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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT 2
FORM 10-KSB/A
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO ..............
COMMISSION FILE NUMBER:...........000-25641............
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TELTRAN INTERNATIONAL GROUP, LTD.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 11-3172507
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PENN PLAZA, SUITE 4430, NEW YORK, NY 10119
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER (212) 643-1600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No __
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of issuer'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 the year ended December 31, 1999 were $2,453,189.
The aggregate market value of the common stock held by non-affiliates of
the issuer is $65,590,502, based on $4.844, which was the average of high and
low sales prices on the OTC Bulletin Board on April 10, 2000.
The number of shares outstanding of the issuer's common stock is 18,275,979
as of April 11, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
In July 1983, we were incorporated in Utah as Spectratek Incorporated and
we subsequently incorporated as Teltran International Group Ltd in Delaware on
October 6, 1997. In 1993 we formed a wholly owned subsidiary, Teltran
International, Inc. and we use Teltran International to engage in our
international telecommunications business. Since 1998 our primary business is
acting as a seller of telecommunications time. In 1999 we began operating an
Internet portal. Recently we have acquired entities in the United Kingdom which
are engaged in or were commencing to engage in providing equipment services for
Internet providers. Prior to 1998 we were engaged in attempts to develop our
business and did not receive any significant revenues. References to "we," "us,"
or "our" include Teltran International as well.
TELECOMMUNICATIONS INDUSTRY BACKGROUND
During the last fifteen years, international telecommunications has changed
dramatically. Deregulation has resulted in the end of monopolies and a
proliferation of competitors. In addition, international agreements among most
industrial nations have opened telecommunication markets to competition and
foreign ownership. At the same time technology has changed adding to the overall
efficiency of telecommunication services and increasing both call volume
capacity and the quality of sound. These factors have also combined to reduce
costs significantly. With the advent of new technology came the development of
new methods of completing calls and reducing costs. One of the most prominent
methods to achieve this is called refiling, which is the routing of calls from
country A to country B for termination in country C. Because of the above
mentioned changes, the rates charged callers using re-filed calls among the
three countries is less than the rate they would otherwise pay for a connection
directly between country A and country C.
Re-filing is typically achieved through a series of resale arrangements
among carriers often involving the wholesale purchase of services on a
per-minute basis by one long distance provider from another. A single
international call may pass through the facilities of several long distance
carriers and resellers before being terminated to a local telephone user by a
carrier in the country of termination. Re-filing has caused the emergence of
alternative international providers that rely on transmission services acquired
on a wholesale basis from other long distance providers. These international
providers include entities whose business is purely to act as a reseller.
The advent and proliferation of Internet Protocol, the computer language
protocol used to transmit data over the Internet and managed networks, has added
to the options available for the delivery of international telephone service.
Internet telephony uses Internet Protocol and voice messaging equipment, or
gateways, to receive voice messages, convert them into digital data packets,
transmit them over the Internet at high speeds and retranslate them back into
voice messages with digital clarity at the call receiver's end. The Internet
telephony industry began in 1995, when experienced Internet users began to
transfer voice messages from one personal computer to another. Subsequently,
software was introduced which allowed personal computer users to place
international calls via the Internet to other personal computer users for the
price of a local call. Initially, the growth of Internet telephony was
constrained due to the poor sound quality of the calls and because calls were
mainly limited to those placed from one personal computer to another. However,
as the industry has grown, substantial improvements have been made. New software
has substantially reduced delays and improved voice quality. The use of private
networks or Intranets to transmit calls as an alternative to the public Internet
also helped to alleviate capacity problems. Developments in hardware, software
and networks are expected to continue to improve the quality and viability of
Internet telephony.
Internet telephony provides customers with substantial savings compared to
conventional long distance calls. The total cost of an Internet telephone call
is based only on the local calls to and from the gateways of the respective
Internet providers. As a result the call bypasses the international settlements
process which requires using the more expensive transoceanic fiber networks of
traditional carriers.
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HISTORY
Initially we intended to concentrate our efforts on establishing and
operating a global messaging business. By pursuing that strategy we intended to
provide our customers with a universal mailbox and a platform that was capable
of generating multimedia broadcasts of messages and documents received by the
client. In other words, the messages could be faxed or otherwise delivered to
various locations within an enterprise. As an adjunct to our global messaging
service we also intended to provide enhanced fax services including fax
broadcasting. We postponed our efforts to provide global messaging services
because of our inability at the time to obtain financing for equipment and due
to the new telecommunications opportunities presented by Internet telephony. We
derived insignificant revenues from the provision of global messaging services
for clients through April 1998. After April 1998, we focused our efforts on
exploiting opportunities in Internet telephony and derived revenues providing
services as a refile hub for and affiliate of OzEmail Interline Pty, Limited.
OzEmail Interline Pty Limited was a subsidiary of OzEmail Limited, a wholly
owned Australian subsidiary of MCI WorldCom, Inc. On November 30, 1999, ITXC
Corp purchased the intellectual property and contractual rights associated with
the operations of the Internet telephony business of OzEmail Interline Pty
Limited. We are currently operating our Internet telephony business through the
ITXC network. We also are in the process of establishing our own systems for
traffic between different countries. We have also acquired telecommunications
companies in the United Kingdom.
FACTORS THAT AFFECT THE TELECOMMUNICATIONS INDUSTRY
There is a chance technological changes in the telecommunications industry
will make our business obsolete. We cannot guarantee that research and
developments by others will not render our operations noncompetitive or
obsolete. Our business strategy is subject to the risks inherent in the
marketing of new services using new technologies and approaches in a rapidly
evolving commercial environment. We cannot assure that unforeseen problems will
not develop with these technologies or applications, or that we will be able to
successfully address the technological challenges we encounter by entering into
alternative arrangements for generating revenues.
Our success in the international telecommunications business may depend on
factors beyond our control including the influence of domestic and foreign
governments on our industry. We believe we will generate a substantial portion
of our revenues by providing international telecommunications services to our
customers on a wholesale basis. The international nature of our operations
involves particular risks. These include changes in foreign government
regulations and telecommunications standards, dependence on foreign partners,
tariffs, taxes and other trade barriers, economic downturns and political
instability in foreign countries. Our business could also be adversely affected
by a reversal in the current trend toward deregulation, or upon a change in the
business affairs of ITXC Corp. In addition, our business is subject to various
U.S. and foreign laws, regulations, agency actions and court decisions. Our U.S.
international telecommunications services are subject to regulation by the FCC.
The FCC requires international carriers to obtain authorizations under Section
214 of the Communications Act of 1934 prior to purchasing or leasing
international facilities, or providing international service to the public. We
have obtained the necessary licensure to conduct our business. We may be
adversely affected by regulations of foreign governments as we seek to establish
local affiliates outside of the United States. Foreign regulations may also
affect affiliates that complete calls on behalf of our clients.
There are several factors unique to the telecommunications industry that
may negatively influence our operating results, including revenues, costs and
margins. Our revenues, costs and expenses may fluctuate in the future as a
result of numerous factors. Our revenues in any given period can vary due to
factors including call volume fluctuations, particularly in regions with
relatively high per minute rates; the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise; financial
difficulties of major customers; and pricing pressure resulting from increased
competition. Technical difficulties or failures of portions of the ITXC system
or other providers may impact our ability to provide service to our customers by
preventing us from delivering call traffic. Additionally, technical difficulties
with the network may cause loss.
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INTERNET TELEPHONY
INTERNET TELEPHONY DESCRIPTION
Internet telephony is the use of the worldwide Internet system to transmit
telephone, fax and other communications between two countries. This process
consists of receiving a call or transmission, usually through a local carrier,
to a switch and/or gateway, which contains software, which converts the voice
input from the transmission to digital data, which is then routed to another
country over the Internet. The basic equipment, which converts the transmission
and routed is called a gateway. The Internet call is directed to a receiving
country. A gateway in the receiving country performs the reverse process
converting the digital data from the Internet to a voice format. This in turn is
transmitted through local telephone providers to the ultimate destination.
The heart of any Internet telephony system is the gateway. There are
several providers of gateways, including Lucent, Cisco, Clarent and VocalTec.
OzEmail utilized their own gateways, which contained proprietary software. Each
gateway, depending on the manufacturer, is capable of handling twenty-four or
more simultaneous calls. The gateway is also used for billing, rating and
verification purposes in conjunction with a gatekeeper or other external billing
package.
The typical structure of a call placed through the Internet telephony
system is as follows:
o a person originates a domestic telephone call to a facility containing
gateways;
o the call is converted into a digital form and delivered to the Internet
through the gateway and is routed to the country of destination;
o the Internet transmission connects to a gateway in a foreign country
where it is converted to analog and connected to foreign domestic local
telephone network; and
o the call is received by the person to which it was directed as a normal
telephone call.
INTERNET TELEPHONY SYSTEM
OzEmail, before its sale to ITXC, operated and ITXC operates an Internet
telephony network. The network consists of a consortium of companies in various
countries that act as affiliates of the network for the transmission and receipt
of service worldwide. All systems use gateways located in various parts of the
world tied together by a network for the transmission, routing and connection of
voice, data and fax communications through the Internet. The network may also
utilize other conventional systems to organize and complete calls. OzEmail used
its own proprietary gateways. Each affiliate primarily furnishes origination
services in its area of affiliation but also furnishes termination service in
its territory enabling affiliates in other countries to route calls into its
territory for termination through the local affiliate over conventional public
switched telephone networks. The local affiliate receives a termination fee for
the completion. Each affiliate markets the service in its territory offering
origination-calling services through the network. Each local affiliate is
required to pay a fee to the network for all international services of the
affiliate's customers routed through the network.
If no affiliate has been appointed in the country of destination, the call
will be routed through an affiliate acting as a refile provider in a third
country for the least expensive routing.
TELTRAN RELATIONS WITH INTERNET TELEPHONY NETWORKS
In 1998 we were appointed as a refile hub for OzEmail in the United States
for calls terminating in countries without OzEmail affiliates. As a refile hub,
we received calls for the OzEmail system and directed them through the least
expensive routing to countries which had no OzEmail Internet termination. We
derived approximately $535,200 in revenues from this activity in 1998 but
revenues in 1999 were not material. The decline resulted from the utilization by
OzEmail of a related party as a refile hub and to a lesser extent from an
increase in affiliates.
In October 1998 we were appointed a non-exclusive OzEmail affiliate in the
United States. This designation enabled us to sell international voice telephone
availability through the OzEmail Internet system utilizing
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OzEmail technology and protocols to clients in the United States. In this
capacity, we sought to wholesale Internet telephony capacity from North America
to other locations around the world within the OzEmail network.
In the first quarter of 1999, we entered into agreements to provide call
connection services from the United States to the Netherlands Antilles and South
Africa. Prior to June 1999, we did not derive significant revenues from our
affiliate operations. It took us, or our clients, a substantial period of time
to complete testing, obtain compatible equipment and software and to complete
arrangements with local telephone companies. In June 1999 we began service to
Netherlands Antilles and South Africa for two clients. Through February 2000 we
have completed calls totaling over 4.1 million minutes.
Generally OzEmail only permitted one affiliate in a country. By November
1999 we obtained affiliate status in the United Kingdom and Ireland through our
ChannelNet subsidiary. We have executed contracts to provide service to an
affiliate in Pakistan. This service has not begun due to, among other things,
local government requirements. Subject to final agreements, we had received
permission to become an affiliate in other countries. In November 1999 OzEmail
disposed of its Internet telephony business to ITXC. ITXC Corporation is a
provider of Internet-based voice and fax services located in Princeton, New
Jersey, whose shares are listed on the NASDAQ National Market under the symbol
"ITXC." It has been operating an Internet telephony network for more than the
last two years, and reported revenues of over $25,000,000 in 1999. Public
filings by ITXC indicate that, in the fall of 1999, ITXC completed its initial
public offering and received over $70,000,000 in proceeds.
After the transfer of OzEmail's Internet telephony business to ITXC, we
entered into a new arrangement with ITXC superceding our past arrangements. We
believe the new arrangement will have substantial benefits as ITXC imposes less
restrictions upon its affiliates than OzEmail did. For example, unlike OzEmail,
ITXC does not limit the number of affiliates in any country. We are now free to
become an affiliate in as many countries as we may desire. ITXC also does not
require the use of proprietary gateways. We may use any commercial gateway as
long as there exists a similar gateway in the receiving country. Finally, ITXC
will provide the gateway for calls, originating in a country in which we are an
affiliate, that terminate within the ITXC network. We are required to provide
gateways for traffic which terminates outside of the ITXC network. We are also
free to purchase gateways from third parties and establish our own network
between any two countries.
