<PAGE>
July 6, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20429
FORM 10/A-4
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Telemonde, Inc.
--------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 62-1795931
-------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
230 Park Avenue
New York, New York 10169
--------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
(646) 435-5645
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name Of Each Exchange On Which
To Be So Registered Each Class Is To Be Registered
------------------- ------------------------------
NONE NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
--------------------------------------------------------------------------------
(Title of Class)
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ITEM 1. BUSINESS....................................................... 1
ITEM 2. FINANCIAL INFORMATION.......................................... 31
ITEM 3. PROPERTIES..................................................... 56
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 57
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS............................... 62
ITEM 6. EXECUTIVE COMPENSATION......................................... 68
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 70
ITEM 8. LEGAL PROCEEDINGS.............................................. 76
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS......................... 76
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES........................ 77
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED........ 80
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... 82
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 85
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 86
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.............................. 87
SIGNATURES............................................................... 92
</TABLE>
<PAGE>
ITEM 1. BUSINESS
You should read this description of our business together with our management's
discussion and analysis of financial condition and results of operations and the
financial statements and related notes appearing elsewhere in this registration
statement.
Overview
We are an international communications company that is creating a global network
which will connect developed countries and regional centers in emerging markets.
We offer voice, data and Internet services which use our network and content
capabilities. We also manage the bandwidth that we provide to our customers. One
of the aims of our services is to enable emerging markets to have access to the
telecommunications facilities of the developed world. These services will enable
people in developing countries to participate in the international
communications community. Our target customers include leading global
telecommunications carriers, public telephone operators in developing countries,
Internet service providers and multimedia service providers. We seek to
capitalize on the increasing demand for high quality international
communications services which is being driven by the globalization of the
world's economies, the worldwide trend toward telecommunications deregulation,
and growth of voice, video, data and Internet traffic.
General Development of Business
We were formed on March 10, 1998 as Telemonde Investments Limited, a British
Virgin Islands company. We began to purchase and sell trans-atlantic bandwidth
through various wholly-owned subsidiaries in April 1998.
Telemonde, Inc. (formerly Pac-Rim Consulting, Inc.) acquired Telemonde
Investments Limited on May 14, 1999. Pac-Rim Consulting, Inc. was a dormant
shell company with no operating history but was listed on the NASD Over-the-
Counter Bulletin Board. Following the acquisition, Pac-Rim Consulting, Inc.
changed its name to Telemonde, Inc. On November 9, 1999 Telemonde, Inc. became a
Delaware corporation by merging into a newly formed Delaware subsidiary.
In August 1999, we acquired TGA (UK) Limited, which provided telecommunications
switch services.
We also established telemonde.net SA, in August 1999. telemonde.net will develop
and sell telecommunications and Internet services to Internet service providers
and multimedia service providers in Western Europe.
On November 8, 1999 we acquired EquiTel Communications Limited, a United Kingdom
company. EquiTel provides telecommunications route management services and
intelligent network services, which include a complete telephony card service,
voice mail, fax mail, prepaid mobile calls, premium rate services, short message
services, intelligent routing and single number services, mainly to emerging
markets. The maximum aggregate value of the consideration for the purchase of
EquiTel is $69 million, which is
1
<PAGE>
mostly dependent upon its future earnings and which is to be satisfied by
the issue of restricted shares of common stock in Telemonde, Inc.
In December 1998, Desert Telecommunications Services, LLC, an Oman company,
was formed through a joint venture between EquiTel and an individual.
Desert Telecommunications Services, in which EquiTel holds a 49% interest,
provides intelligent network services in Oman.
The following chart shows our current organization:
<TABLE>
<CAPTION>
===================================================
TELEMONDE, INC.
a Delaware corporation
===================================================
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
telemonde.net, S.A. Telemonde TGA (UK) Limited, Telecities Limited, EquiTel Telemonde Networks,
organized in Investments Limited, a United a United Kingdom Communications Limited, a United
Switzerland a British Virgin Kingdom company Limited, a United Kingdom company
Islands company company Kingdom company
------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------
EquiTel Card Services
Limited,
---------------------------------------------
Telemonde International Bandwidth, a United Kingdom company
Limited, a British Virgin Islands company
---------------------------------------------
---------------------------------------------
Teleroute Limited,
a United Kingdom company
Telemonde Bandwidth (Bermuda) Limited, a
Bermuda company
---------------------------------------------
---------------------------------------------
Telesource Limited,
a United Kingdom company
Telemonde International Bandwidth
(Bermuda) Limited, ---------------------------------------------
a Bermuda company
---------------------------------------------
Desert Telecommunications Services, LLC
(49%), organized in Oman
---------------------------------------------
</TABLE>
* All Companies are 100% owned unless otherwise indicated
The principal operating subsidiaries of the Telemonde Group are:
. telemonde.net SA Established to sell Internet-related
services to European Internet Service
Providers
. Telemonde Investments Holding company for three bandwidth
Limited subsidiaries
. Telemonde International Sells bandwidth capacity supplied by
Bandwidth Limited Gemini
2
<PAGE>
. Telemonde Bandwidth Sells bandwidth capacity supplied by
(Bermuda) Limited Global Crossing
. Telemonde International Sells bandwidth capacity supplied by
Bandwidth (Bermuda) MCI WorldCom
Limited
. EquiTel Communications Sells network and telecommunications
Limited services
. Desert Joint venture company, providing
Telecommunication network services in Oman
Services LLC
. Telemonde Networks Provides technical, network, marketing
Limited and administrative services to other
Group companies and to third party
customers.
Telecities Limited, EquiTel Card Services Limited, Teleroute Limited and
Telesource Limited are dormant companies, which have no operating history.
TGA(UK) Limited is now a dormant company because its assets and business have
been transferred to other companies in the Telemonde group.
Business Description
Introduction
Our business consisted solely of sales of bandwidth and related services until
the acquisition of EquiTel on November 8, 1999. EquiTel is a significant
subsidiary, and its revenue will represent a separate industry segment. The
EquiTel business is described separately from the description of the Telemonde
business.
It is our intention to fully integrate EquiTel's operations with those of
Telemonde. We therefore describe our plan of operation and strategy as for the
combined business, towards the end of this section.
Telemonde's markets
Bandwidth Capacity.
Bandwidth is the ability to transmit information, packaged as a stream of bits,
from one destination to another without losing or distorting the content of the
bits. Typically bandwidth is transmitted down systems of fiber optic lines
across oceans and land masses. Fiber optic systems use laser-generated light to
transmit bandwidth through fine strands of glass and are generally characterized
by large circuit capacity, good sound quality and resistance to external signal
interference. Recent advances in bandwidth technology called wave division
multiplexing allow us to activate the fiber and increase the transmission speed
and capacity of the fiber optic lines. Wave division multiplexing and its next
generation variation, dense wave division multiplexing take information bits
3
<PAGE>
and transmit them across increasing numbers of wavelengths or light streams,
multiplying the capacity of the fiber optic line by more than one hundred times.
We believe that the demand for bandwidth will continue to grow, primarily
because of the growth of the Internet and the increase in the size and number of
private networks. We expect that bandwidth demand will more than double in the
next two years, from approximately 1,000 Gbps in 1999 to 2,500 Gbps in 2001.
International long distance carriers are often categorized according to
ownership and use of bandwidth capacity. No carrier exclusively utilizes its own
facilities for transmission of all of its long distance traffic. Carriers vary
from being primarily facilities-based, meaning that they own and operate their
own land-based and/or undersea cable, satellite-based facilities and switches,
to those that are purely resellers of another carrier's transmission facilities.
We fall into the category of carriers that purchase transmission facilities from
other carriers and break down and sell or lease the capacity.
Under a typical operating agreement, each carrier owns or leases its portion of
the transmission facilities between two countries. A carrier gains ownership
rights in digital undersea fiber optic systems by: (1) purchasing direct
ownership in a particular system (usually prior to the time the system is placed
into service); (2) acquiring an Indefeasible Right of Use, or IRU (which is the
right to use capacity for the time and bandwidth to which the right applies;
e.g., a long term lease of a specific amount of capacity), in a previously
installed system; or (3) by leasing or otherwise obtaining capacity from another
long distance provider that has either direct ownership or IRUs in a cable. We
acquire IRUs from previously installed systems and then lease or sell the IRU to
our customers.
The cost of an IRU to Telemonde from its bandwidth suppliers depends on the
market price for bandwidth capacity at the time of purchasing or committing to
purchase the IRU. Our aggregate cost for bandwidth to date totals $113,412,000,
which amount includes bandwidth inventory not yet drawn down from suppliers. The
other costs of delivering and installing the IRU for Telemonde's customer
consist of the purchase cost of connectivity from the cable landing station or
from a carrier hotel facility to the customer's premises and of the cost of
installation and testing at the customer's premises. The customer's capacity is
maintained under an annual maintenance contract, for which the customer pays an
annual or quarterly maintenance fee. This fee is based on the annual maintenance
charge which Telemonde pays its suppliers for the maintenance of the cable
capacity of the IRU.
4
<PAGE>
Internet and Data Services.
Internet connectivity and enhanced Internet and data services represent two of
the fastest growing segments of the telecommunications services market. The
popularity of the Internet with consumers has driven the rapid proliferation of
the Internet as a commercial medium. Businesses are increasingly:
. establishing websites and corporate intranets and extranets to expand
their customer reach and improve their communications efficiency;
. recognizing that the Internet can significantly enhance communications
among geographically distributed offices and employees as well as with
customers and suppliers; and
. utilizing the Internet for mission critical applications such as
sales, customer service and project coordination.
In addition, technology trends over the past decade have removed the distinction
between voice and data segments. Today, voice conversations are routinely
converted into digital signals and sent together with other data over high-speed
lines. In order to satisfy the high demand for low-cost communication, software
and hardware developers have developed technologies capable of allowing the
Internet to be utilized for voice communications. Several companies now offer
Internet telephony services which provide real-time voice conversations over the
Internet.
We believe that there is significant market opportunity for an integrated
approach to the supply of destination-to-destination bandwidth capacity,
telehousing facilities, network management and content in order for our
customers to focus upon their core activities.
Telemonde's products and services
We are designing a network to enable us to offer customized products and
services to a wide range of customers with sophisticated voice and data
transmission requirements. We can provide capacity in varying amounts over all
or part of our network utilizing a variety of transmission technologies. We
believe that this range and flexibility will enable us to effectively market our
products to public telephone operators, alternative operators, Internet service
providers, resellers and other carriers comprising our target market.
Telecommunications operators and carriers seeking to acquire cross-border
bandwidth capacity have, until recently, acquired that capacity by leasing
international private leased circuits from public telephone operators.
International private leased circuits have traditionally been formed by
combining half-circuits from two public telephone operators between customer
locations. Our existing destination-to-destination products and planned
international network are designed as an alternative to these arrangements.
We offer the following options and services:
Flexible Capacity Options. We offer customers flexible managed bandwidth
capacity options that include multiples in varying amounts ranging from 45 Mbps
(DS-3) to
5
<PAGE>
multiples of 155 Mbps (STM-1). We also offer the same customer different
bandwidth capacity over different geographic segments of our network.
Backhaul Capacity and Local Connectivity. Backhaul is capacity on terrestrial
fiber optic cables from cable system landing stations to metropolitan areas.
Since we offer customers end-to-end management of the circuit and termination at
local sites, we must provide backhaul capacity and local connectivity. Although
certain of our trans-atlantic contracts provide associated backhaul capacity, we
are always in active negotiations to ensure that we have sufficient backhaul and
local connectivity to meet the needs of our customers. However, there can be
high and unexpected costs in providing local connections due to initial
installation costs, annual local tail rentals, lack of availability of fiber
between connection points, difficulty in obtaining permission to install fiber
and a small number of alternative suppliers.
Flexible Transmission Technologies. Our network can support a variety of
transmission technologies, including synchronous digital hierarchy, asynchronous
transfer mode and Internet protocol transmission technologies.
Flexible Customer Agreements. Our customers can obtain capacity on our network
either under lease or Indefeasible Right of Use terms. Our lease agreements are
typically 12 to 36 months depending on the customers requirements. We offer our
customers the ability to upgrade and expand these agreements as their needs
evolve and grow.
Support Services. In connection with our bandwidth products, we offer services
that provide us with an opportunity to develop customer loyalty and to
anticipate a customer's need. As part of our standard service package, we
provide 24-hour customer service and network management, and service level
agreements. In addition, we intend to develop a secure Internet website which
will allow customers to remotely monitor the performance of their network
configuration on our network. For an additional fee, we will also install,
configure, monitor and manage customer equipment beyond our network, thereby
providing a single point of contact for our customers.
Tailored infrastructure and connectivity solutions. We provide customized
capacity and Internet connectivity to Internet service providers and multimedia
service providers. This service uses our network capabilities, combined with
agreements with leading Internet connectivity providers. As part of this
service, we offer comprehensive service level agreements, as well as flexible
payment terms to ensure that the Internet service provider or multimedia service
provider has the best overall solution for its business.
EquiTel's markets
International Long Distance.
The international long distance telecommunications services industry consists of
transmissions of voice and data that originate in one country and terminate in
another.
The industry is undergoing a period of fundamental change that has resulted, and
is expected to continue to result, in significant growth in the usage of
international
6
<PAGE>
telecommunications services. According to Telegeography 1999, a leading
telecommunications industry source, in 1997 the international long distance
industry accounted for $66 billion in revenues and 82 billion minutes of use.
This is an increase from $27 billion in revenues and 22 billion minutes of use
in 1988. Furthermore, the industry is projected to reach approximately $80
billion in revenues and 159 billion minutes of use by the year 2001.
We believe that a number of trends in the international telecommunications
market will continue to drive growth in international traffic, including:
. globalization of the world's economies and the worldwide trend toward
deregulation and privatization of telecommunications markets;
. the growth of data and Internet traffic;
. declining prices and a wider choice of products and services driven by
greater competition resulting from privatization and deregulation;
. increased telephone accessibility resulting from technological
advances and greater investment in telecommunications infrastructure,
including deployment of wireless networks; and
. increased international business and leisure travel.
The different rates at which these trends have developed in regions of the world
have presented innovative telecommunications service providers with unique
opportunities in emerging markets.
International Switched Long Distance Services.
International switched long distance services are provided through switching and
transmission facilities that automatically route calls to circuits based upon a
predetermined set of routing criteria. An international long distance call
typically originates on a local exchange carrier's network and is transported to
the caller's domestic long distance carrier. The domestic long distance provider
picks up the call and carries the call to its own or another carrier's
international gateway switch, where an international long distance provider
picks it up and sends it directly or through one or more other long distance
providers to a corresponding gateway switch in the destination country. Once the
traffic reaches the destination country, it is routed to the party being called
through that country's domestic telephone network.
Emerging Markets
In many emerging markets, access to bandwidth to transport voice and data
traffic remains highly constrained and continues to represent a considerable
barrier to entry into these markets. Furthermore, the public telephone operators
in these markets have been slow to introduce new intelligent network services
such as voicemail, conference calling and prepaid and postpaid calling cards.
We believe that emerging markets are attractive because their telecommunications
rates are high and remain very profitable. While settlement costs are globally
decreasing, we
7
<PAGE>
believe that developing countries' local authorities will be slow to liberalize
their markets in order to protect the public telephone operators and to continue
to receive high margin revenues and much needed international currencies. We
believe that working in partnership with the public telephone operators in
emerging markets will allow us to provide end-to-end, facilities-based services
to and from these markets.
In addition, as the world's economies continue to globalize, emerging markets
are increasingly focusing on the need to provide local businesses and end-users
with Internet connectivity as well as local Internet content. Through our
planned provision of point-to-point bandwidth and voice services in emerging
markets, we believe that we will be uniquely positioned to expand our service
offering to include enhanced Internet and data services.
EquiTel's products and services
We offer a broad array of communications services through our network and
interconnections with the networks of other carriers. Our decision to offer
certain services in a market is based on competitive factors and regulatory
restraints within the market. Below is a summary of services we offer:
International Route Management. Our international route management services
involve the development of operating agreements with the public telephone
operators of our chosen markets for delivery of international traffic in both
directions. Our route management activities effectively utilize unsold and
available bandwidth and provides us with access to competitive traffic
termination in those markets.
In addition to basic switch voice services, we provide enhanced route management
services such as:
. Development of routes for licensed international operators;
. Development of inbound settlement payment processes;
. Counter-balancing the impact of re-origination (the transfer of
international telephone traffic via a third party carrier); and
. Connection services that allow access between traditional operators
and new licensees in liberalized markets.
We currently have arrangements for route management into the Russian Federation,
the Middle East and South East Asia.
