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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
TELTRAN INTERNATIONAL GROUP, LTD.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION 11-3172507
OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE PENN PLAZA, SUITE 4632
NEW YORK, NEW YORK 10119
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 643-1600
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
Not applicable Not applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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PART I
BUSINESS
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
Teltran International Group, Ltd. ("Teltran" or the "Company") was originally
incorporated in Utah as Spectratek Incorporated in July 1983, and was
subsequently reincorporated in Delaware as Teltran International Group, Ltd. 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. 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.
INDUSTRY BACKGROUND
During the last fifteen years, international telecommunications have 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.
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.
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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; and financial
difficulties of major customers; pricing pressure resulting from increased
competition. Technical difficulties or failures of portions of the ITXC system
or other provider 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.
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 is 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 operating our Internet telephony business through the ITXC and may
establish our own systems for traffic between different countries.
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, 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 providers to the ultimate destination.
The heart of any Internet telephony system is the gateway. There are several
providers of gateways, including Lucent, Cisco and Voice Tech. OzEmail utilized
their own gateway, which contained proprietary software. Each gateway, depending
on the manufacturer, is capable of handling from twenty-four or more
simultaneous calls. The gateway is also used for billing, rating and
verification purposes.
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 connected into a digital form and delivered to the Internet
through the gateway and is routed to the country of destination;
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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.
All the calls are processed by the Gateway which is also used for billing,
rating and verification purposes. The whole process is generally completed
within seconds.
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 to 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. In this case
of OZE mail proprietary gateways were used. Thus the network consists of
affiliates in various countries joined together to provide international
service. 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 have no OzEmail Internet termination. We
derived approximately $535,200 in revenues from this activity in 1998 but this
source has declined to $93,600 through the first six months of 1999. 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 enables us to sell international voice telephone
availability through the OzEmail Internet system utilizing OzEmail technology
and protocols to clients in the United States. In this capacity, our main focus
has been the wholesaling of 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 serve as a United
States affiliate 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 November we have completed calls totaling 2.5 million minutes.
Generally OZE mail only permitted one affiliate in a country. By November 1999
we obtained affiliate status in the United Kingdom and Ireland through
ChannelNet subsidiary and completed contracts with a local entity to become an
affiliate in Pakistan. Subject to final agreements we received permission to
become an affiliate in Bangladesh and Israel. In November 1999 OZE mail disposed
of its Internet telephony business to ITXC. We then 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. Unlike OZE mail, 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
gateway. 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 affiliated and terminating
with ITXC affiliate. We are required to provide other gateways. 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 requires its affiliates to purchase 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 purchased
twelve gateways for an aggregate cost of $108,000 to service our existing United
States clients at present levels. We believe our twelve gateways will be
sufficient to handle the call volumes we currently handle. We are currently in
the process of transitioning our current gateways from OzEmail
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equipment to ITXC owned and Teltran owned equipment. This process is scheduled
to be completed by the end of January 2000. These are being provided at no cost.
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. 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 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.
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 and addendum 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 customers 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.
OTHER POSSIBLE ARRANGEMENTS
Teltran regards itself as a telecommunications reseller and may enter into
arrangements for the resale of telecommunications time not involving the ITXC
network. Future arrangments may involve entirely different providers or a
combination of ITXC and other providers.
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 orgination or
termination of calls to and from their jurisdictions. The United Kingdom
regulates the award of premium-rate telephone services.
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 do
not anticipate that we will derive significant refile revenues from OzEmail in
the future. As a result of resale arrangements entered into by us, we do not
believe we are dependent upon OzEmail as a refile 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.
We market our service through our executive officers, 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 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.
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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
We have eight full-time employees in New York, seven of whom are engaged in
executive and technical functions and one of whom is a clerical employee. We
also have five full time employees in the United Kingdom as a result of our
Channelnet acquisition. We also utilize consultants.
TECHNICAL FACILITY
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 located at this facility. We utilize the owner's equipment to
effect these connections.
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 will complement our line
of telecomunications products and 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 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 an officer of
Teltran, we believe the acquisition was made on arm's length terms. Omnicom
presently utilizes our offices.
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 public company engaged through
subsidiaries in the music business. 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, there will be an adjustment in the
number of shares owned by an entity if there is a disparity in the relative
market value of the two entities. Antra and we have formed a corporation to
establish a website for the sale of music recordings. We each will be equal
owners in the new corporation, although we will grant a minority interest to a
supplier. The corporation has completed the basic design of the website. This
joint venture contemplates beginning testing in January 2000 and sales in
February 2000.
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. ChannelNet had
insubstantial assets and liabilities. A primary reason for the acquisition was
ChannelNet's potential as an affiliate of the ITXC network. ChannelNet is an
affiliate of ITXC in the United Kingdom and Ireland. It has also received
indication that upon presentation of a proper plan, it will be appointed an
affiliate in Turkey, Greece, Cyprus, Turkish Republic of North Cyprus, and
India. 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
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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. The
contract runs for a minimum of six months. The contract calls for 3.5 million
minutes per month in the first 90 days, rising to 5 million minutes per month
after the initial 90-day period.
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.
It seeks to enter into revenue-sharing arrangements with its customers for
providing the use of equipment to access the Internet. It also offers to provide
other services to its customers.
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 direct links to many commercial sites. Recently, we
provided access to brokerage firms through the portal and anticipate receiving
payment from brokerage firms utilizing this service based on customers' business
introduced to the brokerage firm through the portal. 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. Customers may sign up for a personal dial-up
Internet account which includes unlimited Internet usage, an e-mail account, a
personal home page and other features. Customers may also sign up for dedicated
connection accounts featuring high-speed access to the Internet. Advanced
features also include custom web site design and development services, web
hosting, and e-commerce solutions. Teltran will also offer Internet fax
capability.
We are also engaged in additional activity through our web portal. We have
finalized an arrangement with Antra Music Group Ltd., a subsidiary of a
principal shareholder, to establish a website, http:// www.recordstogo.com, for
the sale of music. Initially this website will be utilized as a vehicle to sell
records belonging to an unaffiliated third party. We expect www.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.
Teltran is developing "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). Major vendors to
the XoIP industry contribute to or sponsor the site: past sponsors include
Microsoft, 3Com, Cisco, Brooktrout and Dialogic). Teltran has no other
relationship with either LANSource or 3Com.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes contained elsewhere in this registration
statement.
Forward-looking statements
Some of the statements contained in this prospectus 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 failure of Teltran, its vendors or other third parties to achieve Year
2000 compliance;
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
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
of 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.
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 have already entered
into several agreements to provide these services and others are
scheduled to commence in the fourth quarter. We are negotiating
additional similar arrangements. Each of these arrangements requires 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 in a manner that will enable us to participate in
revenues on both ends of a call. We have recently finalized agreements
to originate and terminate traffic in Pakistan. We have also
established international telephone operations in the United Kingdom
through ChannelNet, our newly acquired entity in England.
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o utilize ChannelNet switching to reduce the costs of worldwide
terminations.
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.
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 develop additional sales affiliate
arrangements on our portal and continue to run live Internet chats on a
monthly basis.
o operate our joint venture, RecordsToGo.com, for the sale an auction of
music. The venture is in the process of obtaining partner/affiliate
agreements with a variety of music and non-music websites and will be
marketing RecordsToGo.com worldwide.
o operate Internet Protocols Ltd., our newly acquired subsidiary in the
United Kingdom.