By establishing gateways, either as an ITXC affiliate or directly, in other
countries and sending calls through our own network for specific countries, we
would have the ability to receive revenues from both ends of a call. In most
instances we contemplate entering into arrangements with a local partner to
implement foreign arrangements.
ITXC/OZEMAIL AGREEMENTS
Our OzEmail affiliate agreements were in effect replaced by an agreement we
signed with ITXC on November 23, 1999. Under the WWExchange Network Services
agreement signed with ITXC, each company will provide termination services for
calls from Internet telephony or public switched telephone networks. ITXC, at
its own cost, will provide Teltran with five E-1 gateways. The contract runs
through May 19, 2002, but may be terminated on 60 days' notice. The relationship
established by the agreement is non-exclusive, and either company may provide
termination services for other parties. We are authorized to originate calls
that will terminate to worldwide destinations over the ITXC Internet telephony
network and terminate calls that originate from the ITXC network. In effect,
Teltran can become both a vendor (affiliate) and customer for ITXC. The gateways
that we operate in the United States and abroad will transmit calls over the
Internet worldwide through ITXC's or our own interconnected systems. As an
affiliate or vendor for ITXC we must purchase the necessary gateways to provide
that service. ITXC will purchase and install for us, as its customer, the
gateways needed to originate calls that will terminate within the ITXC network.
Affiliates in the ITXC system are also obligated to provide termination services
to other ITXC affiliates in other countries, over ITXC's interconnected systems.
Affiliates providing termination services charge originating affiliates a fee
based on the rate the terminating affiliate has negotiated with the local
carrier to terminate the call in the jurisdiction of its affiliation. ITXC
collects the fees from the originating affiliate and, after deducting a service
charge or mark up, remits the fee to the terminating affiliate.
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EQUIPMENT
ITXC requires its affiliates to obtain a sufficient number of gateways to
provide their services and to test them over a period of several weeks to
determine the quality of service to the particular destination. We had
previously purchased twelve gateways for an aggregate cost of $108,000 to
service our existing United States clients at present levels through our OzEmail
affiliates. We have replaced our OzEmail gateways with both ITXC-owned and
Teltran-owned equipment. This process has been completed prior to February 2000.
ITXC replaced, without cost to us, the equipment that will be used in
terminating traffic with ITXC affiliates. We may receive additional gateways
from ITXC at no cost as long as these gateways are used exclusively for sending
calls over the ITXC network. These gateways belong to IXTC and must be returned
to IXTC once we cease service. We also may purchase additional gateways outright
for our own use. In any event, if the volume of calls we handle from our
contracts grows to projected levels, or we initiate call services under
additional contracts, we will need to purchase additional gateways. New gateways
presently cost approximately $9,000 to $17,000 per 24-port unit, depending on
the configuration required by our customers or local telecom regulation. We
presently house all of our gateways at a technical facility operated by an
unaffiliated party located close to our offices in New York City and Manchester,
UK.
We have determined to establish our own network center and for that purpose
are obtaining the equipment necessary for that purpose. We are in the process of
purchasing or leasing equipment, including the lease of a switch from Cisco. We
estimate the network center will be operational by June 30, 2000. It will be
located at the New York colocation facility or technical center in New York City
utilized by the Company. Once the network center is operational the Company will
be able to enter into direct arrangements to provide voice Internet services
directly to other countries without utilizing the services of ITXC. It may also
enable the Company to provide other telecommunication services including fax
broadcasting. As a result of our purchases through Cisco, Cisco has advised us
that we may participate in various programs which provide customers with various
levels of programs established by Cisco which provide us with various levels of
marketing and technical support depending on the amount of purchase.
OTHER TELECOMMUNICATION ARRANGEMENTS
Teltran regards itself as a telecommunications company and may enter into
arrangements for the resale of telecommunications time not involving the ITXC
network. Future arrangements may involve entirely different providers or a
combination of ITXC and other providers. We have established our own network
facility at our existing co-location site in New York City. This enables us to
use our own network for Internet telephony, and other telecommunications
services.
Through April 15, 2000 the Company has advanced $224,770 to and has an
understanding to acquire a start-up venture SaveOnCalling.com LLC engaged in the
marketing of casual access long distance services, better known as "10-10-
dial-around." Dial-around is a telecommunications service that allows consumers
to select alternative long distance providers by entering the particular
provider's carrier identification code (CIC) prior to dialing a long distance
telephone call. Charges for these calls generally appear on the caller's regular
telephone bill.
GOVERNMENT REGULATION
We are licensed as an international reseller under Section 214 of the
Federal Communication Act. This regulation does not impose significant
restrictions on our daily operations. We however are also affected by foreign
regulators or foreign government-owned telephone systems. We or our affiliates
may be required to obtain permission in connection with our client contracts. We
will also be subject to foreign regulation if we are able to establish
affiliates in foreign countries. For example, some foreign countries may limit
the origination or termination of calls to and from their jurisdictions. The
United Kingdom regulates the award of premium-rate telephone services.
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MARKETING/CUSTOMERS
During 1998 our principal customer was OzEmail under the refile
arrangement. During 1998 we received approximately 79.3% of our revenues from
OzEmail. We did not derive significant refile revenues from OzEmail in 1999. We
are not dependent upon OzEmail or its successor ITXC as a customer. We derived
17.1% of our revenues in 1998 from Telecom 2000 for providing it with domestic
long distance capacity. This arrangement has terminated. No customer accounted
for more than 5% of our revenues in 1999.
We market our service through our United States and United Kingdom
executive officers and employees, one of whom is the vice president of sales and
marketing. We have also entered into non-exclusive arrangements with agents who
will receive a commission from the revenues generated by any of our customers
introduced by an agent.
COMPETITION
Currently, we compete with numerous other long distance resellers and
providers. We believe our significant competition will be independent resellers
and providers including providers of competing Internet voice telephony systems.
Other competitors may include large telephone carriers like AT&T, MCI/WorldCom
and Sprint, as well as other providers of international long distance services
like STAR Telecommunications, Inc., and corporate alliances that provide
wholesale carrier services, like "Global One." In addition, we have a
non-exclusive affiliate arrangement with ITXC, therefore ITXC is free to appoint
other affiliates which may result in our facing substantial competition from
within the ITXC system. Many of our competitors are likely to be significantly
larger and have substantially greater market presence, as well as greater
financial, technical, operational, marketing and other resources and experience
than we do. We compete for customers in the telecommunications markets primarily
based on price and, to a lesser extent, the type and quality of service offered.
Increased competition could force us to reduce our prices and profit margins if
our competitors are able to procure rates or enter into service agreements that
are comparable to or better than those we obtain, or are able to offer other
incentives to existing and potential customers.
EMPLOYEES
As of April 15, 2000 we had a total of forty-nine employees all of whom
were full time. Of these we had nine full-time employees in New York, eight of
whom are engaged in executive and technical functions and one of whom is a
clerical employee. We have an additional 40 full time employees in the United
Kingdom as a result of our United Kingdom acquisitions. We also utilize
consultants.
TECHNICAL FACILITIES
We have an oral arrangement with an unaffiliated party by which our
technical equipment is housed and maintained at this party's colocation facility
in New York City located on the same block as our headquarters. All equipment,
connections and telephone lines between us and our customers and overseas
providers are presently located at this facility. Prior to establishing our own
network operation center at this location, we utilized the owner's equipment to
effect these connections.
We have recently entered into a lease in Miami, Florida where we intend to
keep additional equipment.
OMNICOM
In May 1999 we acquired all the shares of Omni Communications, Inc. Since
it was formed in May 1994, "Omnicom" has been an authorized agent of UniDial
Communications located in New York City. Omnicom had nominal assets and minimal
annual revenues. UniDial is a telecommunications reseller. Resellers buy
wholesale services from major carriers like IXC, Sprint, Internet Service
Networks and local Bell companies to provide a spectrum of services to
customers. We believe that the acquisition of OmniCom complements our line of
telecommunications products and will accelerate our entry into the area of
switched and dedicated phone services. These include 1+ outbound and toll free
inbound calls, networking, frame relay, wireless phones and service, Internet
access, debit cards, billing software, multi-media conferencing and network
marketing services. We also plan to feature UniDial services on our website,
http://www.teltran.com, in order to attract more small to
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mid-size businesses to our retail marketplace. Omnicom was acquired for 126,788
shares of our common stock. Even though the principal shareholder of Omnicom was
also an officer of Teltran, we believe the acquisition was made on arm's length
terms. Omnicom presently utilizes our offices.
UNITED KINGDOM OPERATIONS
We have determined to form a new United Kingdom subsidiary to hold, manage
and coordinate all our United Kingdom subsidiaries. As of March 16, 2000, we had
three subsidiaries, ChannelNet, Ltd., Internet Protocols, Ltd. and our recently
formed Teltran Web Factory Ltd.
CHANNELNET
We acquired all of the outstanding shares of ChannelNet Ltd. common stock
on August 16, 1999, effective as of June 1, 1999, from an unaffiliated third
party in an arm's length transaction. ChannelNet was incorporated in May 1999
under the laws of England and Wales and is located in Manchester in the United
Kingdom. ChannelNet provides premium rate telecommunications services to
customers in the United Kingdom. Premium rate services are the United Kingdom
equivalent of "900" number services in the United States. The dominant services
are or will be provided primarily for Tarot card readings, voice messages,
charitable solicitations and other non-adult services. At the time of
acquisition, ChannelNet had insubstantial assets and liabilities. A primary
reason for the acquisition was ChannelNet's potential as an affiliate of the
OzEmail network. ChannelNet was the affiliate of OzEmail in the United Kingdom
and Ireland and had received indication that it would be appointed an affiliate
in additional countries. We entered into an agreement with the former
stockholder of ChannelNet to purchase telecommunications equipment that is
necessary for the operation of the ChannelNet business. Under that arrangement
we will use the equipment in our operation of the ChannelNet business but will
not acquire title to it until we complete making payments of approximately
$535,000 in the aggregate by February 2001.
In consideration of our acquisition of the ChannelNet stock, we issued to
the former shareholder of ChannelNet 94,500 shares of our common stock and we
will be obligated to issue additional shares based upon earnings generated by
the acquired ChannelNet business operations during the period of September 1999
through February 2001. In addition, we entered into an employment agreement with
the key employee of ChannelNet for the operation of the ChannelNet business.
This agreement provides in part that we will issue to that individual shares of
our common stock based on the future earnings of the ChannelNet business.
ChannelNet has entered into an agreement with Norweb Telecom Limited, a
national telecommunications network operator in the United Kingdom, indicating
the intent of the parties to work together to develop opportunities in Internet
telephony. As a result of this relationship, traffic can originate in the United
Kingdom and Ireland for worldwide distribution over Teltran's Internet telephony
network. Furthermore, traffic originating in other parts of the world can also
be terminated in the U.K. Teltran and Norweb are exploring additional ways to
take joint advantage of their geographic reach, technical expertise and
distribution capabilities to offer additional services and to reach additional
customers. In connection with this agreement, Norweb and ChannelNet entered into
an agreement on November 23, 1999. Under the latest agreement with Norweb,
ChannelNet will provide telecommunications services to Norweb, enabling Norweb,
in turn, to provide Voice-over-Internet Protocol services to a customer.
Services under this agreement has not commenced.
We have an understanding with DappaNet plc evidencing the intent of each
party to work together for a two year period. DappaNet is a United Kingdom-based
company engaged in hosting and design services and e-commerce activities, among
other things. DappaNet has provided advice to our joint venture,
RecordsToGo.com, and is providing advisory services in connection with our
United Kingdom subsidiaries.
INTERNET PROTOCOLS LTD.
In December 1999, we acquired Internet Protocols Ltd. Internet Protocols
Ltd., which is based in the United Kingdom, commenced operations in 1999 as a
provider of equipment and services to Internet service providers. Internet
Protocols Ltd. provides Internet access services and installs wiring permitting
customers to connect their computers to the Internet or to communicate with
other computers so that the customer of the Internet provider can "dial up" and
obtain access to the provider. Its primary activity is seeking revenue-sharing
arrangements it can enter into with its customers for providing the use of
equipment to access the Internet.
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Internet Protocol entered into an arrangement with Global 1 pursuant to
which Global 1 will provide network information to facilitate access to the
internet for Internet Protocol customers. Global 1 has also agreed to resell
co-location facilities in the London Switch. Internet Protocols will also market
Global 1 internet provider service. We believe the rates provided by Global 1 to
Internet Protocol are favorable and that relationship will be beneficial to us
because it has the potential to result in additional revenues to us.