Intelligent Network Services. Our intelligent network services include complete
telephony card services with all the necessary surrounding services such as
marketing and distribution, tariff models and traffic management. The card
platform can also be used to provide enhanced services such as voice mail, fax
mail, prepaid mobile calls, premium rate services, short message services,
intelligent routing and single number services.
Intelligent network services are well developed in the liberalized markets but
have rarely been deployed in most emerging markets. Such services are attractive
to the public
8
<PAGE>
telephone operators in emerging markets because they offer significant
opportunities to increase their revenues and enhance their profitability.
We often create a joint venture with strategic local partners in an emerging
market. The joint venture then works with the public telephone operator to
deliver our intelligent network services into a particular market. For example,
as part of our joint venture in Oman, Desert Telecommunications Services LLC
(DeserTel), we are providing in partnership with OmanTel, the Omani public
telephone operator, pre-paid calling cards in Oman. The cards are currently
being marketed and distributed in the Muscat region and are useable on any
telephone in Oman. We are establishing joint ventures with local partners in
South Africa, Malaysia and Bangladesh.
Advisory Services. We also provide advisory services to telecommunications
operators. We target our advisory services to public telephone operators in
emerging markets and provide them with the senior management expertise and
experience we have gained in developed markets. The scope of our advisory
services is flexible. However, we anticipate particular interest from customers
for:
. Board level support in strategic and general business planning;
. Support for the development of international business; and
. Development of business plans and strategies in support of
privatization and fund raising.
Our network
Bandwidth. We have acquired capacity on an IRU basis on the Gemini system and on
Atlantic Crossing ("AC-1"). We take delivery of the AC-1 capacity in cable
stations at Brookhaven, New York, United States and at Whitesands, United
Kingdom. We take delivery of the Gemini capacity in cable stations at Manasquan,
New Jersey, United States and at Porthcurno, United Kingdom. We carry the
traffic inland on a backhaul network to Telehouse in London and 60 Hudson Street
and 111 8th Avenue in New York.
Specifically, we have an agreement with Gemini Submarine Cable System Limited
dated April 3, 1998, which provides for the acquisition of two (2) STM-1's on
the Gemini system, one purchased and the other leased on a monthly basis. We
also have two agreements with MCI WorldCom for the purchase of an additional
four (4) STM-1's on the Gemini system, dated December 31, 1998 and March 31,
1999, respectively. The term of our agreements with both Gemini and MCI WorldCom
is for the life of the submarine cables, which is anticipated to be 25 years
from the date of the agreements. Finally, we have an agreement with Atlantic
Crossing dated June 10, 1998, which provides for the purchase of an aggregate of
sixteen (16) STM-1's on the AC-1 cable for a term of 25 years from the date of
the agreement. All of our capacity purchase agreements require additional annual
payments of maintenance charges and provide us with IRUs in the STM-1s until
expiration of the term of or a default under the agreements.
We are currently negotiating an agreement which would allow us to draw down
capacity on: (1) fiber optic systems in Western Europe, including the United
Kingdom, France,
9
<PAGE>
Belgium, the Netherlands, Germany, Spain, Italy and Luxemburg; (2) a continental
United States system; (3) a trans-Pacific system which should be available
during the first quarter of 2000; and (4) mid-Atlantic and South American
capacity which should be available in late 2000. The enlarged network will
consist of high-capacity fiber optic cable capable of supporting high quality
voice, video, Internet protocol and data traffic.
Each of our systems will be subject to the risks inherent in a large-scale,
complex fiber optic telecommunications system. The operation, administration,
maintenance and repair of these systems require the co-ordination and
integration of sophisticated and highly specialized hardware and software
technologies and equipment located throughout the world. There can be no
assurance that our systems will function as expected or in a cost-effective
manner.
The submarine fiber optic cables are subject to additional risks. Outages can
occur at sea from anchor drag and fouling by fishing vessel gear over which we
have little or no control and for which repair times can be long. However, our
planned network will provide for transferability on both the Gemini and Global
Crossing cables. When our network is installed, any breaks in the cable loop
will not interfere with our system's ability to transmit traffic successfully
and give our engineers time to work with the cable owner to resolve the problem.
Intelligent Network Platforms. In order to provide our route management
services, we acquired TGA(UK) Limited in August 1999, which had a central switch
located in London that interfaces with multiple carriers. In addition, we have
developed strategic relationships with a small number of suppliers for both
satellite links and international private circuits. Our infrastructure, which we
intend to upgrade, provides flexibility and the necessary robustness to enable
us to operate in challenging regions of the world. The enhanced operational
platform increases our ability to handle international traffic trading and
improve our cost base.
Our intelligent networking infrastructure includes a multi-purpose, modular
technology platform with strong signaling capabilities to provide transit
switching facilities and high density voice compression. In addition, we
contract for a number of international private circuits with a small number of
suppliers and we work closely with public telephone operators in the markets we
enter.
Network Operation Center and Services. We currently contract our network
operating services to an experienced third party supplier which provides us with
a 24 hours a day, 7 days a week network operating service and which remotely
monitors and configures our network. We are able to monitor our network end-to-
end, from customer premise to customer premise. In the first half of 2000, we
intend to shift primary network operations to our London headquarters, retaining
our incumbent third party supplier operating center as a back up and for
purposes of disaster recovery. Our network operations center at our headquarters
will be the primary point of contact for our customers, allowing them to speak
directly with our trained staff.
Carrier Hotel Facility. We have signed a lease agreement with Global Switch
Limited, a "carrier hotel" company specializing in telecommunications and
internet co-location and
10
<PAGE>
service management. Global Switch is a recognized leader in the co-location
business, providing high-quality, 24 hours a day, seven days a week staffed,
carrier-neutral facilities designed to house telecommunications, Internet, data
processing, data storage, and related equipment. Pursuant to the agreement, we
have leased, subject to certain conditions, 11,775 square feet in a London
carrier hotel. Once we occupy this space we will maintain a switch, which will
be used to route voice, data and Internet traffic across our network. We also
have agreed to lease space in carrier hotels in Amsterdam and Paris.
Future Network Enhancements. We intend to further enhance our network by
creating metropolitan area networks in both New York and London. This will
require the purchase of additional fiber capacity and related connectivity to
existing points-of-access. We will then be able to provide access to multiple
customers along the route of this enhanced capacity. Customers will be able to
acquire or lease bandwidth on an "as and when required" basis. This will create
the following advantages:
. a simplification in the number of systems and cost savings associated
with reduced future hardware equipment;
. it will allow us to interconnect multiple customers, thus enabling us
to offer connectivity instantly between any party; and
. it will allow bandwidth to be activated and de-activated
instantaneously and on a pre-set timed basis, if required. As a result
we will be able to exploit new market opportunities such as offering
short term leases for connectivity for a few days or hours for special
events. When these periods end, the cross-connect arrangements will
allow us to terminate the bandwidth and enable it to be automatically
reallocated to another customer. In addition, we will program our
cross-connects to activate new bandwidth at set times and dates to
ensure that bandwidth intensive customers such as Internet service
providers have large amounts of continuous bandwidth of varying
capacities, allowing them to keep up with their fluctuating demands.
History of Operations
From its inception on March 10, 1998 to September 1999, we had revenues, losses
and total assets as shown in the table below. During this period, our business
comprised only one industry segment, which was the sale of trans-atlantic
bandwidth.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Period from March 10, 1998 to Nine Months enter September
December 31, 1998 30, 1999
-----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues 29,331 5,857
-----------------------------------------------------------------------------------------------------------------------
Net Loss (11,732) (57,086)
-----------------------------------------------------------------------------------------------------------------------
Total Assets at end of period 89,688 56,711
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The above summary information has been derived from our audited financial
statements for the period to December 31, 1998, which were prepared in
accordance with US GAAP, and from our unaudited financial statements for the
period to September 30, 1999. These financial statements are included in this
registration statement. The table above should be read in conjunction with these
financial statements, the notes thereto, the selected financial information in
Item 2 and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
registration statement.
The audited financial statements at December 31, 1998 show a total shareholders'
deficit of $11,702,000. The financial statements have been prepared assuming
that the Company will continue as a going concern. The report of Moore Stephens,
independent auditors, is shown on page F-1 and indicates that there is
substantial doubt about the ability of the Company to continue as a going
concern. We are planning to obtain additional equity and debt financing, to
provide an increased capital base and working capital facilities.
The interim financial statements for the period to September 30, 1999 may not be
indicative of future operations. We are in the process of expanding our
services. In particular, future periods will include the business and revenue
from new industry segments. In addition the revenue and results of our trans-
atlantic bandwidth business were impacted by the rapid and severe decline in
market prices for this bandwidth, as set forth in more detail below. As a result
potential customers postponed orders until market price levels had stabilized,
and we were not able to sell our bandwidth inventory until we had completed our
negotiations with our suppliers of trans-atlantic bandwidth.
As a consequence of the significant fall of the market prices for bandwidth and
its impact on our operations and financial results in 1999, we have been unable
to generate sufficient cash flow to meet certain of our debt service
requirements, and have triggered events of default on those obligations. The
events of default include obligations to our two major bandwidth suppliers with
whom we had executed agreements in 1998 and early 1999, and from whom we have
not drawn down bandwidth capacity as scheduled in these agreements. In addition,
we have a debt obligation under a Capacity Option Agreement with Communications
Collateral Limited under which we have been unable to complete the repurchase.
These events of default are described in detail below and in the Management's
Discussion and Analysis of Financial Condition and Results of Operation in Item
2.
When Telemonde was formed in March 1998, our business focused solely on sales of
bandwidth and related services. In April 1998, Telemonde, through its now wholly
owned subsidiary Telemonde International Bandwidth (Bermuda) Limited, purchased
IRUs relating to trans-atlantic capacity from Gemini Submarine Cable System
Limited. Specifically, Telemonde agreed to acquire up to a maximum of STM-16.
Due to a subsequent and rapid decline in the market for wholesale
telecommunications bandwidth, the capacity sale agreement was amended by three
letter agreements dated January 27, April 16, and April 22, 1999. These
amendments provided that an IRU for only one (1) STM-1 would be acquired, and a
second STM-1 would be leased for a lump sum payment plus monthly payments for a
three-month period ending July 16, 1999. Further negotiations between the
parties provided that the lump sum payment would fall due on
12
<PAGE>
October 7, 1999 in the form of two promissory notes. Telemonde has paid Gemini
the full balance owing for the IRU relating to the first STM-1 but has not
fulfilled its obligations under two promissory notes in the amount of $2.7
million. Although this default gives Gemini the right to immediately terminate
the Indefeasible Rights of Use, Gemini has not done so as of the date of this
filing and has continued to support Telemonde and its customers using the
services.
In June 1998 Telemonde, through its now wholly-owned subsidiary Telemonde
Bandwidth (Bermuda) Limited, agreed to acquire an aggregate of 16 STM-1(s) on
Segment S-1 from Atlantic Crossing Limited. Since the summer of 1999, we have
not drawn down any capacity from Atlantic Crossing and have not made any
payments under this agreement and are in default under the payment terms in the
amount of approximately $53 million, in addition to interest and outstanding
maintenance payments. Management is in discussions with Global Crossing, the
parent company of Atlantic Crossing, to renegotiate the terms of the contract,
including the extension of capacity drawdowns to include the entire Global
Crossing system, rather than just trans-atlantic capacity. This will allow
Telemonde to expand according to its overall business strategy.
In December of 1998 and on March 31, 1999, Telemonde, through its now wholly
owned subsidiary Telemonde International Bandwidth Limited, entered into
agreements with MCI WorldCom for the purchase of four units of bandwidth
capacity on the Gemini network. Specifically, Telemonde acquired the IRUs in
three units of capacity under the December 1998 agreement, and acquired the
right for an additional unit of capacity under the March 1999 agreement. Under
these agreements, Telemonde is also required to pay annual maintenance charges.
Telemonde has paid the amounts due under the March 1999 agreement; however, as a
result of the liquidity problems, Telemonde was unable to fulfill its
obligations to draw down and pay for the three units of capacity under the
December 1998 agreement. Furthermore, Telemonde was delinquent on its annual
maintenance charges under both agreements, resulting in an overall default to
MCI WorldCom in the amount of approximately $28 million.
Telemonde is in negotiations with MCI WorldCom to restructure their existing
agreements. Telemonde has recently executed a Standstill Letter from MCI
WorldCom in which MCI WorldCom has agreed to refrain from (a) taking any action
to enforce payment of the sums owed to MCI WorldCom under the capacity purchase
agreements; (b) taking any action to enforce or make a demand under any
guarantee, indemnity or security related to the capacity purchase agreements;
and (c) commence any insolvency proceedings against Telemonde or any of its
subsidiaries. The Standstill Letter expires upon the earlier of (i) the full
payment of the sums owed under the capacity purchase agreements; (ii) June 8,
2000; or (iii) Telemonde's failure to comply with a number of terms and
conditions, which includes the prohibition against the sale of assets, dividends
and the borrowing of any additional funds without the signed written consent of
MCI WorldCom's agent other than permitted borrowings.
Telemonde has also executed a letter of intent termed a "Capacity Swap Letter"
in which MCI WorldCom has agreed to enter into a binding agreement with
Telemonde to permit Telemonde to swap the bandwidth purchased under the above
capacity purchase agreements for new bandwidth on MCI WorldCom's European
Ulysses network. The
13
<PAGE>
Capacity Swap Letter is conditional on satisfaction by Telemonde of its
obligations under the Standstill Letter.
Despite the technical defaults with Global Crossing and MCI WorldCom detailed
above, Telemonde has been in extensive negotiations with senior management in
both organizations towards the end of 1999 and continuing into January 2000. It
should also be noted that while the discussions have been held, Telemonde has
made a number of payments to both suppliers for services rendered and both
suppliers have:
. agreed to continue to provide all services to existing Telemonde
customers, including maintenance of the cable systems;
. not taken up the option to enact the default;
. actively supported Telemonde in the development of its strategy and
network deployment;
. allowed further capacity to be taken on a least basis to assist in
fulfilling Telemonde order book.
On April 15, 1999, Telemonde, through its now wholly owned subsidiary Telemonde
Investments Limited, entered into a series of agreements with Communications
Collateral Limited, including, among others, agreements for: (1) the sale of an
IRU for bandwidth to Communications Collateral Limited; (2) the grant of an
option to Communications Collateral Limited which, among other things, required
Telemonde to repurchase the bandwidth upon Communications Collateral Limited's
request; and (3) a $1 million loan by Communications Collateral Limited to
Telemonde due and repaid on August 12, 1999. In connection with these principle
agreements, the three subsidiaries of Telemonde Investments Limited guaranteed
the obligations of Telemonde Investments Limited under those agreements,
including its obligation to pay back the loan and to repurchase the bandwidth in
the event that Communications Collateral Limited exercised its option.
On August 14, 1999, Communications Collateral Limited exercised its option to
require Telemonde to repurchase the capacity. Telemonde was unable to complete
this repurchase and was in default in the amount of approximately $5 million. As
a result, Communications Collateral Limited had the right to foreclose on
essentially all of the assets of Telemonde Investments Limited, including its
ownership interests in the three subsidiaries of Telemonde Investments Limited,
all of the assets in any of the foregoing subsidiaries, including their rights
under Telemonde's bandwidth sale contracts; and any ownership interest the
foregoing subsidiaries might have in any other Telemonde entities until the
default was cured. The amount of the foreclosure, however, would not have
exceeded the amount of the indebtedness.
On January 13, 2000 Telemonde executed a Forbearance Agreement with
Communications Collateral Limited. Under this Agreement, Communications
Collateral Limited agreed not to exercise its rights of default under the
foregoing agreements until February 15, 2000, in consideration of various
obligations of Telemonde.
14
<PAGE>
Plan of Operation
There has been a significant fall in the prices of bandwidth, and as a result,
we find ourselves locked into extremely uneconomical contractual obligations
with our suppliers. The consequence of this has been until such a time as we are
able to complete the negotiation of these supplier contracts our sales have and
will continue to suffer. This in turn has led to severe liquidity problems,
which has obliged us to diversify our business. In November 1999, we acquired
EquiTel, which provides telephone card services and telecommunications route
management services primarily to emerging markets. Our plan of operation for
2000 is to continue to provide bandwidth but to also significantly extend our
business activities and services. In particular, we plan to offer the following
services:
Bandwidth. We will continue to provide bandwidth to leading telecommunications
carriers, new entrants to the developed telecommunications markets and Internet
carriers. We are in negotiations with our suppliers for the right to exchange
our existing inventory of trans-atlantic bandwidth for trans-Pacific, Central
and South American, North American and pan-European fiber capacity. This
expansion will allow us to provide our customers with both regional and global
networks at competitive prices.
Internet Capability. Through telemonde.net SA we intend to offer Internet
service providers cable-based network platforms and high-speed Internet
connectivity, based upon the supply of fiber optic bandwidth and associated
products and services.