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 to resell our UniDial services to 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 promote and market our new "Fax over IP" service to our customers. This
service allows users to send and receive faxes over the Internet at a
reduced cost.
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.
Nine months ended September 30, 1999 compared to nine months ended
September 30, 1998 (unaudited)
Our revenues were approximately $2,800,000 for the nine months ended
September 30, 1999 while we received $449,000 for the nine months ended
September 30, 1998. The increase in revenues is attributed to
telecommunication services provided by our domestic subsidiary and
recently acquired U.K. subsidiary. We anticipate increased revenues as a
result of our recently acquired U.K. subsidiaries, continuing services to
our principal domestic customers and from our strategic alliances.
Our operating expenses during the nine months ended September 30, 1999
were approximately $1,199,000 compared to approximately $394,000 during
the comparable period in 1998. The increased expenses were primarily
attributable to an increase in salary expense and rent due to expanding
our staff and office space. In addition, our professional fees increased
due to our overseas acquisitions and increased filing requirements.
Liquidity
We had a working capital of approximately $7,800,000 as of September 30, 1999
compared to a negative working capital of approximately $208,000 as of September
30, 1998. The increase in capital resulted from receipt of proceeds from our
placements totaling $1,890,000 and an increase in receivables and prepaid
expenses in 1999. Since December 31, 1998 we received gross proceeds of $650,000
from the sale of convertible notes and exercise of warrants. All the notes have
been converted into equity and 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. Upon effectiveness of
this registration statement and in the absence of adverse changes these
purchasers are obligated to pay us another $400,000 for additional shares. We
completed an additional private placement in December 1999 and received
approximately $4,550,000.
In most instances capital requirements of our core business are not significant.
To commence any new service, we will be required to purchase gateways, presently
costing $between 10,000 and $17,000 each. Additional gateways may be required
based on call volume after commencement of service, but these will only be
purchased if revenues justify the purchase. We may also purchase other
equipment. There are additional start-up costs for each new contract. Indeed, we
believe we will have significant equipment expenses. In most instances we
believe that costs associated with these capital expenditures may be obtained
from funds available and from cash flow. There may be instances, however, where
a new contract or service because of its size may require significant capital
expenditures. In those instances we may have to seek debt or equity funding.
There is no assurance that we will be able to obtain
<PAGE>
funding on terms favorable to us. We also may have to contribute up to $300,000
to the joint venture corporation we own with Antra Holding Group, Inc. We have
to make minimum cash payments of approximately $185,000 to our two principal
executive officers.
We may have to pay additional costs if we form joint ventures to establish
foreign affiliations and to pay for the salaries of executives to manage and
operate the ventures.
A substantial portion of our current assets consist of shares of Antra Holding
Group, Inc. In April 1999, we exchanged 2,205,000 of our shares for 2,000,000
shares of Antra. At the time of the exchange, Antra's shares had a market value
of $3.00. Our holdings of Antra's shares are carried on our financial
statements, under current assets, as a $6,000,000 investment. The shares of
Antra are classified as marketable securities because Teltran owns less than 20%
of Antra; the investment is carried using the lower-of-cost-or market method (as
opposed to the "equity method"). Although these shares may not be sold until
April 2000, the investment is classified under current assets because the shares
will be eligible for resale under Rule 144 in less than 12 months.
We believe funds obtained and to be obtained from the sale of shares under
present arrangements and cash flow from operations will be sufficient for
working capital purposes at our present levels through the year 2000.
Changes in capital and accumulated deficit
Paid-in capital increased by approximately $20,482,482 during the nine-month
period ended September 30, 1999. Of this increase, $12,367,190 was attributable
to the stock dividends we issued in June and September 1999. Under generally
accepted accounting principles, we offset this entry by adding $12,368,450 to
the accumulated deficit and $1,260 to capital stock. As a result, there is no
overall effect on stockholder's equity on account of the transaction. An
additional $5,998,000 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. Additional entries were made 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 $1,008,190 for
other shares, including shares issued in the private placement in June 1999. An
adjustment of $981 was made to reflect the rounding of fractional shares
issuable in the two stock dividends.
Our deficit increased by $12,211,508 notwithstanding our consolidated net income
of $157,923 for the period. The decrease was almost entirely attributable to the
stock dividends, as discussed above. An offsetting adjustment of $981 was made
to reflect the rounding of fractional shares issuable in the two stock
dividends.
Year 2000 disclosure
With the new millennium approaching, many businesses and institutions are
reviewing and modifying their computer systems to ensure they accurately process
transactions relating to the Year 2000 and beyond, This effort is 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, computers
that are not Year 2000 compliant may 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 have completed a thorough audit of our Year 2000 state of readiness including
seeking and receiving representations from OzEmail and our Internet service
providers. As a result we have determined that our business is fully Year 2000
compliant. Although we cannot predict with complete accuracy, we nevertheless
anticipate no potential liabilities or stoppages in our business as a result of
the new millennium.
ITEM 3. 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 $180,000.
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.
The Company's telecommunication equipment is located and maintained at a
separate facility owned by a third party. See Item 1 - "Description of Business
- - Technical Facility."
<PAGE>
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. Internet Protocols Ltd. is permitted to provide
additional racks 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.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 10, 1999, information concerning
the beneficial ownership of our common stock and as adjusted by any sale by
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, and
o all our directors and executive officers as a group.
The Company has filed a registration statement covering the sale of
substantially all of the Company's common stock owned by the individuals listed
below. The address of each of these individuals is c/o Teltran International
Group, Ltd., One Penn Plaza, Suite 4632, New York, New York 10119.
Information in the table reflects our recent 5% dividends to stockholders of
record on June 3, 1999 and September 1, 1999. Share ownership includes both
shares beneficially owned and shares a person has the right to acquire pursuant
to any option or warrant which is presently exercisable or which may be
exercised within sixty days.
<TABLE>
<CAPTION>
BENEFICIAL
NAME NUMBER OF OWNERSHIP
SHARES PERCENTAGE
------ ----------
<S> <C> <C>
Byron Lerner(1)........................... 1,148,805 7.4%
James Tubbs(1)............................ 1,201,726 7.7%
Martin Miller(2).......................... 538,650 3.5%
Peter Biagioli(3)......................... 264,600 1.7%
Antra Holding Group Inc................... 2,205,000 14.2%
1515 Locust Street,
Philadelphia, PA 19102
Balmore Funds SA.......................... 1,174,929 21.3%
Trident Chambers P.O. Box 146
Road Town Tortola
British Virgin Islands
All Officers and Directors
(4 persons)(1)(2)(3).................. 3,238,306 20.8%
</TABLE>
(1) Includes currently exercisable options to purchase up to 863,626
shares of common stock
(2) Includes currently exercisable options to purchase up to 538,650
shares of comnmon stock
(3) Includes currently exercisable options to purchase up to 264,600
shares of common stock
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Byron R. Lerner.... 55 President, Chief Executive Officer and Director
Executive Vice President, Chief Operating Officer and
James E. Tubbs..... 39 Director
Peter Biagioli..... 39 Vice President of Sales and Marketing
Martin Miller...... 59 Director
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.
From 1990 to 1993 Mr. Lerner was president of L&S Communications, a reseller of
domestic and international long distance telephone time.
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 our vice president of sales and marketing since 1997.
From February 1988 to January 1997 Mr. Biagioli was vice president of worldwide
commercial development for the Manifest Division 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.
Martin Miller has been a Teltran director since November 1995. Mr. Miller, for
the past five years, has been a manager of corporate finance for Millport Ltd.,
presently a Bahamian based advisor of foreign investors.