WEB FACTORY
On March 15, 2000, our newly formed United Kingdom subsidiary, Teltran Web
Factory Ltd., acquired all the assets of the network business conducted by The
Web Factory Ltd., a U.K. affiliate of Datatec, a South African corporation. We
also acquired certain financial software developed by the seller but not yet
commercially sold. The network assets consists of equipment, including switches
and servers, various customer contracts and the brand name in the United Kingdom
"The Web Factory." The purchase price is (pound)3,000,000 (approximately
$4,800,000) of which we paid (pound)750,000 (approximately $1,200,000). The
balance is due in installments payable through December 31, 2000. The payment of
our indebtedness is secured by the acquired assets. The Company intends to
continue the operations formerly conducted by The Web Factory Ltd. We are
exploring ways to intergrate the operations of this subsidiary and Internet
Protocols.
ANTRA/RECORDSTOGO.COM
In April 1999, we exchanged 2,000,000 of our shares for 2,000,000 shares of
Antra Holding Group Inc. As a result of the transaction Antra may be deemed a
principal stockholder of Teltran. Antra is a company engaged through
subsidiaries in the music business and whose stock is publicly traded. We made
the exchange because we intended to enter into ventures with Antra and because
we thought that their stock was of comparable value. To protect each party, the
parties agreed that there would be an adjustment in the number of shares owned
by an entity if there was a disparity in the relative market value of the two
entities on January 1, 2000. As a result of this adjustment, we received an
additional 800,000 shares of Antra's common stock.
With Antra, we have formed a corporation to establish a website for the
sale of music recordings. The board of directors of this corporation consists of
two members, one nominated by each of Teltran and Antra. Both the website and
the joint venture corporation are named Recordstogo.com. We and Antra have each
contributed at least $75,000 to the joint venture and each now owns 49% of the
joint venture corporation's stock. Each of us have provided services to the
venture, which will be reimbursed from the funds of the joint venture. We and
Antra are each obligated, if requested upon unanimous decision of the board of
directors, to contribute an additional $175,000 to this venture. We and Antra
may also make additional voluntary contributions to the joint venture from time
to time. The remaining two (2%) percent of the shares are owned by one of the
joint venture's suppliers who is not affiliated with either Teltran or Antra.
Recordstogo.com, Inc. has entered into two agreements with distributors of
music recordings for the distribution of records owned by these entities over
the internet and through the website. The records in each case are not being
currently marketed by their original producer or distributor. The
Recordstogo.com website (http://www.recordstogo.com/) has been designed and
completed and may be viewed on the Internet. Recordstogo.com., Inc. has retained
an agency to further develop the joint venture's marketing strategy and has been
actively seeking relationships with a variety of different businesses that can
provide content for or direct potential customers to the Recordstogo.com
website. The joint venture corporation is also in the process of completing the
appropriate databases and fulfillment capabilities at the warehouse of one of
its suppliers. The joint venture commenced commercial operations in May 2000.
INTERNET PORTAL
Because it presented an opportunity that could be accomplished
inexpensively, in February 1999 we instituted a web portal. A portal is a
website which enables the user to access various other web sites without
multiple steps, therefore saving the user time. We believe that maintaining an
Internet portal will assist us in establishing a presence as an Internet service
provider. While maintaining a website is not related to our Internet telephony
business, we believe creating an Internet environment will enhance the brand
recognition of the "Teltran" name and could potentially establish us as a
well-regarded Internet brand. Our Internet portal contains
8
<PAGE>
direct links to many commercial sites. We have affiliate arrangements with
retailers under which we will receive a percentage of revenues generated by
consumers accessing the site through our portal.
Teltran now offers unlimited Internet access service for retail customers
via the www.Teltran.com web portal.
We also expect Recordstogo.com, to increase our revenues through the sale
of records, advertisements and music merchandise and to also attract more
traffic to our web portal through cross-linking.
As part of its portal Teltran inaugurated "Chat-over-IP" with LANSource
Technologies on an informal basis. LANSource is now a subsidiary of 3Com
Corporation. The "Chat-over-IP" website (http://chatoverip.com) offers an
opportunity for people interested in technological and business issues relating
to "XoIP" services (e.g., Voice-over-Internet Protocol and Fax-over-Internet
Protocol). Vendors to the XoIP industry contribute to or sponsor the site. Past
sponsors include Microsoft, 3Com, Cisco, Hewlett-Packard, Cardiff Software,
Brooktrout and Dialogic. Teltran has no other relationship with either LANSource
or 3Com. The chatoverip.com website derives revenues from sponsorships and may
also derive revenues from banner advertising on the site and paid listings in
the site's directory of vendors. Chatoverip.com did not have revenues in 1999.
SEASONALITY
Our Internet telephony business is not subject to seasonal variations in
volume of calls. However, our Internet portal experienced a decline in traffic
during the summer of 1999, as compared to the preceding months. Management
believes that the decline is due largely to the increased amount of time many
Internet users spend outdoors during the warmer weather.
ITEM 2. DESCRIPTION OF PROPERTY.
Our executive offices are located at One Penn Plaza, New York, New York
10119, where, under a new lease, we occupy approximately 4,800 square feet
through March 31, 2010. The annual base rental for this space is approximately
$220,000. Teltran will be responsible for utilities and other charges.
ChannelNet occupies an office at Enterprise House, 15 Whitworth Street
West, in Manchester, U.K. The facility is leased by the former stockholder of
ChannelNet, which is obtaining an assignment of the lease for the premises to
ChannelNet.
Internet Protocols Ltd. has a 10-year lease, commencing in early 2000, for
the space where it will house its equipment. The lease covers 1050 square feet
at the London Switch, a facilities-management center. Internet Protocols Ltd.
will have 80 racks for equipment of which it presently contemplates utilizing
four to five racks. Internet Protocols Ltd. is permitted to provide any space it
will not use to its customers for a fee. Internet Protocols Ltd. also maintains
equipment at other locations, either with companies that provide it with
services or under various short-term leases.
Teltran leases approximately 800 square feet in a colocation facility in
Miami, Florida for $6,000.00 per month in base rent. This space is used
exclusively for operating telecommunications equipment and providing
telecommunications services. The lease runs for 3 years, from March 1, 2000
through February 28, 2003. The lease may be extended for an additional 3-year
period, at Teltran's option.
See "Equipment" and "U.K. Subsidiaries," in "Item 1. Description of
Business," for a description of equipment.
ITEM 3. LEGAL PROCEEDINGS.
In June 1999 an action was commenced against us in the United States
District Court for the Southern District of New York entitled: Silverman et. al.
v. Spectratek, Inc. et. al. The plaintiffs included, Steven Silverman, Joseph P.
Mallon and Scott Broadbent. The defendants included Spectratek, Inc., one of our
predecessors, and Byron Lerner, our chief executive officer.
9
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The plaintiffs claim that Spectratek issued and caused to be issued
misleading statements concerning the status of various contracts Spectratek was
prepared to enter into. As a result of these statements, the plaintiffs
purchased 156,000 shares of Spectratek's stock and suffered damages of an
unspecified amount. Teltran denies all liability since it had actually entered
into arrangements that were not consummated due to its inability to obtain
equipment at the time. We do not believe we have any liability to the plaintiffs
and will vigorously defend this action. We made a motion to dismiss this action,
which was granted in October 1999. The plaintiffs have filed an amended
complaint which we again moved to dismiss. This motion was denied in April 2000.
We are not aware of any other lawsuits, or pending lawsuits, to which we
are party or to which our property is subject. However, in an unrelated matter,
a claim has been made by a corporation for $304,000 representing amounts
advanced on our behalf to a potential reseller of telecommunications time to us.
This amount was to be held in escrow until commencement of the contract between
ourselves and the reseller by an agent appointed by the potential reseller. The
contract was aborted and the escrow agent failed to return the escrow funds. The
claimant has requested the payment of the amount advanced with interest and
alternately a participation in revenues which it believed arose from the
relationship with the reseller.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Quotations for our common stock are listed in the "pink sheets" maintained
by the National Quotation Bureau. Prior to April 19, 2000 the stock was traded
on the OTC Bulletin Board but was removed because we are still in the process of
handling comments of the Securities & Exchange Commission to our initial
filings. We had applied to the American Stock Exchange and then to the NASDAQ
National Market both of which applications were rejected. The NASDAQ application
was rejected recently because our stock price declined during the period our
stock was being removed from the bulletin board. We intend to reapply to the OTC
Bulletin Board and then to the NASDAQ. We must appoint at least three
independent directors to serve an audit and compensation committee of the board.
No assurance can be provided that our stock will be accepted for relisting on
the bulletin board for trading on NASDAQ. On June 19, 2000 the high bid price
for our common stock in the "pink sheets" was $1.90 and the low asked price was
$1.80 on that date.
Set forth below are the high and low closing bid quotations for our common
stock for the periods indicated as reflected on the OTC Bulletin Board. The
quotations reflect interdealer prices without retail mark-up, mark-down or
commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
---------------------------------------------------------------------------- ------ -----
<S> <C> <C>
December 31, 1999........................................................... $11.50 $6.00
September 30, 1999.......................................................... 16.50 6.31
June 30, 1999............................................................... 9.69 1.75
March 31, 1999.............................................................. 2.60 .60
December 31, 1998........................................................... 1.19 .43
September 30, 1998.......................................................... 1.00 .75
June 30, 1998............................................................... 2.94 1.88
March 31, 1998.............................................................. 3.13 .43
December 31, 1997........................................................... .13 .13
September 30, 1997.......................................................... .18 .11
June 30, 1997............................................................... .33 .22
March 31, 1997.............................................................. .65 .40
</TABLE>
As of April 11, 2000, there were approximately 293 recordholders of our
common stock, although we believe that there are more than thirty-five hundred
beneficial owners of our common stock.
DIVIDEND POLICY
We plan to retain most future earnings for use in our business.
Nevertheless we have adopted a semiannual dividend policy commencing in 1999 to
make a cash or stock distribution to holders of record as of a date to be
selected in March and September of each year. We have declared a 5% stock
dividend to holders of record on March 31, 2000 to be distributed April 14,
2000. Payment of dividends is within the discretion of our board of directors
and cash dividends will depend, among other factors, upon our earnings,
financial condition and capital requirements.
RECENT SECURITIES TRANSACTIONS
The following sets forth information relating to all of our unregistered
securities sold by us since December 31, 1995. All share numbers have been
adjusted retroactively to reflect a 1 for 20 reverse stock split on December 31,
1997.
On May 1, 1996, we issued an aggregate of 500,000 shares of common stock to
the stockholders of Teltran International in exchange for all of the outstanding
capital stock of Teltran International. A total of nine shareholders received
these securities. Of these, three were officers or directors of Teltran
International and the other six were accredited, institutional investors, all of
which Teltran believes are non-United States persons.
In June 1996 we issued 158,333 shares of our common stock in accordance
with Regulation 504 of the Securities Act of 1933 for approximately $950,000.
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In September, 1998 we issued 250,000 shares each to an affiliate of Byron
Lerner and to another officer and director in satisfaction of indebtedness of
$100,000. We believe the issuance of these shares is exempt from the
registration requirements under Section 4(2) of the Securities Act.
In May 1998 we issued 6,000,000 shares of our common stock to twenty
unaffiliated entities which collectively had the right to participate in our
future earnings under agreement. These investors acquired the shares for
investment. We believe the issuance of these shares is exempt from the
registration requirements under Section 4(2) of the Securities Act.
In August 1998 and February 1999 we issued convertible notes in the
aggregate principal amount of $850,000 to several foreign investors in a
transaction exempt under Rule 504. We obtained proceeds of $300,000 in the
August 1998 offering and $550,000 in February 1999 offering. In connection with
the transaction we issued warrants exercisable at $1.25 per share in August to
purchase 30,000 shares of common stock. In February 1999 we issued warrants
exercisable at $.625 per share to purchase an aggregate of 137,500 shares of
common stock. All of the notes have been converted and the corresponding shares
issued. All of these warrants have been exercised prior to April 8, 1999. We
received gross proceeds of approximately $975,000 from the sale of notes and
exercise of warrants.
In April 1999 we issued 2,000,000 shares of common stock to Antra Holding
Group Inc. in exchange for 2,000,000 shares of that corporation's shares.
Teltran believes that the transaction was exempt from the registration
requirements of the Securities Act under Section 4(2).
As of May 1999 we acquired all the shares of Omni Communications Inc. This
company is an authorized agent of UniDial Communications, which operates as an
independent network of telecommunications resellers. We issued 126,788 shares of
our common stock to the sellers, of which James Tubbs received 100,000 shares.
Mr. Tubbs is an officer and director of our company. Teltran believes the
issuance of these shares is exempt from the registration requirements of the
Securities Act of 1933 under Section 4(2). We have been advised that the only
issuance of this company's shares were to the three sellers, all of whom were
accredited investors.
