, and which are
characterized by intricate definitions even of simple properties like addition,
multiplication and exponentiation. From a set of specific geometric points on an
elliptic curve, one can calculate through these techniques other points in a way
that the inverse calculations are intractable for an attacker and therein lies
the security of the technique. The levels of complexity are the choice of finite
fields among gigantic quantities of choices. For each chosen finite field there
are truly astounding choices of elliptic curves. Very few of them are adequate
for a cryptographically secure protocol. Finding them is not an easy task. Even
among these few curves, if somebody chooses one, it still is intractable which
specific points on it one uses because there are numerous points on a curve.
Elliptic curve cryptography (ECC) is characterized by sophisticated algebraic
calculations that we believe nobody knows how to invert. It can however be run
on small computing resources, with very small time needed, as compared to other
public-key cryptographic techniques. It has computational agility and capability
to be functional under truly limited resources, small battery-based power supply
and little available memory. This has attracted the attention among others of
the smart-card industry, where chips are embedded for example into plastic
credit cards. Its speed of operation, as compared to other PKI techniques is
very good as it can be seen that with an ECC approach one can digitally sign a
document in a fraction of the time needed by other competing PKI techniques,
like for instance RSA's, a potential competitor using large number factorization
technique.
Elliptic curve cryptography is the base of our PKI and it is a standard
technology for secure Internet-based commerce and communications. PKI helps
ensure the integrity and privacy of information being transmitted and verifies
the identity, authenticity and authority of the sender and the recipient of that
information. We believe that continued expansion of electronic commerce will
require the implementation of improved PKI security measures which will
irrefutably verify the identity of a party and ensure that the information being
transmitted between that party and the other party is kept private. We also
believe that the security required to expand electronic commerce and
communication will be provided through the advancement in PKI of mathematical
formulas and techniques through global standardization bodies like the IEEE.
This is one of the major areas of the company's ongoing research and development
activities.
A password or personal identification number (PIN) is usually used to
authenticate a user's identity. Because both of these approaches are vulnerable
to decoding or observation and subsequent use by unauthorized persons, they are
less secure than if used with tokens. Tokens are small devices ranging from
simple credit card-like objects, rings, proximity cards and plastic keys to more
advanced secured tokens, including smart cards, PKI cards and PCMCIA cards. For
greater protection, two-factor identification and authentication is implemented
by combining tokens with a password or personal identification number to verify
authentication of the user. For added security, three-factor authentication,
which consists of a token, password and biometric comparisons, can be
implemented. We believe the next generation of cellular telephones and
communication devices with an embedded smart card reader may offer platforms
that can exploit similar capabilities. We intend to be able to fully cater to
these needs.
We mentioned earlier that the basic element of PKI is the digital
certificate. Digital certificate technology provides an advanced form of
authentication and secures key exchange. PKI digital certificates are
specifically prepared software files through which the sender can digitally sign
a message with a unique identification code. The recipient of the message can
authenticate the identity of the sender and verify the integrity of the data
through the user of a trusted third party known as a certificate authority by
obtaining the sender's public key from the certificate digitally signed by the
mutually acceptable digital certificate authority. The uniqueness of the
certificate in conjunction with a trusted time stamp provides for
non-repudiation, which prevents the sender from denying that he or she sent the
message. The ability for non-repudiation is not available with less
sophisticated techniques. With the development of secure token technology,
digital certificates can now be incorporated into smart cards, PKI cards and
PCMCIA cards and provide an information security system that provides two-factor
identification and authentication or three-factor identification and
authentication with the incorporation of biometric technology. We intend for our
developing technology to address these potential needs of the market.
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Currently, three types of PKI are considered to be both secure and
efficient (a) large integer factorization, also known as RSA, (b) digital
signature algorithm, or DSA; and (c) elliptic curve cryptography or ECC, which
is considered to be the most efficient public key system known. We believe that
ECC, which our technology implements, offers security at least equivalent to RSA
and DSA while using much smaller key sizes and that the attractiveness of ECC
will increase as computing power improvements force a general increase in key
size. The benefits of this higher-strength-per-bit include higher speeds, lower
power consumption, bandwidth efficiencies, storage efficiencies, and smaller
digital certificates.
These potential advantages are particularly beneficial in applications
where bandwidth, processing capacity, battery-power or memory-storage
availability may be constrained. Such applications include smart cards,
electronic commerce systems, web servers, cellular telephones and pagers.
We believe that current solutions to the problem of encryption of
high-speed wireless voice and data transmissions are essentially software-based
using in most successful cases so called block ciphers like data encryption
standard (DES) and more recently Triple DES. These techniques as well as the
upcoming advanced encryption standard (AES) require the use of very expensive
microprocessor chips to execute the software. Our planned solution is
hardware-based and encryption is done using several advanced stream ciphers,
which effectively encipher bit per bit, as opposed to block ciphers, which
encipher block per block. A block is currently a chunk of 64 bits from the
communications content and it soon, as defined in the AES requirements, will be
128 bits of length. Block ciphers require significant area in silicon to
incorporate all the massive circuitry needed to manipulate simultaneously so
many bits at a time and this is reflected in the prohibitively high cost of the
integrated circuit (ASIC) that would be based on such an approach. Our
developing technology will be based on stream ciphers instead.
Stream ciphers have traditionally suffered by a specific problem called
"loss of cryptographic synchronization". As the cipher engines at the
transmitter and receiver must be simultaneously operating on the same bit to
ensure intelligible communication, even one single lost or corrupt bit can throw
off the session altogether. This loss can happen easily especially in a wireless
transmission due to noise, interference, shadowing and reflection from
obstacles, trees, and high-rise buildings. Advanced digital signal processing
techniques may be embedded in our planned ASICs. This may treat the binary
encrypted traffic as fast-changing analog signal and encode it in such a way
that it expands the energy of each bit over several thousands of other adjacent
bit slots. Then this may make the signal more resistant to loss and interference
and errors. This part of our development of ASICs is a signal recovery engine
that recovers at the receiver the signal in many cases and it presents the
stream ciphers most often with a faithfully reconstructed bit-stream for
decryption. This same capability of our planned ASICs is precisely responsible
for the improved quality of reception. This could lead to higher user
satisfaction because phone calls may not be dropped as easily due to the
improved link quality.
We believe that application-specific integrated circuits, or ASICs,
incorporating our developing technology may provide (a) a low cost solution to
the cellular phone or wireless device user in need of among other things (b)
end-to-end security, (c) operability at the high-speeds of the broadband
networks of the future, while (d) improving the quality of the communications
link. This may encourage manufacturers of cellular phones and other wireless
devices to adopt our technology when successfully developed. We believe that
completion of the development, testing and the commercialization of our
technology may present a significant growth opportunity for us. However, we
cannot assure you that we will be successful in developing the technology or
achieve commercial acceptance of it.
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INTERNET CUSTOMER CONTACT SERVICE AND TELECOM SERVICES
Traditionally, businesses that have included teleservices in their
marketing and customer service programs have primarily used in-house personnel
and facilities. We believe that businesses are increasingly outsourcing their
telephone-based marketing and customer services needs to third party providers
as part of overall efforts to reduce costs and focus internal resources on their
core competencies. Also, we believe the teleservices industry has stronger
growth potential since the Internet has emerged and is fast becoming part of
every company. Timely and effective customer care develops and strengthens
customer loyalty that is critical for companies to remain competitive. We
believe one of the challenges for Internet companies is the lack of positive
customer care. Outsourced teleservicing with technology may provide advantages
over internal operations, including the ability to reduce marketing
infrastructure, labor, training, facilities and specialized equipment, while
maintaining or improving operating efficiencies related to customer contact and
support.
Companies that outsource their customer care activities are likely to
demand an integrated customer care provider that can deliver consistent support
across multiple communication channels voice, video, fax and the Internet. In
addition, being able to provide an end-to-end solution is expected to be a key
competitive factor. In particular, the Internet has created a new market for
customer care. Forrester Research shows that 75% to 90% of online customers
prefer human interaction. Research also indicates that spending on Internet and
e-commerce services, including customer support services, may grow to $22
billion by 2002. As e-commerce grows, companies are seeing an increasing
percentage of their revenue becoming dependent on their ability to service
customers over the Internet.
We believe the success of our Internet customer care and telecom services
will depend upon our ability to provide the level and quality of services our
business clients need. We expect to develop a competitive advantage by providing
value-added services, which may generate business. Presently, we do not have any
long-term agreements and cannot assure you that we will receive any long-term
agreements or binding commitments pertaining to our Internet customer care or
telecom services business.
COMPETITION
SECURE WIRELESS ENCRYPTION TECHNOLOGY
The security encryption industry is a highly competitive and fragmented
environment that is characterized by rapidly evolving technology. Other
companies in this industry have greater financial, technical resources, greater
name recognition and more extensive customer bases that provide them with a
substantial advantage over us.
Our iNSECT(TM) technology, if successfully developed and commercialized,
could compete with the existing encryption companies who use either current
technologies like the Diffie-Hellman cryptographic key exchange, or technology
that cannot address the high-speed requirements of the coming broadband
multimedia networks.
We are aware of some security encryption businesses that may compete with
us, and current and evolving technologies that may provide some of the
attributes of our technology. We are not aware competitors who provide all of
the characteristics of our technology. Some of those technologies may have an
entirely different approach of accomplishing the desired effects of the products
being developed by us. We cannot assure you that either existing or new
competitors will not develop products that are superior to or that otherwise
achieve greater market acceptance than our potential technology.
We expect to be subject to competition from producers of software based
unlocking systems or possibly expensive hardware-based controllers as compared
to our hardware technology. One of our significant competitors would be RSA Data
Security ("RSA"), which has recently announced its intention to
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begin supplying systems software for security management. Some of our other
significant voice/data security competitors would include Certicom Corporation
("Certicom") and WatchGuard Technologies.
Software providers such as Certicom, RSA, and WatchGuard Technologies
provide software solutions to resolve security issues for small packets of bits
in limited applications. These solutions currently are not capable of handling
high-speed (broadband) transmission. They are DSP oriented meaning they have
either a very expensive chip or require software to run on their DSP. We believe
this prohibits their desirability or suitability to run broadband (high-speed)
applications in the future. These solutions also require powerful and expensive
microprocessors. We believe that our technology may offer a cost effective
solution to wireless device manufacturers such as makers of cellular phones.
Some competitor technology solutions are not end-to-end secure or from
transmission to reception. They may be secured from the signal to the nearest
tower but may be unsecured from any point in the transmission to the receiver.
We believe some of these software providers may become a key strategic partner
to us. We may consider licensing some of their technology and perhaps utilize
some of their same silicon foundry for our manufacturing. We also believe they
may be primary candidates to license our intellectual property (IP) cores to be
integrated into their own integrated circuits.
INTERNET CUSTOMER CONTACT CENTER AND TELECOM SERVICES
The markets for our content products and services are intensely competitive
and are characterized by changing technology and industry standards, evolving
user needs and the frequent introduction of new products and services.
The customer communications industry, which includes traditional call
centers and interactive customer contact centers, is extremely competitive and
highly fragmented. Our competitors range in size from very small private
companies, offering special applications or short-term projects, to very large
public companies and the in-house operations of potential clients. Currently,
our Canadian competitors include Vox Data Inc., the Equinox Group, Sodema and
Transcontinental Technologies Inc. Large U.S. independent customer service
companies such as APAC TeleServices Inc., Electronic Data Systems, MATRIXX
Marketing Inc., SITEL Corporation, Stream International Holdings Inc., Sykes
Enterprises Inc., Precision Response Corp., West TeleServices Corporation and
Protcol Communications, Inc., may also exert intense competitive pressure on us
in the U.S. market. In addition, some of these large teleservice companies have
recently opened or acquired interactive customer contact centers in Canada and
may offer increasing competition as their Canadian presence grows. Providers of
other forms of advertising and marketing media, such as direct mail, television,
radio and online services, also offer us varying degrees of competition. We
compete with the internal marketing capabilities of our own potential business
clients. These business clients have their own significant internal teleservice,
marketing and sales capabilities.
Much outsourced customer communications work is contracted on an individual
project basis, with many projects being allocated among various customer
communications providers. This may force us to compete frequently with other
providers as individual projects are initiated or reallocated. The low barriers
to entry to this industry and rapid growth of e-commerce may attract many new
competitors, some of which may be substantially larger and better capitalized
than we are. Entry into the Canadian market may be especially heavy as a result
of the Canadian dollar's current low exchange rate against the U.S. dollar. We
believe that the principal competitive factors in our industry will be price,
quality, service and responsiveness to clients' needs.
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INTELLECTUAL PROPERTY
With respect to our iNSECT(TM) secured wireless encryption technology,
telecommunications encryption and signal recovery enhancement technology, we
currently depend substantially on our proprietary information. In order to
protect our proprietary information, we presently and/or in the future will rely
on a combination of patents, copyrights, trademarks, trade secrets, employee and
third-party non-disclosure agreements, technical measures and other methods to
protect our proposed products and other proprietary information and know-how.
With respect to licenses of our technology to third parties, we presently and/or
in the future expect to rely on license agreements with any potential licensees
of our technology, which would contain non-disclosure provisions.
In the future, we plan to file several patent applications with the United
States Patent and Trademark Office, as well as in foreign countries, for
protecting our technological innovations in selected markets globally. Obtaining
patent protection for one or more products, however, may require the expenditure
of substantial resources. In particular, we expect to expend substantial
resources on attorney fees and administrative costs for patent application
preparation and prosecution. The period of time between the filing of a patent
application and the issuance of a patent can be several years. In some
circumstances, the rapid pace of technological advancements can render the
subject matter of an earlier filed patent application obsolete before the patent
application can be prosecuted to issuance. After a patent is issued, the patent
holder has the exclusive right to stop other from making, using, selling, or
offering for sale the claimed invention for 20 years from the date of filing the
patent application in the U.S. In enforcing these exclusive rights by the patent
holder, potential infringers can challenge the validity of the patent for
numerous reasons.
Our protection measures and non-disclosure agreements may not be adequate
to prevent misappropriation or provide any meaningful protection for our
proprietary technology in the event of misappropriation. Further, others may
independently develop substantially equivalent or superior technologies or
duplicate any technology we develop. We cannot assure you that these measures
will prove sufficient to prevent misappropriation of our intellectual property
or to deter third-party development of similar products. Our technology may
infringe the patents, copyrights or other intellectual property rights owned by
others, however, we are not aware of any pending material conflicts concerning
our intellectual property.
We may also be at risk when we enter into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protection of our rights may be ineffective in foreign markets, and technology
manufactured or sold abroad may not be protectable in jurisdictions in
circumstances where protection is ordinarily available in the U.S.
We believe that, due to the rapid pace of technological innovation for
security products, our ability to establish and, if established maintain, a
position of technological leadership in the industry, is dependent more upon the
skills of our development personnel than upon legal protections afforded our
existing or future technology.
GOVERNMENT REGULATION
Our iNSECT(TM) technology may be controlled under various United States
export control laws and regulations and may require export licenses for certain
exports outside of the United States and Canada. We have not applied for any
export license from the U.S. Department of Commerce for the sale and export of
our proprietary technology.