ITEM 6. EXECUTIVE COMPENSATION.
We have retroactively adjusted the 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 received the below listed compensation during the
fiscal year ended December 31, 1998. No other executive officer's compensation
exceeded $100,000 during that year.
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 1998 $88,000 496,127 shares
President and Chief Executive Officer.......... 1997 37,500 --
</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.
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.
<PAGE>
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
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
Number of Shares
Underlying Option Grant Exercise Price Expiration Date
----------------------- -------------- ---------------
Byron Lerner....... 220,500 $.33 December 8, 2008
91,877 1.51 December 8, 2008
91,875 2.59 December 8, 2008
91,875 4.31 December 8, 2008
James Tubbs........ 220,500 $.33 December 8, 2008
91,877 1.51 December 8, 2008
91,875 2.59 December 8, 2008
91,875 4.31 December 8, 2008
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, 1998 and the value of unexercised options at
the end of that fiscal year.
Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year
End Option Values
Value of Unexercised In
Number of Shares Underlying
<TABLE>
<CAPTION>
Unexercised Options at the Money Options
Shares Fiscal Year End -----------------
Acquired on Value --------------- Non
Name Exercise Realized Exercisable Unexercisable Exercisable Exercisable
- ---- -------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Byron Lerner....... None None None 496,125 None $29,000
</TABLE>
The value of the in-the-money options is based on the market price of our common
stock on December 31, 1998.
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, 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.
The board of directors has recently authorized the grant to Byron Lerner of
options to purchase 400,000 shares of Teltran's common stock.
<PAGE>
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 is to receive a base annual salary of
$150,000 until August 1999 when the salary increases to $180,000. Starting in
the second year of the agreement on April 1, 2000 the salary increases to
$189,000 or $200,000 if the net income as defined in the agreement is at least
$200,000. 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 with us.
ITEM 7. 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 own 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.
We are also completing arrangements to form 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. This new corporation will be owned
equally by Antra and ourselves. We each will be equally responsible for funding
and share equally in losses and profits. This venture initially will market
records owned by an independent third party.
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.
The board of directors has recently authorized the grant to Byron Lerner of
options to purchase 400,000 shares, with an exercise price of $4.00 per share,
as compensation. The options are exerciseable over a period of two years.
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 ITXC affiliate in the United Kingdom and Ireland. It has also received
indication that upon presentation of a proper plan, it will be appointed an
affiliate in Turkey, Greece, Cyprus, Turkish Republic of North Cyprus, and
India. Upon the closing of the acquisition, 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. Some of the persons
named in the prospectus as selling stockholders acquired additional shares and
warrants. These additional shares, including the shares issuable upon exercise
of the additional warrants, are not being offered in this prospectus and
registration statement.
<PAGE>
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.
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 the
company for approximately $3,000,000 payable in installments through August
2000. The ultimate purchase price for the shares acquired from the former
shareholder 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 shareholder 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 its former stockholder.
ITEM 8. DESCRIPTION OF SECURITIES.
General
We are authorized to issue 50,000,000 shares of our common stock, par value
$0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per
share. As of December 18, 1999, 15,568,825 shares of common stock were
outstanding after giving effect to our five percent (5%) stock dividends. No
shares of preferred stock are currently outstanding.
Common stock
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of common stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds
legally available for those dividends.
In the event of our liquidation, dissolution or the winding up of our business,
the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having preference
over the common stock. Holders of shares of common stock have no conversion,
preemptive or other subscription rights. There are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are fully paid and nonassessable.
Preferred stock
Our certificate of incorporation authorizes the issuance of "blank check"
preferred stock with whatever designation, rights and preferences as may be
determined from time to time by our board of directors. Accordingly, the board
is empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of common stock. The
preferred stock could be utilized, under particular circumstances, as a method
of discouraging, delaying or preventing a change in control. Although we
currently do not intend to issue any shares of preferred stock, there can be no
assurance that we will not do so.
Transfer agent
The transfer agent for the common stock is North American Transfer Co.,
147 Merrick Road, Freeport, New York 11520.
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's Common Stock is currently quoted on the OTC Bulletin Board under
the symbol "TLTG."
Set forth below are the high and low closing bid quotations for Company's Common
Stock for the periods indicated as reflected on the electronic bulletin board.
The quotations reflect interdealer prices without retail mark-up, mark-down or
commissions, and may not reflect actual transactions.
PERIOD HIGH LOW
- ------ ---- ---
September 30, 1999............................... $16.50 $6.312
June 30, 1999.................................... 9.687 1.75
March 31, 1999................................... 2.597 .597
December 31, 1998................................ 1.19 .4325
September 30, 1998............................... 1.00 .75
June 30, 1998.................................... 2.94 1.88
March 31, 1998................................... 3.13 .4325
December 31, 1997................................ .125 .125
September 30, 1997............................... .18 .11
June 30, 1997.................................... .33 .22
March 31, 1997................................... .65 .40
As of December 29, 1999, there were approximately 297 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 2000 to make a cash or
stock distribution to holders of record as of March 31 and September 30. We have
declared a 5% stock dividend to holders of record on September 1, 1999 to be
distributed October 15. 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.
ITEM 2. 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, Scott Broadbent. The defendants included Spectratek, Inc., one of our
predecessors, and Byron Lerner, our chief executive officer.
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 liabilitiy since it had actually entered into arrangements
that were not consummated due to its financial condition at the time. We do not
believe we have any liability to the plaintiffs and will vigorously defend this
action. We have made a motion to dismiss this action, which was granted in
October 1999. The plaintiffs have been granted leave to file an amended
complaint.
We are not aware of any other legal proceedings, or pending legal proceedings,
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. The claimant
has failed to respond to our communications for the past several months.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
<PAGE>
None of the events described in Item 304 of Regulation S-B has occurred within
the past twenty-four months.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
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 International in exchange for all of the outstanding capital
stock of International. A total of nine shareholders received these securities.
Of these, three were officers or directors of 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.
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 pursuant to 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 pursuant to agreement. These investors acquired the shares for
investment. We believe the issuance of these shares is exempt from the
registration requirements pursuant to 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 pursuant to 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. The Company
believes that the transaction was exempt from the registration requirements of
the Securities Act pursuant to 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 115,000 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. The Company believes the
issuance of these shares is exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof. 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 the Company issued 94,500 shares of common stock to the sole
stockholder of ChannelNet, Ltd., effective as of June 1, 1999. The Company
believes the issuance of these shares is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. Prior to
this acquisition by us, ChannelNet in 1999 issued its shares to its sole stock-
holder in an offshore transaction. No other ChannellNet shares were issued.
The Company issued an aggregate of 3,000,000 options between December 1998 and
May 1999, all pursuant to the Company's stock plans. All of these options were
issued to officers, directors, employees and consultants to the Company all of
whom were finally familiar with the Company's operation. Of the options issued
1,180,000 options in December 1998 with the balance issued between January and
May 1999.
The board of directors has recently authorized the grant to Byron Lerner of
options to purchase 400,000 shares, with an exercise price of $4.00 per share,
as compensation. The options are exerciseable over a period of two years.
In June 1999 the Company issued a total of 316,499 shares of its common stock in
connection with a private placement of its securities. An additional 6,000
shares were issued to a finder and 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 the Company believes this transactions
is exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof.