In August 1999 Teltran issued 94,500 shares of common stock to the sole
stockholder of ChannelNet, Ltd., effective as of June 1, 1999. Teltran believes
the issuance of these shares is exempt from the registration requirements of the
Securities Act under Section 4(2). Prior to this acquisition by us, ChannelNet
in 1999 issued its shares to its sole stockholder in an offshore transaction. No
other ChannelNet shares were issued.
Teltran issued an aggregate of 3,307,500 options between December 1998 and
May 1999, all under Teltran's stock plans. All of these options were issued to
officers, directors, employees and consultants to Teltran all of whom were
familiar with Teltran's operation. Of the options Teltran issued 1,180,000
options in December 1998 with the balance issued between January and May 1999.
In December, 1999 the board of directors granted to Byron Lerner options to
purchase 400,000 shares, at an exercise price of $4.00 per share, as
compensation. The options are exercisable over a period of ten years.
In June 1999 Teltran issued a total of 316,499 shares of its common stock
in connection with a private placement of its securities. The Company agreed to
issue an additional 6,000 shares to a finder. An additional 776,529 warrants to
purchase our common stock at $6.00 per share were issued to finders. The
purchasers of the shares were accredited investors and Teltran believes this
transaction is exempt from the registration requirements of the Securities Act
under Section 4(2).
In December 1999, Teltran sold 625,000 shares for $8.00 per share and
issued warrants to purchase 2,600,000 shares at prices ranging from $8.00 to
$10.25 per share. Some of the persons who acquired shares and warrants in the
June 1999 transactions acquired additional shares and warrants. If the market
price of Teltran's shares approximately 60 days after a registration statement
covering the shares issuable upon exercise of the warrants is less than the
stated exercise price, the actual exercise price of these warrants will be
reduced. In March 2000, the holders of these shares agreed to eliminate one of
the reset provisions of their subscription agreements in exchange for a
reduction of the purchase price specified in the warrants to $6.625 per share
and an additional 208,331 shares of our common stock. The Company believes that
this transaction was exempt from the registration requirements of the Securities
Act under Section 4(2).
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In December 1999, the Company issued 37,500 shares to Dolores Miller, the
spouse of Martin Miller. Ms. Miller is required to pay $295,312 for these
shares. Martin Miller is a former director of the Company, having resigned in
January 2000. Mr. Miller denies beneficial ownership of the shares owned by
Ms. Miller.
As of December 18, 1999, Teltran acquired all of the issued and outstanding
shares of Internet Protocols Ltd., a company engaged in rendering services to
Internet service providers and others. Internet Protocols Ltd. enters into
arrangements in accordance with which it shares revenue or charges a fee for use
of its equipment. Teltran issued 1,481,566 shares in connection with the
acquisition.
At the time of the acquisition, Teltran issued an additional 83,886 shares
in escrow, which may be used to satisfy approximately $550,000 of indebtedness
of Internet Protocols Ltd. to its former stockholder. The Company believes that
the shares were issued under an exemption from the registration requirements of
the Securities Act under Section 4(2). See "Item 12. Certain Relationships and
Related Transactions--Certain Recent Securities Transactions."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
You should read the following discussion and analysis in conjunction with
the financial statements and related notes contained elsewhere in this report.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various known and unknown risks and uncertainties and Teltran cautions you that
any forward-looking information provided by or on behalf of Teltran is not a
guarantee of future performance. Our actual results could differ from those
anticipated by the forward-looking statements due to a number of factors, some
of which are beyond Teltran's control, including:
o the volatile and competitive nature of the telecommunications and Internet
industry;
o changes in domestic and foreign economic and market conditions;
o the effect of federal, state and foreign regulation on Teltran's business in
general and on the telecommunications and Internet industries;
o changes in technology;
o reduced telecommunication rates;
o delays of third parties in commencing service; and
o the impact of recent and future acquisitions on Teltran's business and
financial condition.
Teltran does not undertake any obligation beyond the requirements of the
federal securities laws to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any statement is made or
to reflect the occurrence of unanticipated events.
PLAN OF OPERATIONS
During 2000 our plan of operation is to:
o enter into and implement arrangements to provide wholesale customers
throughout the world with Internet telephony. We are negotiating
arrangements which, if implemented, would require us to expend money for
equipment purchases and the payment of various fees.
o seek to enter into arrangements to provide Internet telephony in additional
countries that will enable us to participate in revenues on both ends of a
call.
o establish a network facility and expand the services offered including "Fax
Over IP" and direct voice over IP to different countries.
o develop marketing strategies with Norweb, a national telecom network
operator in the UK, and utilize our alliance with them to expand our
Internet telephony network.
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o enhance our portal by providing additional related business services. These
including offering banner ads, sponsorship agreements and other types of
advertising. We will also seeks to develop additional sales affiliate
arrangements on our portal and continue to run live Internet.
o jointly operate RecordsToGo.com, for the sale of music. The venture has
entered into arrangements for the sale of records through the Internet.
o integrate Internet Protocols Ltd., Teltran Web Factory, Ltd. our newly
acquired subsidiaries in the United Kingdom with our recently created
holding company.
o promote and market our new Internet service provider service through our web
portal, www.Teltran.com. The service will be competitively priced and will
offer unlimited Internet access, free e-mail and free home pages to all
users.
o expand our sales staff for our UniDial services to solicit commercial
accounts. UniDial operates as an independent network of telecommunications
resellers. UniDial services will also be marketed to individuals via our
www.Teltran.com web portal.
o hire new employees as needed because of increased activity.
o continue to augment other aspects of our telecommunications business.
We cannot assure you that we will be able to successfully implement our
plan.
RESULTS OF OPERATIONS
Prior to April 1998 we were essentially a start-up venture. During 1998
most of our revenues were derived from acting as an OzEmail refile hub in the
United States. During 1999 these revenues were fully replaced by our successful
efforts in promoting our Teltran Internet telephony service as well as
establishing businesses for our web portal. Therefore comparisons between 1998
and 1999 will be of limited value.
Comparison of the Years Ended December 31, 1999 and December 31, 1998
During the year ended December 31, 1999, the Company had revenues of
$2,453,189 compared to revenues of $535,197 in 1998. The increase of 358% was
due in significant part to Internet telephony revenues and revenue from our
ChannelNet United Kingdom subsidiary. The latter revenues consisted primarily of
premium rate services. The revenues in the fourth quarter 1999 were affected by
the transition of Internet telephony operations from the OzEmail network to the
IXTC network. In addition, the transition was delayed by the fear of Y2K
problems.
Our gross profits increased in 1999 to $508,339 from $290,365 in 1998.
During this period, however, our gross profit margin declined from 54% to 21%.
The decline in gross profits margin arose because of the higher cost of
communications in 1999 compared to 1998 as well as reduced rates in countries we
provide Internet telephony services in 1999.
During 1999 our expenses increased to $2,605,024 from $709,757 in 1998. The
increase was primarily due to cost we incurred to service existing and
anticipated new business and to seek additional business. Salary and payroll
expense increased by approximately $595,000 from approximately $143,300 in 1998
to $738,397 in 1999. This resulted from increased remuneration to existing
officers and personnel and new hires. Professional fees increased by over
$311,500 from $49,500 in 1998 to approximately $361,000 in 1999. This increase
is primarily due to increased auditing and legal fees in connection with
reflects our new regulatory obligations as a reporting company and in connection
with our acquisitions. We incurred over $205,000 in advertising expenses in 1999
while having no expenditures for this purpose in 1998.
We incurred a loss on operations of $2,096,685 in 1999 compared to a loss
of $418,992 in 1998 as a result of the foregoing. We had net loss of $2,237,235
in 1999 compared to a net loss of 449,339 in 1998. Our net loss in 1999 reflects
the foregoing.
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CORRECTION TO PUBLIC ANNOUNCED RESULTS
In March 2000 we announced that our 1999 year end revenues were $5,671,887
and our loss for 1999 was $371,764. We then determined our 1999 revenues were
$2,453,189 and our 1999 loss was $2,239,920. As a result we found our 1999 nine
month revenues and loss of $2,815,908 and $157,923 respectively was $2,019,774
and $638,211.
A substantial part of the overstatement in the announcement for year end
results related to the treatment of gross billing of telecommunication services
provided by Channelnet in financial information which we believed was acceptable
to our auditors. The services of Channelnet are billed directly by the British
Telephone Company to the retail customer. Ultimately, Channelnet receives this
amount less charges of the telephone company and the network provider.
Initially, the entire amount billed to the customers account was treated as
gross revenues with the payments deducted. This treatment had no effect on our
net income. We determined to treat as revenue only the amount remitted to us by
the telephone company. This resulted in reduction of approximately $2,400,000 in
revenues.
The auditors also made adjustments finding that an account receivable was
included in the financial information provided by our subsidiary and their
independent accounting firm was overstated causing a reduction of revenues and
income of approximately $1,200,000. We also reserved an additional amount
against collection of $400,000 of this receivable. At the same time we reduced
our nine month revenue and income by approximately $794,000 with respect to this
same receivable.
While we do not believe we have done anything wrong, we have taken several
steps to make certain that errors of this type do not occur in the future. We
plan to retain another public accounting firm Rosthstein, Kass Comany, LLP to
become our outside auditors for the 2000 fiscal year. This firm, among other
things, will review our financial statements for quarters subsequent to the
first quarter. We have retained a new accounting firm for our Channelnet
subsidiary and appointed an experienced executive officer who recently joined us
with the acquisition of Web Factory to act in the future, as financial officer
of our United Kingdom subsidiaries. Finally, we are in the process of obtaining
a senior financial for the Company.
LIQUIDITY
We had a working capital of approximately $2,810,506 as of December 31,
1999 compared to a negative working capital of approximately $280,880 as of
December 31, 1998. We have financed our operations primarily out of private
financing. Since December 31, 1998 we received gross proceeds of over
$6,4000,000 from such financing. In December 1998 we received proceeds of
$650,000 from the sale of convertible notes and exercise of warrants. All the
notes have been converted into equity. As a result of that financing we have
been able to repay and terminate our factoring arrangement. In June 1999 we
completed a private placement of shares of common stock and received
approximately $1,240,000. We completed an additional private placement in
December 1999 and received approximately $5,550,000. Upon effectiveness of our
registration statement on Form SB-2 and in the absence of adverse changes, these
purchasers may pay us another $400,000 for additional shares.
The Company anticipates substantial capital and other expenditures during
the year 2000. The Company will require additional funds for equipment in
connection with the establishment of a network center in New York. It estimates
it will incur equipment costs of our $500,000 in connection with the operation.
It believes a portion of such cost may be satisfied by leasing arrangements.
While ITXC may provide additional equipment without charge for calls originating
over the IXTC network, the Company may have to purchase additional equipment to
complete calls. If it initiates additional types of telecommunications services
or establishes joint ventures in foreign countries, it may be required to obtain
additional equipment. The Company is required to make additional payments of
$3,600,000 in completing the purchase of Web Factory assets, funding its United
Kingdom operations, funding up to an additional $65,000 for Recordstogo and
$500,000 for officer salaries. If the Company cannot finance these costs from
operations it will be required to obtain additional financing. It is presently
exploring ways to obtain such additional financing. There is no assurance we
will be able to obtain funding on terms favorable to us if at all. If the
Company cannot obtain additional financing, it may have to curtail some
additional activities.
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CHANGES IN CAPITAL AND ACCUMULATED DEFICIT
Paid-in capital increased by approximately $18,792,711 during 1999. Of this
increase, of this amount $7,493,191 was attributable to the stock dividends we
issued in June and September 1999. Under generally accepted accounting
principles, we offset this entry by adding $7,494,456 to the accumulated deficit
and $1,260 to capital stock. An adjustment of $981 was made to reflect the
rounding of fractional shares issuable for the two stock dividends. As a result,
there is no overall effect on stockholder's equity on account of the
transaction. An additional $3,998,000 was added to paid-in capital with respect
to the shares we issued to Antra in April 1999 in exchange for an equivalent
amount of our shares. We had originally valued the Antra shares at $3.00 per
share or an aggregate of $6,000,000. We subsequently adjusted the value to
$4,000,000 (including $2,000 of capital). This was in recognition of the
non-liquidity, thin market and restriction on sale of these shares. Reference is
made Footnote 9 of the Company's financial statements included in this report.
Additional entries were made to paid-in capital to reflect amounts
allocated for the issuance of additional shares: $674,484 for shares issued upon
conversion of notes; $244,732 for shares issued upon the exercise of warrants;
$188,905 for shares issued in connection with the ChannelNet acquisition; and
$6,007,565 for other shares, including shares issued in the private placements
in June and November 1999.
Our deficit increased by $9,734,376 even though our loss was only
$2,239,920 for the year. The significant increase in our accumulated deficit was
in substantial part attributable to the stock dividends, as discussed above.