Our current and planned customer communications operations are subject to
various Canadian federal and provincial and U.S. federal and state laws and
regulations. Specifically, we are required to comply with Canadian and U.S. laws
and regulations as they pertain to telephone sales practices. We have
established and will continue to maintain operating procedures designed to
comply with all applicable rules and
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regulations. We do not anticipate that such compliance will require us to incur
significant additional expenses.
In Canada, the rules promulgated by the Canadian Radio Television and
Telecommunication Commission ("CRTC") under the General Tariffs of Bell Canada
require teleservicers to remove from their calling lists for a period of three
years the names of any parties who so request, to provide the names, addresses
and phone numbers of both the teleservicer and of any party for whom they are
acting, to limit the hours during which they may call consumers, to refrain from
the use of sequential dialing and to refrain from calling emergency and
healthcare facilities. Legislation in the several Canadian provinces also
regulates telephone solicitations in regard to cancellation periods and the sale
of goods.
In the U.S., the rules promulgated by the Federal Communications Commission
(the "FCC") under the Federal Telephone Consumer Protection Act of 1991 limit
the hours during which teleservicers may call consumers and prohibit the use of
automated telephone dialing equipment to call certain telephone numbers. In
addition, regulations under the Federal Telemarketing and Consumer Fraud and
Abuse Prevention Act of 1994, among other things, require teleservicers to make
certain disclosures when soliciting sales. Furthermore, the U.S. Telemarketing
Fraud Prevention Act of 1997 imposes penalties for persons convicted of
telemarketing fraud, requires teleservicers to disclose information to further
investigations of telemarketing fraud, and purports to extend jurisdiction to
foreign teleservicers who may be responsible for fraud inside the U.S.
A number of states in the U.S. have enacted or are considering enacting
legislation to regulate telephone solicitations. For example, telephone sales in
certain states cannot be finalized unless a written contract is delivered to and
signed by the buyer and may be canceled within three business days. Other states
require third-party verification for this sort of solicitation.
From time to time, bills are introduced in the U.S. Congress, which, if
enacted, could regulate the use of credit information. In addition, legislation
could be introduced in the future with respect to the use of the Internet,
including regulations relating to its use in connection with customer care and
service. We cannot predict whether any of these types of legislation will be
enacted and what effect, if any; it would have on the customer communications
industry or us.
The industries served or proposed to be served by us are also subject to
varying degrees of government regulation. We generally require clients to
indemnify us against claims and expenses arising with respect to services we
perform on their behalf. To date, we have not been held responsible for
regulatory noncompliance by a client.
EMPLOYEES
As of January 29, 2000 we employed 85 persons, including five in sales and
marketing, seven in administration, two in information systems and 68 call
center representatives (including five supervisors). We currently hire our call
center representatives as employees on a required basis predicated by our volume
of business.
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ITEM 2. DESCRIPTION OF PROPERTIES
Since September 1998, we have leased 6,812 square feet of office space at
1000 St. Antoine Street, Suite 600, Montreal, Quebec, H3C 3R7, Canada under a
lease with Entreprise Point Zero dated August 21, 1998. The lease is scheduled
to expire October 31, 2003, unless terminated earlier in accordance with the
terms of the lease. The lease provides for a minimum monthly rent of
approximately $5,810 per month. In March 1999, we exercised an option under the
lease to expand into an additional 2,900 square feet adjacent to the existing
office space at an additional monthly rental charge of approximately $2,175
(with the lessor granting us free rental for the months of April and May 1999).
We do not anticipate encountering any difficulties in obtaining future leased
space for the call center operations.
In April 1999, the company established its central headquarters in a
facility located at 24 New England Executive Park, Burlington, MA, which we
share with Young Technology Fund ("YTF"), an affiliate of Stanley A. Young, the
former Chairman of the Company and a substantial stockholder. YTF leases
approximately 4,000 square feet of office space at such location and we expect
to utilize, on a month-to-month basis, up to 2,500 square feet, at a cost of
approximately $6,500 per month. The Company believes this is a fair market rent
for the space and location provided. The lease expires on February 28, 2001 and
the Company expects to relocate prior to the expiration date.
On June 5, 2000, we entered into a lease with Clic Properties Inc. Regina,
Saskatchewan, Canada, at 300 Leo Parsieau, Suite 1700, Montreal, Quebec, H2W2P4
for approximately 15,241 square feet, which will be used for our Internet
Customer Contact Center.
On June 15, 2000, we entered into a lease with Harry G. Linah, Jr. of South
Middleton Township, Cumberland County, Pennsylvania, for approximately 3,500
square feet, which will be used for our Cryptographic engineering group in
Carlisle, Pennsylvania.
The Company intends to enter into a lease with Archon Group, L.P., at 1700
West Park Drive, First Floor, Westborough, Massachusetts, for approximately
3,215 square feet, which will be used for our Technology division.
ITEM 3. LEGAL PROCEEDINGS
We are not a party or subject to any legal proceedings, other than claims
and lawsuits arising in the ordinary course of our business. We do not believe
that any such claims or lawsuits will have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the company's security holders
during the fourth quarter of the fiscal year ending January 29, 2000.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The following table sets forth, for the periods indicated, the range of
high and low closing sale prices for the common stock on the Over-the-Counter
Bulletin Board ("OTC-BB"). During fiscal 1999 and prior to the TeleHub
transaction, the company's common stock traded under the symbol "WHAT" on the
OTC-BB system maintained by the National Association of Securities Dealers
("NASD") or in the over-the-counter "pink sheets". Subsequent to the TeleHub
Transaction, the company changed its symbol to "THLC" from "WHAT." * Note.
<TABLE>
<CAPTION>
CLOSING BID CLOSING ASK
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 HIGH LOW HIGH LOW
------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter (February 1 through May 2, 1998) $ 0.3750 $ 0.2500 $ 0.6250 $ 0.3750
Second Quarter (May 3 through August 1, 1998) $ 0.3125 $ 0.2500 $ 0.5000 $ 0.3750
Third Quarter (August 2 through October 31, 1998) $ 0.3125 $ 0.1536 $ 0.4063 $ 0.2813
Fourth Quarter (November 1, 1998 through January 30, 1999) $ 0.3750 $ 0.1536 $ 0.5938 $ 0.2813
<CAPTION>
CLOSING BID CLOSING ASK
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000 HIGH LOW HIGH LOW
------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter (January 31 through May 1, 1999) $ 0.7500 $ 0.3125 $ 0.8750 $ 0.4375
Second Quarter (May 2 through July 31, 1999) $ 1.9688 $ 0.4375 $ 2.0313 $ 0.5313
Third Quarter (August 1 through October 30, 1999) $ 1.7500 $ 0.8125 $ 1.9063 $ 0.9688
Fourth Quarter (October 31, 1999 through January 29, 2000) $ 3.5000 $ 0.8125 $ 3.6250 $ 1.0313
<CAPTION>
CLOSING BID CLOSING ASK
FOR THE FISCAL YEAR ENDED JANUARY 30, 2001 HIGH LOW HIGH LOW
------------------------------------------ -------- -------- -------- --------
First Quarter (January 31 through April 29, 2000) $ 0.3750 $ 0.2500 $ 0.6250 $ 0.3750
Second Quarter (May 1 through July 14, 2000) (*Partial) $ 0.3125 $ 0.2500 $ 0.5000 $ 0.3750
</TABLE>
* NOTE: ON OR ABOUT JUNE 20, 2000 IN CONJUNCTION WITH THE COMPANY'S LATE FILING,
AN "E" WAS ADDED TO THE COMPANY'S SYMBOL.
The prices set forth above reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions and were provided by consultation with the NASD composite feed or
other qualified quotation medium.
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B. HOLDERS
On January 29, 2000 and of as July 17, 2000, as reported by the Company's
transfer agent, shares of common stock were held by approximately 109 people and
140 people respectively, based on the number of record holders, including at
least one who is a nominee for an undetermined number of beneficial owners.
C. DIVIDENDS
To date, the Company has not paid any cash dividends on our common stock.
Any determination to pay dividends in the future will be at the discretion of
the Company's Board of Directors. The Board's determination whether to pay
dividends will depend upon the Company's earnings, if any, financial condition
and capital requirements as well as other relevant factors. The Board of
Directors does not intend to declare dividends in the foreseeable future, but
instead intends to retain earnings, if any, for use in the Company's business
operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
PLAN OF OPERATION
In February 1999, we acquired the outstanding capital stock of Tele Hub
Link Corporation (TeleHub), a privately held company organized under the laws of
the Province of Ontario, Canada. TeleHub is engaged in the business of providing
teleservices to business clients. We acquired all the outstanding capital stock
of TeleHub from the TeleHub shareholders in exchange for an aggregate of
13,011,339 shares of our common stock. As a result of this transaction, TeleHub
became an operating branch of the Company. In connection with the TeleHub
transaction, we changed our corporate name to TeleHubLink Corporation.
For accounting purposes, this transaction has been treated as a reverse
acquisition. TeleHub has been deemed the acquiring enterprise for financial
statement purposes, as it received a majority of the voting interests in the
combined enterprise. The Securities and Exchange Commission ("SEC") staff has
taken the position that a business combination between an operating enterprise
and a "shell company" in which the shell company is the issuer of securities and
the operating enterprise is determined to be the acquiring enterprise for
financial statement purposes, the transaction should be treated for financial
statement purposes as an issuance of securities by the operating enterprise.
Therefore, the tangible net liabilities of WAW at the date of the transaction of
approximately $204,288 have been recorded at their fair market value with an
offset credit to paid-in capital and the operations of WAW are reflected in the
operations of combined enterprise from the date of acquisition. In addition, the
1999 financial statements have been retroactively restated to reflect the number
of shares TeleHub received in the business combination. Costs related to this
transaction of approximately $362,163 have been charged directly to paid-in
capital.
Since the consummation of the TeleHub Transaction, the Company, through
it's operating branch TeleHub, has been engaged in the business of providing
call center teleservices, including both inbound and outbound teleservices.
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The Company's long-term strategy is to migrate to a technology-based
company. We intend to develop our secure wireless encryption technology business
while providing cash from the other two businesses, Internet customer care
service center and telecom services. This focus would re-direct the primary
resources of the Company toward secure wireless encryption technology while
attempting to drive cash-flow enhancing operations in the other businesses.
The Company intends to build an infrastructure for the secured wireless
encryption business that supports the development of the iNSECT(TM) technology.
We plan to hire the necessary people to support all functional areas of the
business. We plan to subcontract the manufacturing of the ASICs. We also intend
to acquire companies that may enhance the internal development of the iNSECT(TM)
technology including software engineering, cryptography and ASIC architecture.
The Company intends to continue telecom services and provide call center
services for the purposes of generating cash flow from operations to support its
technology business. We believe the telecom services business can expand by
providing "content" products to the industry. This year we plan to develop,
acquire and sell group discount packages through teleservices companies that
will, if successful, permit consumers to buy goods and services at reduced
prices over traditional brick and mortar retailers throughout North America.
During fiscal 2001, we plan to transition from the traditional call center
approach to an Internet customer contact care, which will service Internet
clients. We plan to provide various services to clients in the emerging
electronic commerce service market through our Internet Customer Contact Center
or World-Wide Assist business. Worldwide Assist is planning to provide a
Web-based customer contact center which offers Internet-related inbound/outbound
communications services.
The Company's proposed plan of operation and prospects will be largely
dependent on the Company's ability to successfully establish a technology
development team, and establish and equip an Internet customer contact center on
a timely and cost effective basis; hire and retain skilled technical, marketing
and other personnel; successfully expand into the Internet market and attract
and retain significant numbers of clients.
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion relates to the Company operations for the year
ended January 29, 2000 and the six-month period from inception (July 31, 1998)
through January 30, 1999.
Revenue for the twelve months ended January 29, 2000 and for the six
months ended January 30, 1999 of $1,151,827 and $210,398, respectively, was
derived solely from our Telecom Services segment. The revenue growth in fiscal
2000 can be attributed to a full year of operations with growth in clientele
from both Canada and the U.S. markets.
Cost of sales for the twelve months ended January 29, 2000 was
$795,798 compared to $199,833 for the six months ended January 30, 1999. This
increase in gross profit of $345,464 reflects the impact of a full year of
operations with an overall increase in sales. During fiscal 2000, the Company
was able to secure higher pricing for contracted services on the behalf of
certain U.S. financial institutions.
The stock based charges for the twelve months ended January 29, 2000
were $14,126,578 as compared to zero for the period from inception (July 31,
1998) through January 30, 1999. These non-cash charges were the result of the
issuance of the Company's common stock and stock options at below fair value. In
January 2000, the Company acquired all the issued and outstanding shares of
capital stock of
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wirelessEncryption.com ("WEC") in exchange for 5,000,000 shares of its
unregistered common stock with a value of $14.5 million. In connection with this
transaction, the Company recorded the value of the distribution of the shares as
follows: $1.8 million was allocated to the employment contract of its Chief
Technology Officer, based on a preliminary independent valuation, and the
remaining unallocated costs of $12.3 million was reflected as a non-cash
stock-based charge for related promoter fees, compensation costs and financing
costs.
The Company also recorded a stock-based compensation charge of
approximately $1.7 million relating to the February 1999 sale of its common
stock. The non-cash charge reflects the difference between the price paid and
the market value of the stock. In addition, the Company recorded approximately
$157,000 in stock-based compensation charges relating to stock options grants to
various employees, directors and outside third parties during fiscal 2000.
Selling, general and administrative expenses for the twelve months
ended January 29, 2000 were $2,219,131 as compared to $206,846 for the period
from inception (July 31, 1998) to January 30, 1999. The major increase in
selling, general and administrative expenses was primarily attributable to an
increase in personnel, professional fees and other costs associated with the
development and growth of the Company. Outside services, including professional
services amounted to the bulk of these costs. In addition, we recognized losses
of approximately $425,000 on transactions related to certain acquisitions, which
were disposed of or not concluded, such as Sports and Entertainment Marketing
International, Inc. ("SEMI") and Platinum 2000. The balance of the increase is
related to growth in infrastructure costs.
Depreciation and amortization for the twelve months ended January 29,
2000 were $166,906 as compared to $23,437 for the period from inception (July
31, 1998) to January 30, 1999. The increase results from increased depreciation
expense relating to additions of telecommunications equipment during fiscal 2000
and increased amortization expense relating to additions of intangible assets
from the Web Trafic business acquisition and customer lists purchased during
fiscal 2000.
Since its formation in May 1999, the Company fully supported WEC
through the issuance of unsecured promissory notes. Therefore for financial
reporting purposes, the operating losses of WEC of $311,632 prior to the
acquisition date have been included in the Company's operating losses. These
expenses include salaries, professional fees and other costs incurred in
connection with the development of the secure wireless encryption technology
segment. The Company expects to significantly increase expenditures in the
future due to the design and development of its secured wireless encryption
technology.
Interest expense for the twelve months ended January 29, 2000 was
$319,519 as compared to zero for the period from inception, July 31, 1998, to
January 30, 1999. This increase in interest expense is primarily attributable to
the non-cash charge for amortization of the value assigned to the beneficial
conversion feature of the subordinated convertible debentures. This value is
being treated as a debt discount and is being amortized over the one-year term
of the subordinated convertible debentures. The total amortization of the debt
discount was $280,300 in fiscal 2000.