In November 1999, Teltran sold 625,000 shares for $8.00 per share and issued
warrants to purchase 2,600,000 shares at prices ranging
<PAGE>
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. Some of the persons
named in the prospectus as selling stockholders acquired additional shares and
warrants. These additional shares, including the shares issuable upon exercise
of the additional warrants, are not being offered in this prospectus and
registration statement.
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. We have also purchased shares of Internet Protocols Ltd. for
approximately $3,000,000 payable in installments through August 2000. The
ultimate purchase price for the shares acquired from the former shareholder 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 shareholder
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 its former stockholder.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Sixth of the Certificate of Incorporation of the Company provides with
respect to the indemnification of directors and officers that the Company shall
indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of the
Delaware General Corporation Law, as amended from time to time, each person that
those sections grant the Company the power to indemnify. Article Sixth of the
Certificate of Incorporation of the Company also provides that no director shall
be liable to the corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a director, except with respect to (1) a breach of
the director's duty of loyalty to the corporation or its stockholders, (2) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) liability under Section 174 of the Delaware
General Corporation Law or (4) a transaction from which the director derived an
improper personal benefit, it being the intention of the foregoing provision to
eliminate the liability of the corporation's directors to the corporation or its
stockholders to the fullest extent permitted by Section 102(b)(7) of Delaware
General Corporation Law, as amended from time to time.
PART F/S
See Index to Financial Statements and Financial Statements attached hereto.
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION*
--- ------------
<S> <C>
3.1 -- Certificate of Incorporation*
3.2 -- Certificate of Ownership and Merger of Spectratek
Incorporation by Teltran International Group,
Ltd.*
3.3 -- Amendment to Certificate of Incorporation*
4. -- By-Laws(a)
10.1 -- 1998 Stock Option Plan*
10.2 -- Employment Agreement between Byron Lerner and Registrant*
10.2(a) -- Employment Agreement between James Tubbs and Registrant(a)
10.3 -- USA Interconnectivity and Support Agreement dated October 12,
1999*
10.4 -- USA Intellectual Property License Agreement dated October 12,
1999 between OzEmail and Registrant*
10.5 -- Telecommunication Services Agreement dated October 15, 1998
between OzEmail and Registrant*
10.6 -- Extension and Modification of OzEmail Agreement(d)
10.7 -- Subscription Agreement dated June 10, 1999(b)
10.8 -- Memorandum Agreement between Registrant and Antra Holdings
Group Inc.(b)
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(c) (ii) Memorandum of
Closing between and among Barclay Brydon Limited and Teltran
International
Group, Ltd., dated August 16, 1999(c)
10.10 -- Stockholders' Agreement dated as of September 30, 1999 among
Teltran International Group, Ltd.,
Antra Group Holdings, Inc., and Recordstogo.com Inc.(e)
10.11 -- Telecommunications Services Agreement between Teltran
International, Inc. and Pacific Gateway Exchange(e)
10.12 -- Telecommunications Services Agreement between Teltran
International, Inc. and North American Gateway, Inc.(e)
10.13 -- Exchange Agreement among Teltran International Group, Inc. and
the Sellers named on Schedule A.(e)
10.14 -- Deferred Equipment Purchase Agreement, dated August 16, 1999,
between Barclay Brydon Limited and Teltran International Group,
Ltd. (f)
10.15 -- ChannelNet Limited Service Provider Agreement with Norweb
Telecom Limited, dated November 23, 1999 (f)
21.1 -- Subsidiary List(d)
27 -- Financial Data Schedule*
</TABLE>
* Previously filed with the Company's Form 10-SB on March 24, 1999
(a) Filed with the Company's Amendment 1 to its Form 10-SB
(b) Filed with the Company's Amendment 1 to its Form SB-2
(c) Filed with the Company's Form 8-K, dated August 16, 1999.
(d) Filed with the Company's Amendment 2 to its Form SB-2.
(e) Filed with the Company's Amendment 3 to its Form SB-2.
(f) Filed with the Company's Amendment 4 to its Form SB-2.
ITEM 2. DESCRIPTION OF EXHIBITS.
* All exhibits listed above have previously or concurrently been filed.
<PAGE>
LIEBMAN GOLDBERG & DROGIN LLP
Certified Public Accountants
591 Stewart Avenue, Suite 450
Garden City, New York 11530
-------------
Tel (516) 228-6600
Fax (516) 228-6664
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Teltran International Group, Ltd. and Subsidiaries
We have audited the consolidated balance sheets of Teltran International
Group, Ltd. and Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. These 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. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial 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, 1998 and 1997 and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
February 22, 1999
Garden City, New York
F-1
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................................... $ 5,389 $ 3,646
Accounts receivable....................................................... 94,296 --
Deferred financing costs--net of amortization............................. 19,797 --
------------ ------------
Total current assets................................................... 119,482 3,646
------------ ------------
Other Assets:
Goodwill--net of amortization............................................. 37,588 40,273
Organization expense--net of amortization................................. 98 218
------------ ------------
Total other assets..................................................... 37,686 40,491
------------ ------------
Total assets........................................................... $ 157,168 $ 44,137
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Convertible debentures payable............................................ $ 180,488 $ --
Loan payable.............................................................. 50,000 50,000
Due to factor............................................................. 65,193 --
Accounts payable, accrued expenses and taxes payable...................... 104,581 35,081
Corporation taxes payable................................................. 100 488
------------ ------------
Total current liabilities.............................................. 400,362 85,569
------------ ------------
Long-Term Liabilities:
Notes payable............................................................. -- 250,000
Loans payable--stockholders'.............................................. 1,245 10,880
------------ ------------
Total long-term liabilities............................................ 1,245 260,880
------------ ------------
Total liabilities...................................................... 401,607 346,449
------------ ------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, $.001 par value per share, 5,000,000 shares authorized
and -0- shares issued and outstanding..................................