YEAR 2000 DISCLOSURE
Prior to the year 2000 many businesses and institutions reviewed and
modified their computer systems to ensure they accurately process transactions
relating to the Year 2000 and beyond. This effort was necessary because many
existing computer systems and microprocessors with date functions, including
those in non-information technology equipment and systems, use only two digits
to identify a year in the date field and assume that the first two digits of the
year are always "19." Consequently, on January 1, 2000, some computers that were
not Year 2000 compliant read the year as 1900. Computer systems that calculate,
compare or sort using the incorrect date may malfunction causing disruption of
operations, including a temporary inability to process transactions, send
invoices or engage in other normal business activities. Our failure to address
potential Year 2000 malfunctions in our computer and non-information technology
equipment and systems could have resulted in our suffering business
interruptions, financial loss, harm to our reputation and legal liability. We
nevertheless experienced no potential liabilities or stoppages in our business
as a result of the new millennium. Because of the fear of the possible
consequences of a Y2K problem, the implementation of our operations into the
ITXC network was delayed in late 1999.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements beginning on Page F-1, filed as part of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
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TELTRAN INTERNATIONAL GROUP, LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH
INDEPENDENT AUDITORS' REPORT
17
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INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Teltran International Group, Ltd. and Subsidiaries
We have audited the consolidated balance sheet of Teltran International Group,
Ltd. and Subsidiaries as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the two years
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.
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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as, evaluating the overall financial statements
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 Teltran
International Group, Ltd. and Subsidiaries as of December 31, 1999 and the
results of its operations and its cash flows for the two years then ended in
conformity with generally accepted accounting principles.
LIEBMAN GOLDBERG & DROGIN LLP
Garden City, New York
March 10, 2000
18
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TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Part I Financial Information
Consolidated Balance Sheet at December 31, 1999................................................. F-1
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998.................................................................... F-2
Consolidated Statements of Stockholders Equity for the years ended
December 31, 1999 and 1998.................................................................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998.................................................................... F-4
Notes to Consolidated Financial Statements...................................................... F-5 - F-12
</TABLE>
19
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
Current Assets:
Cash............................................................................................. $ 3,823,468
Accounts receivable--net of allowance
for doubtful accounts of $398,067............................................................. 978,037
Prepaid expenses and other current assets........................................................ 192,466
------------
Total current assets........................................................................ 4,993,971
------------
Property and Equipment
Machinery & Equipment, net of accumulated depreciation........................................... 1,094,816
------------
Other Assets:
Investment (Cost method)......................................................................... 4,000,000
Security deposits................................................................................ 50,705
Goodwill--net of amortization.................................................................... 229,564
------------
Total other assets.......................................................................... 4,280,269
------------
Total assets................................................................................ $ 10,369,056
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Loan payable..................................................................................... $ 97,818
Accounts payable, accrued expenses and taxes payable............................................. 2,069,556
Corporation taxes payable........................................................................ 16,090
------------
Total current liabilities................................................................... 2,183,464
------------
Long-Term Liabilities:
Loans payable--stockholders'..................................................................... 1,245
Long term debt................................................................................... 50,449
------------
Total long-term liabilities................................................................. 51,694
------------
Total liabilities........................................................................... 2,235,158
------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value per share, 5,000,000 shares
authorized and -0- issued and outstanding
Common stock, $.001 par value per share, 50,000,000 shares
authorized and 16,420,983 and 7,697,295 issued
and outstanding, respectively................................................................. 16,421
Additional paid in capital in excess of par value................................................ 20,795,070
Note receivable.................................................................................. (391,219)
Stock subscription receivable.................................................................... (295,312)
Deficit.......................................................................................... (11,988,871)
Translation adjustment........................................................................... (2,191)
------------
Total stockholders' equity.................................................................. 8,133,898
------------
Total liabilities and stockholders' equity.................................................. $ 10,369,056
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
Revenues:
Sales........................................................................... $ 2,453,189 $ 535,197
Cost of Sales:
Purchases....................................................................... 1,944,849 244,832
----------- ---------
Gross profit...................................................................... 508,339 290,365
----------- ---------
Expenses:
Salaries........................................................................ 738,397 143,356
Outside services................................................................ 50,331 271,850
Professional fees............................................................... 361,031 49,531
Bad debts....................................................................... 398,067 --
Fees--other..................................................................... 95,039 9,384
Payroll taxes................................................................... 26,167 14,878
Leasing expense................................................................. 13,834 11,446
Travel.......................................................................... 168,257 93,701
Insurance....................................................................... 41,297 28,863
Rent............................................................................ 153,440 48,834
Office expense.................................................................. 21,208 3,435
Miscellaneous................................................................... 25,089 3,908
Maintenance costs............................................................... 2,030 --
Printing........................................................................ 39,825 --
Commissions..................................................................... 21,538 --
Depreciation.................................................................... 6,785 --
Registration fees............................................................... 16,135 --
Business development............................................................ 70,304 --
Telephone....................................................................... 140,532 6,088
Contributions................................................................... 1,450 --
Advertising..................................................................... 206,709 --
Joint venture expenses.......................................................... 4,150 --
Amortization expense............................................................ 6,094 24,083
----------- ---------
Total expenses............................................................... 2,607,709 709,357
----------- ---------
(Loss) from operations............................................................ (2,099,370) (418,992)
Interest expense--net........................................................... 17,154 29,959
----------- ---------
(Loss) before other expense and provision for income taxes........................ (2,116,524) (448,951)
Other expense:
(Loss) from joint venture....................................................... (104,653) --
----------- ---------
(Loss) before provision for income taxes.......................................... (2,221,177) (448,951)
Provision for income taxes...................................................... 18,743 388
----------- ---------
Net (loss)........................................................................ $(2,239,920) $(449,339)
=========== =========
Net (loss) per share of common stock based upon 11,845,357 and 6,929,082 (weighted
average) shares issued, respectively............................................ $ (0.19) $ (0.06)
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
---------------------- IN EXCESS OF
SHARES AMOUNT PAR VALUE DEFICIT
----------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Balance--January 1, 1998............................... 915,637 $ 916 $ 1,501,928 $ (1,805,156)
Issuance of shares re:
joint venture termination............................ 6,000,000 6,000 284,000 --
Issuance of shares re:
conversion of debt................................... 281,658 281 116,931 --
Issuance of shares re:
payment of stockholders' loans....................... 500,000 500 99,500
Net (loss) for the period.............................. -- -- -- (449,339)
----------- ------- ------------ -------------
Balance--December 31, 1998............................. 7,697,295 7,697 2,002,359 (2,254,495)
Issuance of shares re:
conversion of debt................................... 1,835,033 1,835 674,484
Investment: Omnicom of NY Inc.......................... 115,000 115
Writedown of investment:
Omnicom of NY Inc.................................... (24,957)
Issuance of shares re:
warrants (conversion of debt)........................ 167,500 167 98,270
Issuance of shares re:
Private placement.................................... 278,999 279 1,008,190
Issuance of shares re:
Warrants exercised................................... 37,500 38 146,462
Investment............................................. 2,000,000 2,000 3,998,000
Issuance of shares re:
acquisition--Channelnet.............................. 94,500 95 188,905
Stock dividend......................................... 585,000 585 2,596,815 (2,597,400)
Stock dividend......................................... 675,456 675 4,896,381 (4,897,056)
Issuance of shares re:
Private placement.................................... 625,000 625 4,524,375
Stock issued to employees exercising stock
options.............................................. 706,758 707 390,511
Investment: Internet Protocols......................... 1,565,442 1,565 15,151,914
Writedown of investment--Internet Protocols............ (15,151,914)
Issuance of stock for stock subscription............... 37,500 38 295,274
Net (loss) for the period.............................. (2,239,920)
----------- ------- ------------ -------------
Balance--December 31, 1999............................. 16,420,983 $16,421 $ 20,795,070 $ (11,988,871)
=========== ======= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss)......................................................................... $(2,239,920) $(449,339)
Adjustment to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization expense............................................ 12,879 24,083
(Loss) from joint venture........................................................ 104,653 --
(Increase) in accounts receivable................................................ (883,741) (94,296)
(Increase) in prepaid expenses and other current assets.......................... (192,466) --
(Increase) in goodwill........................................................... (198,070) --
(Increase) in security deposits.................................................. (50,705) --
Decrease (increase) in deferred financing costs.................................. 19,797 (55,875)
Cash (repayments) received--factor............................................... (65,193) 65,193
Increase in accounts payable, accrued expenses and taxes payable................. 1,982,555 69,112
----------- ---------
Net cash (used in) operating activities....................................... (1,510,210) (441,122)
----------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment............................................... (1,101,512) --
----------- ---------
Cash Flows from Financing Activities:
(Decrease) Increase of convertible debentures payable............................ (180,488) 180,488
(Decrease) in notes payable...................................................... -- (250,000)
Decrease in loans payable--stockholders.......................................... -- 102,865
Conversion of convertible debenture--stock issued................................ 676,319 119,512
Decrease in loan payable......................................................... 47,818 (50,000)
Proceeds from loan payable....................................................... 107,747 50,000
Exercise of warrants............................................................. 244,937 --
Private placement................................................................ 5,533,469 --
Issuance of stock for notes payable.............................................. -- 290,000
----------- ---------
Net cash provided by financing activities..................................... 6,429,802 442,865
----------- ---------
Net increase in cash............................................................... 3,818,079 1,743
Cash--January 1,................................................................... 5,389 3,646
----------- ---------
Cash--December 31,................................................................. $ 3,823,468 $ 5,389
=========== =========
Supplemental Disclosures:
Income tax....................................................................... $ 625 $ 625
=========== =========
Interest paid.................................................................... $ 37,692 $ 29,959
=========== =========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Non-cash issuance of common stock................................................ $17,246,526 $ --
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--OPERATIONS:
Nature of Business:
Teltran International Group, Ltd. through its wholly owned Subsidiaries
("the Company") provides services for state of the art telecommunications.
Specifically, the Company operates as both an international and domestic
reseller of telecommunications, a provider of internet telephoning and the
continued development of related interest business such as a web portal. During
the year, the Company acquired two subsidiaries in the United Kingdom and
intends to form a new United Kingdom subsidiary to manage and coordinate all of
their United Kingdom subsidiaries.
Effective March 1, 1996, the shareholders of Teltran International Inc.
("the Subsidiary"), a Delaware corporation, completed a stock exchange with
Spectratek Inc., a Utah corporation, whereby all the common shares of the
subsidiary, were exchanged for 10,000,000 common shares of Spectratek, par value
$.001. The 10,000,000 shares represented approximately 67% of the then total
issued and outstanding 15,145,491 shares of Spectratek Inc.
On October 6, 1997, Spectratek merged into a newly formed Delaware
corporation; Teltran International Group, Ltd., becoming the surviving publicly
trading entity.
Prior to 1998, the Company was engaged in attempts to develop their
business and did not receive any significant revenues.
Except as otherwise indicated by the context, references to "the Company"
refer to Teltran International Group, Ltd. and its subsidiaries.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries. Intercompany balances and transactions have
been eliminated.
The Company acquired all the outstanding shares of Omnicom of New York Inc.
in exchange for 115,000 shares of Teltran common stock. At the time of the
acquisition, Omnicom had insubstantial assets and liabilities.
Teltran acquired all of the outstanding common stock of ChannelNet, Ltd. in
exchange for 94,500 shares of Teltran's common stock. Teltran may also be
obligated to issue additional shares based upon earnings generated by the
acquired subsidiary during the period September 1999 through February 2001. At
the time of the acquisition, ChannelNet had insubstantial assets and
liabilities.
The Company also entered into an agreement with the former stockholder of
ChannelNet to purchase equipment necessary for the operation of ChannelNet's
business. Teltran also entered into an employment agreement with a key
ChannelNet employee for the operation of the ChannelNet business. The agreement
provides in part for the issuance of Teltran shares based on the future earnings
of ChannelNet.
Additionally, on December 18, 1999, Teltran acquired all the outstanding
shares of Internet Protocols Ltd., a provider of equipment and services to
internet service providers. Teltran is required to transfer approximately
$3,000,000 to Internet Protocols Ltd. and issue 1,565,442 shares of its common
stock to the shareholders of Internet Protocols Ltd. in exchange for their stock
in Internet Protocols Ltd,. Subsequent to the completion of this transaction and
after December 31, 1999, the parties have agreed in principle to substantially
modify this purchase based upon the downward reevaluation of the assets acquired
and the inability to determine the true, if any goodwill, factor of Internet
Protocols Ltd. Internet Protocols Ltd. is a development stage company and
realized minimal sales in 1999.
F-5
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Development Stage Activities and Operations:
Prior to April 1998, the Company (Teltran) was a development stage company.
Since the Company now has continuing business revenues, comparative financial
information does not include losses accumulated during the development stage
period.