No provision for income taxes has been recorded for the year ended
January 29, 2000 and the period ended January 30, 1999 as the Company has
incurred net operating losses for tax purposes. The Company has established a
full valuation allowance because we believe that it is more likely than not the
tax benefits may not be realized under the criteria established by FAS No. 109.
LIQUIDITY AND CAPITAL RESOURCES
Since inception (July 31, 1998), we financed our operating and capital
needs, including cash used for acquisitions, capital expenditures and working
capital, from sales of equity securities, issuance of subordinated convertible
debentures and an equipment loan borrowing. At January 29, 2000, the Company
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had cash and cash equivalents of $26,549 and a working capital deficit of
$1,549,134. At January 30, 1999, the Company had no cash and cash equivalents
and a working capital deficit of $157,675.
For the year ended January 29, 2000, and the period ended from inception
(July 31, 1998) through January 30, 1999, cash used in operating activities
amounted to $1,317,681 and $272,171 respectively. This increase in cash used in
operating activities resulted primarily from costs in legal, accounting, outside
consulting and loss on certain transactions related to certain acquisitions,
which were disposed of or not concluded. The balance of increases included the
opening of the Company's headquarters in Burlington, Massachusetts as well as
increased personnel and operating losses in connection with development of
secured wireless encryption technology.
For the year ended January 29, 2000 and the period from inception (July
31, 1998) through January 30, 1999, cash used in investing activities amounted
to $129,938, respectively. Cash used in investing activities in the period ended
January 30, 1999 was to acquire telecommunications equipment and other property
and equipment needs at the inception of the call center operations. Cash used in
investing activities in the year ended January 29, 2000 was for the purchase of
property and equipment and customer lists, offset by the $168,650 net cash
received from the acquisition of businesses.
For the year ended January 29, 2000, and the period ended from inception
(July 31, 1998) through January 30, 1999, cash provided by financing activities
amounted to $1,483,743 and $500,399, respectively. Cash provided by financing
activities in the period ended January 30, 1999, resulted from the formation and
subsequent issuance of common stock, which raised $297,533 and the approximately
$203,000 obtained through an equipment loan with AT&T Canada. Cash provided by
financing activities in the year ended January 29, 2000 resulted from the two
private placement issuances of its common stock, which raised $915,214, and the
$600,000 rose through the issuance of subordinated convertible debentures. The
proceeds were used primarily for working capital and continued expansion of the
Company's operations.
In March 2000, the Company raised $8.1 million through a private placement
sale of 2,699,999 shares of its restricted common stock at $3.00 per share and
the issuance of warrants to purchase up to 2,699,999 shares of common stock at
$4.50 per share with GE Capital, ZERO.NET, Inc., First Global Ventures LLC and
other individuals. The proceeds are planned to be used for the development of
its' secured wireless encryption technology, the expansion of the telecom
business and developing its business into servicing the Internet customer care
market
In July 2000, the Company received notice from the holders of the
subordinated convertible debentures that they have chosen to convert the debt to
shares of the Company's common stock. As a result, the Company will issue
1,200,000 shares of its common stock and issue 1,200,000 warrants at an exercise
price of $2.00 per warrant. This conversion of the subordinated convertible
debentures has substantially reduced a major portion of the Company's
outstanding debt.
Since its inception the Company has experienced net losses from operations
and, as of January 29, 2000 had an accumulated deficit of $17,261,179. The
Company expects to incur substantial additional expenses resulting in losses at
least through the period ending January 27, 2001 due to minimal revenues
associated with the initial market entry of the secured wireless encryption
technology, continued research and development costs as well as increased sales,
marketing and other operational expenses associated with telecom services and
Internet customer care business.
If the Company's cash flow proves to be insufficient to fund operations,
the cash available to the Company would satisfy its contemplated cash
requirements for developing its secure wireless technology, on-going telecom
service operations, and expanding its business into servicing the Internet
market through at least January 2001. In the event that the Company does not
provide sufficient revenue and operating cash to sustain this level of
development and expenditure the Company would be required to seek additional
financing and/or revise its plans, including making significant reductions in
operating costs.
The Company is planning to add additional financing from several sources,
in order to add to existing cash available for operations. There can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. Any inability to obtain additional
financing could have a materially adverse effect on the Company, including
possibly requiring the Company to
20
<PAGE>
significantly curtail, and possibly causing the Company to cease, its
operations. In addition, any equity financing may involve substantial dilution
to the interests of the Company's then-existing stockholders. Further, there can
be no assurance that the Company will achieve profitability or positive cash
flow.
RESTATEMENT OF HISTORICAL QUARTERLY FINANCIAL STATEMENTS
As a result of our year end audit, we recorded several adjustments in the
fourth quarter that impacted our previously reported operating results for the
three quarters of fiscal 2000. As a result, we will restate our previously filed
quarterly financial statements on Form 10-Q. The significant adjustments relate
to a non-cash compensation charge for the issuance of common stock and stock
options, a non-cash charge for the beneficial conversion feature of the
subordinated convertible debentures, a non-cash charge for the pricing
modifications of warrants, the accounting for the WEC transaction and the
reverse merger with WAW.
YEAR 2000
The company did not incur material expenses in fiscal 2000 in connection
with remediating its systems to become Year 2000 ready. The company is not aware
of any material problems resulting from Year 2000 issues, either with its
iNSECT(TM) technology, internal systems or the products and services of third
parties. The company will continue to monitor its computer applications and
those of its suppliers and vendors through the year 2000 to ensure that latent
Year 2000 matters that may arise are addressed.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101") REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. Under SAB No. 101, the staff has given guidance on numerous issues,
including: treatment of nonrefundable cash received at the outset of an
arrangement, recognition of net versus gross revenue for e-commerce and other
intermediary sales, and other revenue recognition criteria related to contract
accounting. The Company is required to adopt this guidance by the fourth quarter
of its fiscal year 2001. The Company expects that adopting the guidance of SAB
No. 101 will not have a material impact on its financial position or its results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2002 pursuant to SFAS No. 137 (issued in June 1999),
which delays the adoption of SFAS No. 133 will not have a material impact on its
financial position or its results of operations.
In March 1998, the Accounting Standard Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position (SOP) 98-1, ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. SOP 98-01 requires the capitalization of certain
internal costs related to the implementation of computer software obtained for
internal use. The standard, which the Company adopted in the first quarter of
2000, did not have a material impact on its financial position or its results of
operations.
In April 1998, the AcSEC issued SOP-98-5, Reporting Costs of Start-Up
Activities. Under SOP 98-5, the cost of start-up activities should be expensed
as incurred. Start-up activities are broadly defined as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
This standard, which the Company adopted in the first quarter of 2000, did not
have any material impact on its financial position or its results of operations.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing discussion of financial condition and
the results of operations, or elsewhere in this document, represent
"forward-looking" statements as defined in the Private Securities Litigation
Reform Act of 1996. Such statements involve matters that are subject to risks
and uncertainties, as a result of which actual future results or events may
differ materially depending on a variety of factors.
FACTORS AFFECTING FUTURE RESULTS
Our future operations are subject to various risk factors, including the
following:
The limited funds currently available to us may not be adequate for us to
pursue our business objectives, and there is no assurance funds will be
available from any source and, if not available, we will be required to limit
our operations to those that can be financed from existing funds.
We have a limited operating history and we cannot assure you that any of
our future activities will be profitable.
As a holding company, our success will depend on the operations, financial
condition and management of our subsidiaries. If we do not have the resources or
are otherwise unable to diversify our operation into a number of areas, we may
become subject to economic fluctuations within a particular business or industry
and thereby increase the risks associated with our operations.
We may be unable to successfully complete acquisitions of assets or shares
of complementary companies which are necessary to expand our business, and we
may be not be able to successfully integrate into our operations the operations
of any business we may acquire.
Although we previously operated a retail sales business, our current
operations commenced in July 1998. Accordingly, we may be considered to be a
start-up company and, as such, may be subject to the problems, expenses,
difficulties, complications and delays a company establishing a new business
frequently encounters.
The Internet customer care center we plan to open in Montreal may be unable
to: secure contracts with clients or generate revenues under any such contracts
it does secure; successfully develop and utilize its acquired infrastructure and
develop databases to perform for our clients; successfully implement marketing
and sales methods for its services; acquire and implement quality
telecommunications and computer technology and equipment and end user database
and software products necessary for our operations; correspond to changing
technological developments and acquire and implement new equipment and systems
to meet changing customer needs on a timely and cost-effective basis; all of
which could have a material adverse effect on our future financial condition,
operations, results and cash flow.
Our inability to obtain adequate local or long distance telephone service,
for our Montreal call center or our planned Internet customer care center or any
interruption in such service or rate increases relating thereto, could
materially adversely affect our future cash flows, results of operations and
financial condition.
We may be unable to successfully complete the development our secure
wireless encryption technology thereby being unable to produce products to
successfully provide a business.
We may not be able to procure, hire and train on a timely basis a
sufficient labor force of qualified employees or independent contractors to
operate our businesses, which could have a material adverse effect on our future
financial condition, operations, results and cash flow.
Our failure to retain the services of our key employees or our failure to
hire additional qualified management personnel when required to support our
planned growth could have a material adverse effect on us.
22
<PAGE>
The security encryption and customer communications industry is highly
competitive. We may not be able to compete effectively against our current
competitors or future competitors, many of whom may be substantially larger and
better capitalized than we are.
Any changes to existing U.S. federal or Canadian provincial or state laws
or regulations governing our existing business or any additional laws or
regulations, could limit our current or future activities or could significantly
increase our cost of compliance.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are set forth in a separate section of this Annual
Report on Form 10-KSB. See "Index to Consolidated Financial Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported in our 8-K filed March 17, 2000, we discontinued the engagement
of Kirkland, Russ, Murphy, & Tapp (the "Former Accountant") on March 14, 2000 as
our independent accountants. Our Board of Directors participated in and approved
the decision to change independent accountants.
The reports of the Former Accountant on our financial statements for the
fiscal years ended January 31, 1998 and January 30, 1999 were qualified as to
uncertainty with respect to our ability to continue as a going concern. There
were no disagreements with the Former Accountant for the fiscal years ended
January 31, 1998 and January 30, 1999, or for the interim periods subsequent to
January 30, 1999 on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of the Former Accountant, would have caused them to
make reference thereto in their reports on the financial statements of such
years. No events of the kind set forth in Item 304(a)(1)(iv)(B) of Regulation
S-B occurred during the fiscal year ended January 31, 1998 or the fiscal year
ended January 30, 1999, or during any of the interim periods subsequent to
January 30, 1999.
The Former Accountant has furnished us with a letter addressed to the
Securities and Exchange Commission stating that it agrees with the above
statements. A copy of this letter is included as an exhibit to the Report on
Form 8-K reporting this event.
We have engaged KPMG LLP (the "New Accountant") as our new independent
accountants, effective March 14, 2000. During the fiscal years ended January 31,
1998 and January 30, 1999 and the interim
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periods subsequent to January 30, 1999 we did not (i) consult with the New
Accountant on the application of accounting principles to any specified
transaction, either completed or proposed, (ii) consult with the New Accountant
on the type of audit opinion that might be rendered on our financial statements,
(iii) receive either written or oral advice from the New Accountant that was an
important factor in reaching a decision as to an accounting, auditing or
financial reporting issue or (iv) consult with the New Accountant on any matter
that was the subject of a disagreement or a reportable event (each as described
in Item 304(a)(1)(iv) of Regulation S-B).
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A. DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David B. Cornstein 60 Chairman of the Board and Director
Bruce W. Young 55 President, Chief Executive Officer, and Director
Panos C. Lekkas 43 Chief Technology Officer
Douglas A. Miller 48 Vice President - Finance
Carl M. Youngman 57 Director
Vincent Sabella 65 Director
</TABLE>
DAVID B. CORNSTEIN has been a director of the Company since its
inception and was appointed Chairman of the Board on September 1, 1999. He
previously served as Chairman of the Board from 1994 to February 4, 1999. Since
February 1, 1999, Mr. Cornstein has served as Chairman Emeritus of the Board of
Finlay Enterprises, Inc. and from May 1993 until his retirement from day-to-day
involvement with Finlay Enterprises effective January 1, 1999, served as its
Chairman of the Board. Mr. Cornstein has also served as a director of Finlay
Enterprises and its wholly owned subsidiary, Finlay Fine Jewelry Corporation,
since their inception in December 1988. Mr. Cornstein is a Principal of Pinnacle
Advisors Limited, which has served as a consultant to Finlay Enterprises since
February 1999. From December 1988 to January 1996, Mr. Cornstein served as
President and Chief Executive Officer of Finlay Enterprises, and from December
1985 to December 1988, he served as President, Chief Executive Officer and a
director of a predecessor of Finlay Enterprises. Finlay Enterprises, through its
subsidiary Finlay Fine Jewelry Corporation, operates leased fine jewelry
departments in major department stores throughout the United States.
BRUCE W. YOUNG founded TeleHub in May 1998 and has been a director since
inception. Mr. Young was elected on February 4, 1999 to serve as President and
Chief Executive Officer and a director of the Company. From 1995 to May 1998,
Mr. Young served as President of Global Business Consultants, Inc., a
manufacturing and telecommunications-consulting firm formed by him and of which
he is the sole shareholder. In addition, during this time, Mr. Young also served
as acting Chief Operating Officer for NUKO Information Systems, Inc., a publicly
held video compression hardware company. From 1986 through 1995, Mr. Young
served as Senior Vice President and General Manager of the Fiber Optics Division
of Telco Systems, Inc., a publicly held access multiplexer company, and from
1978 to 1986, served as plant manager of Computervision Inc., a publicly-held
CADD/CAM software and hardware company. He also spent twelve years at General
Electric, graduating from the Financial Management Program. Mr. Young also
attended Harvard University's Advanced Management Program (AMP-112).
24
<PAGE>
PANOS C. LEKKAS was named Chief Technology Officer for the company in
January 2000. From October 1998 to March 1999 he was with ACI as Vice President
Advanced Technology Development. From May 1996 to February 1998 he was with TCC
as Director of Business Development. Between September 1991 and May 1996 he was
with Galileo Corp. in several management positions. Among several positions he
has held both in Europe and the United States, he was a Leading Systems Engineer
with IBM Corporation in 1985 where he was involved with the introduction of the
RISC (reduced-instruction set computers) architecture that eventually became
part of the IBM RS/6000 supercomputers. The last twelve years he has held senior
technical and business management positions in several US companies involved
with advanced communications technologies. From 1999 to 2000 he was one of the
founders and President/CEO of wirelessEncryption.com, where he started
developing the iNSECT(TM) communications technology subsequently acquired by the
Company. He holds several graduate degrees in electrical engineering,
specialized in wireless communications and VLSI (very-large-scale integration)
design of integrated circuits and he is a Licensed Professional Engineer in the
European Union.