Although the basis of telemonde.net's offering to Internet service providers is
Telemonde's high speed fiber optic network, telemonde.net aims to offer its
customers tailored solutions. In particular it offers the following
capabilities, which are packaged according to the customers' needs:
. capacity, which solves customers' speed requirements and enables them to
deal with the projected rapid growth of the Internet in Europe.
. connectivity, providing immediate access to the Internet and web sites
world-wide.
. content, enabling customers to differentiate their offering with video,
audio and software, using the latest streaming technologies.
. e-commerce, enabling customers to transact over the Internet.
Intelligent Network Services. Through EquiTel, we plan to place our intelligent
network services into emerging markets through joint ventures and relationships
with the public telephone operators of developing countries. By targeting
emerging markets we can use our intelligent network solutions as a foundation
from which we can improve the existing telecommunications facilities of the
developing country. We create, in partnership with public telephone operators,
incremental and new revenue opportunities through route management services and
the introduction of enhanced services such as voice mail, fax mail, prepaid
mobile calls and premium rate services.
Managed Voice and Data Services. Through EquiTel we intend to further develop
and enhance our existing switched voice and data services and route management
services.
15
<PAGE>
These services will generate more bandwidth sales across the network, lower the
costs per minute of our traffic and generate revenues from utilizing the
competitive international interconnect rates of developed markets.
Burst Bandwidth. We plan to offer burst bandwidth capacity on demand, which
allows customers to significantly increase their capacity on our network for
short periods. In order to provide bandwidth capacity on demand, we plan to
provide cross-connects in globally strategic locations such as New York and
London. A cross-connect is a bridge between a customer and bandwidth, which we
control through software. This enables telecommunications traffic to be re-
routed from one ring to another instantaneously and without physical disruption.
The cross-connects will enable us to provide enhanced network management options
and improved network restoration and reconfiguration capabilities, to offer
instant connections and real-time or timed activation and deactivation of
bandwidth. As a result of the cross-connects, we will expand our bandwidth
leasing operations to include short term leases of bandwidth of a few days or
hours for peak hours or special events. Once a short term lease is terminated
the bandwidth will be automatically reallocated to another customer. We intend
to target customers that have underestimated their bandwidth needs or have
occasional, seasonal or hourly demand shifts.
Streaming video. We plan to provide streaming video Internet content and
services for customers in our markets. Streaming technology enables the playing
of a video or sound extract while it is being downloaded, instead of waiting for
the entire file to be downloaded before playing the extract. By providing a
combination of streaming video and bandwidth solutions, we can become a single
source supplier for the delivery of televised services on-line.
Our short-term success will depend substantially on sales of bandwidth on our
network and on the prices of such bandwidth sales. The sale of bandwidth and the
associated maintenance revenues accounted for the bulk of our revenues through
the end of 1999.
We cannot be certain that we will continue to be successful in selling capacity
on our networks. Our ability to continue to sell capacity will depend in large
part upon our sales and marketing capabilities. We have assembled an experienced
and dedicated sales and marketing staff and we depend upon the ability of such
employees to effectively market and sell capacity. However, we cannot be certain
that we will be able to effectively sell capacity on our network. If we are
unable to effectively sell capacity on our network, our operational results
could be negatively affected.
Our plans for entering into the Internet involves several risks. Whether, and
the manner in which, the market for our products and services to Internet
service providers will continue to grow is uncertain. Any decline in the
Internet market will adversely affect our
16
<PAGE>
business. Our business would be damaged if Internet usage does not continue to
grow. Internet usage may be inhibited for a number of reasons, including:
. access costs;
. inadequate network infrastructure;
. security concerns;
. uncertainty of legal and regulatory issues concerning the use of the
Internet;
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to support
the demands placed on it or the Internet's performance and reliability may
decline. Similarly, Web sites have experienced interruptions in their services
as a result of outages and other delays occurring throughout the Internet
network infrastructure. If these outages or delays occur frequently, use of the
Internet as a commercial or business medium could, in the future, grow more
slowly or decline. This could adversely affect our business.
We have recently begun offering terrestrial network platforms and high-speed
Internet connectivity, based upon the supply of fiber optic bandwidth between
New York, London and other European cities. We intend to expand our services
worldwide and we anticipate offering a full-range of global connectivity
solutions for European Internet and multimedia service providers over our
existing global network infrastructure, as well as specialist and geographic
Internet packages for our customer base in emerging markets. We have limited
experience in the Internet business and can provide no assurance that we will
successfully establish or expand the business. Currently, we only provide
capacity to one European Internet service provider.
The market for network platforms and value-added Internet services is extremely
competitive. Our primary competitors include other telecommunications businesses
that have a significant national or international presence. Many of these
carriers have substantially greater resources, capital and operational
experience than we do. We also expect we will experience increased competition
from traditional telecommunications carriers that expand into the market for
Internet services. In addition, we will require substantial additional capital
to make investments in our Internet operations, and we may not be able to obtain
that capital on favorable terms or at all.
Our Strategy
In addition to the plan of operation described above, our approach to building
an international communications company is to:
Operate in markets that retain high margins in voice retail and wholesale voice
services. Emerging markets continue to retain high margins in retail and
wholesale voice services. We can bring technology and infrastructure developed
and tested in the liberalized markets to the emerging markets. By working with
public telephone operators to provide enhanced services, we can capitalize on
the higher margins available in the monopolistic markets. In addition, our
partnership with public telephone operators will allow us to
17
<PAGE>
develop our local operations. Therefore, we believe we will be well positioned
to become a second operator in certain of these markets when the markets become
liberalized.
Create an international infrastructure capability upon which services can be
offered. This network infrastructure, which will include carrier hotel
facilities, will link with the regional hubs being created in emerging markets
to provide a seamless global infrastructure. A regional hub is a point of
telephony concentration in a geographically distant location. It is created only
for reasons of economy, in that it is cheaper to send or receive traffic and
purchase bandwidth into a single distant point for onward distribution than it
is to individually reach each of the final destinations.
Build Internet capabilities and services. Decreasing bandwidth prices in the
developed markets are allowing us to create a fiber optic network. Through
acquisitions and internal development, we are building the capability to address
our customers' Internet requirements, such as business to consumer and business
to business online electronic transactions, web site development and hosting,
streaming video content and bandwidth provisioning, all of which will be
provided through our international network.
Our strategy is to develop, build, and deploy international fiber optic networks
and international carrier hotels and switch/server capabilities on a "just-on-
time" basis. This will enable us to deliver voice, data, and Internet products
and services to our chosen customers and markets. Key elements of our strategy
are to:
Continue to Build and Expand the Reach of Our International Network. We have
access to trans-atlantic bandwidth capacity. Through negotiations with our
capacity suppliers, we hope to soon offer routes in Europe, the Americas, the
Pacific Rim and the Far East.
Provide Managed Voice and Data Services. We intend to further develop and
enhance our switched voice services, which we use to generate more bandwidth
sales across the network and lower the costs per minute of our traffic.
Pursue Early Entry Into Selected Emerging Markets. We seek early entry into
selected emerging markets worldwide where we can create significant demand for
voice, data and Internet services by introducing technology and infrastructure
already in use in the developed markets. We believe that there is, and will
continue to be for the foreseeable future, substantial growth of such services
in emerging markets. We believe that early entry into these markets will provide
us with competitive advantages as we develop sales channels, establish a
customer base, hire local personnel and establish a strong partnership with the
monopoly public telephone operator prior to competitors entering these markets.
Our objective is to position ourselves as the second telecommunications operator
when and if liberalization occurs in these markets.
Provide Enhanced Internet Services. Through our wholly-owned subsidiary,
telemonde.net, we are setting up peering agreements with other leading Internet
backbone service providers. Internet peering agreements are agreements between
two carriers for the exchange of Internet traffic between their networks and
onwards. Using the latest developments in data transmission for video, audio and
software services, telemonde.net
18
<PAGE>
plans to become the host and carrier for broadband content providers delivering
unique full screen Internet broadcast services to European Internet and media
companies.
Expand the Capabilities of Our Network With the Development of Regional
Telecommunications Centers. Through the planned geographic expansion of our
network and development of regional telecommunications centers in emerging
markets, we expect to be able to increase our network traffic and thereby
continue to reduce transmission and operating costs. In addition, we intend to
make focused capital investments to deliver enhanced services and lower costs to
our customers. We will continue to invest in our network to provide a full range
of asynchronous transfer mode, frame relay and Internet protocol-based data and
voice communications over our existing network infrastructure.
Financial Information Regarding Industry Segments
We have included in this registration statement financial information up to
September 30, 1999. From our inception on March 10, 1998 to September 30, 1999
our business consisted entirely of the sale of trans-atlantic bandwidth and of
the management of bandwidth through maintenance contracts with our customers.
See Item 2, "Financial Information."
Customers and Geographic Concentration
Our target customers include leading international telecommunications carriers,
public telephone operators in emerging markets, Internet service providers,
media service providers and new entrants to the telecommunications market.
Telemonde's business focus is global; while customers may have a specific
geographic location, the bandwidth Telemonde provides them may be located
anywhere in the world. Conversely, EquiTel works in specific geographic markets
through the formation of joint ventures with local partners which could be a
business, an individual or the public telephone operator in that location.
A relatively small number of customers have accounted for a significant amount
of our total revenues to date. Although we intend to expand our customer base as
our business grows and through acquisitions, this dependence on a relatively
small number of customers may continue for the foreseeable future. In 1998 we
delivered bandwidth capacity to three major customers who constituted more than
10% of our revenues for that period and in the nine months ended September 30,
1999 only one bandwidth customer constituted more than 10% of our revenues:
<TABLE>
<CAPTION>
Period from March 10, 1998 to Nine months ended September 30,
December 31, 1998 1999
$ $
<S> <C> <C>
Carrier 1 (Switzerland) 10,318,000
North American Gateway Inc.
(Canada) 8,206,000
Unisource Carrier Services A.G.
(Switzerland) 10,807,000
Telecom Italia (Italy) 4,432,000
</TABLE>
19
<PAGE>
Although we continue to have relationships with these customers (e.g., through
our annual maintenance contracts), none has placed further orders for bandwidth.
Additionally, EquiTel has joint venture operations in Oman which in the nine
months ended September 30, 1999 generated revenues of $1,060,000. Most of our
arrangements with large customers do not provide any guarantees that they will
continue using our services at current levels. In addition, if (1) our customers
build their own facilities, (2) our competitors build additional facilities, or
(3) our customers are involved in further consolidations in the
telecommunications industry, we could experience a reduction in the use of our
services, which could have a material adverse effect on our business.
We are exposed to concentrations of credit risk to the extent that we have a
limited number of customers, all of which operate in the telecommunications
sector. We perform on-going evaluations of our customers' financial condition.
As at December 31, 1999 we have customer orders of $19 million which we believe
to be firm and which have not been included in our revenues in 1998 and 1999.
The comparable amount of backlog orders at December 31, 1998 was $5.4 million.
We believe that all of the backlog orders of $19 million should be fulfilled in
2000, with the exception of an order for $1.9 million which the customer may
wish to defer until 2001. There are no seasonal or other material aspects of the
backlog at December 31, 1999.
Since its inception, EquiTel has had contracts with seven customers for its
route management services for traffic to the Russian Federation, the Middle East
and the Far East. EquiTel also operates a pre-paid card service in Oman.
EquiTel's revenue mainly derives from monthly traffic on its routes and usage of
its services. Although EquiTel has contracts for its services, the nature of
EquiTel's business means that there are no backlog orders.
We market our services to our customers through a variety of sales channels, as
summarized below:
Direct Sales. We market our network services primarily through our direct sales
force. As of September 30, 1999, our direct sales force was comprised of 5 full-
time employees who focus on selling wholesale services to other long-distance
carriers and resellers. We also have 7 full-time employees who concentrate on
traffic services. Our existing sales force can leverage their long-term industry
relationships and those of our senior management in securing sales. Our sales
force is trained to serve the sophisticated needs of our customers and is in
charge of maintaining existing relationships and anticipating customers' needs.
We currently have sales offices in New York City, London, and Geneva.
Media and Marketing. We use a variety of print and other media to increase our
name recognition and generate new customers. We have marketing programs that
include our participation in targeted industry conferences, trade shows and
seminars and targeted distributions and mailings of marketing materials.
20
<PAGE>
Although we intend to expand our customer base as our business grows and through
acquisitions, our dependence on a relatively small number of customers may
continue for the foreseeable future. Most of our arrangements with large
customers do not provide any guarantees that they will continue using our
services at current levels. In addition, if (1) our customers build their own
facilities, (2) our competitors build additional facilities, or (3) our
customers are involved in further consolidations in the telecommunications
industry, we could experience a reduction in the use of our services, which
could have a material adverse effect on our business.
Competition
The international communications industry in developed world markets is highly
competitive and significantly affected by regulatory changes, marketing and
pricing decisions of the larger industry participants and the introduction of
new services made possible by technological advances. Privatization and
deregulation have had, and are expected to continue to have, significant effects
on competition in the industry.
The telecommunications industry has relatively limited barriers to entry in the
more deregulated countries with numerous entities competing for the same
customers. We believe that competition in all of our markets is likely to
increase, which could result in greater competition in telecommunications
services offered in these countries. This increase in competition could
adversely affect our net revenues.
At this stage of our development, many of our competitors are significantly
larger than we are, and many of our competitors have:
. substantially greater financial, technical, and marketing resources;
. larger networks;
. a greater ability to support the portfolio of services;
. stronger name recognition and customer loyalty; and
. long-standing relationships with our prospective customers.
Telemonde's major competitors for international communications bandwidth
services are Gemini, MCI WorldCom, Iaxis, GTS, Level 3, Viatel, KPN/Qwest,
Global Crossing and a rapidly changing number of arbitrage operators and
brokers, such as Transglobal Network Services and Band-X. Telemonde
differentiates its market offering through:
. supplier independence -- Telemonde is able to acquire bandwidth,
telehousing and switched services from all of its suppliers, including
its competitors, at least cost;
. full network management of services from installation through contract
life, which allows our customer to concentrate their key resource upon
their core business activities; and
. flexible financial and commercial contracts, which includes the ability
to exchange bandwidth, provide flexible payment facilities and trade
bandwidth for our customers capabilities which can be re-sold in the
market at retail rates.
21
<PAGE>
In addressing the Internet service provider market, our competitors are the
major European Tier 1 carriers, such as British Telecommunications, Deutsche
Telekom, France Telecom, Telecom Italia, Teleglobe, MCIWorldCom. We
differentiate through:
. the ability to customize our market offering to meet the individual
needs of our customers;
. a market positioning that does not compete with our customers retail
services, unlike many of our competitors; and
. the delivery of bundled content (Internet shopping, sport and other
broadcast services, niche programming) and infrastructure (bandwidth,
telehousing and peering facilities to the Internet backbone network)
services. This provides a one-stop-shop for emerging Internet service
providers where financial and resource constraints exist.
EquiTel does not aim to operate in highly competitive markets and is primarily
focused upon working in partnership with the incumbent public telephone
operator. As such, we do not compete in our markets with other operators but
collaborate with the public telephone operator to enhance the service offering
in their market.
Our competitive strengths. We believe that we can compete effectively in the
competitive markets described above, because we have a number of competitive
strengths, including:
. Established presence as a network services operator. We have entered
into major supply contracts for international bandwidth capacity. During
our short history, we have signed sale contracts with customers totaling
$52 million. As a result of these contracts and discussions with
prospective customers, we have established a market presence and created
a market awareness of Telemonde as a participant in the carrier's
carrier market. We are responsible for the delivery and maintenance of
our customers' capacity. Through our subsidiary, Telemonde Networks
Limited, our technical staff provide quality network services to our
customers. The recent launch of telemonde.net, S.A., has brought our
bandwidth and network services to the attention of European Internet
service providers to meet their demands for high volume digital video,
sound, software and high speed connectivity to the Internet.
. Supplier independence. We do not construct network infrastructure.
However, our strength, through our independence, is our ability to
acquire lowest cost facilities at any point in time incorporating the
latest technology. Also we do not compete with our customer in the
retail markets, unlike most of our competitors.
. Operations and presence in emerging markets. We have established
operations or a presence in the emerging markets of the Russian
Federation, the Middle East, and Africa. EquiTel has obtained and
operates several route management contracts terminating in the Russian
Federation and South East Asia. Since February 1999, EquiTel has
provided intelligent networks system in Oman. EquiTel has signed a
joint-venture agreement with local partners in
22
<PAGE>
Bangladesh and is in negotiations to place intelligent network services
in Malaysia in conjunction with local partners. In addition, EquiTel
plans to establish a new entity to market EquiTel's services in Asia,
Africa and Middle East. These and similar operations provide the markets
for our advanced communications services, that are tried and tested,
enabling EquiTel to expand its revenue base and enhance the services
available.