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $4,000,000 after limitations based on changes in ownership.
The Company adopted Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share." The Statement established standards for computing
and presenting earnings per share (EPS). It replaced the presentation of primary
EPS with a presentation of basic EPS and also requires dual presentation of
basic and diluted EPS on the face of the income statement. Basic loss per share
was computed by dividing the Company's net loss by the weighted average number
of common shares outstanding during the period. There is no presentation of
diluted loss per share, as the effect of common stock options, warrants and
convertible debt amounts are antidilutive. The weighted average number of common
shares used to calculate loss per common share during 1999 and 1998 was
11,845,357 and 6,929,082 respectively.
Income Taxes:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company
to recognize income tax benefits for loss carryforwards which have not
previously been recorded. The tax benefits recognized must be reduced by a
valuation allowance in certain circumstances. The benefit of the Company's net
operating loss carryforwards have been reduced 100% by a valuation allowance.
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforwards...................... $ 4,114,217 $ 2,241,245
=========== ===========
Deferred Tax Liabilities: 1,398,834 762,023
Valuation Allowance................................... (1,398,834) (762,023)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1999, the Company has approximately $4,000,000 of net
operating loss carryforwards for income tax purposes, which expire 2016 through
2019.
At December 31, 1999, the Company's net deferred tax assets were fully
offset by a valuation allowance. The Company will continue to assess the
valuation allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the remaining net deferred tax assets will
be recognized in the future.
F-6
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Income Taxes (Continued):
Teltran International Group, Ltd. and Subsidiaries Deferred Taxes--1999:
<TABLE>
<S> <C> <C>
NOL from 1998........................................... $2,241,245
Current Year NOL........................................ 1,872,972
----------
Total................................................... 4,114,217
Rate.................................................... 34%
Deferred Tax............................................ $1,398,834
Less 1998 Taxes Payable................................. --
----------
Net Deferred Taxes...................................... $1,398,834
==========
1997 Federal NOL Carryover.............................. $1,801,606
1998 Operating Loss..................................... 439,639
----------
NOL Carryover to 1999................................... $2,241,245
==========
</TABLE>
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those amounts.
Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value information, whether or not recognized in
the balance sheet, where it is practicable to estimate that value. The carrying
value of cash, cash equivalents, accounts receivable and notes payable
approximates fair value.
Revenue Recognition:
Telecommunication revenues from services provided are recognized and billed
as services are performed.
Revenues can vary, due to factors including call volume fluctuations,
particularly in regions with relatively high per minute rates; the addition or
loss of major customers, whether through competition, merger, consolidation or
otherwise; and financial difficulties of major customers; pricing pressure
resulting from increased competition, technical difficulties or failures of
portions of the provider may impact the ability to provide service to customers.
Additionally, technical difficulties with the internet network, web portal, etc.
may be responsible for revenue variations.
F-7
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Major Customer:
During the year ended December 31, 1998, approximately 70% of the company's
revenue was from one customer. Also, 65% of accounts receivable were from this
customer who also was factored.
Advertising Costs:
Advertising costs are expensed as incurred and were $206,709 in 1999 and 0
in 1998.
Goodwill:
Goodwill is stated at cost and is amortized on a straight line basis over a
life of 15 years. Amortization expense is $6,094 for the year ended
December 31, 1999.
NOTE 3--PROPERTY AND EQUIPMENT:
Property and equipment--net consists of computer equipment and furniture at
a cost of $1,101,512 less depreciation of $6,696. The estimated useful lives of
the assets are 3-5 years.
NOTE 4--RELATED PARTY TRANSACTIONS:
On May 1, 1999, the company acquired all the outstanding shares of Omnicom
of New York Inc. from Mr. James Tubbs, Executive Vice President, Chief Financial
Officer and a director of the Company. The agreement called for the issuance of
115,000 shares of common stock (126,788 after the two stock dividends) and is
reflected in the consolidated statements of stockholders' equity.
In December 1999, the company issued 37,500 shares to Dolores Miller, the
spouse of Martin Miller. Ms. Miller is required to pay $295,312 for these
shares. Martin Miller is a former director of the company, having resigned in
January 2000.
NOTE 5--INVESTMENT IN JOINT VENTURE:
During the year ended December 31, 1999 Teltran invested $75,000 as their
initial investment in a joint venture with Antra Holdings Group Inc. The joint
venture, known as Recordstogo.Com will be utilized as a vehicle to sell records
belonging to an unaffiliated third party. Revenues will be generated from
numerous sources that are part of the joint venture website. These include hard
to find records, memorabilia, old record albums, music downloads in MP3 and
other formats. As of December 31, 1999, Teltran's share of the joint venture
loss was $104,653. Teltran has not advanced a working capital requirement of
$75,000 and $29,653 of loss over their initial investment, is a liability.
NOTE 6--CONVERTIBLE DEBENTURES PAYABLE:
In August 1998, the Company issued $300,000 of convertible debentures due
August 14, 1999 to non-related parties. The debentures accrued interest at 10%.
The debentures were convertible into the Company's stock at $1.25 or 70% of the
lowest closing bid price, which was approximately $.50, of the common stock, 30
trading days preceding the conversion date. During the years ended December 1999
and 1998, $730,488 and $119,512, respectively, of debentures were converted to
2,116,691 shares of common stock. In connection with the transaction, the
Company issued 30,000 warrants to purchase 30,000 shares of common stock at
$1.25 per share. Financing costs of this transaction were deferred, and
amortized to the convertible debentures conversion date.
F-8
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 7--NOTES PAYABLE:
Prior to 1998, the Company received a loan in the amount of $50,000. The
loan was from a non-related party (Fiscal Concepts, Inc.) and the note stated
that no interest was to be paid. During 1998, the repayment due date was
extended until December 15, 1999. Since it was anticipated that the loan would
be repaid within one year and there was no interest due; imputed interest in
accordance with APB#21 was not calculated. On December 15, 1999, the loan was
extended until March 31, 2000.
In November 1997, the Company entered into a joint venture agreement with a
group of unrelated foreign investors which provided for their participation of
future profits of the Company in return for cancellation of indebtedness. In
June 1998, the Company issued an aggregate of 6,000,000 shares to these
investors in consideration of the termination of the joint venture.
NOTE 8--DUE TO FACTOR:
In May 1998, the Company entered into a factoring agreement which was
terminated in February 1999. The Company financed the accounts receivable of its
major customers and used advances from the factor ($509,036 before customer
repayments) to pay operating expenses as well as vendor purchases. Upon
termination of the factoring agreement the outstanding balance was paid in full.
NOTE 9--STOCKHOLDERS' EQUITY:
During the period August 1998 to December 31, 1999, the Company issued
2,116,691 shares of its common stock upon the conversion of $730,488 and
$119,512 of the debentures referred to in Note 6.
Relating to the same transaction, the Company issued 167,500 shares when
warrants that were issued as part of the convertible debenture transaction were
exercised.
The Company also issued 500,000 shares of its common stock to related
parties of an officer and an officer as repayment of $100,000 advanced to the
Company during 1998.
In January 1999, the Company issued $550,000 principal amount of
convertible debentures due to non-related parties. The debentures accrue
interest at 10%, and are convertible into the Company's common stock at prices
related to market. Subsequent to the issuance of the debentures, all the
debentures were converted into shares.
In April, 1999, Teltran and Antra Holding Group Inc. exchanged shares of
their Company's common stock. Teltran owns 2,000,000 shares of Antra's common
stock and Antra owns 2,205,000 shares of our common stock (based upon two 5%
stock dividends paid in June and October 1999). Antra is a public company
engaged, through subsidiaries, in the music business. As a result of the
transaction, Antra may be deemed a principal stockholder of Teltran. Each
Company exchanged shares which were valued at $3 per share representing
$6,000,000. As of December 31, 1999, the Company adjusted the value of its
investment to give effect to the non-liquidity, thin market and restriction on
sale of shares of such stock. The investment is reflected on the balance sheet
at the fair market value of $4,000,000.
Additionally, the agreement with Antra requires an adjustment in the shares
delivered in connection with the above described exchange if on the first
business day of the year 2000 either Antra's shares or the Company's shares are
trading less than 20% below the market price of the other party's shares, the
party whose shares are trading lower must issue additional shares to the other
party.
Teltran issued 94,500 shares of its common stock to acquire 100% of
ChannelNet, Ltd. Teltran may be obligated to issue additional shares based upon
earnings generated by the acquired subsidiary during the period September, 1999
through February, 2001.
F-9
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9--STOCKHOLDERS' EQUITY:--(CONTINUED)
The purchase price was determined as follows:
94,500 common shares @ $2.00 per share = $189,000 (fair market value)
The purchase price was allocated as follows:
In U.S. Dollars
<TABLE>
<S> <C>
Accounts receivable........................................... $ 8,795
Accounts payable.............................................. (6,598)
--------
Net assets.................................................. 2,197
Purchase price................................................ 189,000
--------
Goodwill...................................................... $186,803
========
</TABLE>
In April, 1999 the Company declared a 5% stock dividend to shareholders of
record on June 1, 1999 and issued 585,000 common shares on June 15, 1999.
In August, 1999 the Company declared a second 5% stock dividend to
shareholders of record on September 1, 1999 and issued 675,456 common shares on
October 15, 1999.
At the time of issuance of both 5% stock dividends, the Company had a
retained earnings deficit. The transaction was recorded by increasing the
retained earnings deficit and increasing additional paid in capital.
In June 1999, the Company issued 316,499 shares in a private placement
transaction; the net proceeds to the Company were $1,154,969.
In November 1999, the Company sold 625,000 shares at $8.00 per share in a
private placement. With each share purchased in this private placement, the
purchaser received four warrants to purchase one share of Teltran common stock
at a price ranging from $8 to $10.25 per share. The actual price of these
warrants could be reduced if the market price of Teltran's stock is less than
the stated exercise price approximately 60 days after the filing of the
registration statement covering the shares issuable upon exercise of the
warrants.
On December 18, 1999, Teltran, as part of the acquisition of Internet
Protocols, Ltd., issued 1,565,442 shares of its common stock to the shareholders
of Internet Protocols Ltd. in exchange for their stock in Internet Protocols
Ltd.
The Company adopted Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share." The Statement established standards for computing
and presenting earnings per share (EPS). It replaced the presentation of primary
EPS with a presentation of basic EPS and also requires dual presentation of
basic and diluted EPS on the face of the income statement. The Statement was
retroactively applied to the 1997 loss per share but did not have any effect.
NOTE 10--LEGAL PROCEEDINGS:
The Company and its subsidiaries are subject to legal proceedings, claims,
and litigation arising in the ordinary course of business. The Company's
management does not expect that the ultimate costs to resolve these matters will
have a material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
F-10
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11--COMMITMENTS AND CONTINGENCIES:
A substantial accounts receivable held by the foreign subsidiary,
ChannelNet, may not be collectible. The Company has set up a reserve of $398,067
against this receivable.
During the first three months of 1998, the Company was a development stage
company and had no significant revenues and limited financing. Additionally, the
Company, as shown in the accompanying consolidated financial statements, has an
accumulated deficit of $11,988,871 at December 31, 1999 and incurred a net loss
of $2,239,920 during the year ended December 31, 1999.
The Company rents its facility under a lease agreement through August 31,
2003.
Future minimum lease payments under these agreements for the years ended
December 31, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 162,981
2001........................................................ 217,308
2002........................................................ 217,308
2003........................................................ 224,553
2004 and thereafter......................................... 1,461,966
----------
$2,284,116
==========
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 was $153,440
and $48,834, respectively.
NOTE 12--STOCK COMPENSATION PLAN:
During the year ended December 31, 1998, the company granted 1,180,000
stock options, with a life of 10 years, to certain officers/directors, employees
and non-employees that may be exercised at prices ranging from $.375 to $5.00
per share. Subsequent to December 31, 1998, the Company pursuant to the plan,
granted 2,127,500 additional stock options, also with a 10 year life, to certain
employees and non-employees that may be exercised at a price of $2.00 per share.
These options vested immediately upon the date of issuance.
The following table summarizes certain information relative to stock
options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INCENTIVE STOCK OPTIONS SHARES EXERCISE PRICE
---------------------------------------------------- --------- ----------------
<S> <C> <C>
Granted............................................. 1,180,000 $ 1.69
Exercised........................................... 0 --
---------
Outstanding--December 31, 1998...................... 1,180,000 1.69
Exercised........................................... (706,758) .55
Granted............................................. 2,127,500 2.00
---------
Outstanding--December 31, 1999...................... 2,600,742 --
=========
Exercisable--December 31, 1999...................... 959,732 1.11
=========
</TABLE>
The Company adopted the provisions of Statement No. 123, Accounting for
Stock-Based Compensation. As permitted by the Statement, the Company has chosen
to continue to account for stock-based compensation using the intrinsic value
method. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans.