DOUGLAS A. MILLER was named Vice President of Finance for the company in
October 1999. From July 1997 to October 1999, Mr. Miller served as Controller of
Wave Systems Corporation, a technology research and development company
specializing in personal computers and other devices. From 1987 to 1995, Mr.
Miller served as Controller for a division of Chase Manhattan Bank and from 1981
to 1986; he served in various financial positions, including Corporate Business
Manager for Time Warner, the cable and communications company. Mr. Miller has
also served as Senior Auditor for Deloitte & Touche from 1979 to 1981.
CARL M. YOUNGMAN was elected to serve as a director of the company on
February 4, 1999 in connection with the TeleHub Transaction. Mr. Youngman is
currently a member of several boards of directors, including being Managing
Director of Triumph Capital Group, Inc., a Massachusetts-based investment firm.
Mr. Youngman served as Chairman and Chief Executive Officer of Whole Systems
International during 1993 and 1994, President and Chief Executive Officer of
Southworth Industries during 1991 and 1992 and President and Chief Executive
Officer of Sun-Times Distribution Systems, Inc. from 1989 to 1990. He also
served as Chief Financial Officer, Director and Treasurer of Vie de France
Corporation from the period of 1995 to 1998.
VINCENT SABELLA was elected to serve as a director of the company on
April 5, 2000. He has been President of Alpha Omega Sales Corporation a sales
and distribution company for electronic components since 1985. He was also the
founder of RC Components. His companies provided distribution for corporations
such as SAE, NEC, LSI Logic, ITT Cannon, Fox and Rohm. Prior to Alpha Omega
Sales Corporation and RC Components he was the Eastern Regional Sales Manager
for Fairchild Semiconductor. He holds a Bachelor of Science degree in electrical
engineering.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors.
B. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of such reports. Based solely on its
review of the copies of such forms furnished to the Company by such reporting,
the Company believes that during the fiscal year ended January 29, 2000 all of
the reporting persons complied with their section 16(a) filing requirements
except that a Form 3 was filed in March 2000 for Douglas Miller.
25
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation paid to Bruce W.
Young, the company's president and chief executive officer for services rendered
during the last fiscal year. No other executive officer of the company earned an
annual salary and bonus that exceeded $100,000 during fiscal 2000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- --------------------- --------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
SATION AWARD(S) OPTIONS/ PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS $ $ $ SARS (#) $ $
--------------------------- ---- ---------- ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce W. Young,
President and CEO 2000 $200,000 -0- -0- -0- 520,000 -0- -0-
</TABLE>
COMPENSATION OF DIRECTORS
The Company's non-management directors, together with Mr. Bruce Young,
are entitled to receive $1,000 per meeting of the Board of Directors attended.
In addition, each of such directors is also entitled to receive options to buy
20,000 shares of the Company's common stock at the current market price at the
time of the grant. In addition, non-employee directors are also entitled to
receive options under the Company's 1994 Non-employee Directors' Stock Option
Plan. See "Executive Compensation - 1994 Non-employee Directors' Stock Option
Plan."
OPTION/SAR GRANTS TABLE DURING FISCAL 2000
The following table shows information concerning stock options granted
during the year ended January 29, 2000 for the individual shown in the Summary
Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE
NAME (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
----------------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Bruce W. Young, 520,000 49.6% $0.8125 February 3, 2009
President and CEO
</TABLE>
26
<PAGE>
OPTION/SAR EXERCISES DURING FISCAL 2000 AND YEAR-END OPTION VALUES
No stock options were exercised by any of the Company's executive
officers during the fiscal year-ended January 29, 2000. The following table
shows information concerning stock option values as of January 29, 2000 for the
individual shown in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 29, 2000(#) JANUARY 29, 2000($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------ ------------------------- -------------------------
<S> <C> <C>
Bruce W. Young, 260,000/260,000 $609,362/$609,362
President and CEO
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Bruce W.
Young for a period of two years, commencing February 4, 1999, pursuant to which
Mr. Young will serve as President and Chief Executive Officer on a full-time
basis in return for an annual salary of $200,000 per year. Mr. Young also
received 500,000 stock options in connection with his employment with the
Company. In the event of Mr. Young's termination, he is entitled to the greater
of $500,000 or two full years pay including any bonuses less taxes and social
security required to be withheld. In June 2000, the Company's Board of Directors
extended Mr. Young's employment contract through December 31, 2001with a salary
of $250,000 per year plus certain incentive bonuses.
The Company has entered into an employment agreement with Mr. Lekkas
for a period of two years, commencing January 27, 2000, pursuant to which Mr.
Lekkas will perform the function of Chief Technology Officer on a full-time
basis in return for an annual salary of $125,000 per year and a maximum
contingent bonus of $100,000, plus 3% of net sales in excess of $7.5 million in
calendar year 2000. In the event of Mr. Lekkas's termination, he is entitled to
six months of base plus any bonuses less taxes and social security required to
be withheld. In June 2000, the Company's Board of Directors extended Mr.
Lekkas's employment contract through December 31, 2002 with a salary of $200,000
per year plus certain incentive bonuses.
The Company has entered into an employment agreement with Mr. Randall
K. Nichols for a period of one year, commencing March 24, 2000, pursuant to
which Mr. Nichols will perform the function of Vice President Cryptography on a
full-time basis in return for an annual salary of $100,000 per year, a maximum
contingent bonus equal to his annual salary and 25,000 options of the Company's
common stock. In the event of Mr. Nichols's termination, he is entitled to three
months of base plus any bonuses less taxes and social security required to be
withheld.
Directors are entitled to receive compensation for serving on the Board
of Directors. Each Director is entitled to $1,000 per meeting for attending a
Board of Directors meeting. Each Director who is not an employee also receives
20,000 options of the Company's common stock at the fair market value. These
options are granted upon reelection of each Director subsequent to the Company's
Annual Meetings. The options are at fair market value and fully vested as of the
grant date.
27
<PAGE>
1994 STOCK OPTION PLAN
In order to attract, retain and motivate employees (including officers),
directors, consultants and other persons who perform substantial services for or
on behalf of the Company, in November 1994, the Company adopted the 1994 Stock
Option Plan (as amended in 1996, the "Stock Option Plan"), pursuant to which
stock options covering an aggregate of 560,000 shares of the Company's Common
Stock may be granted to such persons. Under the Stock Option Plan, "incentive
stock options" ("Incentive Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, may be granted to employees
(including officers), and non-incentive stock options ("Non-incentive Options")
may be granted to any such employee and to other persons (including directors)
who perform substantial services for or on behalf of the Company. Incentive
Options and Non-incentive Options are collectively referred to herein as
"Options".
The Stock Option Plan is administered by the Board of Directors or, at its
discretion, by a committee appointed by the Board to perform such function (the
"Committee"). The Board of Directors or the Committee is vested with complete
authority to administer and interpret the Stock Option Plan, to determine the
terms upon which Options may be granted, to prescribe, amend and rescind such
interpretations and determinations and to grant Options. The Board of Directors
or the Committee has the power to terminate or amend the Stock Option Plan from
time to time in such respects as it deems advisable, except that no termination
or amendment may materially adversely affect any outstanding Option without the
consent of the grantee, and the approval of the Company's stockholders will be
required in respect of any amendment which would (i) change the total number of
shares subject to the Stock Option Plan or (ii) change the designation or class
of employees or other persons eligible to receive Incentive Options or
Non-incentive Options.
The price at which shares covered by an Option may be purchased pursuant
thereto shall be no less than the par value of such shares and, in the case of
Incentive Options, no less than the fair market value of such shares on the date
of grant. The purchase price of shares issuable upon exercise of an Option may
be paid in cash or by delivery of shares with a value equal to the exercise
price of the Option. The Company may also loan the purchase price to the
optionee, or guarantee third-party loans to the optionee, on terms and
conditions acceptable to the Board of Directors. The number of shares covered by
an Option is subject to adjustment for stock splits, mergers, consolidations,
combinations of shares, reorganizations and recapitalizations. Options are
generally non-transferable except by will or by the laws of descent and
distribution, and in the case of employees, with certain exceptions, may be
exercised only so long as the optionee continues to be employed by the Company.
If the employee dies or becomes disabled, the right to exercise the Option, to
the extent then vested, continues for specified periods. Options, both Incentive
Stock Options and Non-qualified, may be exercised within a period not exceeding
10 years from the date of grant. The terms of Incentive Options are subject to
additional restrictions provided by the Stock Option Plan.
1994 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
In order to attract and retain the services of non-employee members of
the Board of Directors and to provide them with increased motivation and
incentive to exert their best efforts on behalf of the Company by enlarging
their personal stake in the Company, in November 1994, the Company adopted the
1994
28
<PAGE>
Nonemployee Directors' Stock Option Plan (the "Directors' Plan"), pursuant to
which stock options covering an aggregate of 40,000 shares of the Company's
Common Stock may be granted to such non-employee directors
Pursuant to the Directors' Plan, each member of the Board of Directors of
the Company who is not an employee of the Company (or a subsidiary) (a
"Non-employee Director") and who is elected or re-elected as a director of the
Company by the stockholders at any annual meeting of stockholders, will receive,
as of the date of each such election or re-election, options to purchase 2,500
shares of the Company's Common Stock. In addition, Non-employee Directors at the
time of the Offering received options to purchase 2,500 shares of the Company's
Common Stock, and any other future Non-employee Director will receive options to
purchase 2,500 shares of the Company's Common Stock upon his election or
appointment as director. All options granted under the Directors' Plan will be
exercisable at the fair market value of the Company's Common Stock as of the
date of grant. The options granted under the Directors' Plan are to be
Non-incentive Options.
ADDITIONAL OPTIONS
In February 1999, we granted to Bruce Young, the company's President and
Chief Executive Officer, options to acquire an aggregate of 520,000 shares at
the fair market value of the common stock on the date of the grant. The exercise
price is $.8125 per share. Fifty percent of such options vested immediately upon
grant, and the balance of such options vest on the first anniversary of the date
of grant; provided however, that in the event the closing bid quotation of the
company's common stock equals or exceeds $5.00 for a period of 30 consecutive
trading days, the remaining unvested options will become immediately vested and
exercisable.
In February 1999, we granted to Mr. Patrick Thomas, the former Chief
Operating Officer of TeleHub Canada and director of the Company, options to
acquire an aggregate of 150,000 time-based options and 100,000 performance-based
at $0.06 per share. Of such options, in October 1999, all but 50,000 were
canceled and the remaining options were considered final severance for any and
all responsibilities of the Company to Mr. Thomas.
In February 1999, we granted to Mr. John DeLuca, a Vice president of
TeleHub Canada and director of the Company, options to acquire an aggregate of
250,000 time-based options and 100,000 performance-based options at $0.06 per
share. Of such options, in May 1999 all options were canceled.
In February 1999, we granted to David Cornstein and Stanley Young 20,000
options each to acquire shares of the Company at $0.8125 per share.
In December 1999, we granted to Carl Youngman, a Company Director, 20,000
options to acquire shares of the Company at $0.9375 per share.
In February 1999, we granted to a former employee in consideration for
goods and services provided by him to the company, options to purchase an
aggregate of 90,000 shares at the fair market value of the common stock on the
date of the grant. The exercise price is $.8125 per share.
In connection with our acquisition of Web Trafic Inc. on June 16, 1999, we
retained a management firm operated by the former President of Web Trafic Inc.
to assist us in establishing our Internet division. Pursuant to our agreement
with such management firm, we granted to the firm options to acquire an
aggregate of 250,000 shares at an exercise price of $.50 per share. Of such
options, 50,000 vested immediately upon execution of the agreement and the
remaining 200,000 options vest and become exercisable in increments of 50,000 on
each six-month anniversary of the agreement, subject to completion of certain
milestones. These milestones were not met and the contract has been terminated.
29
<PAGE>
On August 31, 1999, we granted to a third party consultant of the Company
an aggregate of 50,000 options in consideration for services rendered at an
exercise price of $1.50 per share.
On August 31, 1999, we agreed to issue to a law firm of the Company an
aggregate of 150,000 shares in consideration for services rendered.
On October 20, 1999, we granted to Douglas Miller, the company's Vice
President of Finance, options to purchase an aggregate of 30,000 shares of
common stock. All of such options are exercisable at a price of $.9375 per share
(the fair market value on the date of the grant) and vest in three equal
installments commencing one year from the date of the grant. In addition, on
October 20, 1999, we also granted to a third-party consultant, for services
previously rendered by him, options to acquire an aggregate of 25,000 shares,
all of which options are exercisable at a price of $.9375 and vest on the first
anniversary of the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 19, 2000, the beneficial
ownership of shares of Common Stock by (i) each person who is known by the
Company to own more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company and each executive officer of the Company listed in the
Summary Compensation Table, and (iii) all of the Company's current officers and
directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL
OWNER (1) OWNERSHIP (2) PERCENT OF CLASS
------------------------------ -------------------------------- ----------------
<S> <C> <C>
Stanley A. Young 5,042,082(3) 19.0%
Bruce W. Young 2,753,241(4) 10.2%
Panos Lekkas 1,751,345(5) 6.6%
David B. Cornstein 1,948,748(6) 7.1%
Douglas A. Miller -7 *
Carl M. Youngman 150,000(8) *
Vincent Sabella 17,500(9) *
Carol and David Smith 3,247,148(10) 12.0%
All officers and directors as a 6,620,834(4)(9) 23.7%
group (6 persons)
</TABLE>
* Less than one percent
(1) Unless otherwise stated, the address of each person listed is c/o
TeleHubLink Corporation, 24 New England Executive Park, Burlington,
Massachusetts 01803.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Form 10-KSB
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date of this Form 10-KSB have
been exercised. Unless otherwise noted, the Company believes
30
<PAGE>
that all persons named in the table have sole voting and investment power
with respect to all shares of Common Stock beneficially owned by them.
(3) Includes (i) 1,117,186 shares owned directly by Mr. Stanley Young, (ii)
1,636,241 shares owned by Young Management Group, Inc., a corporation
wholly owned by Mr. Young and of which he is the sole director and officer,
(iii) 2,091,588 shares owned by The Young Technology Fund, a general
partnership of which Mr. Young is the general partner, (iv) 177,067 shares
owned by The SAY Family Limited Partnership, a limited partnership of which
Mr. Young is a general partner and (v) options to acquire an aggregate of
20,000 shares of Common Stock. Does not include 200,000 shares issuable
upon exercise of options granted to Mr. Young, which are not exercisable
within 60 days of the date hereof. Does not include 468,133 shares of
Common Stock owned by Mr. Young's wife, as to which shares Mr. Young
disclaims beneficial ownership. Stanley Young is not related to Bruce
Young.
(4) Includes (i) 1,925,142 shares owned by Mr. Bruce Young, (ii) options to
acquire an aggregate of 520,000 shares of Common Stock, (iii) warrants to
acquire an aggregate of 33,333 shares of Common Stock and (iv) 274,766
shares owned by Global Business Consultants Inc., a corporation which is
wholly owned by Mr. Young and of which he serves as President. Does not
include 200,000 shares issuable upon exercise of options granted to Mr.
Young, which are not exercisable within 60 days of the date hereof. Bruce
Young is not related to Stanley Young.