. Established intelligent networks platform. As discussed above, EquiTel
has developed and installed a national intelligent network system in
Oman. Although the Omani system currently supports pre-paid card
services, the intelligent networks system is capable of providing other
intelligent network services, including post-paid card services and
enhanced services for voice mail, fax mail, short message services,
intelligent routing and single number services. This has provided
EquiTel with the experience of implementing and operating highly
technical services in challenging commercial environments.
. Experienced management team. Our executive officers have substantial
industry and management experience. Most of them have many years of
experience in senior management positions in leading international
telecommunications businesses. In addition, our executive officers are
supported by industry-experienced management in sales, operational and
technical functions. As a result, we have the skills and ability to
support business growth and to effectively manage such growth.
. Strategic implementation is progressing. Part of our strategy is to
create an extensive international infrastructure, which will enable us
to deliver a broad range of voice, data and Internet products and
services to our chosen markets. As a result, we will be able to provide
dedicated "turnkey" solutions to customers in the United States and
Western Europe, but, in particular, we will use our infrastructure and
services to enable emerging markets to access the telecommunications and
Internet services of the developed world. We have made progress in
implementing this strategy. Through the acquisition and utilization of
fiber optic capacity, we are creating a network in the developed markets
of the United States and Western Europe. Through the acquisition of
EquiTel, we have developed and we are developing business in a number of
emerging markets. We are therefore well positioned for the further
implementation of our strategy. We intend to create retail
telecommunications companies in the emerging markets, in partnership
with public telephone operators, to offer enhanced telecommunications
services to those markets. We also intend to develop Internet services
for commercial use in both the liberalized and emerging markets. In the
emerging markets, we will supply these services over our planned
international infrastructure; however, they will be marketed and
supported through local partnerships.
Government Regulation
As a multinational telecommunications company, we are and will be subject to
varying degrees of regulation in each of the jurisdictions in which we provide
services. Local
23
<PAGE>
laws and regulations, and the interpretation of these laws and regulations,
differ significantly among each of the jurisdictions in which we operate and
intend to operate. We can offer no assurance that our interpretation of existing
applicable laws and regulations is correct. Moreover, we can offer no assurance
that future regulatory, judicial or legislative changes will not have a material
adverse effect on our business, financial condition or operating results or that
regulators or third parties will not raise material issues with regard to our
compliance or non-compliance with applicable regulations or that any changes in
applicable laws or regulations will not have a material adverse effect on our
business, financial condition or operating results.
With regard to our current operations, we either have received or have
reasonable expectations of receiving the necessary licenses which we believe are
required to undertake our business and to implement our short-term plans. In
particular in December 1999 we received a Public Telephone Operators License
from the Department of Trade and Industry in the United Kingdom, where our
international operations center and network infrastructure will be based.
We can offer no assurance that our expectations concerning our ability to
operate in compliance with all applicable laws and regulations are correct, that
we will be able to obtain, maintain or renew the required licenses,
authorizations or registrations, or that they will be issued or renewed on terms
or with fees that are commercially practicable. In addition, other licenses,
authorizations or registrations may be required in the future. The loss of, or
failure to obtain, these licenses, authorizations or registrations or
substantial limitations upon the terms of these licenses, authorizations or
registrations could have a material adverse effect on our business, financial
condition or operating results.
United States Federal Regulations. Pursuant to the Communications Act of 1934,
as amended (the "Communications Act"), the FCC is required to regulate the
telecommunications industry in the United States. Under current FCC policy,
telecommunications carriers reselling the services of other carriers and not
owning their own transmission facilities are considered non-dominant and, as a
result, are subject to streamlined regulation. The degree of regulation varies
between domestic telecommunications services (services which originate and
terminate within the United States) and international telecommunications
services, (services which originate in the United States and terminate in a
foreign country or vice versa).
Non-dominant providers of domestic services do not require prior authorization
from the FCC to provide service. However, non-dominant providers of
international services must obtain authorization from the FCC pursuant to
section 214 of the Communications Act. Although we do not require a U.S.
license in order to carry out our current business, we intend to apply for an
international resale license under section 214 in the near future. Once we have
obtained such authorization we will be required to file a tariff with the FCC,
setting forth the terms and conditions under which we provide international
services. The regulatory requirements in force today impose a relatively
minimal burden on us. However, we cannot provide assurance that the current
regulatory environment and the present level of Federal Communications
Commission regulation will continue.
24
<PAGE>
United Kingdom Regulations. The Telecommunications Act 1984 (the "1984 Act")
provides a licensing and regulatory framework for telecommunications activities
in the United Kingdom. In 1998, the UK regulatory framework was modified to
bring it in line with EU requirements, in particular its provisions on
licensing, interconnection, voice telephony and leased lines. The policy of the
Department of Trade and Industry and Office of Telecommunications, the UK
Regulator, is to grant telecommunications licenses to all operators who meet a
transparent and pre-determined set of criteria. The majority of UK licenses are
either registered to offer International Simple Voice Resale or hold an
individual fixed public telephone operator license.
We were granted in December 1999 a fixed Public Telephone Operators License,
which covers all companies in the Telemonde Group, including EquiTel. Our
subsidiary, TGA, is also licensed to offer International Simple Voice Resale
(ISVR) services, which permits it to buy network capacity from any inter-
connecting UK operator to resell to its customers. Our Public Telephone
Operators License permits us to offer a full range of fixed voice and data
services using its own facilities or through leasing or interconnection of other
operator facilities. Most operators who offer publicly available
telecommunications services and network bearer capabilities are granted
interconnection rights by the Office of Telecommunications. We received our
interconnection rights in January 2000. An operator with interconnection rights
is entitled to negotiate interconnection with every other operator with
interconnection rights.
Swiss Regulations. In Switzerland, a new telecommunications act was adopted in
April 1997 and became effective on January 1, 1998. This new Act provides for
the liberalization of the Swiss telecommunications market and facilitates market
entry by various measures. These measures include:
. Notice application procedure for resellers;
. Application for a procedures for operators wishing to be granted a license
for the establishment and operation of the transmission facilities; and
. Providing rights of way, subject to authorization, over the public domain to
facilities based carriers.
A license is required if the telecommunications service involves extensive
independent use of telecommunications installations for transmission. In the
absence of such extensive independent use a simple notification will be
sufficient. Our current operations in Switzerland do not require a license.
Other Government Regulations. Telecommunications activities are subject to
government regulation to varying degrees in every country throughout the world.
To illustrate, in Malaysia our partner has informed us that no license is
required for telecommunications activities. However, in may countries where we
operate, equipment cannot be connected to the telephone network without
regulatory approval, and therefore installation and operation of our operating
platform or other equipment requires such approval. In most jurisdictions where
we conduct business, we rely on our local partner
25
<PAGE>
to obtain the requisite authority. For instance, in Bangladesh our partner has
informed us of the need for a license and has applied for one on our behalf.
Employees
At December 31, 1999 we employed a total of 42 persons. Of these, 7 are the
executive officers of the Group as described in Item 5; Telemonde employs 17
persons; and EquiTel employs 18 persons.
During 1999 we have progressively built up a senior management team and a group
of employees with substantial industry experience, longstanding industry
relationship and technical telecommunications and Internet knowledge.
Competition for such personnel is intense and we may not be able to attract,
motivate and retain highly skilled qualified personnel. Loss of services of key
personnel could adversely affect Telemonde's business. We have, however, entered
into employment agreements with members of the senior management team, in
particular with Adam Bishop, Kevin Maxwell, Harry Pomeroy and with other
executive officers, as detailed in Item 5. We are in the process of procuring
"key person" life insurance policies covering Mr. Bishop, Mr. Maxwell and Mr.
Pomeroy.
Where You Can Find More Information
We filed a Form 10, General Form for Registration of Securities pursuant to
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, on November 15,
1999 and an amendment to the Form 10 on March 3, 2000, which updates that
information to January 14, 2000, the date the registration statement became
effective with the SEC.
As from the filing of the Form 10 on November 15, 1999, we are subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and will file periodic reports, and other information relating to our business,
financial statements and other matters with the Securities and Exchange
Commission. Our SEC filings are available to the public over the Internet at
the SEC's web site at http://www.sec.gov. You may also read and copy any
document we file at the SEC's public reference room at 450 Fifth Street, N.W.
Washington, D.C. 20549 or at the SEC's regional offices at 7 World Trade Center,
New York, New York 10048 and Citicorp Center, 5-West Madison Street, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms and their copy charges.
We have filed with the SEC a Form 10-K in respect of our results for the year
ended on December 31, 1999 and a Form 10-Q in respect of our results for the
three months ended March 31, 2000.
We maintain a web site on the Internet, which gives selected information about
our business. The Internet address of our web site is: http://www.telemonde.com
------------------------
26
<PAGE>
Reports to Security Holders
We have sent an annual report to our security holders. This report contains
financial information for our previous fiscal year, which has been examined and
reported on, with an opinion expressed by Moore Stephens, independent
accountants.
Glossary of Certain Telecommunications Terms
Asynchronous Transfer Mode (ATM) - A switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video at varying
rates. The ATM format can be used by many different information systems.
Bandwidth - The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the greater
the information-carrying capacity of such medium. For fiber optic transmission,
electronic transmitting devices determine the bandwidth, not the fibers
themselves. Bandwidth is measured in Hertz (analog) or Bits Per Second
(digital).
Bit - A binary unit of information that can have either of two values, 0 or
1. Higher amounts of binary digit are:
. kilobit = 1,000 bits
. megabit = 1 million bits
. gigabit = 1 billion bits
. terabit - 1 trillion bits
Bps - Bits per second. This is the basic measuring unit of speed in a
digital transmission system. The number of bits that a transmission facility
can convey between a sending location and a receiving location in one second.
Capacity - The information-carrying ability of a telecommunications system,
as defined by its design (number of fibers, system length, and opto/electronic
equipment) and its deployed equipment (amount of opto/electronics in the
station) and measured in bits per second. Capacity is sold in discrete units,
usually system interface levels such as DS-3s and STM-1s, that in the aggregate
are the equivalent of total system capacity.
Carrier - A third party provider of communications services by wire, fiber
or radio.
Carrier Hotel - A building (or part of a building) that has either been
specifically designed and built or has been adapted, for use by
telecommunications companies to meet their specific requirements.
27
<PAGE>
Dense Wavelength Division Multiplexing (DWDM) - Similar technology to WDM,
except permitting a larger number of constituent spectrum colors to be signal
carrying, thus further expanding fiber optic cable capacity.
Digital - A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission/switching technologies employ a
sequence of discrete, distinct pulses to represent information, as opposed to
the continuously variable analog signal. The precise signal transitions preclude
any distortion such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission.
DS-3 - Data transmission rate of approximately 45 Mbps.
Gbps - Gigabit per second, which is a measurement of speed for digital
signal transmission expressed in billions of bits per second.
Indefeasible Right of Use (IRU) - A measure of currency in the fiber optic
cable business. The owner of an IRU has the right to use the capacity for the
time and bandwidth to which the IRU applies. In telecommunications, an IRU is
the effective long term lease (temporary ownership) of the capacity of an
international cable.
Internet - Interconnected computer networks, originally known as the
Defense Advanced Research Projects Agency connecting government and academic
sites. It currently links about 50 million people worldwide who use it for
everything from scientific research to simple electronic mail.
Internet Service Provider - A company that provides individuals and
companies with access to the Internet and to other related services such as
website access and hosting.
Internet Peering - An agreement between two carriers for the exchange of
Internet traffic between their networks and onwards, covering the physical
interconnect as well as the financial terms of the interconnect where
applicable.
Intranet - A private network that uses Internet software. An Intranet is a
private Internet reserved for use by people who have been given the authority
and passwords necessary to use that network Internet Protocol. A standard which
describes software that keeps track of Internet addresses, routes outgoing
messages and recognizes incoming messages.
Local Loop or Tail - The local loop or tail is that portion of the local
telephone network that connects the customer's premises to the local exchange
provider's central office or switching center. This includes all the facilities
starting from the customer premise interface which connects to the inside wiring
and equipment at the customer premise to a terminating point within the
switching wire center.
28
<PAGE>
Multimedia - The electronic conversation between two or more people or
groups of people in different places using two or more types of digitally
integrated communication for voice, sound, text, data, graphics, video, image or
presence at the same time. Applications include conferencing, presentations,
training, referencing, games, etc.
Multiplexing - An electronic or optical process that combines two or more
lower bandwidth transmissions into one higher bandwidth signal by splitting the
total available bandwidth into narrower bands (frequency division) or by
allotting a common wavelength to several transmitting sources one at a time in
sequence (time division).
Optical Fibers - Thin filaments of glass through which light beams are
transmitted. Enormous capacity, low-cost, low-power consumption, small space,
light-weight, insensitivity to electromagnetic interference characterize this
transport media.
Physical Point of Presence (POP) - A place where a telecommunications
carrier has a physical presence for access to its network.
Public Telephone Operator (PTO) - Originally a government owned national
provider of telecommunications services. In countries where deregulation has
occurred, the public telephone operator may be privatized whereas in countries
where deregulation has not occurred, the public telephone operator remains
government owned.
STM (Synchronous Transfer Mode) - New term for traditional Time Division
Multiple switching to distinguish it from ATM.
STM-1 - The largest standard circuit unit of capacity, which consists of
155 Mbps. Thus, each Gbps contains enough capacity for 6.4 STM-1 circuits. While
capacity is sold to the largest telecommunications companies in minimum
investment units equal to one STM-1 unit, most telecommunications companies buy
smaller units at a price higher than the equivalent STM-1 price.
Switch - A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnection circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Synchronous Digital Hierarchy (SDH SONET) - SDH SONET is a set of standards
for optical communications transmission systems that define optical rates and
formats, signal characteristics, performance, management and maintenance
information to be embedded within the signals and the multiplexing techniques to
be employed in optical communications transmission systems. SDH SONET
facilitates transmission between dissimilar vendors' equipment and benefits
customers by minimizing the equipment necessary for telecommunications
applications. SDH SONET also improves
29
<PAGE>
the reliability of the Local Loop connection, historically one of the weakest
links in the transmission of information.
Wavelength Division Multiplexing (WDM) - A multiplexing technique which
employs more than one light source and director operating at different
wavelengths and simultaneously transmits optical signals through the same fiber
while message integrity of each signal is preserved.
30
<PAGE>
ITEM 2. FINANCIAL INFORMATION
Selected Consolidated Financial Information and Other Operating Data
Selected historical consolidated financial data of Telemonde as of and for the
period from March 10, 1998 (date of inception) to December 31, 1998 is presented
below. This has been derived from Telemonde's audited financial statements
included in this registration statement, which were prepared in accordance with
US GAAP. The selected historical consolidated financial data of Telemonde
presented below as of and for the nine-month period ended September 30, 1999
have been derived from Telemonde's unaudited financial statements included in
this registration statement. The summary unaudited pro forma financial data have
been derived from our audited financial statements for the period from March 10,
1998 to December 31, 1998, our unaudited financial data for the nine months
ended September 30, 1999 and unaudited results reported from EquiTel. The data
below should be read in conjunction with Telemonde's consolidated financial
statements, the notes thereto, and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained
elsewhere in this registration statement.
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Nine
Period from Period Nine Months Months
3/10/98 to from 3/10/98 to Ended Ended
12/31/98 12/31/98(1) 9/30/99 9/30/99(2)
----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Data
Operating Revenues 29,331 29,331 5,857 5,954
Line Cost (32,510) (31,612) (5,315) (4,887)
Cost of Contract Cancellation(3) (6,094) (6,094) - -
Dispute Settlement Costs - - - (4,000)
Reserve for inventory - - (40,690) (40,690)
Selling, General, and Administrative Expenses (1,055) (1,777) (6,821) (9,078)
Depreciation and Amortization - (2,431) (112) (2,391)
Amortization of Financing Costs - - (8,976) (8,976)
Loan Arrangement Fees (1,321) (1,321) (500) (500)
--------------------------------------------------------
Operating Expenses (40,980) (43,235) (62,414) (70,522)
--------------------------------------------------------
Operating Loss (11,649) (13,904) (56,557) (64,568)
========================================================
Share of Losses of Joint Ventures - - - (582)
Interest Income 247 247 580 582
Interest Expense (330) (330) (1,109) (1,121)
--------------------------------------------------------
Other (Expense) Income (83) (83) (529) (1,121)
--------------------------------------------------------
Net Loss (11,732) (13,987) (57,086) (65,689)
========================================================
Loss per share (basic and diluted) (528.97) - (1.27) -
Balance Sheet Data
Cash and Cash Equivalents 2,655 125 168
Bandwidth Inventory 77,515 47,190 47,190
Trade and Other Receivables 9,518 7,401 6,551
Investment in Joint Venture - - 1,038
Property and Equipment, Net - 706 920
Goodwill - 1,289 21,668
Other Intangible Assets 4,798
---------- ---------------------
Total Assets 89,668 56,711 82,333
Total Liabilities (101,390) (114,847) (105,219)
========== =====================
Stockholders Equity (Net Capital Deficiency) (11,702) (58,136) (22,886)
---------- ---------------------
</TABLE>
31
<PAGE>
(1) Gives pro forma effect to (a) the acquisition of EquiTel and (b) a debt to
equity conversion of $16,250,000 as if they had occurred on March 10, 1998.