The Company recognizes compensation for stock options granted to employees
in accordance with APB#25. The Intrinsic value method does not recognize
compensation cost in the financial statements when options are granted. Had the
Company determined compensation based on the fair value at the grant date for
its stock options, the Company's net loss would have been increased to the
pro-forma amounts indicated below. The fair
F-11
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 12--STOCK COMPENSATION PLAN:--(CONTINUED)
value was estimated using the Black Scholes option pricing model based on the
weighted average market price at grant date of $2.00 in 1999. The following
assumptions were used:
<TABLE>
<S> <C>
Dividend Yield 0%
Risk Free Interest Rate 6%
Volatility 67%
Expected Life 10 years
Net Loss:
As reported........................................... $(2,239,920)
===========
Pro-forma............................................. $(2,737,481)
===========
Net loss per share:
As reported........................................... $ (0.19)
===========
Pro-forma............................................. $ (0.23)
===========
</TABLE>
NOTE 13--SUBSEQUENT EVENTS:
On January 3, 2000, Teltran received an additional 800,000 shares of
Antra's stock. Teltran now owns 2,800,000 shares of Antra's common stock.
The adjustment of stock was agreed to by the parties, should there be a
disparity in the relative market value of the two entities on January 3, 2000.
F-12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Our directors and executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Byron R. Lerner................................. 55 President, Chief Executive Officer and Director
James E. Tubbs.................................. 39 Executive Vice President, Chief Operating
Officer and Director
Peter Biagioli.................................. 39 Vice President of Sales and Marketing
Mitchell Hershkowitz............................ 31 Vice President of Operations
Michael Neville................................. 44 Vice President--UK Operations
James Supple.................................... 35 Chief Financial Officer
</TABLE>
Byron R. Lerner has been chief executive officer and president of Teltran
since June 1997 and one of our directors since May 1996. Mr. Lerner was
Teltran's chief financial officer between May 1996 and June 1997. Between 1993
and 1995, Mr. Lerner was president of International GlobalCom, a firm he founded
which engaged in the resale of domestic and international long distance phone
time. This firm is no longer engaged in the resale of telephone time but is in
existence and used as a vehicle for Mr. Lerner's personal transactions. From
1990 to 1993 Mr. Lerner was president of L&S Communications, a reseller of
domestic and international long distance telephone time. Mr. Lerner believes
this firm has been liquidated.
James E. Tubbs has been our executive vice president and a director since
May 1996. Between 1994 and 1995, Mr. Tubbs was president of OmniCom, a reseller
of UniDial services; OmniCom is now a subsidiary of Teltran. From 1984 through
May 1996 he was employed as an executive in various entities controlled by Brent
Musburger, the sports broadcaster. Simultaneously Mr. Tubbs was employed in
various capacities as an executive in sports and entertainment matters by the
networks which engaged Mr. Musburger.
Peter Biagioli has been employed by us since 1997 as an officer and has
been our vice president of sales and marketing since February, 2000. From
February 1988 to January 1997 Mr. Biagioli was vice president of worldwide
commercial development for the Manifest Division of TNT Express Worldwide.
During the period November 1982 to January 1988 he was employed by Avis Rent A
Car System Inc. and was a regional sales manager for the New York metropolitan
market.
Mitchell Hershkowitz has been our vice president of operations since April
1999. From October 1997 through April 1999, Mr. Hershkowitz's title was director
of operations. From October 1994 through October 1997, he was regional sales
director for OmniCom.
Michael Neville has been our vice president of United Kingdom operations
since February 2000. He is presently acting as a consultant on a part-time basis
and providing services to others as a consultant. From July 1998 to January
2000, he was director of business development and wholesale services for Norweb.
From August 1997 to May 1998, Mr. Neville was managing director of OzEmail
Interline Pty., a joint venture between Metro Holdings and OzEmail Ltd. From
1989 to 1997, Mr. Neville held various positions with Cable and Wireless
Communications; most recently his title was general manager--international
partner services.
James Supple has been employed by us since July 1999 and since January,
2000 has been our chief financial officer. From 1994 to June, 1999 Mr. Supple
was financial controller of Schiavetti, Geisler, Corgan, Soscia, DeVito,
Gabriele and Nicholson a law firm located in the city of New York. From 1991 to
1994 Mr. Supple held various positions in the law firm of Gordon Altman Butowski
Weitzen Shalov and Wein serving as assistant director of finance from 1992
through 1994.
20
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Forms 3, 4 and 5 have not yet been filed by any officer, director or
beneficial owner of more than 10 percent of our common stock. Teltran had no
securities registered under the Exchange Act prior to its last fiscal year and
therefore no such reporting person was required to file reports under
Section 16(a) of the Exchange Act in prior years. All reports for officers and
directors will be filed by June 10, 2000. Teltran will encourage beneficial
owners of more than 10% of Teltran's common stock to file their reports by the
same date.
ITEM 10. EXECUTIVE COMPENSATION.
We have retroactively adjusted the share and price per share information in
this section to reflect the five percent stock dividends to holders of record on
June 3, 1999 and September 1, 1999.
Our chief executive officer and two additional highest paid officers
received the compensation listed below during the fiscal years ended
December 31, 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
---------------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY UNDERLYING OPTIONS
------------------------------------------------------------------------ ---- -------- ------------------
<S> <C> <C> <C>
Byron E. Lerner
President and Chief Executive Officer................................. 1999 $159,375 951,250
1998 88,000 496,127 shares
1997 37,500 --
James Tubbs
Executive Vice President and Chief Operating Officer.................. 1999 $161,000 550,250
1998 35,000 496,127 shares
1997 66,000 --
Peter Biagioli.......................................................... 1999 $124,466 132,300 shares
1998 41,477 132,300
1997 90,000 --
</TABLE>
All of our directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. The board
of directors annually elects executive officers to hold office until the first
meeting of the board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
1998 STOCK OPTION PLAN
We have adopted our 1998 Stock Option Plan for our officers, employees and
consultants and for those of any of our subsidiaries. The option plan authorizes
the grant of options to purchase 3,307,500 shares of our common stock, after
giving effect to our stock dividends. Options to purchase all 3,307,500 shares
have been granted.
The option plan is administered by the board of directors. In general, the
board, or a committee of the board, is empowered to select the persons to whom
options would be granted and to determine, subject to the terms of the option
plan, the number, the exercise period and other provisions of the options. The
options granted under the option plan are exercisable in however many
installments as may be provided in the grant.
Options granted to employees may either qualify as incentive stock options
under the Internal Revenue Code or be non-qualified options. The board may
determine the exercise price provided that, in the case of qualified options,
the price may not be less than 100% of the fair market value of our common stock
at the date of grant. In the case of qualified options granted to holders of 10%
of or more the voting power of our stock, the price may not be less than 110% of
the fair market value of our common stock at the date of grant. The aggregate
fair
21
<PAGE>
market value, determined at the time the option is granted, of stock with
respect to which qualified options become exercisable for the first time in any
year cannot exceed $100,000.
The options are evidenced by a written agreement containing the above terms
and other terms and conditions consistent with the option plan as the board of
directors may impose. Each option, unless sooner terminated, shall expire no
later than ten years or, in the case of qualified options granted to holders of
10% or more of the voting power of our stock, five years from the date of the
grant, as the board of directors may determine. The board of directors has the
right to amend, suspend or terminate the option plan at any time, provided,
however, that unless ratified by our stockholders no amendment or change in the
option plan will be effective for limited matters including increase in the
total number of shares which may be issued under the option plan or extending
the term of the option plan.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
OPTION GRANT EXERCISE PRICE EXPIRATION DATE
---------------- -------------- -----------------
<S> <C> <C> <C>
Byron Lerner............................................. 275,625 $ 0.51 January 31, 2009
275,625 3.49 May 8, 2009
400,000 4.00 December 30, 2009
James Tubbs.............................................. 275,625 $ 0.51 January 31, 2009
275,625 3.49 May 8, 2009
Peter Biagioli........................................... 22,050 $ 0.51 January 31, 2009
110,250 3.49 May 8, 2009
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The table below provides information concerning stock option exercises
during the fiscal year ended December 31, 1999 and the value of unexercised
options at the end of that fiscal year. All of the unexercised options were in
the money on this date.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SHARES UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED ON UNEXERCISED OPTIONS AT
NAME EXERCISE VALUE REALIZED OPTIONS END OF YEAR
---------------------------------------------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
Byron Lerner........................................ 281,758 $2,285,416 1,165,617 $5,368,137
James Tubbs......................................... 35,000 $ 294,700 1,012,375 $5,717,171
Peter Biagioli...................................... 35,000 $ 294,700 225,000 $1,252,202
</TABLE>
The value of the in-the-money options is based on the market price of our
common stock on December 31, 1999, which was $7.56 based on the average of high
and low sales on the OTC Bulletin Board that day. All of the options were in the
money.
On January 31, 1999 we issued options to purchase an additional 876,488
shares of common stock at $.51 per share exercisable immediately. Of these
options 275,625 were issued to each of Messrs. Lerner and Tubbs and Martin
Miller, then one of our directors. In May 1999 we granted options to purchase an
additional 1,102,500 shares of our common stock at $3.49 per share. Of these,
options to purchase 275,625 shares were issued to each of Byron Lerner, James
Tubbs and Martin Miller. All the options granted in 1999 vested immediately.
On December 20, 1999 the board of directors awarded Byron Lerner an
additional option to purchase 400,000 shares of common stock at $4.00 per share.
On February 1, 2000 the board of directors awarded Byron Lerner and James Tubbs
options to purchase 890,500 and 717,933 shares of our common stock,
respectively. The exercise price of the options is $8.00 per share until August
2, 2000 and $1.00 thereafter. These options, as
22
<PAGE>
amended, vest as to one-half ( 1/2) of the shares subject to the Option on the
date of issuance. An additional one-half of the shares vest on January 1, 2001.
If, however, an optionee's employment is terminated as a result of a change of
control, then the shares subject to the option immediately vest and the exercise
price of the option is reduced to ten cents per share. The total number of
shares subject to the option increase by an amount equal to the difference
between 9.9% of the outstanding shares and the shares subject to the option
(including exercised shares). The options are exercisable until February 1,
2010.
In December 1999 we issued a total of 573,000 shares of our common stock
subject to existing options. The purchasers issued non-interest bearing notes
totaling $362,318 as payment of the exercise price under the options for the
shares. The notes are due July 1, 2000 or earlier if the shares are sold.
Mr. Byron Lerner acquired 281,758 shares of common stock upon exercise of
options and has delivered a note for $188,618 representing the unpaid exercise
price and Mr. James Tubbs has acquired 35,000 shares and delivered his note for
$11,550 representing the unpaid exercise price. Martin Miller, who was then a
director, acquired 250,000 shares and issued his note for $127,500.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Byron Lerner to serve as
our president and chief executive officer. The agreement is for a term of
37 months commencing March 1, 1999 and unless notice of non-renewal is given at
the end of first thirteen months or any later year, the term of the agreement is
extended for an additional year period. Mr. Lerner received a base annual salary
of $150,000 until August 1999 when the salary increased to $180,000. As amended,
starting on February 1, 2000, the salary increased to $250,000. After that, the
salary increases at the rate of ten percent per annum. The agreement provides
for a bonus pool which shall be equal to 15% of net income as defined in the
agreement of which Mr. Lerner will receive forty percent (40%) of the pool.
Mr. James Tubbs, Teltran's executive vice president and chief operating officer,
has entered into an identical agreement, as amended, with us.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 15, 2000, information
concerning the beneficial ownership of our common stock.
o each person who beneficially owns more than five percent of our
outstanding common stock,
o each of our directors,
o each of the executive officers named in the summary compensation table,
o all our directors and executive officers as a group and
Share ownership includes both shares beneficially owned and shares a person
has the right to acquire under any option or warrant which is presently
exercisable or which may be exercised within sixty days. These include 1,165,617
options in case of Byron Lerner, 1,012,375 options in case of James Tubbs,
229,600 options in the case of Peter Biagioli and 2,694,242 options for all
officers and directors as a group.
(1) Balmore S.A. owns 328,309 issued and outstanding shares, or
approximately 2.1%, of our common stock. The bulk of Balmore's apparent
ownership is in the form of warrants. Under an agreement with Teltran, Balmore
is not allowed to exercise warrants if its total ownership of shares at any time
would exceed 4.99% of Teltran's outstanding shares. Therefore, despite what
appears to be Balmore's ownership of over nineteen percent (19%) of Teltran's
common stock, Balmore is actually a holder of less than 5%. Teltran has been
advised that Balmore S.A has changed its name from Balmore Funds S.A.