Common stock, $.001 par value per share, 50,000,000 shares authorized and
7,697,295 and 915,637 shares issued and outstanding in 1998 and 1997
respectively........................................................... 7,697 916
Additional paid in capital in excess of par value......................... 2,002,359 1,501,928
Deficit................................................................... (2,254,495) (1,805,156)
------------ ------------
Total stockholders' deficit............................................ (244,439) (302,312)
------------ ------------
Total liabilities and stockholders' deficit............................ $ 157,168 $ 44,137
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Sales................................................................ $ 535,197 $ --
Cost of Sales:
Purchases............................................................ 244,832 --
--------- ---------
Gross profit............................................................ 290,365 --
--------- ---------
Expenses:
Salaries............................................................. 143,356 371,379
Outside services..................................................... 271,850 112,032
Professional fees.................................................... 49,531 21,274
Fees--other.......................................................... 9,384 1,003
Payroll taxes........................................................ 14,878 28,386
Leasing expense...................................................... 11,446 --
Travel............................................................... 93,701 21,219
Insurance............................................................ 28,863 33,573
Rent................................................................. 48,834 36,532
Office expense....................................................... 3,435 170,618
Miscellaneous........................................................ 3,908 4,275
Telephone............................................................ 6,088 27,369
Amortization expense................................................. 24,083 120
--------- ---------
Total expenses.................................................... 709,357 827,780
--------- ---------
Loss from operations.................................................... (418,992) (827,780)
Interest expense........................................................ 29,959 --
--------- ---------
Loss before provision for income taxes.................................. (448,951) (827,780)
Provision for income taxes.............................................. 388 464
--------- ---------
Net loss................................................................ $(449,339) $(828,244)
--------- ---------
--------- ---------
Net loss per share of common stock based upon 7,697,295 and 915,637
(weighted average) shares issued, respectively....................... $ (0.06) $ (0.90)
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
---------------------- IN EXCESS OF
SHARES AMOUNT PAR VALUE DEFICIT
----------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Balance--March 1, 1996........................... 5,145,491 $ 5,145 $ 588,550 $ (550,478)
March, 1996 Teltran Merger.................... 10,000,000 10,000
July, 1996 issuance of 3,166,667 shares....... 3,166,667 3,167 946,833
Adjustment re: merger elimination entries..... 31,273
Net loss for the year......................... (457,707)
----------- -------- ----------- -----------
Balance--January 1, 1997......................... 18,312,158 18,312 1,535,383 (976,912)
Adjustment re: promissory note................ (50,851)
Reverse stock split 1:20 - December 1,
1997....................................... (17,396,521) (17,396) 17,396
Net loss for the year......................... (828,244)
----------- -------- ----------- -----------
Balance--December 31, 1997....................... 915,637 916 1,501,928 (1,805,156)
Issuance of shares in consideration of 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
stockholder's loans........................ 500,000 500 99,500 --
Net loss for the year......................... -- -- -- (449,339)
----------- -------- ----------- -----------
Balance--December 31, 1998....................... 7,697,295 $ 7,697 $ 2,002,359 $(2,254,495)
----------- -------- ----------- -----------
----------- -------- ----------- -----------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................................ $(449,339) $(828,244)
Adjustment to reconcile net loss to net cash (used in) operating activities:
Amortization expense............................................................. 24,083 120
(Increase) in accounts receivable................................................ (94,296) --
(Increase) in deferred financing costs........................................... (55,875) --
Cash advances from factor (net of repayments).................................... 65,193 --
Increase in accounts payable and accrued expenses................................ 69,112 5,613
--------- ---------
Net cash (used in) operating activities....................................... (441,122) (822,511)
--------- ---------
Cash Flows from Financing Activities:
Issuance of convertible debentures............................................... 180,488 --
Cash received from issuance of common stock...................................... -- 602,300
Conversion of convertible debenture--stock issued................................ 119,512 --
(Decrease) in loan payable....................................................... (50,000) --
Proceeds from loan payable....................................................... 50,000 --
(Decrease) in notes payable...................................................... (250,000) --
Decrease in loans payable--stockholders'......................................... 102,865 --
Issuance of stock for notes payable.............................................. 290,000 --
Cash received as advances from investors......................................... -- 199,149
--------- ---------
Net cash provided by financing activities..................................... 442,865 801,449
--------- ---------
Net increase (decrease) in cash..................................................... 1,743 (21,062)
Cash--January 1,.................................................................... 3,646 24,708
--------- ---------
Cash--December 31,.................................................................. $ 5,389 $ 3,646
--------- ---------
--------- ---------
Supplemental Disclosures:
Income tax....................................................................... $ 625 $ 464
--------- ---------
--------- ---------
Interest paid.................................................................... $ 29,959 $ --
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--OPERATIONS:
Nature of Business:
Teltran International Group, Ltd. through its wholly owned Subsidiary
Teltran International, Inc. (the "Company") provides services for state of the
art telecommunications.
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 with Teltran International Group,
Ltd., a newly formed Delaware corporation with the surviving entity.
Except as otherwise indicated by the context, references to "the Company"
refer to Teltran International Group, Ltd. and the subsidiary.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiary. Intercompany balances and transactions have
been eliminated.
Development Stage Activities and Operations:
Prior to April 1998, the Company was a development stage activity. Since
the Company now has continuing business revenues, comparative financial
information does not include losses accumulated during the development stage
period not part of the financial statement period.
At December 31, 1998, the Company has a net operating loss carryforward of
approximately $2,254,000 after limitations based on changes in ownership.
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 1998 and
1997 was 7,697,295 and 915,637 respectively.
The Company adopted Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share". The Statement established standards for computing
and
F-6
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
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.
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.
Impairment of Long-Lived Assets:
The Company has not completed it's evaluation of the adoption of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." However, management believes any such effect will not be
material.
Revenue Recognition:
Telecommunication revenues from services provided are recognized and billed
as services are performed.
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 are from this
customer who also was factored.
F-7
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Goodwill:
Goodwill is stated at cost and is amortized on a straight line basis over a
life of 15 years. Amortization expense is $2,685, for the year ended
December 31, 1998.
Stock Options:
The Company recognizes compensation for stock options granted to employees
in accordance with Accounting Principles Board Opinion No. 25.
NOTE 3--NOTES RECEIVABLE:
In July 1996, the Company issued 3,166,667 shares of common stock to investors
for the sum of $950,000. During the year ended December 31, 1996, the Company
received $347,700 and the balance of $602,300 was received during the year ended
December 31, 1997.
NOTE 4--DUE TO FACTOR:
In May 1998, the Company entered into a factoring agreement; financing the
accounts receivable of their major customers. At December 31, 1998, the
outstanding balance due to the factor, represents approximately 70% of the
customers' open balance. Advances from the factor totaled $509,036 (before
customer repayments) from May, 1998 to December, 1998 and were used to pay
operating expenses as well as vendor purchases. In February 1999, the Company
terminated the factoring agreement and paid the outstanding balance in full.
NOTE 5--NOTES 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 are convertible into the Company's stock at $1.25 or 70% of the
lowest closing bid price of the common stock, 30 trading days preceding the
conversion date. During the period August through December 1998, $119,512 of
debentures were converted to 269,158 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 are being amortized to the convertible debentures maturity date.
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. The loan is due upon notification from the maker or upon the
anniversary date of the renegotiation. Since it is anticipated that this loan
will be repaid within one year and there is not interest due; imputed interest
in accordance with APB#21 has not been calculated.
F-8
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 5--NOTES PAYABLE:--(CONTINUED)
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 on aggregate of 6,000,000 shares to these
investors in consideration of the termination of the joint venture.
NOTE 6--STOCKHOLDERS' DEFICIT:
During the period August 1998 to December 31, 1998, the Company issued
269,158 shares of its common stock upon the conversion of $119,512 of the
debentures referred to in Note 5.
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 the year.
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.
Upon completion of the reincorporation on October 6, 1997, the Company's
capitalization consisted of 50,000,000 shares of common stock and 5,000,000
shares of preferred stock. On December 1, 1997, the shareholders approved a
reverse one for twenty common stock split. The stock split has been reflected
retroactively in the accompanying financial statements and all applicable
references as to the number of common shares and per share information.
NOTE 7--COMMITMENTS AND CONTINGENCIES:
The Company was a development stage company and had no significant revenues
and limited financing during the first three months of 1998. Additionally, the
Company, as shown in the accompanying consolidated financial statements, has an
accumulated deficit of $2,254,495 at December 31, 1998 and incurred a net loss
of $449,339 during the year ended December 31, 1998. Subsequent to June 30,
1998, the Company is no longer a development stage company since revenues are
continuing.
The Company rents its facility under a lease agreement through August 31,
2003.
F-9
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 7--COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
Future minimum lease payments under these agreements for the years ended
December 31, are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 90,500
2000............................................................ 90,500
2001............................................................ 90,500
2002............................................................ 98,644
2003............................................................ 98,644
--------
$468,788
--------
--------
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 was $48,834 and
$36,532, respectively.