(5) Includes 1,751,345 shares owned by Mr. Lekkas. Does not include 200,000
shares issuable upon exercise of options granted to Mr. Lekkas, which are
not exercisable within 60 days of the date hereof.
(6) Includes (i) 1,185,415 shares owned by Mr. Cornstein, (ii) 5,000 shares
issuable upon exercise of options granted to Mr. Cornstein under the
Company's 1994 Nonemployee Directors' Stock Option Plan, (iii) 225,000
shares issuable upon exercise of warrants to purchase Common Stock, (iv)
options to acquire an aggregate of 70,000 shares of Common Stock, (v)
warrants to acquire 83,333 shares of Common Stock and (vi) 190,000 shares,
and 190,000 shares issuable upon exercise of warrants to purchase Common
Stock, to be received by Mr. Cornstein upon conversion of debentures issued
by the Company. Does not include 500,000 shares issuable upon exercise of
options granted to Mr. Cornstein, which are not exercisable within 60 days
of the date hereof. The address for David B. Cornstein is c/o Finlay
Enterprises, Inc., 529 Fifth Avenue, New York, New York 10017.
(7) Does not include 30,000 shares issuable upon exercise of options granted to
Mr. Miller, which are not exercisable within 60 days of the date hereof.
(8) Includes 150,000 shares owned by Mr. Youngman. Does not include 105,000
shares issuable upon exercise of options granted to Mr. Youngman, which are
not exercisable within 60 days of the date hereof.
(9) Includes 17,500 shares owned by Mr. Sabella. Does not include 45,000 shares
issuable upon exercise of options granted to Mr. Sabella, which are not
exercisable within 60 days of the date hereof. Does not include 1,650
shares of Common Stock owned by Mr. Sabella's wife, as to which shares Mr.
Sabella disclaims beneficial ownership.
(10) According to a Schedule 13G dated February 10, 1999 filed with the
Commission by Carol Smith, Mrs. Smith owns 606,044 directly and an
additional 1,099,066 shares as custodian for her minor children. In
addition, David Smith, the husband of Carol Smith, acquired 942,040 shares
from the Company in connection with the Company's February 1999 private
placement of Common Stock. In addition the Company believes that an
additional 200,000 shares, and 200,000 shares issuable upon exercise of
warrants to purchase Common Stock, would be received by Mr. Smith upon
conversion of debentures issued by the Company an, that an additional
33,333 shares, and 33,333 shares issuable upon exercise of warrants are
held by Carol Smith, as custodian for each of Lindsey A. Smith and Andrew
Brewer Smith, and 33,333 shares, and 33,333 shares issuable upon exercise
of warrants are held by Carol and David Smith, co-trustees FBO DASCAS
REVOCABLE UTAD 7/6/93. The address for Carol and David Smith
31
<PAGE>
is P.O. Box 2012, Santa Fe, New Mexico, 87504.
(11)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, Mr. Cornstein, Chairman of the company and two former
directors of the company, entered into a commitment to lend the Company, for
working capital purposes, as needed, and to fund the opening of 13 temporary
stores, up to an aggregate of $600,000 at an interest rate of 12% per annum. All
amounts outstanding under this working capital commitment were repaid when due,
together with accrued interest thereon, on January 3, 1997. Such loans had been
secured by a first priority lien on substantially all the assets of the Company.
As partial consideration for the working capital commitment, the Company granted
to the lenders warrants to purchase an aggregate of 200,000 shares at an
exercise price of $1.00, originally exercisable until August 31, 2001. In
addition, the Company granted to the lenders certain demand and piggyback
registration rights relating to the securities underlying such warrants.
In May 1998, the Company announced that it had extended the exercise
period of its publicly held Redeemable Common Stock Purchase Warrants from May
17, 1998 to May 17, 2000. Following such action, on February 2, 1998, the Board
of Directors also approved the extension of the warrants issued to Mr. Cornstein
and other investors pursuant to the 1996 working capital commitment from August
31, 2001 to August 31, 2003.
From time to time during the period from September 1997 to February 4,
1999 (the date of the TeleHub Transaction), Mr. Cornstein acquired an aggregate
of 146,929 shares of TeleHub's common stock and Mr. Cornstein's son acquired an
aggregate of 280,000 shares of TeleHub's common stock (as to which shares Mr.
Cornstein disclaimed beneficial ownership). In connection with the TeleHub
Transaction, pursuant to which each shareholder of TeleHub received 3.9252318
shares of the Company's Common Stock for each share of TeleHub common stock
held, Mr. Cornstein received an aggregate of 576,530 shares of Common Stock and
his son received an aggregate of 1,099,065 shares of Common Stock (as to which
shares Mr. Cornstein disclaimed beneficial ownership).
In April 1999, the Company established its central headquarters in a
facility located at 24 New England Executive Park, Burlington, MA, which the
Company shares with Young Management Group, Inc. ("YMG"), an affiliate of
Stanley A. Young, the former Chairman of the company and a substantial
shareholder. YMG leases approximately 4,000 square feet of office space at such
location and the Company expects to utilize, on a month-to-month basis, up to
2,500 square feet thereat, at a cost of approximately $6,500 per month.
On January 27, 2000, the Company acquired all the issued and outstanding
shares of capital stock of wireless.Encryption.com ("WEC") in exchange for
5,000,000 shares of its unregistered common stock with a value of $14.5 million.
The Company's former Chairman, Stanley A. Young, who co-founded WEC, is also a
principal shareholder of the Company and of WEC. As a result of the exchange of
shares, the former Chairman and principal shareholder of the Company received
directly and indirectly 1,751,345 shares of the Company's stock with a fair
value of approximately $5.1 million. Panos C. Lekkas, former co-founder of WEC,
is also the Chief Technology Officer (CTO) of THLC. As a result of the exchange
of shares, the former co-founder and new CTO of the Company received directly
1,751,345 shares of the Company's stock with a fair value of approximately $5.1
million. Carl Youngman, a director of the Company also received as a result of
the exchange of shares directly 150,000 shares of the Company's stock with a
fair value of approximately $436,000.
32
<PAGE>
In July 1999, the Company consummated a private financing pursuant to which
it sold a total of 24 units for gross proceeds of $600,000. Each unit consisted
of a 10% subordinated convertible debenture in the aggregate principal amount of
$25,000. Mr. Cornstein purchased, for $125,000, an aggregate of 5 units in the
financing. David Smith purchased, for $100,000, an aggregate of 4 units in the
financing. The Company anticipates that the holders of substantially all of the
debentures will convert such securities in accordance with their terms and,
accordingly, the Company expects to issue upon conversion up to an aggregate of
1,200,000 shares of common stock and warrants to purchase up to an aggregate of
1,200,000 shares at an exercise price of $2.00 per share.
In March 2000, the Company consummated a private placement pursuant to
which we issued 2,699,999 shares of common stock and warrants to purchase up to
2,699,999 shares of common stock (at an exercise price of $4.50 per share) and
received proceeds of $8,100,000. Among the purchasers of securities in the
private placement were Bruce Young, the company's President, who purchased, for
$100,000 an aggregate of 33,333 shares of common stock and warrants to purchase
33,333 shares, and David B. Cornstein, the Chairman of the Board of the Company,
who purchased, for $250,000, an aggregate of 83,333 shares of common stock and
warrants to purchase 83,333 share; Carol Smith, as custodian, who purchased, for
$200,000, an aggregate of 66,666 shares of common stock and warrants to purchase
66,666 shares, and Carol Smith and David Smith, as co-trustees, who purchased
for $100,000, an aggregate of 33,333 shares of common stock and warrants to
purchase 33,333 shares.
In March 2000, the Company announced that it had extended the exercise
period of its publicly held redeemable common stock purchase warrants to October
31, 2000.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
A. (1) The following consolidated financial statements of the company and
the reports thereon of KPMG LLP dated July 14, 2000 and Giroux, Menard
and Associates dated June 30, 2000 are being filed as part of this
Annual Report on Form 10-KSB.
Independent auditors' reports.
Consolidated balance sheet as of January 29, 2000 and January 30, 1999.
Consolidated statements of operations for the year ended January 29,
2000 and for the period from inception (July 31, 1998) through January
30, 1999.
Consolidated statements of stockholders' equity for the year ended
January 29, 2000 and for the period from inception (July 31, 1998)
through January 30, 1999.
Consolidated statements of cash flows for the year ended January 29,
2000 and for the period from inception (July 31, 1998) through January
30, 1999.
Notes to Consolidated Financial Statements
(2) The following exhibits are filed as part of this report
(exhibits marked with an asterisk have been previously filed with the
Commission as indicated and are incorporated herein by this reference):
33
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant, as amended (incorporated by
reference from Exhibit 1.1 of the Registrant's Registration Statement
on Form SB-2 (Commission No.33-84774), as filed with the Securities and
Exchange Commission (the"SB-2")).
3.2 By-Laws of Registrant (incorporated by reference to Exhibit 3.2 of the
SB-2).
3.2.A Restated By-Laws of Registrant (incorporated by reference to Exhibit
3.2A of the SB-2).
4.1 Form of Certificate for Common Stock (incorporated by reference to
Exhibit 4.1 of the SB-2).
4.2 Public Warrant Agreement between the Registrant, American Stock
Transfer & Trust Company Whale Securities Co., L.P. (incorporated by
reference to Exhibit 4.2 of the SB-2).
4.3 Form of Public Warrant Certificate (incorporated by reference to
Exhibit 4.3 of the SB-2).
4.4 Underwriter's Warrant Agreement (incorporated by reference to Exhibit
4.4 of the SB-2).
10.1 Share Purchase Agreement dated as of December 21, 1998, as amended as
of January 11, 1999, between the Registrant, Tele Hub Link Corporation
("TeleHub"), and the shareholders of TeleHub. (incorporated by
reference to Exhibit 10.1 to the Registrant's Registration Statement on
Form S-4 (Commission No.333-69435).
10.2 Agreement among the Registrant, Edward J. Munley, David B. Cornstein,
David Miller and the other parties thereto, dated as of July 21, 1993,
together with amendments to said Agreement (incorporated by reference
to Exhibit 10.1 of the SB-2).
10.43 1994 Stock Option Plan (incorporated by reference to Exhibit 10.12 of
the SB-2).
10.54 1994 Nonemployee Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.12 of the SB-2).
10.65 Letter agreement dated October 3, 1994 by and among the Registrant,
David B. Cornstein, David F. Miller and Edward J. Munley (incorporated
by reference to Exhibit 10.17 of the SB-2).
10.76 Agreement dated as of September 8, 1994 by and among the Registrant,
Edward J. Munley, David B. Cornstein and David F. Miller in respect of
contribution of shares to the Registrant (incorporated by reference to
Exhibit 10.19 of the SB-2).
10.87 Form of Seasonal Secured Revolving Note dated August 28, 1996 in favor
of each of David B. Cornstein, Hugh H. Jones, Jr. and David F. Miller.
(incorporated by reference to the Registrant's Form 10-Q for the
Quarter ended August 3, 1996 as filed September 17, 1996 (the "Third
Quarter 1996 10-Q")).
10.98 Form of Warrant and Registration Agreement dated as of August 28, 1996
in favor of each of David B. Cornstein, Hugh H. Jones, Jr. and David F.
Miller. (incorporated by reference to the Third Quarter 1996 10-Q).
10.109 Asset Purchase Agreement dated as of March 7, 1997 between the
Registrant and Natural Wonders, Inc. (incorporated by reference to the
Registrant's Form 10-KSB for the fiscal year ended February 1, 1997 as
filed May 16, 1997 (the "Fiscal 1996 10-KSB")).
34
<PAGE>
10.131 General Security Agreement dated as of June ___, 1998 between TeleHub
and AT&T Canada Long Distance Services Company. (incorporated by
reference to the Registrant's Form S-4/A as filed January 13, 1999.)
10.142 Business Long Distance Special Flat Rate Service Agreement between
TeleHub and AT&T Canada Long Distance Services Company. (incorporated
by reference to the Registrant's Form S- 4/A as filed January 13,
1999.)
10.153 Employment Agreement between the Company and Bruce W. Young
(incorporated by reference to 10.1 to the Registrant's Form 10-Q for
the Quarter ended July 31, 1999 as filed September 14, 1999 (the
"Second Quarter 1999 10-Q")).
10.16 Form of Debenture Issued in July 1999 Private Financing (incorporated
by reference to Exhibit 10.2 the Second Quarter 1999 10-Q)
10.17 Form of Warrants to be issued in connection with July 1999 Private
Financing (incorporated by reference to Exhibit 10.3 to the Second
Quarter 1999 10-Q)
10.18 Registration Rights Agreement entered into in connection with July 1999
Private Financing (incorporated by reference to Exhibit 10.4 to the
Second Quarter 1999 10-Q)
10.19 Registration Rights Agreement entered into in connection with August
1999 Private Financing (incorporated by reference to Exhibit 10.5 to
the Second Quarter 1999 10-Q)
10.20 Employment Agreement between the Company and Panos C. Lekkas dated
January 20, 2000.
10.21 Common Stock and Warrant Purchase Agreement dated as of March 6, 2000
by and among the registrant and the investor parties thereto.
10.22 Stockholders' Agreement dated as of March 6, 2000 by and among the
Registrant and investor parties thereto.
10.23 Registration Agreement dated as of March 6, 2000 by and among the
registrant and the investor parties thereto.
10.24 Employment Agreement between the Company and Randall K. Nichols dated
March 24, 2000.
11 Statement re Computation of Per Share Earnings (not required because
the relevant computations can be clearly determined from material
contained in the consolidated financial statements included herein).
16 Letter dated March 17, 2000 from Kirkland, Russ, Murphy, and Tapp in
regard to their review of the Current Report on Form 8-K dated March
17, 2000 which reports the dismissal of Kirkland, Russ, Murphy, and
Tapp as the Registrant's independent certified public accountants
(incorporated by reference from Exhibit 1 of the Current Report on Form
8-K dated March 17, 2000 as filed with the Securities and Exchange
Commission).
22 Subsidiaries of the Registrant include wirelessEncryption.com, Inc.,
Comsec Solutions, LLC And 3709361 Canada, Inc.
23.1 Consent of Independent Accountants - KPMG LLP
35
<PAGE>
23.2 Consent of Independent Accountants - Giroux, Menard et Associes
27 Financial Data Schedule (For SEC Use Only)
99.1 Purchase Agreement between the Company and Web Trafic, Inc.
(incorporated by reference to the Second Quarter 1999 10-Q)
99.2 Management Agreement between the Company and Serge Trudeau Resources
(incorporated by reference to the Second Quarter 1999 10-Q)
99.3 Purchase Agreement between the Company and Sports and Entertainment
Marketing International, Inc. (incorporated by reference to the
Registrant's Form 10-Q for the October 30, 1999 Quarter ended as filed
December 17, 1999)
99.4 Lease Agreement between CLIC Properties Inc., Landlord, and 3709361
Canada Inc.; Tenant dated June 5, 2000.
B. No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 2000.
Subsequent to January 29, 2000, we filed with the Securities and
Exchange Commission on February 17, 2000 a Current Report on Form 8-K
regarding the consummation of the acquisition by the Company of all the
issued and outstanding stock of wirelessEncription.com Inc., and filed
on March 17, 2000 a Current Report on Form 8-K regarding the change in
our independent auditors.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TeleHubLink Corporation.