23
<PAGE>
(2) Antra Holding Group, Inc., a principal stockholder listed below, is a
corporation whose stock is publicly traded. We are a principal stockholder of
Antra Holding Group, Inc., having a beneficial interest in 2,800,000 or 22.7% of
its outstanding shares.
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY SHARES
IDENTITY OF STOCKHOLDER OR GROUP WNED OUTSTANDING
------------------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
Byron Lerner.................................................................. 1,748,000 9.6%
James Tubbs................................................................... 1,444,188 8.0%
Peter Biagioli................................................................ 263,600 1.5%
Balmore S.A, C.B (1).......................................................... 3,312,429 19.3%
Trident Chambers,
P.O. Box 146
Road Town Tortola
British Virgin Islands
Antra Holding Group Inc (2)................................................... 2,205,000 12.9%
1515 Locust Street,
Philadelphia, PA 19102
All Officers and Directors (6 persons)........................................ 3,742,438 18.9%
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in this section is retroactively adjusted to reflect the five
percent stock dividend to holders of record on June 3, 1999 and September 1,
1999.
During and prior to 1998 an affiliate of Byron Lerner and James Tubbs each
advanced $50,000 to us. In 1998 all these advances were converted into 551,250
shares of our common stock. All these advances were interest free. Mr. Lerner
has advanced approximately an additional $13,000 to us in 1998 and received an
additional 71,662 shares of common stock.
In April 1999, we and Antra Holding Group Inc. exchanged shares of each
other's stock. We received 2,000,000 shares of Antra's common stock and Antra
owns 2,205,000 shares of our common stock. Antra is a public company engaged
through subsidiaries in the music business. As a result of the transaction Antra
may be deemed a principal stockholder of Teltran. We have entered into an
agreement with Antra which requires an adjustment in the shares delivered in
connection with the above-described exchange. If on the first business day of
the year 2000 either Antra's shares or our shares are trading less than 20%
below the market price of the other party's shares, the party whose shares are
trading lower must issue additional shares to the other party. As a result of
this adjustment we received an additional 800,000 shares of Antra's common
stock.
We formed a joint venture corporation with a subsidiary of Antra to market
records with Antra through a website to be established on the Internet using our
portal. We and Antra each own 49% of the outstanding shares of this corporation
with an unrelated third party owning 2% of the outstanding shares. We each will
be equally responsible for funding and share equally in losses and profits. This
venture initially will market records owned by independent third parties through
the Internet. See "Item 1. Description of Business."
As of May 1999 we acquired all the shares of Omni Communications Inc. This
company is an authorized agent of UniDial Communications. We issued 126,788
shares of our common stock to the sellers, of which James Tubbs received 110,250
shares. Mr. Tubbs is an officer and director of Teltran. We did not obtain a
fairness opinion.
A portion of the space leased by us is occupied by entity, a corporation in
which two of our officers have an equity interest. These entities are paying us
an aggregate of $48,000 per annum for the use of the facilities. We believe the
terms are fair and are equal to what we would have received from an independent
third party.
(1) Mr. Matityahu Kaniel, a citizen of Israel, is the beneficial owner of
all the shares of Balmore S.A., CB.
24
<PAGE>
(2) Joseph M. Marrone is President of Antra Holding Group Inc. and owner of
approximately 15.4% of the outstanding shares. Antra Holding Group Inc. is a
publicly traded company and its shares are widely held.
CERTAIN RECENT SECURITIES TRANSACTIONS
On August 16, 1999, in exchange for 94,500 shares of our common stock, we
acquired all of the outstanding shares of ChannelNet Ltd. common stock,
effective June 1, 1999. ChannelNet has been providing premium-rate
telecommunications services to customers in the United Kingdom as well as being
an OzEmail affiliate in the United Kingdom and Ireland. Byron Lerner and James
Tubbs, officers and directors of Teltran, became directors of ChannelNet.
In June 1999 we issued a total of 332,324 shares of common stock in
connection with a private placement of our securities. Five investors acquired
326,024 shares at $3.81 per share. If the price of our common stock is selling
below specified levels after the offering, we may have to issue additional
shares to these investors. The purchasers of 286,650 of the shares are required
to purchase an additional number of shares after this registration statement is
declared effective provided that there is no material change adversely effecting
Teltran. An additional 6,300 shares were issued to a finder and an additional
815,355 warrants to purchase our common stock at $5.71 per share were issued to
finders. In November 1999, Teltran sold an additional 625,000 shares for $8.00
per share and issued warrants to purchase 2,600,000 shares at prices ranging
from $8.00 to $10.25 per share. If the market price of Teltran's shares
approximately 60 days after a registration statement covering the shares
issuable upon exercise of the warrants is less than the stated exercise price,
the actual exercise price of these warrants will be reduced.
In April, 1999 we agreed to issue options to purchase shares of our common
stock to Corrie Ltd. and Craighouse Ltd. if their assistance proved successful
in obtaining international communication arrangements. These options, if issued,
may entitle the holder or holders to purchase an aggregate maximum of 450,000
shares of common stock. While the conditions for these options have not
occurred, we believe there is a strong possibility that these options will be
issued. Neither of these entities or their principals are related to Teltran.
In December 1999, the Company issued 37,500 shares to Dolores Miller, the
spouse of Martin Miller. Ms. Miller is required to pay $295,312 for these
shares. Martin Miller is a former director of the Company, having resigned in
January 2000. Mr. Miller denies beneficial ownership of the shares owned by
Ms. Miller.
As of December 18, 1999, Teltran acquired all of the issued and outstanding
shares of Internet Protocols Ltd., a company engaged in rendering services to
Internet service providers and others. Internet Protocols Ltd. enters into
arrangements under which it shares revenue or charges a fee for use of its
equipment. Teltran issued 1,481,566 shares in connection with the acquisition.
We have also purchased shares of Internet Protocols Ltd. directly from this
subsidiary company for approximately $3,000,000 payable in installments through
August 2000. The ultimate purchase price for the shares acquired from the former
shareholders may be increased or decreased depending upon the valuation of
Internet Protocols Ltd. in November 2000. One-half of the shares issued to the
former shareholders were deposited in escrow covering indemnification and
possible downward revaluation. At the time of the acquisition, Teltran issued an
additional 83,886 shares in escrow, which may be used to satisfy approximately
$550,000 of indebtedness of Internet Protocols Ltd. to several of its former
stockholders. The price was determined by negotiation. The total amount payable
by us for Internet Protocols before any adjustments was approximately
$18,200,000 ((pound)10,800,000). This includes approximately $3,000,000 payable
to Internet Protocols, pursuant to acquisition agreement with former
shareholders of Internet Protocols. We shall nevertheless remain responsible for
funding the operating of this subsidiary. All references to dollar amount are
based on exchange rates at the time of the transactions. The number of shares
may be adjusted in certain circumstances based on a decline in the market price
of the Company's shares.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index To Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
.1 3 -- Certificate of Incorporation (a)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.2 -- Certificate of Ownership and Merger of Spectratek Incorporation by Teltran International Group,
Ltd.(a)
3.3 -- Amendment to Certificate of Incorporation (a)
4. -- By-Laws(b)
10.1 -- 1998 Stock Option Plan (a)
10.2 -- Employment Agreement between Byron Lerner and Registrant (a)
10.2(a) -- Employment Agreement between James Tubbs and Registrant (b)
10.2(b) -- Amendment 1 dated as of January 31, 2000 to the Employment Agreement between Byron Lerner and
Registrant *
10.2(c) -- Amendment 1 dated as of January 31, 2000 to the Employment Agreement between James Tubbs and
Registrant *
10.3 -- USA Interconnectivity and Support Agreement dated October 12, 1999 (a)
10.4 -- USA Intellectual Property License Agreement dated October 12, 1999 between OzEmail and Registrant
(a)
10.5 -- Telecommunication Services Agreement dated October 15, 1998 between OzEmail and Registrant (a)
10.6 -- Extension and Modification of OzEmail Agreement (e)
10.7 -- Subscription Agreement dated June 10, 1999 (c)
10.8 -- Memorandum Agreement between Registrant and Antra Holdings Group Inc.(c)
10.9 -- (i) Exchange Agreement dated as of July 15, 1999 between Barclay Brydon Limited and Teltran
International Group,Ltd., as amended by the Closing Memorandum dated August 16, 1999(d)
(ii) Memorandum of Closing between and among Barclay Brydon Limited and Teltran International
Group, Ltd., dated August 16, 1999(d)
10.10 -- Restated and Amended Stockholders' Agreement dated January 24, 2000 amending and restating the
Agreement dated as of September 30, 1999 among Teltran International Group, Ltd., Antra Group
Holdings, Inc., and Recordstogo.com Inc. *
10.11 -- Telecommunications Services Agreement between Teltran International, Inc. and Pacific Gateway
Exchange (f)
10.12 -- Telecommunications Services Agreement between Teltran International, Inc. and North American
Gateway, Inc.(f)
10.13 -- Exchange Agreement among Teltran International Group, Ltd. and the Sellers named on Schedule A.(f)
10.14 -- Deferred Equipment Purchase Agreement, dated August 16, 1999, between Barclay Brydon Limited and
Teltran International Group, Ltd. (g)
10.15 -- ChannelNet Limited Service Provider Agreement with Norweb Telecom Limited, dated November 23, 1999
(g)
10.16 -- Acquisition Agreement made as of December 18, 1999, by and among Teltran International Group, Ltd.
and Internet Protocols Limited and the Shareholders of Internet Protocols Limited. (h)
(a) Exhibits to Internet Protocols Limited Acquisition Agreement*
10.17 -- Office Lease, One Penn Plaza, New York. *
10.18 -- Commercial Lease Agreement , made and effective February 4, 2000 by and between TELEVISIONES
COMMUNICATIONS, CORP. and Teltran International Group, Ltd., for collocation facility in Miami,
Florida. *
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.19 -- WWExchange Network Services Agreement by & between Teltran International, Inc. & ITXC Corp. (i)
10.20 -- Stock Option Agreement, made as of February 1, 2000 between Teltran International Group, Inc. and
Bryon R. Lerner. (i)
10.20a -- Corrected and restated option of Mr. Lerner (k)
10.21 -- Stock Option Agreement, made as of February 1, 2000 between Teltran International Group, Inc. and
James Tubbs. (i)
10.21a -- Corrected and restated option of Mr. Tubbs (k)
10.22 -- Form of Promissory Note, dated December 9, 1999, used in connection with the exercise of stock
options. (i)
10.23 -- Agreement for Sale and Purchase of Part of the Business of the Web Factory Limited among Web
Factory Limited, Castlegate 133 Limited, Teltran International Group Limited and Datatec Limited
dated March 15, 2000. (j)
21.1 -- Subsidiary List *
27 -- Financial Data Schedule*
</TABLE>
------------------
* Filed herewith.
(a) Previously filed with the Company's Form 10-SB on March 24, 1999.
(b) Filed with the Company's Amendment 1 to its Form 10-SB.
(c) Filed with the Company's Amendment 1 to its Form SB-2.
(d) Filed with the Company's Form 8-K, dated August 16, 1999.
(e) Filed with the Company's Amendment 2 to its Form SB-2.
(f) Filed with the Company's Amendment 3 to its Form SB-2.
(g) Filed with the Company's Amendment 4 to its Form SB-2.
(h) Filed with the Company's Current Report on Form 8-K on January 3, 2000 with
additional exhibits thereto filed herewith.
(i) Filed with Company's Annual Report for 1999 on Form 10K SB.
(j) Filed with the Company's Current Report on Form 8-K for March 15, 2000.
(k) Filed with the Company's Amendment 1 to its Annual Report for 1999 on
Form 10KSB/A
(b) Reports on Form 8-K.
No new reports on Form 8-K were filed during the last quarter of the period
covered by this report. However, an amendment containing financial statements
was filed on October 19, 1999 with respect to the Form 8-K originally filed on
August 31, 1999. Additionally, a Form 8-K was filed on January 3, 2000, with
respect to an acquisition that occurred on December 18, 1999. An amendment
containing financial statements was filed on March 2, 2000 with respect to this
Form 8-K.
27
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
Date: June 22, 2000
TELTRAN INTERNATIONAL GROUP, LTD.
By: /s/ BYRON R. LERNER
----------------------------------
Byron R. Lerner
President
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATES INDICATED.
Date: June 22, 2000
/s/ BYRON R. LERNER
---------------------------------------
Byron R. Lerner
President, Chief Executive Officer and
Director
Date: June 22, 2000
/s/ JAMES E. TUBBS
---------------------------------------
James E. Tubbs
Executive Vice President, Chief
Operating
Officer and Director
Date: June 22, 2000
/s/ JAMES SUPPLE
---------------------------------------
James Supple
Chief Financial Officer
28