NOTE 8--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 795,000 additional stock options, also with a 10 year life, to certain
employees and non-employees that may be exercised at a price of $.59 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, 1997.................................... 0 --
Expired/cancelled................................................. 0 --
Granted........................................................... 0 --
---------
Outstanding--December 31, 1998.................................... 1,180,000 1.69
---------
---------
Exercisable--December 31, 1998.................................... 497,500 1.69
---------
---------
</TABLE>
The Company recognizes compensation for stock options granted to employees
in accordance with APB#25 and has adopted SFAS # 123, Accounting for Stock Based
Compensation for non-employees. The fair value of options granted in 1997 was
estimated as of the grant date with the following assumptions: no dividend for
all years, risk-free interest rate of 6%, expected life of ten years and
expected amount to be exercised at 100%. 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
F-10
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 8--STOCK COMPENSATION PLAN:--(CONTINUED)
grant date for its stock options, the Company's net loss would have been
increased to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
Net Loss:
<S> <C>
As reported..................................... $ (449,339)
=============
Pro-forma....................................... $ (553,514)
=============
Net loss per share:
As reported..................................... $ (0.06)
-------------
Pro-forma....................................... $ (0.07)
-------------
</TABLE>
NOTE 9--SUBSEQUENT EVENT:
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.
F-11
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash....................................................................... $ 498,048 $ 28,297
Accounts receivable........................................................ 1,715,707 223,413
Investment................................................................. 6,000,000 --
Prepaid expenses........................................................... 163,350 8,278
Loans and exchanges........................................................ 29,200 --
Deferred financing costs--net of amortization.............................. -- 47,057
------------- -----------
Total current assets.................................................... 8,406,305 307,045
------------- -----------
Fixed Assets:
Machinery & equipment, net of accumulated depreciation..................... 29,138 --
------------- -----------
Other Assets:
Goodwill--net of amortization.............................................. 222,166 40,273
Organization expense--net of amortization.................................. 23 128
------------- -----------
Total other assets...................................................... 222,189 40,401
------------- -----------
Total assets............................................................ $ 8,657,632 $ 347,446
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Convertible debentures payable............................................. $ -- $ 290,000
Loan payable............................................................... 50,000 50,000
Accounts payable, accrued expenses and taxes payable....................... 574,078 82,042
Due to factor.............................................................. -- 93,748
Corporation taxes payable.................................................. 100 100
------------- -----------
Total current liabilities............................................... 624,178 515,890
------------- -----------
Long-Term Liabilities:
Loans payable--stockholders'............................................... 1,245 19,196
------------- -----------
Total long-term liabilities............................................. 1,245 19,196
------------- -----------
Total liabilities....................................................... 625,423 535,086
------------- -----------
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
13,371,283 and 6,929,082 issued and outstanding, respectively........... 13,371 6,929
Additional paid in capital in excess of par value.......................... 22,484,841 1,794,292
Deficit.................................................................... (14,466,003) (1,988,861)
------------- -----------
Total stockholders' equity (deficit).................................... 8,032,209 (187,640)
------------- -----------
Total liabilities and stockholders' equity.............................. $ 8,657,632 $ 347,446
------------- -----------
------------- -----------
</TABLE>
F-12
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Revenues:
Sales........................................................................... $ 2,807,749 $ 449,304
Miscellaneous................................................................... 8,159 --
----------- ---------
2,815,908 449,304
Cost of Sales:
Purchases....................................................................... 1,420,009 220,383
----------- ---------
Gross profit....................................................................... 1,395,899 228,921
----------- ---------
Expenses:
Salaries........................................................................ 545,746 56,787
Professional fees............................................................... 227,746 137,486
Fees other...................................................................... 70,039 2,800
Payroll taxes................................................................... 18,102 5,756
Leasing expense................................................................. 8,397 8,259
Travel.......................................................................... 86,013 87,825
Insurance....................................................................... 27,886 16,411
Rent............................................................................ 102,049 41,292
Office expense.................................................................. 21,861 21,032
Miscellaneous................................................................... 12,538 1,915
Registration fees............................................................... 12,469 --
Business development............................................................ 2,923 --
Telephone....................................................................... 52,724 7,688
Contributions................................................................... 1,450 --
Advertising..................................................................... 6,505 --
Amortization expense............................................................ 2,302 7,285
----------- ---------
Total expenses............................................................... 1,198,750 394,536
----------- ---------
Income (loss) from operations................................................... 197,149 (165,615)
Interest expense............................................................. 36,753 17,703
----------- ---------
Income (loss) before provision for income taxes................................. 160,396 (183,318)
Provision for income taxes...................................................... 2,473 387
----------- ---------
Net income (loss)............................................................... $ 157,923 $(183,705)
----------- ---------
----------- ---------
Net income (loss) per share of common stock based upon 11,698,334 and 6,929,082
(weighted average) shares issued, respectively................................ $ 0.01 $ (0.03)
----------- ---------
----------- ---------
</TABLE>
F-13
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss)................................................................. $ 157,923 $(183,705)
Adjustment to reconcile net income (loss) to net cash (used in) operating
activities:
Amortization expense........................................................... 2,302 7,285
(Increase) in accounts receivable.............................................. (1,619,216) (223,413)
(Increase) in loans and exchanges.............................................. (29,200) --
(Increase) in prepaid expenses................................................. (163,350) (8,278)
Decrease (increase) in deferred financing costs................................ 19,797 (55,875)
Cash (repayments) received--factor............................................. (65,193) 93,748
Increase in accounts payable, accrued expenses and taxes payable............... 469,497 46,573
----------- ---------
Net cash (used in) operating activities..................................... (1,227,440) (323,665)
----------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets....................................................... (29,138) --
----------- ---------
Cash Flows from Financing Activities:
(Decrease) Increase of convertible debentures payable.......................... (180,488) 290,000
(Decrease) in notes payable.................................................... -- (250,000)
Loans from stockholders and others............................................. -- 8,316
Conversion of convertible debenture--stock issued.............................. 676,319 10,000
Exercise of warrants........................................................... 244,937 290,000
Private placement.............................................................. 1,008,469 --
----------- ---------
Net cash provided by financing activities................................... 1,749,237 348,316
----------- ---------
Net increase in cash.............................................................. 492,659 24,651
Cash January 1.................................................................... 5,389 3,646
----------- ---------
Cash September 30,................................................................ $ 498,048 $ 28,297
----------- ---------
----------- ---------
Supplemental Disclosures:
Income tax..................................................................... $ 780 --
----------- ---------
----------- ---------
Interest paid.................................................................. $ 749 --
----------- ---------
----------- ---------
</TABLE>
F-14
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the nine month period ended September 30,
1999 is not necessarily indicative of the results to be expected for the full
year.
2. MATERIAL EVENTS
During the nine months ended September 30, 1999, the following events
occurred:
In the six months ended June 30, 1999, the company issued 1,835,033 shares
of common stock which represented the conversion of $850,000 of convertible
debentures issued August 1, 1998 and due August 1, 1999. 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.
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 April, 1999, Teltran and Antra Holding Group Inc. exchanged shares of
their company's shares. 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 in June and September 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.
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 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 share to the other party.
Both Companies are also completing arrangements to form a joint venture
corporation with a subsidiary of Antra, to market records with Antra through a
website to be established on the Internet using the Teltran portal. The new
corporation will have equal ownership by Antra and Teltran after granting a
minority interest to a supplier. Each will be equally responsible for funding
and share equally in losses and profits. This venture initially will market
records owned by an independent third party.
In a transaction effective June 1, 1999, the Company issued 94,500 common
shares to acquired 100% of Channel Net, Ltd.
585,000 common shares, representing a previously declared 5% stock
dividend, were issued during the quarter ended June 30, 1999.