(2) Gives pro forma effect to (a) the acquisition of EquiTel and (b) a debt to
equity conversion of $16,250,000 as if they had occurred on March 10, 1998
(income statement data) and September 30, 1999 (balance sheet data).
(3) On April 16, 1999 Telemonde terminated a Capacity Purchase Agreement with
Gemini ("CPA"). Under the CPA, Telemonde was committed to drawing down
capacity over a three year period. Under the termination agreement, the
commitment, other than the capacity already drawn down, has been canceled.
All costs connected with the termination agreement have been expensed
within the operating statement to December 31, 1998 as the decision to
terminate the CPA was made in 1998.
Unaudited Pro Forma Combined Financial Data
The unaudited pro forma combined financial information has been prepared in
accordance with generally accepted accounting principles in the United States
and gives effect to the following:
(a) The acquisition of all outstanding share capital of EquiTel Communications
Limited in November 1999. The combination will be accounted for under the
purchase method. Shares for the market value of $19 million will be issued
on completion.
Possible contingent considerations are listed below:
(i) An additional sum calculated by multiplying reported earnings before
interest and tax for the year ending December 31, 2000 by 6, subject
to a maximum of $30 million, payable in common stock on June 30, 2001.
(ii) A further additional sum calculated by multiplying reported earnings
before interest and tax for the year ending December 31, 2001 by 5,
subject to a maximum of $50 million, less the amount paid under (i)
above, payable in common stock on June 30, 2002.
Any additional consideration will result in additional goodwill.
(b) A debt to equity conversion of $16,250,000 on November 10, 1999.
The pro forma combined statements of income give effect to the acquisition as if
it had occurred on March 10, 1998 (date of inception of Telemonde Investments
Limited). The pro forma combined balance sheet gives effect to the acquisition
and the equity injection, as if they had occurred on September 30, 1999. The pro
forma combined financial information does not purport to represent what
Telemonde's results of operations would have been had the acquisitions been
consummated at the beginning of fiscal 1998 nor do they project Telemonde's
results for any future period.
32
<PAGE>
Telemonde, Inc.
Pro-Forma Unaudited Combined Statement of Income
Period from March 10, 1998 to December 31, 1998
<TABLE>
<CAPTION>
Telemonde
Investments EquiTel
Limited Communications Telemonde, Pro-Forma
(consolidated) Limited Inc. Adjustments/1/ Combined
-------------- -------------- ---------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Revenues
Bandwidth Revenues $ 29,331 $ - $ - $ - $ 29,331
Other Revenues - 898 - (a) (898) -
------------ -------------- --------- -------------- ----------
Operating Revenues 29,331 898 - (898) 29,331
------------ -------------- --------- -------------- ----------
Operating Expenses
Line Costs 32,510 - - (a) (898) 31,612
Cost of Contract Cancellation 6,094 - - - 6,094
Depreciation and Amortization - - - (b) 2,431 2,431
Selling, General and
Administrative Expenses 1,055 720 2 - 1,777
Loan Arrangement Fees 1,321 - - - 1,321
------------ -------------- --------- -------------- ----------
Operating Expenses 40,980 720 2 1,533 43,235
------------ -------------- --------- -------------- ----------
Operating Profit/(Loss) (11,649) 178 (2) (2,431) (13,904)
Other Income (Expense)
Interest Income 247 - - - 247
Interest Expense (330) - - - (330)
------------ -------------- --------- -------------- ----------
Other (Expense) Income (83) - - - (83)
------------ -------------- --------- -------------- ----------
Net Profit/(Loss) $ (11,732) $ 178 $ (2) $ (2,431) $ (13,987)
============ ============== ========= ============== ==========
</TABLE>
_______________
(1) The pro-forma unaudited combined statements of income for the period from
March 10, 1998 to December 31, 1998 gives effect to the following pro-forma
adjustments:
(a) Elimination of fees and commissions amounting to $898,000 payable by
Telemonde to EquiTel Communications Limited.
(b) Amortization of goodwill and other intangible assets amounting to
$2,431,000 attributable to the acquisition of EquiTel Communications
Limited.
33
<PAGE>
Telemonde, Inc.
Pro-Forma Unaudited Combined Statement of Income
for the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Telemonde, EquiTel
Inc. Communications Pro-Forma
(consolidated) Limited Adjustments/1/ Combined
-------------- -------------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues
Bandwidth Revenues $ 5,857 $ - $ - $ 5,857
Other Revenues - 525 (a) (428) 97
----------- -------------- -------- --------
Operating Revenues 5,857 525 (428) 5,954
----------- -------------- -------- --------
Operating Expenses
Line Costs 5,315 - (a) (428) 4,887
Dispute Settlement Costs - 4,000 - 4,000
Reserve for inventory 40,690 - - 40,690
Provision for Doubtful Debts 924 - - 924
Depreciation and Amortization 112 31 (b) 2,248 2,391
Selling, General and
Administrative Expenses 5,897 2,257 - 8,154
Amortization of financing costs 8,976 - - 8,976
Loan Arrangement Fees 500 500
----------- -------------- -------- --------
Operating Expenses 62,414 6,288 1,820 70,522
----------- -------------- -------- --------
Operating (Loss) (56,557) (5,763) (2,248) (64,568)
Other Income (Expense)
Share of Losses of Joint Ventures - (582) - (582)
Interest income 580 2 - 582
Interest expense (1,109) (12) - (1,121)
----------- -------------- -------- --------
Other (Expense) Income (529) (592) (1,121)
----------- -------------- -------- --------
Net (Loss) $ (57,086) $ (6,355) $ (2,248) $(65,689)
=========== ============== ======== ========
</TABLE>
(1) The pro-forma unaudited combined statement of income for the nine months
ended September 30, 1999 gives effect to the following pro-forma
adjustments:
(a) Elimination of fees and commissions amounting to $428,000 payable by
Telemonde to EquiTel Communications Limited.
(b) Amortization of goodwill and other intangible assets amounting to
$2,248,000 attributable to the acquisition of EquiTel Communications
Limited.
34
<PAGE>
Telemonde, Inc.
Pro-Forma Unaudited Combined Balance Sheet
as of September 30, 1999
<TABLE>
<CAPTION>
Telemonde, EquiTel
Inc. Communications Pro-Forma
(consolidated) Limited Adjustments/1/ Combined
-------------- -------------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $ 125 $ 43 $ - $ 168
Trade Accounts Receivable 4,237 - - 4,237
Other Receivables 3,164 535 (e) (1,385) 2,314
Inventory 47,190 - - 47,190
Property, Plant & Equipment 706 214 - 920
Investment in Joint Venture - 1,038 - 1,038
Goodwill 1,289 - (a) 20,379 21,668
Other Intangible Assets - - 4,798 4,798
----------- -------------- -------- --------
Total Assets $ 56,711 $ 1,830 $ 23,792 $ 82,333
=========== ============== ======== ========
Liabilities and Shareholders' Equity
Trade Accounts Payable 85,164 571 (b) (6,729) 79,006
Other Payables - 1,700 (e) (1,385) 315
Accrued Expenses 11,332 147 - 11,479
Deferred Income 1,139 - - 1,139
Other Loans 6,500 300 - 6,800
Shareholder Loans 10,712 5,289 (b) (9,521) 6,480
----------- -------------- -------- --------
Total Liabilities 114,847 8,007 (17,635) 105,219
----------- -------------- -------- --------
Stockholders' equity
Share Capital 59 - (c) 11 70
Retained Earnings (68,818) (6,177) (d) 6,177 (68,818)
Additional Paid in Capital 10,623 - (b,c) 35,239 45,862
----------- -------------- -------- --------
Total Shareholders' Funds (58,136) (6,177) 41,427 (22,886)
----------- -------------- -------- --------
Total Liabilities
and Stockholders' Funds $ 56,711 $ 1,830 $ 23,792 $ 82,333
=========== ============== ======== ========
</TABLE>
35
<PAGE>
(1) The pro-forma unaudited combined balance sheet as of September 30, 1999
gives effect to the following pro-forma adjustments:
(a) Capitalization of goodwill and other intangible assets amounting to
$25,177,000 arising on the acquisition of EquiTel Communications
Limited. This represents the purchase price (excluding any contingent
consideration) of $19 million plus the fair value of net liabilities
acquired of $6,177,000. Goodwill is being amortized over 10 years
under the straight-line method. Other intangible assets are being
amortized over 5 years under the straight-line method.
(b) A debt to equity conversion of $16,250,000, resulting in the issue of
6,000,000 shares.
(c) Shares valued at $19 million issued as the non-contingent
consideration to acquire EquiTel Communications Limited, resulting in
the issuance of 4,947,917 shares.
(d) The elimination of pre-acquisition retained earnings in EquiTel
Communications Limited amounting to $6,177,000.
(e) The elimination of intercompany balances.
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
You should read the following discussion and analysis together with Telemonde's
financial statements, including the notes, appearing elsewhere in this
registration statement.
Overview
We are an international communications company that is creating an international
network which will connect countries in the developed world with regional
centers in the emerging markets.
Telemonde Investments Limited, a British Virgin Islands company and the holding
company for the Telemonde business, was formed in March 1998. Telemonde, Inc.
(formerly Pac-Rim Consulting, Inc.) acquired Telemonde Investments Limited on
May 14, 1999. In exchange for all of the issued and outstanding shares of
Telemonde Investments Limited, Telemonde, Inc. issued 35,297,000 restricted
shares of Telemonde, Inc.'s common stock. Pac-Rim Consulting, Inc. was a
dormant shell company with no operating history but was listed on the NASD Over-
the-Counter Bulletin Board.
The issuance of common stock by Pac-Rim was accounted for as a reverse purchase
acquisition of Pac-Rim by Telemonde Investments Limited. Although Pac-Rim was
the surviving legal entity in the Reverse, Telemonde Investments Limited is
considered to be the acquirer in the transaction because:
. the sole shareholder of Telemonde Investments Limited prior to the
acquisition became the majority shareholder of Pac-Rim following the
acquisition;
. Telemonde management became Pac-Rim management following the acquisition;
and
. Pac-Rim was simply a shell company rather than an operating business.
36
<PAGE>
Following the acquisition by Telemonde Investments Limited, Pac-Rim Consulting,
Inc.'s name was changed to Telemonde, Inc. On November 9, 1999, Telemonde, Inc.
became a Delaware corporation by merging into a newly formed Delaware
subsidiary.
We have a limited operating history. Our financial information relates
principally to a period in which we were obtaining trans-atlantic capacity and
were establishing our business and market presence. We have incurred operating
losses and negative cash flow since our inception. Despite recognizing
$35,188,000 in revenues, Telemonde incurred a deficit on total shareholder
equity of $58,136,000 for the period from March 10, 1998 (the date of inception)
through September 30, 1999. We expect to continue to incur operating losses and
negative cash flow for at least the first half of 2000 as we continue to
establish our networks and expand our services. The continuation and magnitude
of our operating losses and negative cash flows in the future will be affected
by a variety of factors, including:
. The ability to put in place working capital facilities and to increase
our capital base.
. The rate at which we add new customers and the prices those customers
pay for our bandwidth and internet services.
. The mix of our business, including, among other factors, the proportion
of IRUs compared to leases and short term rentals we sell to our
customers.
. The ability and cost to obtain trans-atlantic and other bandwidth
capacity; in particular the cost of bandwidth under the major supplier
agreements currently under re-negotiation.
. Customer payment terms where customers require a deferred payment plan
for their purchase of our IRUs.
. The speed and extent to which we add networking and other related
services, including but not limited to our telehousing facilities, to
our portfolio of products and services.
. The ability to predict demand for our networking and other related
services, including but not limited to our telehousing facilities.
. The ability of our local relationships in emerging markets to support
our customers and meet our obligations.
. The completion of our planned networks and infrastructure and the
expansion of our networks generally, with completion being achieved by
currently expected completion dates.
. General economic, financial, competitive, legislative, regulatory,
licensing, and other factors that are beyond our control,
We have financed, and expect to continue to finance, our net losses, debt
service, capital expenditures and other cash needs through flexible supplier
payments, the issuance of debt and the proceeds from sales of shares of common
stock.
37
<PAGE>
As a development stage company, we have not yet completed our transition to an
operating company. It is anticipated that our network and operations center will
be established by the end of the first half of 2000. Although our senior
management team has substantial industry knowledge and experience, it has been
built up in the course of 1999 and has only recently been completed. EquiTel was
only formed in late 1998, only recently signed several major contracts and,
following its acquisition in November 1999 needs to be fully integrated into
Telemonde.
The transition from a development stage company to an operating company places
significant demands on our management and operations. We are in the process of
expanding the management and operational capabilities necessary for this
transition. Our ability to manage this transition successfully will depend on,
among other things:
. expanding, training and managing our employee base, including attracting,
retaining and motivating highly skilled personnel;
. creating customer interface and operations, administrative and maintenance
systems;
. procuring terrestrial capacity to provide connectivity to inland cities.
There can be no assurance that we will succeed in developing all or any of these
capabilities, and any failure to do so could have a material adverse effect on
our results of operations.
Industry Trends
Bandwidth demand is expected to more than double in the next two years. This
future growth of bandwidth demand will be met by the building of new cable
infrastructure. This will be particularly visible in Western Europe and the USA,
where a significant number of cable systems will be brought into service over
the next 18-24 months (including TAT-14, Flag-Atlantic, Level 3's Yellow System,
Hibernia, Southern Cross). As Asia progresses with liberalization, we would
expect to see the same broad pattern develop during the next five years.
We believe that following the recent sharp decline in market price, existing
supply and demand are now well matched. Current prices are cost based to ensure
that existing inventories are run down prior to new cable systems becoming
operational. The future market pricing of bandwidth will be affected by any
future imbalances between supply of capacity and demand per bandwidth and
therefore by the timing of new generation cable systems.
These developments have impacted buyer behavior by shifting some purchase
decisions away from outright capacity ownership (IRUs) to short-term leases
(less than 1 year durations typically), in anticipation of lower prices in the
near future. Buyers are balancing the cost of purchasing short term bandwidth to
meet user driven demand for bandwidth and service quality in a competitive
market against a forward view of prices for IRUs on the new cable systems and
delivery date expectations. We believe that the demand for bandwidth will be
driven primarily from Internet Protocol (IP) based services
38
<PAGE>
and the growing availability of broad band capacity on the wireline and wireless
access networks. This, coupled to the radically reduced cost base for
international bandwidth, will increase the demand for new high-speed data and
internet services over the next 18 months due to the abundance of high-quality,
cost-effective bandwidth, particularly on trans-atlantic and intra-European
routes. Services such as high capacity streaming video and content via the
Internet, previously thought to be uneconomical, will develop rapidly as prices
for the underlying bandwidth steps down to the next, technology driven, level.
As the Internet user market continues to be redefined into smaller and more
focused user groups, a key dynamic of this market will be the large number of
smaller service providers using the Internet as a distribution channel for their
content. This presents a major opportunity for wholesale operators to provide a
range of bandwidth, telehousing, commodity content and support services to these
service providers, enabling them to concentrate on their core capabilities.
Our subsidiary, telemonde.net, is ideally placed to exploit these increases in
demand for bundled support services.
Revenues
Operating revenues for the nine month period ended September 30, 1999 totaled
$5.9 million compared with $29.3 million for the period beginning March 10, 1998
and ended December 31, 1998. The principal reason for the decline in revenues
for the nine month period ended September 30, 1999 has been the rapid decline of
prices in the trans-atlantic bandwidth capacity industry in 1999. Customers were
reluctant to purchase capacity while prices were falling, and we were unable to
sell capacity profitably until we had renegotiated terms with our suppliers.
Our medium-term contracts for the supply of trans-atlantic bandwidth were
contracted for in 1998 and early 1999 at fixed prices and before the
unexpectedly severe fall in market prices. The details of our Capacity Purchase
Agreements with suppliers are described in detail in the section on "Liquidity
and Capital Resources" below. In order to address this bandwidth price
compression, we have reached agreements in principle but have yet to sign
definitive agreements with our principal suppliers to replace its old capacity
with new capacity on higher-value networks on the Atlantic, Pacific, Europe and
South American regions. The management is of the opinion that the carrying value
of the new capacity is equivalent to the cost of the old capacity and that the
final agreements will be executed within a reasonable time on the terms already
agreed upon in principle.