By: /s/ BRUCE W. YOUNG July 19, 2000
------------------------------------- Date
Bruce W. Young
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated have signed this report below.
<TABLE>
<S> <C>
/s/ DAVID B. CORNSTEIN July 19, 2000
---------------------- -------------
David B. Cornstein, Chairman of the Board and Director Date
/s/ BRUCE W. YOUNG July 19, 2000
------------------ -------------
Bruce W. Young, Chief Executive Officer, President and Director Date
/s/ DOUGLAS MILLER July 19, 2000
------------------ -------------
Douglas Miller, Vice President of Finance Date
/s/ CARL YOUNGMAN July 19, 2000
----------------- -------------
Carl Youngman, Director Date
/s/ VINCENT SABELLA July 19, 2000
------------------- -------------
Vincent Sabella, Director Date
</TABLE>
37
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TeleHubLink Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of TeleHubLink
Corporation and subsidiaries as of January 29, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
accompanying financial statements of TeleHubLink Corporation (formerly Tele Hub
Link Corporation) as of January 30, 1999 were audited by other auditors whose
report dated June 30, 2000 expressed an unqualified opinion on those statements,
before the restatement of stockholders' equity as described in note 1 to the
consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TeleHubLink
Corporation and subsidiaries as of January 29, 2000, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We also audited the adjustment described in note 1 that was applied to restate
the 1999 financial statements. In our opinion, the adjustment is appropriate and
has been properly applied.
/s/ KPMG LLP
Boston, Massachusetts
July 14, 2000
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Tele Hub Link Corporation:
We have audited the balance sheet of Tele Hub Link Corporation as of January 30,
1999 and the statements of earnings and deficit and cash flows for the initial
period of six months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatements.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of January 30, 1999 and the
results of its operations and the cash flows for the initial period of six
months then ended in accordance with generally accepted accounting principles.
/s/ Giroux, Menard et Associes
Chartered Accountants
Longueuil, Canada
June 30, 2000
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
January 29, 2000 and January 30, 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,549 --
Accounts receivable, less allowance for doubtful
accounts of $49,844 in 2000 and $0 in 1999 44,223 20,030
Amount due from sale of assets (note 3) 125,000 --
Prepaid expenses and other current assets 37,095 87,579
------------ ------------
Total current assets 232,867 107,609
Property and equipment, net (note 4) 336,645 204,791
Intangible assets, net (note 5) 1,981,793 --
Other assets 7,929 27,195
------------ ------------
Total assets $ 2,559,234 339,595
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 213,219 17,910
Accrued expenses (note 6) 1,092,087 44,508
Subordinated convertible debentures, at accreted
value (liquidation value $600,000) (note 7) 280,300 --
Equipment loan (note 8) 196,395 202,866
------------ ------------
Total current liabilities 1,782,001 265,284
------------ ------------
Total liabilities 1,782,001 265,284
------------ ------------
Commitments and contingencies (notes 10 and 14)
Stockholders' equity (notes 1, 3, 7, 9, 12 and 14):
Common stock, $.01 par value; authorized
50,000,000 shares, issued and outstanding
23,753,442 and 13,011,339 shares as of
January 29, 2000 and January 30, 1999,
respectively 237,534 130,114
Additional paid-in capital 17,814,241 167,419
Stockholders' notes receivable (3,763) --
Unearned compensation (9,600) --
Accumulated deficit (17,261,179) (223,222)
------------ ------------
Total stockholders' equity 777,233 74,311
------------ ------------
Total liabilities and stockholders' equity $ 2,559,234 339,595
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 31, 1998)
YEAR ENDED THROUGH
JANUARY 29, JANUARY 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue $ 1,151,827 210,398
Cost of revenue 795,798 199,833
------------ ------------
Gross profit 356,029 10,565
------------ ------------
Operating expenses:
Stock-based charges (notes 3 and 9) 14,126,578 --
Selling, general and administrative expenses 2,219,131 206,846
Depreciation and amortization 166,906 23,437
Operating losses of WEC prior to acquisition (note 3) 311,632 --
------------ ------------
Total operating expenses 16,824,247 230,283
------------ ------------
Operating loss (16,468,218) (219,718)
Other income (expense):
Interest expense (note 7) (319,519) --
Foreign currency loss (21,420) (3,504)
------------ ------------
Net loss (16,809,157) (223,222)
Charge for pricing modification of warrants (note 9) (228,800) --
------------ ------------
Net loss available to common stockholders (17,037,957) (223,222)
============ ============
Basic and diluted net loss per share $ (.96) (.02)
============ ============
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share 17,792,181 10,957,128
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Year ended January 29, 2000 and the period from inception (July 31, 1998) through January 30, 1999
NOTES
ADDITIONAL RECEIVABLE TOTAL
COMMON STOCK PAID-IN FROM STOCK UNEARNED ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL SALES COMPENSATION DEFICIT EQUITY
---------- -------- ---------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception -- $ -- -- -- -- -- --
Issuances of common stock 13,011,339 130,114 167,419 -- -- -- 297,533
Net loss -- -- -- -- -- (223,222) (223,222)
---------- -------- ---------- ------ --------- ----------- -------
Balance at January 30, 1999 13,011,339 130,114 167,419 -- -- (223,222) 74,311
Reverse merger with WAW, net of
acquisition costs (note 1) 2,268,125 22,680 (592,131) -- -- -- (569,451)
Issuances of common stock (note 9) 3,173,978 31,740 2,577,290 -- -- -- 2,609,030
Common stock issued in connection with
business acquisitions (note 3) 5,300,000 53,000 14,666,663 (3,763) -- -- 14,715,900
Compensation expense in connection with
stock options granted (note 9) -- -- 166,200 -- (10,500) -- 155,700
Amortization of unearned compensation
(note 9) -- -- -- -- 900 -- 900
Beneficial conversion feature of
subordinated convertible debentures
(note 7) -- -- 600,000 -- -- -- 600,000
Charge for pricing modification of
warrants (note 9) -- -- 228,800 -- -- (228,800) --
Net loss -- -- -- -- -- (16,809,157) (16,809,157)
---------- -------- ---------- ------ --------- ----------- -------
Balance at January 29, 2000 23,753,442 $237,534 17,814,241 (3,763) (9,600) (17,261,179) 777,233
========== ======== ========== ====== ========= =========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 31, 1998)
YEAR ENDED THROUGH
JANUARY 29, JANUARY 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,809,157) (223,222)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 166,906 23,437
Amortization of debt discount 280,300 --
Stock-based charges 14,126,578 --
Loss on sale of business 199,000 --
Changes in operating assets and liabilities,
net of impact of acquisition of businesses:
Accounts receivable (24,193) (20,030)
Prepaid expenses and other current assets 56,375 (87,579)
Other assets 19,266 (27,195)
Accounts payable 128,248 17,910
Accrued expenses 529,421 44,508
------------ ------------
Net cash used in operating activities (1,327,256) (272,171)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (194,702) (228,228)
Net cash received from acquisition of businesses 168,650 --
Purchases of customer lists (103,886) --
------------ ------------
Net cash used in investing activities (129,938) (228,228)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of subordinated convertible debentures 600,000 --
Proceeds from issuance of common stock 890,214 297,533
Proceeds from equipment loan -- 202,866
Repayment of equipment loan (6,471) --
------------ ------------
Net cash provided by financing activities 1,483,743 500,399
------------ ------------
Net increase in cash and cash equivalents 26,549 --
Cash and cash equivalents, beginning of period -- --
------------ ------------
Cash and cash equivalents, end of period $ 26,549 --
============ ============
Supplemental disclosure information:
Cash paid during the period for interest $ 9,219 --
============ ============
Non-cash investing and financing activities:
Net liabilities assumed on reverse merger with WAW (note 1) $ 569,451 --
============ ============
Debt discount from beneficial conversion feature of
subordinated convertible debenture (note 7) $ 600,000 --
============ ============
Charge for pricing modification of warrants (note 9) $ 228,800 --
============ ============
Business acquisitions (note 3):
Fair value of assets acquired $ 2,703,313 --
Liabilities assumed -- --
Stock-based charge 12,242,587 --
Issuance of common stock (14,715,900) --
------------ ------------
Cash paid 230,000 --
Less: cash acquired 398,650 --
------------ ------------
Net cash received from acquisition of businesses $ 168,650 --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(1) DESCRIPTION OF BUSINESS AND MERGER WITH WHAT A WORLD
On February 4, 1999, What A World!, Inc. ("WAW"), a publicly-held "shell
company," acquired all the issued and outstanding capital stock of Tele Hub
Link Corporation ("TeleHub") (the "Company"), a privately-held company
organized under the laws of the Providence of Ontario, Canada, engaged in
the business of providing teleservices. Pursuant to a Share Purchase
Agreement dated December 21, 1998, WAW acquired all the issued and
outstanding common stock of TeleHub in exchange for an aggregate of
13,011,339 shares of WAW common stock (or 3.9252318 shares of WAW's common
stock for each share of TeleHub common stock) and, as a result thereof,
TeleHub became a wholly owned subsidiary of WAW. In addition, in connection
with the TeleHub transaction, WAW amended its Certificate of Incorporation
in order to change its legal name to TeleHubLink Corporation.
For accounting purposes, this transaction has been treated as a reverse
acquisition. TeleHub has been deemed the acquiring enterprise for financial
statement purposes, as it received a majority of the voting interests in
the combined enterprise. The SEC staff has taken the position that a
business combination between an operating enterprise and a "shell company"
in which the shell company is the issuer of securities and the operating
enterprise is determined to be the acquiring enterprise for financial
statement purposes, the transaction should be treated for financial
statement purposes as an issuance of securities by the operating
enterprise. Therefore, the tangible net liabilities of WAW at the date of
the transaction of approximately $207,288 have been recorded at their fair
value with an offset credit to paid-in capital and the operations of WAW
are reflected in the operations of the combined enterprise from the date of
acquisition. In addition, the 1999 financial statements have been
retroactively restated to reflect the number of shares TeleHub received in
the business combination. Costs related to this transaction of
approximately $362,163 have been charged directly to paid-in capital.
WAW was incorporated under the laws of the State of Delaware in July 1993.
Until May 1997, the Company operated as a mall-based specialty retailer of
a wide assortment of products which targeted customers having an active
interest in nature, the environment, education, wildlife, the outdoors and
science. In May 1997, the Company sold substantially all of its assets to
Natural Wonders, Inc. for cash in the amount of $517,795 plus the
assumption by Natural Wonders, Inc. of specified liabilities. The
completion of this sale terminated the Company's specialty retail
operations. For the period May 1997 through February 3, 1999, the Company
had no operating business and sought to serve as a vehicle to effect an
acquisition, whether by merger, exchange of capital stock, acquisition of
assets or other similar business combination.
Two directors and principal shareholders of WAW prior to the acquisition
were also shareholders of TeleHub owning, directly and indirectly,
approximately 13% of the outstanding common shares.
At this time, the Company's primary focus is on the development and
marketing of wireless encryption technology. The technology is in the
development stage, the success of which is highly dependent on certain key
individuals. Because the technology has not yet produced revenue, the
Company continues to be highly dependent on outside funding. Failure of the
development effort or failure to maintain outside funding could have a
severe negative impact on the Company's future operations and viability.
8 (Continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) FISCAL YEAR END
The Company's fiscal year end is the last Saturday in the month of
January. The year ended January 29, 2000 is a 52-week year. The period
ended January 30, 1999 is from date of inception (July 31, 1998).
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) 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 disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates. Significant estimates made by the Company include
the useful lives of fixed assets, the recoverability of long-term
assets, valuation of its common stock, and the collectibility of
accounts receivable and deferred tax assets.
(d) CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of overnight deposits.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized
straight line over the shorter of the lease term or estimated useful
life of the asset.
Expenditures for maintenance and repairs are charged to expense as
incurred.
9 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
(g) REVENUE RECOGNITION
Revenue is recognized as services are performed.
(h) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(i) EARNINGS PER SHARE
The Company has adopted SFAS No. 128, EARNINGS PER SHARE. Under SFAS
No. 128, basic net loss per share of common stock is computed by
dividing income available to common stockholders by the weighted
average number of common shares actually outstanding during the period.
Diluted net loss per share of common stock presents loss attributable
to common shares actually outstanding plus potential dilutive common
shares outstanding during the period. The Company's stock options and
warrants were not included in computing diluted net loss per common
stock because their effects were anti-dilutive.
(j) STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principle Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB No. 25") and
complies with the disclosure provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Under APB No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant
between the fair value of the Company's common stock and the amount an
employee must pay to acquire the stock.
10 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(k) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires that the Company
report comprehensive income, which includes net income (loss) as well
as other changes in assets and liabilities recorded in stockholders'
equity (deficit) in the consolidated financial statements. For each
period presented, the Company's comprehensive loss is equal to its net
loss reported in the accompanying consolidated statements of
operations.
(l) SEGMENT REPORTING
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,
replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization
that is used by management for making operational decisions and
assessing performance as the source of the Company's reportable
segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers (see note 13).
(m) FOREIGN CURRENCY TRANSACTIONS
Gains or losses on foreign currency transactions are included in the
determination of net income as the Company considers the United States
dollar to be the functional currency of its foreign subsidiary.
(n) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(o) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial statements, including cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses, and borrowings are carried at cost, which approximates fair
value because of either their short-term nature of conversion to cash
or the corresponding variable interest rate attached to the
instruments.
11 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(p) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101") REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. Under SAB No. 101, the staff has given guidance
on numerous issues, including: treatment of nonrefundable cash received
at the outset of an arrangement, recognition of net versus gross
revenue for e-commerce and other intermediary sales, and other revenue
recognition criteria related to contract accounting. The Company is
required to adopt this guidance by the fourth quarter of its fiscal
year 2001. The Company expects that adopting the guidance of SAB No.
101 will not have a material impact on its financial position or its
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires the recognition of all derivatives as
either assets or liabilities in the statement of financial position and
the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of fiscal year
2002 pursuant to SFAS No. 137 (issued in June 1999), which delays the
adoption of SFAS No. 133 until that time. The Company expects that the
adoption of SFAS No. 133 will not have a material impact on its
financial position or its results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC"), issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COST OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires the
capitalization of certain internal costs related to the implementation
of computer software obtained for internal use. The standard, which the
Company adopted in the first quarter of fiscal 2000, did not have a
material impact on its financial position or its results of operations.
In April 1998, the AcSEC issued SOP 98-5, REPORTING COSTS OF START-UP
ACTIVITIES. Under SOP 98-5, the cost of start-up activities should be
expensed as incurred. Start-up activities are broadly defined as those
one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new
operation or organizing a new entity. This standard, which the Company
adopted in the first quarter of fiscal 2000, did not have any material
impact on its financial position or results of operations.