675,456 common shares, representing a declared 5% stock dividend, were
issued during the quarter ended September 30, 1999.
F-15
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated financial statement of
operations for Teltran International Group, Ltd. and Subsidiaries consists of
actual operating results for the nine months ended September 30, 1999 for
Teltran and four months ended September 30, 1999 for ChannelNet (acquisition
date June 1, 1999 to September 30, 1999). The nine month proforma statement of
operations includes the actual operating results for Teltran for that period and
the four months ended (June 1, 1999 to September 30, 1999) September 30, 1999
for ChannelNet, Limited. ChannelNet, Limited was acquired effective June 1, 1999
and began business on that date as well. Usually, proforma information includes
the prior year end statement of operations. However, since ChannelNet, Limited
was not in existence prior to June 1, 1999, the proforma statement of operations
for the year ended December 31, 1998 is the Teltran historical statement of
operations for that period. That statement is presented as part of their audited
financial statement.
In a transaction effective June 1, 1999, Teltran issued 94,500 shares of
its common stock to acquire 100% of ChannelNet, Ltd. Teltran will be obligated
to issue additional shares based upon earnings generated by the acquired
subsidiary during the period September, 1999 through February, 2001.
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:
<TABLE>
<S> <C>
In U. S. Dollars
Accounts receivable...................................................... $ 8,795
Accounts payable......................................................... (6,598)
------------
Net assets............................................................ 2,197
Purchase price........................................................... 189,000
------------
Goodwill................................................................. $ 186,803
------------
------------
</TABLE>
(a) Amortization of Goodwill:
$186,803 over a 40 year life = $389/month
(b) Miscellaneous adjustment to reflect net assets of ChannelNet prior to
acquisition (May, 1999 transaction of sales and expenses that did not
belong to Teltran).
F-16
<PAGE>
TELTRAN INTERNATIONAL GROUP, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ------------------------
TELTRAN CHANNEL NET ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales.......................................... $ 420,399 $ 2,387,350 $ -- $2,807,749
Miscellaneous.................................. 8,159 8,159
----------- ----------- ------- ----------
428,558 2,387,350 -- 2,815,908
Cost of Sales:
Purchases...................................... 354,621 1,016,388 1,420,009
----------- ----------- ------- ----------
Gross profit...................................... 73,937 1,370,962 -- 1,395,899
----------- ----------- ------- ----------
Expenses:
Salaries....................................... 416,421 129,325 -- 545,746
Professional fees.............................. 217,246 10,500 -- 227,746
Fees--other.................................... 70,039 -- -- 70,039
Payroll taxes.................................. 18,102 -- -- 18,102
Leasing expense................................ 8,397 -- -- 8,397
Travel......................................... 81,762 4,251 -- 86,013
Insurance...................................... 27,886 -- -- 27,886
Rent........................................... 102,049 -- -- 102,049
Office expense................................. 11,687 10,174 -- 21,861
Miscellaneous.................................. 9,144 1,197 2,197(b) 12,538
Registration fees.............................. 12,469 -- -- 12,469
Business development........................... 2,923 -- -- 2,923
Telephone...................................... 101,724 -- -- 52,724
Contributions.................................. 1,450 -- -- 1,450
Advertising.................................... 6,505 -- -- 6,505
Amortization expense........................... 746 -- 1,556(a) 2,302
----------- ----------- ------- ----------
Total expenses.............................. 1,088,550 155,447 3,753 1,198,750
----------- ----------- ------- ----------
Income (loss) from operations..................... (1,014,613) 1,215,515 (3,753) 197,149
Interest expense............................ 36,753 -- -- 36,753
----------- ----------- ------- ----------
Income (loss) before provision
for income taxes............................... (1,051,366) 1,215,515 (3,753) 160,396
Provision for income taxes........................ 2,473 -- -- 2,473
----------- ----------- ------- ----------
Net income (loss)................................. $(1,053,839) $ 1,215,515 $(3,753) $ 157,923
----------- ----------- ------- ----------
----------- ----------- ------- ----------
</TABLE>
F-17
<PAGE>
CHANNELNET LIMITED
COMPANY INFORMATION
31.5.1999
Incorporated in England on 13th May 1999
Number 3772561
<TABLE>
<S> <C>
DIRECTORS B. Lerner Esq. (appointed 16.08.99)
J. Tubbs Esq. (appointed 16.08.99)
M. Thompson Esq. (appointed 09.08.99)
REGISTERED OFFICE Enterprise House
15 Whitworth Street West
MANCHESTER
M1 5GS
BANKERS Whiteway Laidlaw
ACCOUNTANTS Darent Business Services
Accountants
51 Leigh Road
Boothstown Worsley
MANCHESTER
M28 1HP
AUDITORS David Nugent & Co.
Chartered Certified Accountants
& Registered Auditors
51 Leigh Road
Boothstown Worsley
MANCHESTER
M28 1HP
</TABLE>
F-18
<PAGE>
CHANNELNET LIMITED
DIRECTORS' REPORT
31.5.1999
The directors present their report and the financial statements for the
period ended 31.5.1999.
PRINCIPAL ACTIVITY
The principal activity of the company is the supply of telecommunications
services.
YEAR 2000
Our business depends on a computerised accounting system to record the
transactions. We can confirm that our system has been guaranteed as being year
2000 compliant. However we could be at risk if other parties do not adequately
deal with the issue.
We have assessed the possibility of related failures in our significant
suppliers and customers all of whom inform us that they are dealing with the
problem. It is impossible to guarantee that no year 2000 problems will remain.
However the directors feel that they will be able to deal promptly with any
failures that may occur.
DIRECTORS
The directors of the company during the period 13th May 1999 to 31st May
1999 and their interests in the shares of the company as recorded in the
register of directors interests were as follows
<TABLE>
<CAPTION>
31.5.1999
ORDINARY
SHARES
----------
<S> <C>
B. Lerner Esq. (appointed 16.08.99).............................. --
J. Tubbs Esq. (appointed 16.08.99)............................... --
M. Thompson Esq. (appointed 09.08.99)............................ --
</TABLE>
AUDITORS
David Nugent & Co were appointed as Auditors of the company of 7th August
1999 and have agreed to offer themselves for re-appointment as auditors of the
company.
SMALL COMPANY EXEMPTIONS
This report has been prepared in accordance with the special provisions of
Part VII of the Companies Act 1985 relating to small companies.
applicable to small companies.
On behalf of the board
Director
Enterprise House
15 Whitworth Street West
MANCHESTER
11 5GS
9th August 1999
F-19
<PAGE>
CHANNELNET LIMITED
STATEMENT OF DIRECTORS' RESPONSIBILITIES
We are required under company law to prepare financial statements for each
financial period which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements we are required to:
o select suitable accounting policies and apply them consistently;
o make reasonable and prudent judgements and estimates;
o prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in
business.
We are also responsible for:
o keeping proper accounting records;
o safeguarding the company's assets;
o taking reasonable steps for the prevention and detection of fraud.
On behalf of the board
Director
19th August 1999
F-20
<PAGE>
CHANNELNET LIMITED
AUDITORS' REPORT
AUDITORS' REPORT TO THE MEMBERS OF
CHANNELNET LIMITED
We have audited the financial statements on pages 5-8 which have been
prepared under the accounting policies set out on page 7.