Although we believe that trans-atlantic market prices have now stabilized, we
can give no assurance that prices may not fall further. We have made in the
past, and may make in the future, commitments to suppliers to obtain bandwidth
capacity. Market price reductions reduce and can eliminate the expected margin
on bandwidth sales over the purchase price from the supplier. In addition, we
would need to seek further price reductions from our suppliers for future
bandwidth capacity purchases in order to restore margins and the outcome of such
negotiations are inevitably uncertain. Therefore our business, financial
39
<PAGE>
condition, and operating results could be materially and adversely affected by
market price declines.
A number of companies are constructing or have plans to construct new submarine
and terrestrial fiber optic systems. The additional capacity may create over-
capacity in the market and cause future prices to drop which could have an
adverse impact on our revenues and operational results. In the European
terrestrial market, lead times are short and there is significant competition
from new or upgraded systems. Therefore, it is possible that there will be over-
capacity in the European market and that prices may fall.
To further offset the possible impact of future bandwidth capacity market
fluctuations, we have diversified our revenue streams through the acquisition of
EquiTel and the formation of telemonde.net S.A.
Although we expect EquiTel's switched services to be a significant service of
growth and revenues in the future, our operations relating to the pre-paid card
business face a number of risks, which include:
. the increased entry into the market by pre-paid card vendors,
including vendors that are larger than us;
. our reliance on a small number of independent distributors to place
pre-paid cards in retail outlets;
. our inability to create exclusive pre-paid phone card distribution
arrangements in certain markets;
. the availability of alternative telephony methods;
. the cost sensitive nature of consumer demand; and
. the lack of customer loyalty to any particular pre-paid card company.
Many of these risks may cause prices to drop throughout the pre-paid card
industry. Because we depend on informal relationships with independent
distributors to market and sell our products, increased competition and lower
prices could force us to further lower our prices to continue to sell pre-paid
cards to these distributors. We cannot guarantee that we will be able to
continue to provide competitively priced pre-paid cards to our distributors or
that lower prices in the pre-paid card marketplace will not have a negative
effect on the results of our operations.
Results of Operations
For the nine months ended September 30, 1999 compared with the period from March
10, 1998 to December 31, 1998
Operating revenues decreased $23.4 million or 80% from $29.3 million for the
period ended December 31, 1998 to $5.9 million for the nine months ended
September 30, 1999. Sales of Indefeasible Rights of Use fell $25.4 million or
88% from $28.9 million for the period ended December 31, 1998 to $3.5 million
for the nine months ended
40
<PAGE>
September 30, 1999. Backhaul and maintenance revenues increased $1.8 million or
450% from $0.4 million in the period ended December 31, 1998 to $2.2 million in
the nine months ended September 30, 1999. The increase in backhaul and
maintenance revenues reflects the fact that the related sales agreements came
into effect part way through the period ended December 31, 1998. Leasing
revenues increased from nil in the period ended December 31, 1998 to $0.2
million in the nine months ended September 30, 1999.
Revenues are overwhelmingly attributable to the subsidiaries of Telemonde
Investments Limited.
Line costs decreased $27.2 million or 84% from $32.5 million in the period ended
December 31, 1998 to $5.3 million in the nine months ended September 30, 1999.
The decrease reflects an equivalent decrease in capacity sales. Line costs are
attributable to the subsidiaries of Telemonde Investments Limited.
Reserve for inventory increased $40.7 million from nil in the period ended
December 31, 1998 to $40.7 million in the nine months ended September 30, 1999.
The reserve for inventory is attributable to a rapid decline in market prices in
1999.
Provision for doubtful debts increased from nil in the period ended December 31,
1998 to $0.9 million in the nine months ended September 30, 1999. The provision
relates to a 1999 capacity sale made by Telemonde International Bandwidth
(Bermuda) Limited.
The cost of contract cancellation decreased from $6.1 million in the period
ended December 31, 1998 to nil in the nine months ended September 30, 1999. On
April 16, 1999, Telemonde terminated a Capacity Purchase Agreement with Gemini.
Under the terms of the Capacity Purchase Agreement Telemonde was committed to
drawing down capacity over a three year period. Under the termination
arrangement, the commitment, other than the capacity already drawn down, has
been cancelled. All costs connected with the termination arrangement have been
expensed in the period ended December 31, 1998 as the decision to terminate the
Capacity Purchase Agreement was made in 1998.
Selling, general and administrative expenses increased $4.9 million or 445%
from $1.1 million in the period ended December 31, 1998 to $6.0 million in the
nine months ended September 30, 1999. Staff costs increased from nil in the
period ended December 31, 1998 to $1.0 million in the nine months ended
September 30, 1999. The increase in staff costs reflects the fact that Telemonde
Networks Limited was incorporated on February 16, 1999 to perform the sales and
marketing functions previously undertaken outside the Company by Telemonde
Limited and to build infrastructure and staff. Legal fees increased $1.2 million
or 200% from $0.6 million in the period ended December 31, 1998 to $1.8 million
in the nine months ended September 30, 1999. The increase in legal fees reflects
an increase in corporate finance activity. Other selling, general and
administrative expenses increased $2.8 million or 700% from $0.4 million in the
period ended December 31, 1998 to $3.2 million in the nine months ended
September 30, 1999, primarily as a result of an increase in travel and
accommodation costs.
41
<PAGE>
Amortization of financing costs increased from nil in the period ended December
31, 1998 to $9.0 million in the nine months ended September 30, 1999. The
increase is attributable to the warrants issued to Communications Collateral
Limited and Global Crossing in 1999. Generally accepted accounting principles in
the United States require that the fair value of the warrants is recorded as an
expense over the period of the related financing.
Loan arrangement fees decreased $0.8 million or 62% from $1.3 million in the
period ended December 31, 1998 to $0.5 million in the nine months ended
September 30, 1999. The decrease is attributable to a fall in the aggregate
value of bridging finance to date in 1999 compared with 1998.
Interest income increased $0.4 million or 200% from $0.2 million in the period
ended December 31, 1998 to $0.6 million in the nine months ended September 30,
1999. The increase is attributable to an increase in income from sales interest
on capacity sold on deferred payment terms.
Interest expense increased $0.8 million or 236% from $0.3 million in the period
ended December 31, 1998 to $1.1 million in the nine months ended September 30,
1999 since average borrowings increased.
The net loss increased $45.4 million or 388% from $11.7 million in the period
ended December 31, 1998 to $57.1 million in the nine months ended September 30,
1999. The net loss for these periods is attributable to:
<TABLE>
<CAPTION>
Period from March Nine months
10, 1998 to ended September
December 31, 1998 30, 1999
<S> <C> <C>
Telemonde, Inc. - (436,000)
Telemonde Investments Limited - (1,551,000)
Subsidiaries of Telemonde Investments Limited (11,732,000) (55,099,000)
Total ($11,732,000) ($57,086,000)
</TABLE>
The increase of $45.4m in the net loss arises principally from the reserve for
inventory of $40.7 million and the amortization of financing costs of $9.0
million in the nine months ended September 30, 1999 as described above.
Excluding the reserve for inventory and the amortization of financing costs, the
net loss would have decreased 37% from $11.7 million in the period ended
December 31, 1998 to $7.4 million in the nine months ended September 30, 1999.
Liquidity and Capital Resources
Telemonde's liquidity requirements arise from:
. purchases and maintenance of bandwidth capacity and network equipment;
. development of intelligent network platforms, which includes pre-paid
calling cards and other value-added telephony services;
42
<PAGE>
. interest and principal payments on outstanding indebtedness;
. net cash used in operating activities; and
. acquisitions of, and strategic investments in, businesses.
Telemonde has satisfied its liquidity requirements to date through operating
cash flows, vendor finance, short-term bridge financing, shareholder loans and
equity subscriptions.
Net cash used in operating activities was $20.0 million in the nine months ended
September 30, 1999, compared to net cash provided by operating activities of
$2.7 million in the period from March 10, 1998 to December 31, 1998. The
increase in net cash used in operating activities was primarily due to a fall in
receipts under capacity sales agreements, an increase in payments under capacity
purchase agreements and an increase in general and administrative payments.
Net cash used in investing activities was $0.8 million in the nine months ended
September 30, 1999 compared to nil in the period from March 10, 1998 to December
31, 1998. Net cash used in investing activities in the nine months ended
September 30, 1999 comprises purchases of property, plant and equipment.
Net cash provided by financing activities was $18.2 million in the nine months
ended September 30, 1999 compared with $30,000 in the period from March 10, 1998
to December 31, 1998. Proceeds from shareholder loans increased from nil in the
period ended December 31, 1998 to $10.7 million in the nine months ended
September 30, 1999. Proceeds from the Communications Collateral Limited Capacity
Option Agreement increased from nil in the period ended December 31, 1998 to
$6.5 million in the nine months ended September 30, 1999. In the period from
March 10, 1998, Telemonde repaid loans of $18.3 million which had been drawn
down in the period.
Telemonde's ability to meet its liquidity requirements is dependent on its
ability to generate cash inflows from operations and raise short term or
permanent finance. Since inception through September 30, 1999, Telemonde has had
negative cash flow from operating activities of $17.3 million. In addition,
Telemonde incurred net losses of $11.7 million in the period ended December 31,
1998 and $57.1 million in the nine months ended September 30, 1999. On a pro
forma basis, after giving effect to the acquisition of EquiTel, Telemonde would
have had a net loss of $14.0 million in the period ended December 31, 1998 and
$65.7 million in the nine months ended September 30, 1999.
We plan to make expenditures of approximately $40 million in the first half of
2000 to build infrastructure and organize our bandwidth and switched services
businesses. This includes the purchase of bandwidth capacity for our own
networks, planned leasing and rental business, and our customers' requirements.
We hope to fund these expenditures from a short-term bridge financing, vendor
financing and from planned equity funding, as well as from proceeds of future
sales.
Beyond the initial amount, we will incur additional capital expenditures to
support our projected growth of the bandwidth business. In particular, we aim to
significantly grow
43
<PAGE>
our bandwidth leasing and rental business by purchasing additional bandwidth
capacity to be leased to our customers. We expect to meet the cash requirements
of our capital expenditures from:
. cash flow from fiber sales and operations;
. income from route management operations;
. income from our intelligent network services;
. additional equity and/or debt financing; and
. supplier financing, if available.
Our failure to accomplish any of the foregoing sources may significantly delay
or prevent capital expenditures. If we are unable to make our capital
expenditures as planned, our business may grow slower than expected with a
material adverse effect on our business, financial condition, results of
operations, and the value of our securities.
We currently do not have the capital base or working capital facilities to meet
our current and projected commitments. If we fail to successfully obtain
necessary capital, or to obtain an insufficient amount of capital, we would harm
our prospects and could jeopardize our existence. We have benefited from the
willingness of suppliers to reschedule commitments and payments and may continue
to require and take advantage of such flexibility in the future. However, this
reliance on supplier flexibility for short term funding inevitably leads to
pressure from suppliers which weakens our commercial position. In addition, it
could result and has resulted in formal events of default, which could endanger
us, especially if this supplier flexibility ceased to be available. It is for
this reason that we plan to seek substantial external debt and equity funding.
The independent auditors have reported that the financial statements for the
period from March 10, 1998 to December 31, 1998 have been prepared assuming that
the Company will continue as a going concern. As discussed in note 12 to the
financial statements, the Company has incurred a net loss of $11.7 million. At
December 31, 1998, total liabilities exceeded total assets by $11.7 million.
These factors, and the others discussed in Note 12, raise substantial doubt
about the ability of the Company to continue as a going concern if it fails to
raise additional debt and equity financing. The financial statements do not
include any adjustments relating to the recoverability of recorded assets, or
the amounts of liabilities, that might be necessary in the event the Company
fails to raise additional financing and cannot continue in existence.
We have incurred a high level of debt. As of September 30, 1999, Telemonde and
EquiTel had a combined $114,847,000 in total liabilities, including:
. $79,162,000 to capacity suppliers relating to undrawn bandwidth. Undrawn
bandwidth comprises trans-atlantic bandwidth capacity, which we have not
yet drawn-down and taken delivery of from the supplier, but to which we
are committed to draw down at scheduled dates under the terms of
Capacity Purchase Agreements with the supplier.
44
<PAGE>
. $15,001,000 of advances from third parties, which amount was
subsequently converted into equity on November 10, 1999.
. $5,815,058 owed to Communications Collateral Limited under a Capacity
Option Agreement.
. $1,000,000 in loans to EquiTel from Rhone Financial Indemnity Re
Limited.
The amount of our debt could have important consequences for our future,
including, among other things:
. cash from operations may be insufficient to meet the principal and
interest on our indebtedness as it becomes due;
. payments of principal and interest on borrowings may leave us with
insufficient cash resources for our operations; and
. restrictive debt covenants may impair our ability to obtain additional
financing.
We are in discussions with investment bankers for the immediate provision of
short-term debt and equity financing. The amount of this financing which is
required to meet our commitments is significant.
We cannot assure you that our current negotiations and discussions will be
successful. Failure to successfully complete our current negotiations and
discussions will not only impair our ability to develop our business but may
also result in the termination of our operations.
Due to our lack of liquidity resulting from a decline on the market for
wholesale fiber optic bandwidth, we have been unable to generate sufficient cash
flow to meet certain of our debt service requirements and have triggered events
of default under our monetary obligations on a number of our material contracts.
We are, however, renegotiating our capacity purchase agreements with our two
major suppliers, MCI WorldCom and Atlantic Crossing.
MCI WorldCom Capacity Purchase Agreements. In December of 1998 and on March 31,
1999, Telemonde, through its now wholly owned subsidiary Telemonde International
Bandwidth Limited, entered into agreements for the purchase of four units of
bandwidth capacity on the Gemini network. Specifically, Telemonde acquired the
IRUs in three units of capacity under the December 1998 agreement, and acquired
the right for an additional unit of capacity under the March 1999 agreement.
Under these agreements, Telemonde is also required to pay annual maintenance
charges. As of filing, Telemonde has paid the amounts due under the March 1999
agreement. However, as a result of the liquidity problems detailed above,
Telemonde was unable to fulfill its obligations to draw down and pay for the
three units of capacity under the December 1998 agreement. Furthermore,
Telemonde was delinquent on its annual maintenance charges under both
agreements, resulting in an overall default to MCI WorldCom in the amount of
approximately $28 million.
In light of these circumstances, Telemonde has recently executed a Standstill
Letter from MCI WorldCom in which MCI WorldCom has agreed to refrain from (a)
taking any
45
<PAGE>
action to enforce payment of the sums owed to MCI WorldCom under the capacity
purchase agreements; (b) taking any action to enforce or make a demand under any
guarantee, indemnity or security related to the capacity purchase agreements;
and (c) commence any insolvency proceedings against Telemonde or any of its
subsidiaries. The Standstill Letter expires upon the earlier of (i) the full
payment of the sums owed under the capacity purchase agreements; (ii) June 8,
2000; or (iii) Telemonde's failure to comply with a number of terms and
conditions, which includes the prohibition against the sale of assets, dividends
and the borrowing of any additional funds without the signed written consent of
MCI WorldCom's agent other than permitted borrowings.
Telemonde has also executed a letter of intent termed a "Capacity Swap Letter"
in which MCI WorldCom has agreed to enter into a binding agreement with
Telemonde to permit Telemonde to swap the bandwidth purchased under the above
capacity purchase agreements for new bandwidth on MCI WorldCom's European
Ulysses network. The Capacity Swap Letter is conditional on satisfaction by
Telemonde of its obligations under the Standstill Letter.
Atlantic Crossing Limited Capacity Purchase Agreement. Telemonde, through its
now wholly-owned subsidiary Telemonde Bandwidth (Bermuda) Limited, agreed to
acquire an aggregate of 16 STM-1(s) on Segment S-1 from Atlantic Crossing
Limited, under a Capacity Purchase Agreement dated June 10, 1998. Since the
summer of 1999, we have not drawn down any capacity from Atlantic Crossing and
have not made any payments under this agreement and are in default under the
payment terms in the amount of approximately $53 million, in addition to
interest and outstanding maintenance payments. Management is in discussions with
Global Crossing, the parent company of Atlantic Crossing, to renegotiate the
terms of the contract, including the extension of capacity drawdowns to include
the entire Global Crossing system, rather than just trans-atlantic capacity.
This will allow Telemonde to expand according to its overall business strategy.