12 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(3) BUSINESS ACQUISITIONS AND DIVESTITURES
WIRELESSENCRYPTION.COM
On January 27, 2000, the Company acquired all the issued and outstanding
shares of capital stock of wirelessEncryption.com ("WEC") in exchange for
5,000,000 shares of its unregistered common stock with a value of $14.5
million, based on the average market value of the Company's common stock
for five days before and after the transaction date reduced by a 10%
discount due to the shares being unregistered. The Company's former
Chairman, who co-founded WEC, is a principal shareholder of the Company and
of WEC. In addition, one of the Company's directors was also a shareholder
of WEC.
Since its formation in May 1999, WEC was fully supported by unsecured
promissory notes from the Company. Therefore for financial reporting
purposes, the operating losses of WEC prior to the acquisition date have
been included in the operating losses of the Company and reported
separately on the accompanying consolidated statements of operations. In
connection with this transaction, the Company recorded the value of the
distribution of its 5,000,000 shares of common stock as follows: $1.8
million was allocated to the employment contract of its Chief Technology
Officer, based on a preliminary independent valuation, and the remaining
$12.3 million was reflected as a non-cash stock-based charge for related
promoter fees, compensation costs and financing costs. Cash proceeds of
approximately $400,000 received from the sale of WEC's common stock in
December 1999 and January 2000, represents the total book value of WEC's
tangible assets and the value of net assets acquired by the Company in the
transaction. In addition, stockholders' notes receivable of $3,763 relating
to the sale of WEC common stock remain outstanding at January 29, 2000. The
costs allocated to the employment agreement will be amortized over the
two-year life of the contract.
As a result of the exchange of shares, the former Chairman and a principal
shareholder of the Company received directly and indirectly 1,751,345
shares of the Company's common stock with a fair value of approximately
$5.1 million. The value of this exchange has been recorded as promoter
expense. In addition, one of the Company's directors' received 150,000
shares of the Company's common stock with a fair value of approximately
$436,000. The value of this exchange has been recorded as a compensation
expense. Both of these charges are included in the $12.3 million non-cash
stock-based charge recorded by the Company as a result of this transaction
in fiscal 2000.
WEB TRAFIC INC.
On June 16, 1999, the Company acquired the assets of Web Trafic Inc., a
privately held Canadian company for approximately $148,400 which was
comprised of $80,000 in cash and 100,000 shares of the Company's restricted
common stock. The acquisition was accounted for under the purchase method.
Web Trafic Inc. had no operations since its incorporation on July 24, 1998.
Under the Sale of Enterprise Agreement, the Company acquired the rights to
the "iMall Agreement", which among other things, allows access to sell
products on a certain iMall web-site. The Company has allocated the full
purchase price to the contract rights of the iMall Agreement and is
amortizing it over a five-year period.
13 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
In connection with the acquisition Web Trafic Inc., the Company retained a
management firm operated by the former president of Web Trafic Inc., to
assist the Company in developing its Internet division. Pursuant to the
management agreement, the Company granted options to acquire an aggregate
of 250,000 shares at an exercise price of $.50 per share. The Company is
amortizing the value of the stock option grant to compensation expense over
the period the services are being provided to the Company (see note 9).
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the acquisitions of WEC
and Web Trafic Inc. (collectively referred to as the "2000 Acquisitions")
as if the acquisitions had occurred as of January 30, 1999 and January 31,
1998, after giving effect to certain adjustments, including amortization of
intangible assets. The pro forma information does not necessarily reflect
the results of operations that would have occurred had the Company and the
2000 Acquisitions constituted a single entity during 1999 and 2000.
2000 1999
------------ ------------
Revenue $ 1,151,827 210,398
Net loss (18,620,257) (1,993,522)
Net loss to common stockholders (18,849,057) (1,993,522)
Net loss per share (1.06) (.18)
SPORTS AND ENTERTAINMENT MARKETING INTERNATIONAL, INC.
On August 20, 1999, the Company acquired all of the assets of Sports and
Entertainment Marketing International, Inc. ("SEMI"), a privately held
Canadian company, of which the former president of Web Traffic, Inc. was
also a director and shareholder. The total consideration was $352,500,
which was comprised of $150,000 in cash and 200,000 shares of the Company's
restricted common stock. SEMI is engaged in the development and production
of strategic marketing concepts relating to various sports, sporting
events, shows memorabilia and products. The acquisition was accounted for
under the purchase method, and accordingly, the purchase price was
allocated to the identifiable tangible and intangible assets based on their
estimated fair values. The Company allocated approximately $11,000 to
acquired merchandise and $341,500 to contract and marketing rights. The
Company is amortizing the contract and marketing rights over a five-year
period.
On January 17, 2000, the Company entered into an Asset Sale Agreement and
sold SEMI to a Canadian company for $125,000. The transaction closed on
February 14, 2000. The Company recorded the sale transaction in 2000
resulting in a recorded a loss of $199,000. At January 29, 2000, the
Company has a receivable of $125,000 for the sale proceeds, which was paid
in February 2000.
14 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
PLATINUM 2000
During 2000, the Company entered into an agreement to acquire Platinum
2000, a Canadian company. In May 2000, the companies mutually agreed not to
close the deal because certain financial representations were not met. In
connection with this transaction, the Company incurred costs of
approximately $225,000 in 2000. These costs are reflected in selling,
general and administrative expenses in the accompanying consolidated
statements of operations.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
USEFUL
2000 1999 LIFE
---------- ---------- -----------
Telecommunications equipment $ 261,420 122,260 5 years
Furniture and fixtures 97,089 63,591 5 years
Computer equipment 54,808 39,230 3 years
Leasehold improvements 10,613 3,147 Lease term
--------- ---------
423,930 228,228
Less: accumulated depreciation
and amortization (87,285) (23,437)
--------- ---------
$ 336,645 204,791
========= =========
Depreciation and amortization of property and equipment was approximately
$67,900 and $23,400 for the year ended January 29, 2000 and for the period
of inception (July 31, 1998) to January 30, 1999, respectively.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
ESTIMATED
USEFUL
2000 1999 LIFE
---------- ---------- -----------
Employment contract $ 1,800,000 -- 2 years
Licensing and marketing rights 148,400 5 years
Customer lists 103,886 -- 2 years
----------- ----------
2,052,286
Less: accumulated amortization (70,493) --
----------- ----------
$ 1,981,793 --
=========== ==========
15 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
Amortization of intangible assets was approximately $98,966 and $0 for the
year ended January 29, 2000 and for the period of inception (July 31, 1998)
to January 30, 1999, respectively.
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
2000 1999
---------- ----------
Accrued legal expense $ 511,641 --
Accrued brokerage fee 100,000 --
Accrued payroll to officer 100,000 --
Accrued professional fees 93,592 --
Accrued interest 30,000 --
Accrued other 256,854 44,508
---------- ----------
$1,092,087 44,508
========== ==========
(7) SUBORDINATED CONVERTIBLE DEBENTURES
On July 13, 1999, the Company raised $600,000 through the issuance of
subordinated convertible debentures. The Company sold 24 "Units". Each unit
consisted of a 10% subordinated convertible debenture in the principal
amount of $25,000 due one year from the closing. The number of shares
issuable at the maturity date will be based on a conversion price of $.50
per share (see note 14). Interest expense accrues at a rate of 10% per
annum and is payable on the maturity date.
Upon issuance, the total intrinsic value of the embedded conversion feature
of the subordinated convertible debentures was $1,425,000. In accordance
with EITF 98-5, the Company recorded a discount for the intrinsic value of
the embedded conversion feature up to the principal amount ($600,000) of
the issued subordinated convertible debentures. The Company is amortizing
the discount over the one-year life of the subordinated convertible
debentures. For the year ended January 29, 2000, amortization totaling
$280,300 has been included in interest expense.
Any holder who elects to receive payment on the debenture in the form of
shares of common stock will also receive, concurrent with such payment,
redeemable warrants to purchase an aggregate of 50,000 shares of the
Company's common stock at an exercise price of $2.00 per share per unit.
Any holder who elects to receive payment on a debenture in the form of cash
will also receive concurrent with such payment, redeemable warrants to
purchase an aggregate of 6,250 shares of the Company's common stock at an
exercise price of $2.00 per share. The warrants can be exercised at any
time and expire three years from the date of issuance. The warrants will be
redeemable by the Company at any time after issuance, at a price of $.10
per warrant, upon 30 days notice, provided that the closing bid quotation
of the Company's common stock has exceeded $3.00 for a period of 30
consecutive days during the period in which the warrants are exercisable.
16 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
One of the Company's directors and a principal shareholder is a holder of
subordinated convertible debentures totaling $125,000.
(8) EQUIPMENT LOAN
In November 1998, the Company secured a loan with a principal amount of
approximately $200,000, bearing interest of 10%, from AT&T Canada Long
Distance Services Company ("AT&T"). Of the total loan proceeds,
approximately $155,000 was paid directly by AT&T to third-party suppliers
for telecommunications and computer equipment for use at the Company's call
center facility located in Montreal, Canada. The remainder was advanced
directly to the Company. Under the original terms of the loan agreement,
the loan is to be repaid via a per-minute surcharge based on actual phone
usage. The loan matures in March 2003 and is secured by the related
equipment.
Due to competitive pressures in the long distance services industry, the
per-minute usage rate being charged by AT&T has decreased substantially
from the original agreement, effectively eliminating the surcharge. It is
management's belief that the surcharge will not reappear and that the loan
balance will ultimately be forgiven.
(9) STOCKHOLDERS' EQUITY
COMMON STOCK
On February 4, 1999, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of its common stock to
50,000,000. This change has been reflected retroactively in the
accompanying consolidated financial statements.
On February 5, 1999, the Company consummated a private placement financing
arrangement pursuant to which it issued 2,593,979 shares of its common
stock at between $.06 and $.09 per share for an aggregate of $165,214. In
connection with this transaction, the Company recorded a stock-based
compensation charge of $1,728,390 for the difference between the fair value
of the Company's common stock issued and the cash proceeds received.
In August and September 1999, the Company consummated private placement
financing arrangements pursuant to which it issued 580,000 shares of its
common stock at $1.25 per share for an aggregate of $725,000.
17 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
WARRANTS
As of January 29, 2000, the following warrants were outstanding:
TITLE OF AGGREGATE
ISSUANCE AMOUNT
OF OF
SECURITY SECURITIES
CALLED CALLED TERM OF THE
FOR BY FOR BY WARRANTS EXERCISE REDEMPTION
TITLE WARRANTS WARRANTS (SEE NOTE 14) PRICE PRICE
------------- ----------- ---------- ------------- ------- -----------
May 17, 1995
Redeemable Common to October 31,
warrants stock 1,150,000 2000 $ 3.50 $ 0.10
November 17,
Underwriters' 1995 to
underlying Redeemable October 31,
warrants warrants 100,000 2000 .1015 --
August 31, 1996
Directors' Common to August 31,
warrants stock 200,000 2003 1.00 --
----------
Total warrants 1,450,000
==========
REDEEMABLE WARRANTS
In connection with WAW's 1994 initial public offering, WAW issued an
aggregate of 1,150,000 redeemable common stock purchase warrants. Each
warrant originally entitled the holder to purchase one share of common
stock at a price of $5.00, subject to adjustment in specified
circumstances, for a period of three years commencing on May 17, 1995 and
ending on May 17, 1998. In May 1998, WAW extended the exercise period of
the warrants to May 17, 2000 (see note 14). On July 6, 1999, the Company's
board of directors approved the reduction of the warrant exercise price
from $5.00 per share to $3.50. In connection with this change, the Company
recorded the value of the modification of $210,500, based on the change in
the quoted market price of the warrants, as additional paid-in capital and
a direct charge to accumulated deficit. The warrants are redeemable by the
Company, upon the consent of Whale Securities Co., L.L.P., the underwriter
in the initial public offering, at anytime upon notice of not less than 30
days, at a price of $0.10 per warrant, provided that the closing bid
quotation of the common stock on all 20 trading days ending on the third
day before the day on which the Company gives notice has been at least 150%
of the then-effective exercise price of the warrants.
18 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
UNDERWRITERS' WARRANTS
In connection with WAW's 1994 initial public offering, WAW issued to the
underwriter and its designees certain warrants to purchase up to 100,000
shares of common stock at an exercise price of $7.25 per share
("underwriters' warrants") and/or up to 100,000 underlying warrants
exercisable at $.145 per underlying warrant for the purchase shares of
common stock at an exercise price of $5.00 per share ("underlying
warrants"). The underwriters' warrants expired unexercised on November 17,
1999.
In May 1998, WAW extended the exercise period of the underlying warrants to
May 17, 2000 (see note 15). On July 6, 1999, the Company's board of
directors approved the reduction of the exercise price of the underlying
warrants and the purchase price of the common stock to $.1015 and $3.50,
respectively. In connection with this change, the Company recorded the
value of the modification of $18,300, based on the change in the quoted
market price of the warrants, as additional paid-in capital and a direct
charge to accumulated deficit.
DIRECTORS' WARRANTS
In August, 1996, the WAW obtained debt financing from three individuals who
were directors at the time to fund working capital requirements. In
connection with the debt issuance, WAW granted warrants to purchase an
aggregate of up to 200,000 shares of its common stock at an exercise price
of $1.00 per share exercisable until August 31, 2001. The securities
underlying the warrants are subject to demand and "piggyback" registration
rights. All amounts outstanding under the working capital commitments were
repaid together with accrued interest in January 1997.
On February 2, 1999, WAW's Board of Directors approved an extension of the
directors' warrants from August 31, 2001 to August 31, 2003.
STOCK OPTIONS
1994 STOCK OPTION PLAN
In November 1994, the Company adopted the 1994 Stock Option Plan ("Stock
Option Plan"), pursuant to which employees, directors, consultants and
other persons who perform substantial services for or on behalf of the
Company may be granted stock options to purchase shares of the Company's
common stock. The Stock Option Plan, as amended, reserved 560,000 shares of
the Company's common stock for issuance under the Stock Option Plan as
incentive or non-incentive stock options. Options under the Stock Option
Plan vest ratable between one and five years as determined by the Board of
Directors and must be exercised within ten years from the date of grant.
The exercise price per share of each stock options will be an amount not
less than the par value of such shares and, in the case of incentive
options, not less than the fair market value of such shares on the date of
grant. At January 29, 2000, 59,833 shares are available to be granted under
the Stock Option Plan.
19 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In November 1994, the Company adopted the 1994 Non-employee Directors'
Stock Option Plan ("the Directors' Plan"), pursuant to which non-employee
directors may be granted options to purchase shares of the Company's common
stock. An aggregate of 40,000 shares of common stock have been reserved for
issuance under the Directors' Plan. Options vest as determined by the Board
of Directors on the date of grant and must be exercised within ten years
from the date of grant. All stock options granted under the Directors' Plan
will be exercisable at the fair market value of the Company's common stock
on the date of grant. At January 29, 2000, 20,000 shares are available to
be granted under the Directors' Plan.
NONPLAN STOCK OPTIONS
During fiscal year 2000, the Company issued nonplan stock options to
directors and consultants. In connection with these grants, the Company
recorded compensation and consulting expense of approximately $156,000.
On February 5, 1999, the Company granted to two directors and principal
shareholders and to its President and Chief Executive Officer options to
purchase 20,000 unregistered shares each of the Company's common stock at
an exercise price of $0.8125. The options vest one-year from the date of
grant.