RESPECTIVE RESPONSIBLITIES OF DIRECTORS AND AUDITORS
As described on page 3, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material missatatement, whether caused by fraud or error or other
irregularity. In forming our opinion we also evaluated the overall adequacy of
the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the
state of the company's affairs as at 31.5.1999 and of its profit for the period
13th May 1999 to 31st May 1999 and have been properly prepared in accordance
with the provisions of the Companies Act 1985 applicable to small companies.
David Nugent & Co.
Chartered Certified Accountants
& Registered Auditors
MANCHESTER
19th August 1999
F-21
<PAGE>
CHANNELNET LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE PERIOD 13TH MAY 1999 TO 31ST MAY 1999
<TABLE>
<CAPTION>
1999
NOTE pounds
---- ---------
<S> <C> <C>
Turnover 2 4,678
Net operating expenses
Administrative expenses (3,155)
---------
Profit on ordinary activities
before taxation 1,523
Taxation 4 (152)
---------
Profit on ordinary activities
after taxation 1,371
retained for the 13th May 1999 to 31st May 1999 9
---------
---------
</TABLE>
Movements in reserves are shown in note 9.
None of the company's activities were acquired or discontinued during the above
financial period.
There are no recognised gains and losses in 1999 other than the profit for the
period 13th May 1999 to 31st May 1999.
F-22
<PAGE>
CHANNELNET LIMITED
BALANCE SHEET
AT 31.5.1999
<TABLE>
<CAPTION>
1999
-----------------
NOTE pounds pounds
---- ------- -------
<S> <C> <C> <C>
Current assets
Debtors 5 5,497
-------
5,497
Creditors: amounts falling due
within one year 6 (4,125)
-------
Net current assets 1,372
-------
Total assets less current liabilities 1,372
-------
-------
Capital and reserves
Called up share capital 8 1
Profit and loss account 9 1,371
-------
Total shareholders' funds 7 1,372
-------
-------
</TABLE>
These accounts have been prepared in accordance with:
(a) The special provisions of Part VII of the Companies Act 1985: and
(b) The Financial Reporting Standard for Smaller Entities.
The accounts were approved by the board of Directors on 19th August 1999.
Director
F-23
<PAGE>
CHANNELNET LIMITED
NOTES ON FINANCIAL STATEMENTS
31.5.1999
1. ACCOUNTING POLICIES
Basis of accounting
The financial statements have been prepared under the historical cost
accounting rules.
The company has taken advantage of the exemption from preparing a cash flow
statement conferred by Financial Reporting Standard No. 1 on the grounds that it
is entitled to the exemptions available in Section 246 to 247 of the Companies
Act 1985 for small companies.
Deferred taxation
Deferred taxation is provided on the liability method in respect of the
taxation effect of all timing differences to the extent that tax liabilities are
likely to crystallise in the foreseeable future.
2. TURNOVER
Turnover represents the amount derived from the provision of goods and
services which fall within the company's ordinary activities stated net of value
added tax.
In the opinion of the directors, none of the turnover of the company is
attributable to geographical markets outside the UK. (1999 nil)
3. OPERATING PROFIT
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Operating profit is stated after charging
Auditors' remuneration........................................................... 250
-----
-----
</TABLE>
4. TAXATION
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Corporation tax on profit on ordinary activities at 10%.......................... 152
-----
-----
</TABLE>
5. DEBTORS
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Amounts falling due within one year
Other debtors.................................................................... 5,497
-----
5,497
-----
-----
</TABLE>
F-24
<PAGE>
6. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Other creditors.................................................................. 4,125
-----
4,125
-----
-----
</TABLE>
7. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Profit for the financial period 13th May 1999 to 31st May 1999................... 1,371
New share capital subscribed..................................................... 1
-----
Net addition to shareholders' funds.............................................. 1,372
Opening shareholders' funds...................................................... --
-----
Closing shareholders' funds...................................................... 1,372
-----
-----
</TABLE>
8. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1999
------------------
NUMBER OF
SHARES POUNDS
--------- -----
<S> <C> <C>
Authorised........................................................ 1,000 1,000
----- -----
----- -----
Allotted called up and fully paid
Ordinary Shares of pounds 1 each.................................. 1 1
----- -----
----- -----
</TABLE>
9. PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
1999
POUNDS
-----
<S> <C>
Retained profit for the period 13th May 1999 to 31st May 1999.................... 1,371
-----
-----
</TABLE>
F-25
<PAGE>
APPENDIX 1
CHANNELNET LIMITED
TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE PERIOD 13TH MAY 1999 TO 31ST
MAY 1999.
1999
----
pounds pounds
------ ------
Turnover
Sales............................................ 4,678
Less overheads
Salaries and wages............................... 2,805
Auditors' remuneration........................... 250
Accountants' fees................................ 100
-----
3,155
-----
Net profit for the year 1,523
=====
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, HEREUNTO DULY AUTHORIZED.
Date: December 30, 1999
TELTRAN INTERNATIONAL GROUP, LTD.
By: /s/ Byron R. Lerner
--------------------------------
Byron R. Lerner
Chief Executive Officer, President
(Principal Executive, Financial
and Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION*
--- ------------
3.1 -- Certificate of Incorporation*
3.2 -- Certificate of Ownership and Merger of Spectratek
Incorporation by Teltran International Group, Ltd.*
3.3 -- Amendment to Certificate of Incorporation*
4. -- By-Laws(a)
10.1 -- 1998 Stock Option Plan*
10.2 -- Employment Agreement between Byron Lerner and Registrant*
10.2(a) -- Employment Agreement between James Tubbs and Registrant(a)
10.3 -- USA Interconnectivity and Support Agreement dated
October 12, 1999*
10.4 -- USA Intellectual Property License Agreement dated
October 12, 1999 between OzEmail and Registrant*
10.5 -- Telecommunication Services Agreement dated October 15, 1998
between OzEmail and Registrant*
10.6 -- Extension and Modification of OzEmail Agreement(d)
10.7 -- Subscription Agreement dated June 10, 1999(b)
10.8 -- Memorandum Agreement between Registrant and Antra Holdings
Group Inc.(b)
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(c)
(ii) Memorandum of Closing between and among Barclay Brydon
Limited and Teltran International Group, Ltd., dated
August 16, 1999(c)
10.10 -- Stockholders' Agreement dated as of September 30, 1999 among
Teltran International Group, Ltd.,
Antra Group Holdings, Inc., and Recordstogo.com Inc.(e)
10.11 -- Telecommunications Services Agreement between Teltran
International, Inc. and Pacific Gateway Exchange(e)
10.12 -- Telecommunications Services Agreement between Teltran
International, Inc. and North AmericanGateway, Inc.(e)
10.13 -- Exchange Agreement among Teltran International Group, Inc.
and the Sellers named on Schedule A.(e)
10.14 -- Deferred Equipment Purchase Agreement, dated
August 16, 1999, between Barclay Brydon Limited and Teltran
International Group, Ltd. (f)
10.15 -- ChannelNet Limited Service Provider Agreement with Norweb
Telecom Limited, dated November 23, 1999 (f)
21.1 -- Subsidiary List(d)
27 -- Financial Data Schedule*
* Previously filed with the Company's Form 10-SB on March 24, 1999
(a) Filed with the Company's Amendment 1 to its Form 10-SB
(b) Filed with the Company's Amendment 1 to its Form SB-2
(c) Filed with the Company's Form 8-K, dated August 16, 1999.
(d) Filed with the Company's Amendment 2 to its Form SB-2.
(e) Filed with the Company's Amendment 3 to its Form SB-2.
(f) Filed with the Company's Amendment 4 to its Form SB-2.
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