Despite the technical defaults with Global Crossing and MCI WorldCom detailed
above, Telemonde has been in extensive negotiations with senior management in
both organizations towards the end of 1999 and continuing into January 2000. It
should also be noted that while these discussions have been held, Telemonde has
made a number of payments to both suppliers for services rendered and both
suppliers
. agreed to continue to provide all services to existing Telemonde
customers, including maintenance of the cable systems;
. not taken up the option to enact the default;
. actively supported Telemonde in the development of its strategy and
network deployment;
. allowed further capacity to be taken on a leased basis to assist in
fulfilling Telemonde's order book.
It is the opinion of Telemonde's management that the ongoing negotiations with
both suppliers will lead to a successful conclusion of the outstanding defaults
and provide Telemonde with much more flexible supply contracts.
46
<PAGE>
Gemini Capacity Purchase Agreement. On April 3, 1998, Telemonde, through its now
wholly owned subsidiary Telemonde International Bandwidth (Bermuda) Limited,
purchased Indefeasible Rights of Use relating to trans-atlantic capacity from
Gemini Submarine Cable System Limited. Specifically, Telemonde agreed to acquire
up to a maximum of STM-16. Due to a subsequent and rapid decline in the market
for wholesale telecommunications bandwidth, the capacity sale agreement was
amended by three letter agreements dated January 27, April 16, and April 22,
1999. These amendments provided that an IRU for only one (1) STM-1 would be
acquired, and a second STM-1 would be leased for a lump sum payment plus monthly
payments for a three-month period ending July 16, 1999. Further negotiations
between the parties provided that the lump sum payment would fall due on October
7, 1999 in the form of two promissory notes. As of the date of filing, Telemonde
has paid Gemini the full balance owing for the IRU relating to the first STM-1.
However, Telemonde has not fulfilled its obligations under two promissory notes
in the amount of $2.7 million. Although this default gives Gemini the right to
immediately terminate the Indefeasible Rights of Use, Gemini has not done so as
of the date of this filing. Furthermore, such a termination would not
substantially effect Telemonde's bandwidth sales contracts, as it only has one
customer operating on the Gemini network under this particular capacity purchase
agreement, and this customer is protected under the agreement with Gemini.
Current Obligations to Communications Collateral Limited. On April 15, 1999,
Telemonde, through its now wholly owned subsidiary Telemonde Investments
Limited, entered into a series of agreements with Communications Collateral
Limited, including, among others, agreements for: (1) the sale of an IRU for
bandwidth to Communications Collateral Limited; (2) the grant of an option to
Communications Collateral Limited which, among other things, required Telemonde
to repurchase the bandwidth upon Communications Collateral Limited's request;
and (3) a $1 million loan by Communications Collateral Limited to Telemonde due
and repaid on August 12, 1999. In connection with these principle agreements,
the three subsidiaries of Telemonde Investments Limited guaranteed the
obligations of Telemonde Investments Limited under those agreements, including
its obligation to pay back the loan and to repurchase the bandwidth in the event
that Communications Collateral Limited exercised its option.
On August 14, 1999, Communications Collateral Limited exercised its option to
require Telemonde to repurchase the capacity. Telemonde was unable to complete
this repurchase and was in default in the amount of approximately $5 million. As
a result, Communications Collateral Limited had the right to foreclose on
essentially all of the assets of Telemonde Investments Limited, including its
ownership interests in the three subsidiaries of Telemonde Investments Limited,
all of the assets in any of the foregoing subsidiaries, including their rights
under Telemonde's bandwidth sale contracts; and any ownership interest the
foregoing subsidiaries might have in any other Telemonde entities until the
default was cured. The amount of the foreclosure, however, would not have
exceeded the amount of the indebtedness.
On January 13, 2000, Communications Collateral Limited executed a Forbearance
Agreement with Telemonde. Under the terms of the Forbearance Agreement,
Communications Collateral Limited agreed not to exercise its rights of default
under the foregoing agreements until February 15, 2000, in consideration of
certain additional
47
<PAGE>
credit enhancements, including the issuance of additional shares and the payment
of $500,000.
Liabilities at December 31, 1999. As at December 31, 1999, Telemonde and EquiTel
had a combined $102.1 million of total liabilities. This included $78.3 million
owed to capacity suppliers relating to undrawn bandwidth and $4.5 million owed
to Communications Collateral Limited, with which whom we were in default. As at
December 31, 1999 we therefore had incurred events of default in respect of
$82.8 million of the total liabilities.
We also had the following obligations, included in the total liabilities of
$102.1 million at December 31, 1999:
. $1 million in loans to EquiTel from Rhone Financial Indemnity Re Limited,
repayable when EquiTel's resources permit.
. $1 million in loans to Telemonde from Kingsfame Investments, to be repaid on
March 7, 2000.
. $1 million in loans to Telemonde from Atlas, repaid by Telemonde in January
2000.
. $830,000 in loans from Dunloe, of which $165,000 was repaid in January 2000
and the balance is to be converted into equity.
At December 31, 1999 we had no material capital commitments. We intend to
establish our own operations center, as described in our plan of operation in
Item 1. This will involve capital expenditure of approximately $2 million in
respect of network equipment and connectivity. The intended sources of funds for
this expenditure are described below.
Fund Raising Plans. We currently do not have the capital base or working capital
facilities to meet our projected commitments. We are currently seeking short-
term debt finance, primarily to repay the obligations to Communications
Collateral Limited. In addition we plan to raise additional equity in the order
of $20 million to provide us with an increased capital base for the future.
We can give no assurance that our plans to raise additional equity will be
successful. If we fail to obtain the necessary capital, or to obtain an
insufficient amount of capital, this would harm our prospects and could
jeopardize our existence. We have benefited in the past from the willingness of
suppliers to reschedule commitments and payments and may continue to require and
take advantage of such flexibility in the future. However, this reliance on
supplier flexibility for short term funding inevitably leads to pressure from
suppliers. In addition, it has resulted in the past and could result in the
future in formal events of default, which could endanger us, especially if this
supplier flexibility ceased to be available. It is for this reason that we plan
to seek substantial external funding.
48
<PAGE>
Recent Events and Transactions
EquiTel. Telemonde acquired EquiTel Communications Limited on November 8, 1999.
The maximum aggregate value of the consideration payable by Telemonde to the
shareholders of EquiTel is $69 million. The consideration is to be satisfied as
follows:
. the initial consideration of $19 million was satisfied by the issuance
to the EquiTel shareholders of restricted shares of common stock of
Telemonde.
. on or before June 30, 2001 or within seven days thereafter, a sum not
exceeding $30 million will be paid to EquiTel shareholders in proportion
to their respective interests in EquiTel by the issue of restricted
shares of common stock of Telemonde, which amount will be based upon its
earnings.
. on or before June 30, 2002 or within seven days thereafter, a sum not
exceeding $50 million, less the amount paid on June 30, 2001, will be
paid to EquiTel shareholders in proportion to their respective interests
in EquiTel by the issue of restricted shares of common stock of
Telemonde, which amount will be based upon its earnings.
TGA Limited. On August 13, 1999 Telemonde acquired 100% of the issued and
outstanding stock of TGA(UK) Limited. The former shareholders of TGA received
200,000 shares of common stock of Telemonde, Inc. as consideration for the TGA
stock.
ITS (Spain). Telemonde, through its subsidiary EquiTel, entered into an
agreement to acquire ITS Europe, which is a Spanish registered company that
sells and distributes telecommunications products and services, including pre-
paid calling cards. This agreement was conditional on the market price of the
common stock of Telemonde being and remaining above $3 per share, since this
would impact on the value received by the sellers. As a result of the recent
decline in the Telemonde share price, the sellers exercised their right not to
proceed with the agreement.
Desert Telecommunications Services. EquiTel holds 49% of the issued share
capital of Desert Telecommunications Services LLC, an Omani company which is a
joint venture between EquiTel and a local partner to provide intelligent network
services to Oman. On November 8, 1999 EquiTel entered into a letter of intent to
increase its share of the profits of Desert Telecommunications Services from the
current 50% profit. As a result of the discussions with the local partner, it
was agreed that EquiTel's profit share from the joint venture would be increased
to 75%. An agreement to this effect was signed as of January 1, 2000. The
consideration for this transaction will be satisfied by the issue of 1,250,000
shares of Common Stock of Telemonde, Inc.
Global Switch (London) Limited. On November 8, 1999, Telemonde Networks entered
into a lease and service agreement, subject to certain conditions, for space in
the London Switch Building and agreed to lease space in Paris and Amsterdam upon
completion of those carrier hotels. The London facility will house Telemonde's
London switching equipment.
49
<PAGE>
Global Communications (Holdings) Limited. On November 5, 1999, Telemonde and
Global Communications signed a letter of intent for the purchase by Telemonde of
the entire share capital of Global Communications (Holdings) Limited, a UK based
Internet applications service provider. The letter of intent contained a number
of conditions on both parties before completion of the acquisition might occur.
Although discussions with Global Communications are continuing some of the
conditions remain unfulfilled and as a result this acquisition is unlikely to
proceed.
TGA Limited. On August 13, 1999, Telemonde acquired 100% of the issued and
outstanding stock of TGA(UK) Limited. The former shareholders of TGA received
200,000 shares of common stock of Telemonde, Inc. as consideration for the TGA
stock.
Future acquisitions
A key element of our business strategy is to acquire or make future investments
in complementary assets and businesses. A major portion of our future growth
will be as a result of such acquisitions. Acquisitions, including our recent
acquisitions of EquiTel and TGA, and intended possible acquisitions of ITS
Europe, and strategic investments involve financial and operational risks. In
order to effect an acquisition we may incur indebtedness and will need to
service that indebtedness or we may need to issue additional equity, which will
lead to dilution. An acquisition may not provide the benefits originally
anticipated while we continue to incur operating expenses. There may be
difficulty in integrating the service offerings, distribution channels and
networks gained through acquisitions and strategic investments with our own.
Although we attempt to minimize the risk of unexpected liabilities and
contingencies associated with acquired businesses through planning,
investigation and negotiation, such unexpected liabilities nevertheless may
accompany such strategic investments and acquisitions. We cannot guarantee that
we successfully will:
. identify attractive acquisition and strategic investment candidates;
. complete and finance additional acquisitions on favorable terms; or
. integrate the acquired businesses or assets into our own.
We cannot guarantee that the integration of our business with any acquired
business, including the business of EquiTel, will be accomplished smoothly or
successfully, if at all. If we encounter significant difficulties in the
integration of the existing services or technologies or the development of new
technologies, resources could be diverted from our development, and delays in
our development could occur. Successful integration of operations and
technologies requires the dedication of management and other personnel which may
distract their attention from our day-to-day business, the development or
acquisition of new technologies, and the pursuit of other business acquisition
opportunities.
50
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
Telemonde's primary market risk exposures relate to changes in foreign currency
rates. Telemonde is exposed to the risk of fluctuations in foreign currency
exchange rates due to the international nature and scope of its operations. In
the future, Telemonde expects to continue to derive a significant portion of its
net revenue and incur a significant portion of its operating costs outside the
United States, and changes in foreign currency exchange rates may have a
significant effect on Telemonde's results of operations. Telemonde historically
has not engaged in hedging transactions to mitigate foreign exchange risk.
Telemonde's main exchange risk currently arises from fluctuations between the US
dollar and pounds sterling. Its revenue from bandwidth sales is in US dollars.
Although capacity purchases are also made in dollars, Telemonde's sales, general
and administrative costs are mostly incurred in pounds sterling because most of
its employees are based in its executive and administrative offices in London
England.
EquiTel's revenues will be mainly received in the local currency of the country
of operations (for example, in Omani rigals) in the case of the current contract
in Oman). As EquiTel's contracts are mainly contracted through local joint
ventures and partnerships, much of the costs of the contract are also incurred
in the same local currency. However, there will be an exchange risk on the
profit or loss of the local operations or joint venture arising from the
fluctuation of the local currency, against the pounds sterling (in which
currency EquiTel's central sales, general and administrative costs in London are
mainly incurred).
We will derive substantial revenues from international operations and a key
element of our business strategy is to expand our operations in international
markets. Accordingly, our business is subject to certain risks inherent in
international operations. These risks include:
. unexpected changes in regulatory requirements, tariffs, customs, duties and
other trade barriers;
. difficulties in staffing and managing overseas operations;
. problems in collecting accounts receivable;
. political risks;
. fluctuations in currency exchange rates;
. foreign exchange controls which restrict or prohibit repatriation of funds;
. technology export and import restrictions or prohibitions;
. delays from customs brokers or government agencies; and
. potentially adverse tax consequences resulting from operating in multiple
jurisdictions with different tax laws.
During our limited operating history we have not experienced any material
adverse effects with respect to our overseas operations arising from such
factors. However, problems associated with such risks could arise in the future.
Finally, managing operations in multiple jurisdictions will place further strain
on our ability to manage our overall growth.
51
<PAGE>
In addition, EquiTel's targeted markets are in emerging markets, including
Africa, the Middle East, most of the Asia Pacific region, the Indian sub-
continent, Southern and Central America, and parts of Eastern Europe. Political
and social instability is widespread in many such areas and EquiTel is subject
to greater risks and potential losses due to unexpected changes in political
regimes.
We rely on local relationships in these emerging markets to support our
customers. Failure on the part of our local contacts to fulfill their
obligations may harm our reputation, business and operations. We, and in
particular our switched services business, utilize local persons to market our
services and provide local training and support. The quality of the local
training and support may be inconsistent and may not reach our "benchmark" of
quality service levels. In this event, customer relations, and possible future
business, may be jeopardized. In addition, our senior management may be diverted
to remedy the failure of our local relationships and this diversion may impede
other projects.
Telemonde's results of operations may be affected by fluctuations in currency
exchange rates. Whilst all revenues have been earned in U.S. Dollars, a portion
of operating costs are incurred in currencies other than U.S. Dollars, such as
Pounds Sterling. A partial mismatch in operating revenues and expenses could
lead to fluctuations in results of operations due to changes in the value of the
U.S. Dollar relative to foreign currencies. Although we continue to have a
relationship with these customers, for instance through their annual maintenance
contracts, they have not to date placed further orders with us for bandwidth
capacity.
There will also be currency gains or losses on translation of EquiTel's
financial statements, which as a UK company are initially prepared in pounds
sterling, into US dollars for consolidation into Telemonde, Inc.'s consolidated
financial statements.
Year 2000 Compliance
General. In advance of the start of the Year 2000, we reviewed our network
elements, computer systems, software applications and other business systems in
order to determine if any of these systems will not properly reflect or
recognize the year 2000. We identified, corrected, reprogrammed and tested our
systems for Year 2000 readiness. We contacted third party suppliers of our major
equipment, software and systems to identify and resolve any issues involving
Year 2000 readiness. We put in place contingency plans to mitigate, to the
extent possible, any Year 2000 non-readiness if it occurred.
Costs. We incurred minimal expenditures in 1999 to complete our Year 2000
readiness program. This does not include the costs of systems, software and
equipment that were being replaced or upgraded in the normal course of business.
The costs of modifying our network elements, software and systems for Year 2000
readiness were being funded from existing cash resources and were charged as
expenses as incurred.
Outcome. There was no instances of failure, non-readiness or non-compliance in
our equipment, network, software or computer systems arising from the effect of
the date
52
<PAGE>
change to the Year 2000. Although we can give no assurance that failures or non-
compliance may not occur in the future, we are confident that Year 2000 issues
will not have a material adverse effect on our business or results of
operations.
Other Risk Factors
Our business involves a significant number of material risks, which are either
disclosed elsewhere in this registration statement or are set forth below.
Certain of our officers and directors may have conflicts of interest with
Telemonde.
Certain of our directors and executive officers also serve as officers and
directors of other companies. Additionally, certain of our officers and
directors are active investors in the telecommunications industry. Although
these directors have fiduciary obligations to Telemonde under Delaware law,
service as a director or officer of Telemonde and as a director or officer of
another company could create conflicts of interest. In particular, we have an
advisory agreement with Sands Brothers, of which Mark Hollo is the managing
director. Mr. Hollo's duties as a manager at Sands Brothers could be in conflict
with his duties as a Telemonde board member. Any of these conflicts of interest
could have a material adverse effect on our financial condition. Telemonde has
not adopted special voting procedures to deal with such conflicts of interest
and resolution of these conflicts may be unfavorable to Telemonde but intends to
adopt such procedures in the near future.
Telemonde may be adversely affected if we do not successfully manage the
expansion of our bandwidth and switched services business and our expansion into
new markets and services.
In conjunction with our acquisition of EquiTel, we intend to expand our switch
services business at a rapid rate. We expect switched services to be a
significant source of growth and revenues in the future. In addition, we plan to
offer new telecommunications services, expand and interconnect its service in
its existing markets, and enter new markets. If we are not successful in
implementing these changes, our operating results will be negatively impacted.