In February 1999, the Company granted to a third-party 5,000 stock options
to purchase shares of the Company's common stock in consideration for
providing certain furniture to the Company. The stock options were granted
at $0.8125, the fair market value of the common stock on the date of grant.
The options vest 50% on December 31, 1999 and 50% on December 31, 2000.
In June 1999, in connection with the acquisition of Web Trafic Inc., the
Company retained a management firm operated by the former President of Web
Trafic Inc. to assist the Company in establishing its Internet division.
Pursuant to the management agreement, the Company granted to the firm
options to acquire an aggregate of 250,000 shares at an exercise price of
$0.50 per share. Of such options, 50,000 vested immediately upon execution
of the agreement and, accordingly, compensation expense of $32,800 has been
recognized based on the value of the stock option grant using the
Black-Scholes option valuation model. The remaining 200,000 options were to
vest in increments of 50,000 on each six-month anniversary of the
agreement, subject to completion of certain milestones. None of the
remaining 200,000 options was expected to vest, and thus no compensation
expense has been recognized. The management firm terminated its agreement
with the Company on March 28, 2000 and the remaining 200,000 options were
canceled.
In August 1999, the Company granted a third-party consultant options to
purchase an aggregate of 50,000 shares of its common stock at an exercise
price of $1.50, the fair market value of the Company's common stock on the
date of grant, in consideration for public relations services to be
performed over a three month period. The options vest one year from the
date of grant. The Company calculated the value of the stock option grant
using the Black-Scholes option valuation model. The estimated value of the
stock options of $52,300 is being amortized over the period of service.
20 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
In October 1999, the Company granted a third-party consultant options to
acquire an aggregate of 25,000 shares at an exercise price of $0.9375, the
fair market value on the date of grant, in consideration for services
previously rendered by the consultant. The options vest one year from the
date of grant. The Company calculated the value of the stock option grant
using the Black-Scholes option valuation model. The estimated value of the
stock options of $16,300 was recognized on the date of grant.
In October 1999, the Company granted an employee options to purchase 50,000
unregistered shares of the Company's common stock at an exercise price of
$0.06. The options vested immediately. The Company has recognized an
expense of $53,300 for the difference between the fair value of the stock
options and the grant price on the date of grant.
In December 1999, the Company granted 20,000 stock options to a Director.
The stock options vest after one year. The Company recorded a deferred
compensation amount of $10,500 for the difference between the fair value of
the common stock and the exercise price of the stock option on the date of
grant. At January 29, 2000, the remaining deferred compensation was $9,600.
The following table summarizes information about the aggregate stock option
activity for the Company's stock option plans for the year ended January
29, 2000:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- --------
Balance at January 30, 1999 -- $ --
Acquired through WAW acquisition 520,167 2.24
Granted 1,625,000 0.51
Exercised -- --
Forfeited (550,000) 0.06
---------- --------
Balance at January 29, 2000 1,595,167 $ 1.23
========== ========
21 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
The following table summarizes information about the Company's outstanding
stock options at January 29, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
--------- ------------ --------- ----------- ------------ ----------
$0.06 50,000 $ 0.06 9.67 50,000 $ 0.06
$0.50 250,000 0.50 9.33 50,000 0.50
$0.81 650,000 0.81 9.01 295,000 0.81
$0.94 75,000 0.94 9.77 -- --
$1.00 36,667 1.00 6.57 36,667 1.00
$1.50 160,000 1.50 7.28 110,000 1.50
$1.69 49,000 1.69 6.31 49,000 1.69
$1.88 217,500 1.88 9.00 217,500 1.88
$4.25 80,000 4.25 4.87 80,000 4.25
$5.00 27,000 5.00 4.79 27,000 5.00
--------- --------- ----------- ------------ ----------
1,595,167 $ 1.23 8.52 915,167 $ 1.57
========= ========= =========== ============ ==========
SFAS No. 123 sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company
has elected to apply APB No. 25 to account for its stock-based compensation
plans. Had compensation costs for awards in fiscal 2000 under the Company's
stock-based compensation plans been determined based on the fair value
method set forth under SFAS No. 123, the pro forma effect on the Company's
net loss would have been as follows:
2000
------------
Net loss As reported $ (16,809,157)
Pro forma (17,011,601)
The weighted-average fair values at the date of grant for options granted
during the year ended January 29, 2000 was $0.66 and was estimated using
the Black-Scholes option valuation model with the following
weighted-average assumptions:
2000
----------
Expected life in years 2.0
Interest rate 5.0%
Volatility 170%
Dividend yield --
22 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(10) COMMITMENTS AND CONTINGENCIES
LEASES
During fiscal 2000, the Company entered into a month-to-month sublease
agreement with Young Management Group, Inc. ("YMG"), for its central
headquarters in a facility located in Burlington, Massachusetts. YMG is
owned by Stanley Young, the former chairman and a significant stockholder
of the Company. YMG's lease agreement expires in February 2001. The
Company's annual lease payments total approximately $66,000.
The Company leases an office facility located in Quebec Canada. In
connection with the lease, the Company has granted the lessor a security
interest in certain movable assets to secure the value of six-months of
rent. The lease term runs through October 2003. The Company's annual lease
payments under the lease agreement are approximately $57,000.
Total rent expense under the Company's operating leases was approximately
$129,500 and $18,500 for the year ended January 29, 2000 and for the period
from inception (July 31, 1998) through January 30, 1999, respectively.
Minimum future rental payments under these noncancelable operating leases
(including its central headquarters) as of January 29, 2000 were as
follows:
FISCAL YEAR END AMOUNT
------------------- ----------
2001 $ 123,000
2002 62,200
2003 56,700
2004 42,500
----------
$ 284,400
==========
In connection with the 1997 sale of the WAW retail operations, the Company
agreed to assign the existing operating leases to the buyer. The Company
received landlord consent for all of the lease assignments, except one for
which the landlord consent for the assignment was not required. The
Company, as well as the buyer, believe that the buyer has satisfactorily
complied with the landlord's requirements for assigning this lease
obligation. The Company may still be held liable under these lease
obligations should the buyer default on the assigned leases. The total
remaining payments under the assigned leases total approximately $4.8
million. In addition, the lease agreements contain contingency clauses
regarding results.
23 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
EMPLOYMENT CONTRACTS
The Company maintains employment contracts with its President and Chief
Executive Officer and its Chief Technology Officer.
The President and Chief Executive Officer's employment agreement includes
severance or change in control provisions that provide for compensation of
the greater of two-years base salary or $500,000. Under the employment
agreement, the President and Chief Executive Officer was granted options to
acquire 500,000 shares of the Company's common stock of which 50% vested
immediately and the remaining 50% vest upon completion of the first full
year of employment. The employment agreement also provides for accelerated
vesting of stock options in the event the Company's common stock meets
certain market performance levels.
The Company's Chief Technology Officer's employment agreement includes
severance and change in control provisions that provide for compensation of
six months base salary and accelerated vesting of any outstanding stock
options the individual holds at that time. The agreement also provides for
financial incentives, based on meeting specified developmental and
financial goals, of up to $100,000 plus 3% of net sales in excess of $7.5
million in calendar year 2000.
TELECOMMUNICATIONS CONTRACT
The Company signed an agreement with AT&T for telecommunication services
for a period of four years beginning in March 1999. Under the agreement,
the Company is committed to purchase telecommunication services of
approximately $23,000 per month.
LEGAL PROCEEDINGS
The Company is not a party or subject to any legal proceedings, other than
claims and lawsuits arising in the ordinary course of business. The Company
does not believe that any such claims or lawsuits will have a material
adverse effect on its financial condition or results of operations.
24 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(11) INCOME TAXES
No provision for income taxes has been recorded for any period presented as
the Company has incurred net operating losses for tax purposes.
The following table reconciles the Federal statutory income tax rate to the
Company's effective income tax (benefit) rate:
PERIOD FROM
INCEPTION
YEAR ENDED (JULY 31, 1998)
JANUARY 29, THROUGH
2000 JANUARY 30, 1999
----------- -----------------
Federal statutory income tax rate (34.0%) (34.0)
Change in valuation allowance 5.0 34.0
Stock-based charges 28.0 --
Other 1.0 --
----------- -----------------
Effective income tax (benefit) rate -- --
=========== =================
Deferred income tax assets and liabilities result from temporary
differences in the recognition of income and expense for tax and financial
reporting purposes. The sources and tax effects of these temporary
differences are presented below:
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
Deferred tax assets:
Federal net operating loss credit
carryforwards $ 437,733 --
State net operating loss carryforwards 80,723 --
Foreign net operating loss carryforwards 430,987 100,449
Start-up and organizational costs 86,168 --
Non-qualified stock options 63,022 --
Other 7,047 --
----------- -----------
Total gross deferred tax assets 1,105,680 100,449
Less: valuation allowance (1,105,680) (100,449)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
25 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
The valuation allowance for deferred tax assets was $1,105,680 and $100,449
as of January 29, 2000 and January 30, 1999, respectively. The net change
in the total valuation allowance for the year ended January 29, 2000 and
for the period from inception (July 31, 1998) through January 30, 1999 was
an increase of $1,005,231 and $100,449, respectively. The valuation
allowance has been established because, based on the limited operating
history of the Company and other available evidence, the realization of the
deferred tax assets does not meet the "more likely than not" criteria under
SFAS No. 109.
At January 29, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,287,000 which are available
to offset future Federal taxable income, if any, through 2020. Pursuant to
the Tax Reform Act of 1986, annual utilization of the Company's net
operating loss carryforwards and other tax attributes may be limited if a
cumulative change in ownership of more than 50% occurs within a three year
period. The Company has not determined whether there has been such a
cumulative change in ownership or the impact on the utilization of the loss
carryforwards if such change has occurred.
(12) OTHER RELATED PARTY TRANSACTIONS
On July 6, 1999, the Board of Directors approved the reduction of the
exercise price of the redeemable common stock purchase warrants $5.00 per
share to $3.50. A director of the Company is a principal warrant holder
holding an aggregate of 135,000 redeemable warrants.
The Company paid consulting fees to a firm which is owned by the Company's
President and Chief Executive Officer. Total fees incurred were $80,000 for
the year ended January 29, 2000.
The Company paid consulting fees to a firm owned by a principal shareholder
and former Chairman of the Board. Total fees incurred were approximately
$70,000 for the year ended January 29, 2000.
The Company paid consulting fees to firms owned by certain shareholders.
Total fees incurred were $70,500 for the period from inception (July 31,
1998) through January 30, 1999.
26 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
(13) SEGMENT REPORTING
As of January 29, 2000, the Company's operations are classified in two
reportable business segments; secure wireless encryption segment and
telecom services segment. Call center teleservices, included in the telecom
services segment, are provided though the Canadian subsidiary, Tele Hub
Link Corporation, who provides services in both the United States and
Canada. The secure wireless encryption segment began in fiscal 2000 and is
in its development stage. The following is a tabulation of business segment
information for the fiscal year ending January 29, 2000, and the period
from inception (July 31, 1998) through January 30, 1999:
SECURE
WIRELESS TELECOM
ENCRYPTION SERVICES
SEGMENT SEGMENT TOTAL
---------- ---------- ---------
2000
----
Revenue $ -- 1,151,827 1,151,827
Operating loss (15,263,663) (1,204,555) (16,468,218)
Net interest (310,300) (9,219) (319,519)
Pretax loss (15,573,963) (1,235,194) (16,809,157)
Net loss (15,573,963) (1,235,194) (16,809,157)
Assets 1,851,889 707,345 2,559,234
Depreciation and
amortization -- 166,906 166,906
Additions to
long-lived assets 1,800,000 695,602 2,495,602
1999
----
Revenue $ -- 210,398 210,398
Operating loss -- (219,718) (219,718)
Net interest -- -- --
Pretax loss -- (223,222) (223,222)
Net loss -- (223,222) (223,222)
Assets -- 339,595 339,595
Depreciation and
amortization -- 23,437 23,437
Additions to
long-lived assets -- 228,228 228,228
GEOGRAPHIC AREA UNITED
INFORMATION STATES CANADA TOTAL
------------------- ------------ -------- ----------
2000
----
Revenue $ 916,603 235,224 1,151,827
Long-lived assets 1,981,793 336,645 2,318,438
1999
----
Revenue $ 90,838 119,560 210,398
Long-lived assets -- 204,791 204,791
27 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
Revenue from four and two customers of the Telecom services segment
represents approximately 46% and 71% of the Company's consolidated revenues
for the year ended January 29, 2000 and revenues for the period of
inception (July 31, 1998) to January 30, 1999, respectively.
(14) SUBSEQUENT EVENTS
SALE OF COMMON STOCK AND WARRANTS
On March 6, 2000, the Company raised $8.1 million through its sale of
2,699,999 shares of restricted common stock at $3.00 per share and the
issuance of warrants to purchase up to 2,699,999 shares of common stock at
no consideration. The warrants are exercisable at the option of the holder
at any time up to the expiration date of March 4, 2005 at a price of $4.50
per share. Among the purchasers of these securities were the Company's
President and its Chairman of the Board, who acquired an aggregate of
116,666 shares for $350,000.
ACQUISITION OF BUSINESSES
COMSEC SOLUTIONS, LLC
On March 24, 2000, the Company acquired 100% of the membership interest in
COMSEC Solutions, LLC ("COMSEC") for 100,000 shares of its unregistered
common stock. COMSEC is a consulting company with expertise in the field of
encryption, both radio and wireless, authentication, web security and
e-commerce. The acquisition will be accounted for under the purchase
method, and accordingly, the purchase price will be allocated to the
identifiable tangible and intangible assets based on their estimated fair
values.
MVP SYSTEMS, INC.
In June 2000, the Company signed a letter of intent to acquire the issued
and outstanding stock of MVP Systems, Inc. for $100,000 in cash and the
issuance of 600,000 shares of the Company's common stock. The acquisition
will be accounted for under the purchase method and, accordingly, the
purchase price will be allocated to the identifiable tangible and
intangible assets based on their estimated fair values.
EXTENSION OF EXERCISE PERIOD OF REDEEMABLE COMMON STOCK WARRANTS AND
UNDERWRITERS' UNDERLYING WARRANTS
On March 27, 2000, the Board of Directors approved an exercise period
extension of its publicly held redeemable common stock warrants and
underwriters' underlying warrants from May 17, 2000 to October 31, 2000.
28 (continued)
<PAGE>
TELEHUBLINK CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 29, 2000 and January 30, 1999
ISSUANCE OF STOCK OPTIONS TO EMPLOYEES AND DIRECTORS
On February 9, 2000, the Company's Board of Directors granted 1,250,000
options to certain employees and directors of the Company at a grant price
of $4.50. Of the total options granted, 1,200,000 options become
exercisable on February 4, 2001, while the remaining options become
exercisable on February 4, 2002.
CONVERSION OF SUBORDINATED CONVERTIBLE DEBENTURES
On July 14, 2000, the Company received notice that all holders of the
subordinated convertible debentures have chosen to convert the debt to
shares of the Company's common stock. As a result, the Company will issue
1,200,000 shares of its common stock.
29