Our ability to manage this expansion depends on many factors, including the
ability to:
. attract new customers and sell new services to existing customers;
. expand our network and available bandwidth design;
. acquire and install transmission and switching facilities;
. obtain any required governmental permits and rights-of-way;
. implement interconnection with local exchange carriers;
. expand, train and manage our employee base;
. improve our financial, operating and information systems to effectively
manage our growth;
. acquire suitable telehouse facilities; and
. accurately predict and manage the cost and timing of our capital
expenditure programs.
53
<PAGE>
Even if we are successful in completing the infrastructure to support our
expanded business, that business may not be profitable and may not generate
positive cash flow.
We depend on local connections that may be difficult and expensive to obtain.
We offer customers end-to-end management of the circuit and termination at local
sites. Therefore, we must provide backhaul capacity and local connectivity.
However, there can be high and unexpected costs in providing local connections
due to initial installation costs, annual local tail rentals, lack of
availability of fiber between connection points, difficulty in obtaining
permission to install fiber and a small number of alternative suppliers. In
addition, local connection agreement may be subject to local regulation. We may
not be able to obtain backhaul and local connectivity at rates that are both
competitive and profitable.
If we do not respond effectively and on a timely basis to rapid technological
change, our business could suffer.
If we do not successfully use or develop new technologies, introduce new
services or enhance our existing services on a timely basis, or if new
technologies or enhancements used or developed by us do not gain market
acceptance, our business could be damaged. The telecommunications industry,
including the Internet, is characterized by rapidly changing technology,
industry standards, customer needs and competition, as well as by frequent new
product and service introductions. Our future success will depend, in part, on
our ability to accomplish all of the following in a timely and cost-effective
manner, all while continuing to develop our business model and rolling-out our
services:
. effectively use and integrate leading technologies;
. continue to develop our technical expertise;
. develop new products and services that meet changing needs of
telecommunications industry and ISPs;
. have the market accept our services;
. advertise and market our products and services; and
. influence and respond to emerging industry standards and other changes.
We cannot assure you that we will successfully be able to use new technologies,
introduce new services or enhance our existing services on a timely basis, or
that new technologies or enhancements used by us will achieve market acceptance.
Our pursuit of necessary technological advances may require substantial time and
expense. In addition, we cannot assure you that, if required, we will
successfully adapt our network and services to alternate access devices and
conduits.
Adoption of New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other
54
<PAGE>
contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it is designated. For example, gains or losses related to
changes in the fair value of a derivative, not designated as a hedging
instrument, are recognized in earnings in the period of the change, while
certain types of hedges may be initially reported as a component of other
comprehensive income until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter. On that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company believes that the adoption of this standard will not have a material
effect on the Company's consolidated results of operations or financial
position. The FASB has delayed the effective date of SFAS No. 133 by one year to
years beginning after June 15, 2000 by the issuance of SFAS No. 137.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires that such costs to be expensed as
incurred. SOP 98-5 applies to all non-governmental entities and is generally
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
previously have not been issued. The adoption of SOP 98-5 is not expected to
have a material impact on results of operations, financial position, or cash
flows of the Company as the Company's current policy is substantially in
accordance with SOP 98-5.
In June 1999 the Financial Accounting Standards Board issued interpretation No.
43 ("FIN43") which states that SFAS 66 applies to all sales of real estate,
including real estate with property improvements or integral equipment.
The corporation adopted FIN 43 on July 1, 1999. As a result, capacity sales
agreements entered into subsequent to June 30, 1999 are bifurcated into an
equipment portion and a real estate portion. The real-estate portion is
classified as an operating lease. Revenues are recognised on a straight line
basis over the life of the agreement. The equipment portion of a capacity sales
agreement is classified as a direct financing sub lease. The difference between
the gross investment in the capacity sales agreement and the cost of the
capacity is initially recorded as deferred interest income. Deferred interest
income is amortized to interest income so as to produce a constant periodic rate
of return on the net investment in the capacity sales agreement. Under the terms
of substantially all capacity sales agreements, the purchase price is due in
full when the capacity is ready for service. In such cases, revenue is
recognised when the capacity is ready for service.
Capacity purchase agreements entered into subsequent to June 30, 1999 are
bifurcated into an equipment portion and a real estate portion. The real estate
portion is classified as an operating lease. Leasing costs are recognised on a
straight line basis over the lift of the agreement. The equipment portion of a
capacity purchase agreement is classified as a capital lease. Capacity acquired
under capital leases is initially recorded as an obligation at an amount equal
to the present value at the beginning of the lease term of minimum lease
payments during the lease term. Thereafter it is stated at the lower of carrying
value and fair value.
55
<PAGE>
ITEM 3. PROPERTIES
As of January 14, 2000, Telemonde owned none of its office or operations
facilities. All of Telemonde's operations were located at leased properties, as
set forth below.
<TABLE>
<CAPTION>
Location Type
-------- ----
<S> <C>
Telemonde
London, England
40 Portman Square Office
Aylesbury Street Telehouse
Harbour Exchange, London Docklands Telehouse
Coriander Avenue, London Docklands Telehouse
New York, New York
230 Park Avenue* Office
200 Madison Avenue** Office
8th Avenue Telehouse
Hudson Street Telehouse
EquiTel
London, England
40 Portman Square Office
Telemonde Networks Limited
London, England Switching
telemonde.net
Geneva, Switzerland Office
Desert Telecommunications Services, LLC
Muscat, Oman Office
</TABLE>
*Pending.
**Terminated.
Telemonde's executive and administrative offices are located in London. EquiTel
leased this space from its landlord on March 1, 1999 for a period of seven (7)
years. The costs of the lease are allocated between Telemonde and EquiTel. After
January 14, 2000, Telemonde intends to relocate its New York office to 230 Park
Avenue. Upon execution of a lease, Telemonde will lease this property for a
period of six (6) months. Previously, the New York offices of Telemonde were
located at 200 Madison Avenue. After negotiation with the property owner,
Telemonde terminated this lease in January 2000
56
<PAGE>
and has satisfied its obligations in full to the property owner and has cleared
the previous event of default under the lease.
In London and New York, Telemonde leases "telehouse" facilities to house the
routing and switching equipment that operates Telemonde's network and
interconnects it to the networks of other carriers. Telemonde's present
telehouse facilities also contain space that can be used to house equipment to
operate its local networks in London and New York when those networks are
developed. Telemonde generally leases telehouse facilities for periods of one
year, and renews the leases annually.
On November 8, 1999, Telemonde Networks Limited entered into a lease with Global
Switch (London) Limited for space in the London Switch Building, East India
Dock. This facility will be used for switching traffic on Telemonde's network,
as well as providing network switching services to other carriers. Telemonde's
lease with Global Switch is contingent upon the termination of a third party's
prior lease for the same space. We believe this condition will be fulfilled in
the near future, permitting Telemonde to use the switch facility.
We consider the offices and facilities described above to be appropriate for the
current position and size of the business. They enable us to market our
services, serve our customers, house our employees and fulfil our contracts in a
satisfactory manner. As our business grows, we shall need to lease additional
space for our equipment, network and employees. In particular we are in
discussions for additional space in London for the operations center, which we
plan to establish in the first half on 2000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides you with certain information, as of January 14,
2000 regarding beneficial ownership of Telemonde's common stock by: (1) each of
our directors and named executive officers (the "named executive officers" are
described in the Summary Compensation Table set forth in Item 6); (2) each
person whom we believe beneficially owns more than 5% of our outstanding voting
stock; and (3) all executive officers and directors as a group. In accordance
with the rules promulgated by the Securities and Exchange Commission, this
ownership includes shares currently owned as well as shares which the named
person has the right to acquire beneficial ownership of
57
<PAGE>
within 60 days, through the exercise of options, warrants or other rights.
Except as otherwise indicated, each stockholder listed below has sole voting and
investment power as to the shares owned by that person.
<TABLE>
<CAPTION>
Amount and Nature of Percentage
Name and Address (1) Beneficial Ownership (2)(3) of Class (4)
-------------------- --------------------------- ------------
<S> <C> <C>
Kevin F.H. Maxwell (5) 3,183,790 4.8%
Adam N. Bishop (6) 989,583 1.5
Andrew J. Hedges -- --
Harry D. Pomeroy (7) 989,583 1.5
Nicholas Topham (8) 682,812 1.0
Larry Trachtenberg (9) 484,402 *
Mark G. Hollo (10) 980,263 1.5
Miguel Tirado (11) 105,263 *
Intelecom Limited (12) 29,260,000 43.8
Lake Building, 1st/ Floor
Wickhams, Cay One
Road Town, Tortola
British Virgin Islands
Communications Collateral Limited (13) 7,602,825 10.4
The Tropic Isle Building
Road Town, Tortola
British Virgin Islands
All Directors and Executive Officers as a group 7,415,398 11.1
(9 persons)
</TABLE>
* Less than one percent of Telemonde common stock.
(1) If no address is given, the named individual is an executive officer or
director of Telemonde, whose business address is: 40 Portman Square,
London, England.
(2) Shares of common stock that a person has the right to acquire within 60
days of January 14, 2000 are deemed outstanding for computing the
percentage ownership of the person having the right to acquire such shares,
but are not deemed outstanding for computing the percentage ownership of
any other person.
(3) Beneficial ownership for each named person includes the number of shares
initially issued to him, her or it upon the acquisition of EquiTel by
Telemonde, but does not include shares that may be issued to each person as
additional consideration paid to former EquiTel shareholders, as described
in Item 7, "Certain Relationships and Related Transactions."
(4) As of January 14, 2000, there were 66,771,750 shares of common stock issued
and outstanding.
(5) Mr. Maxwell's beneficial ownership includes 2,756,790 shares of Telemonde
common stock attributable to Mr. Maxwell because of his right to purchase
such shares from Intelecom Corporation Limited, under the arrangements
described below under "Ownership by Rhone Financial and Intelecom." Mr.
Maxwell's beneficial ownership also includes 426,702 shares of Telemonde
common stock held by Telcoworld Limited, in which Mr. Maxwell has a 33.4%
ownership interest, which were received by Telcoworld as consideration for
its beneficial ownership of shares in EquiTel.
58
<PAGE>
ownership interest, which were received by Telcoworld as consideration for
its beneficial ownership of shares in EquiTel.
(6) Mr. Bishop's shares were received as consideration for his beneficial
ownership of shares in EquiTel.
(7) All shares attributed to Mr. Pomeroy are held by his wife and were received
as consideration for her beneficial ownership of shares in EquiTel.
(8) Mr. Topham's shares were received as consideration for his beneficial
ownership of shares in EquiTel.
(9) All shares attributed to Mr. Trachtenberg are held by his wife and were
received as consideration for her beneficial ownership of shares in
EquiTel.
(10) Mr. Hollo's beneficial ownership includes 105,263 shares authorized for
issuance to Mr. Hollo as compensation for his membership on the Board of
Directors, which number represents $250,000 in shares of common stock,
valued at $2.375 per share. The compensation package provides the shares
will be issued at the closing sales price on the business day prior to
issuance, and $2.375 represents the price per share as of the close of
business on January 14, 2000. The actual number of shares issued to Mr.
Hollo may be different than 105,263. Mr. Hollo's ownership also includes
875,000 shares beneficially owned by Black Trust, beneficiaries of which
are descendants and other family members of Mr. Hollo. Mr. Hollo is agent
for Black Trust through a Power of Attorney.
(11) Dr. Tirado's beneficial ownership includes 105,263 shares authorized for
issuance to Dr. Tirado as compensation for his membership on the Board of
Directors, which number represents $250,000 in shares of common stock,
valued at $2.375 per share. The compensation package provides the shares
will be issued at the closing sales price on the business day prior to
issuance, and $2.375 represents the price per share as of the close of
business on January 14, 2000. The actual number of shares issued to Dr.
Tirado may be different than 105,263.
(12) The beneficial owner of Intelecom Limited is Rhone Financial Indemnity Re
Ltd., an Irish company, which formerly was the sole shareholder of
Telemonde Investments Limited and which created Intelecom as a vehicle for
its ownership of Telemonde shares. Intelecom has granted or will grant to
certain persons, including Mr. Maxwell, the right to purchase Telemonde
shares from Intelecom. The beneficial ownership of persons holding such
rights is identified separately in the table. For more information, see
"Rhone Financial and Intelecom" below.
(13) The beneficial ownership of Communications Collateral Limited includes
5,025,831 shares of Telemonde common stock issuable upon the exercise of a
warrant for the purchase of such shares at an exercise price of $2.70, as
amended by the Forbearance Agreement between Communications Collateral and
Telemonde; this number is equal to seven percent of Telemonde's issued and
outstanding common stock as of January 14, 2000. The warrant presently is
exercisable, and will remain exercisable until the third anniversary of the
closing date of the first transaction that raises additional capital for
Telemonde of at least $10 million through the sale of equity securities.
The beneficial ownership of Communications Collateral also includes a
1,016,829 shares of Telemonde common stock issuable under a penalty
provision in a registration rights agreement between Telemonde and
Communications Collateral. For more information, see "Communications
Collateral Limited" below.
Rhone Financial and Intelecom
Rhone Financial Indemnity Re Ltd., an Irish company, operates an investment and
asset management business for private investors. Rhone was the founding
shareholder and sole beneficial owner of Telemonde Investments until the reverse
acquisition of Pac-Rim, following which Telemonde (formerly Pac-Rim) became the
sole owner of Telemonde
59
<PAGE>
Investments. As part of this transaction, Rhone agreed that, Kevin Maxwell, Adam
Bishop, Harry Pomeroy and other Telemonde employees and associates were to have
a majority interest in Telemonde, leaving Rhone with an agreed-upon minority
interest. To complete this reorganization, on September 30, 1999 Rhone
transferred all its common stock in Telemonde to Intelecom Corporation Limited,
a newly created British Virgin Islands company owned by Rhone.
The transfer of shares of Telemonde common stock from Rhone to the Telemonde
employees and affiliates entitled to the shares under the agreement with Rhone
will be completed in the following manner. Intelecom will grant the right to
purchase shares of Telemonde common stock from Intelecom to an Employee Benefit
Trust to be organized for the benefit of certain Telemonde employees. Along with
a number of other employees, Mr. Bishop, Mr. Hedges, Mr. Pomeroy, Mr. Topham and
Mr. Trachtenberg would hold Telemonde shares through the trust. As of January
14, 2000, however, the Trust had not been organized, and accordingly neither the
beneficial ownership of the Trust nor that of the individual employees of
Telemonde in the shares held by Intelecom is indicated in the above table.
Intelecom will grant non-employees the right to purchase shares of Telemonde
common stock directly from Intelecom.
Mr. Maxwell, however, has informed Intelecom of his intention to purchase the
2,756,790 shares of Telemonde common stock to which he is entitled directly from
Intelecom, instead of purchasing them through the Trust, and Intelecom has
agreed to permit Mr. Maxwell to do so. Because Mr. Maxwell could purchase these
shares at any time, beneficial ownership of the number of shares which he is
entitled to purchase has been included in the table.
Communications Collateral Limited
Communications Collateral Limited, a British Virgin Islands company, is an
investment company widely owned by third party investors. On April 15, 1999,
Telemonde Investments Limited, which now is a wholly owned subsidiary of
Telemonde, entered into a series of contracts, providing for:
. the sale of an IRU for bandwidth to Communications Collateral for $6.5
million;
. the grant of an option to Communications Collateral which, among other
things, required Telemonde to repurchase the bandwidth for $6.5 million
upon Communications Collateral's request; and
. a $1 million loan by Communications Collateral to Telemonde due in August
1999.
On September 1, 1999, Telemonde issued to Communications Collateral a warrant
for the purchase of a number of shares of Telemonde's common stock equal to 7%
of Telemonde's outstanding common stock, as of a date not yet fixed, and entered
into a Registration Rights Agreement with respect to the shares of Telemonde
common stock held by Communications Collateral or issuable upon exercise of the
warrant. The number of shares issuable upon the exercise of the warrant will
fluctuate; if the warrant
60
<PAGE>
had been exercised in full on January 14, 2000, Communications Collateral would
have received 5,025,831 shares of Telemonde's common stock. The stated exercise
price of the warrant is $2.70 per share, as amended by the Forbearance Agreement
between Communications Collateral and Rhone. The warrant is exercisable at any
time from September 1, 1999 until the third anniversary of the closing date of
the first transaction that raises additional capital for Telemonde of at least
$10 million through the sale of equity securities. No such transaction has
occurred since the issuance of the warrant. The 5,025,831 shares issuable upon
exercise of the warrant are included in Communications Collateral's beneficial
ownership as set forth in the above table.
Pursuant to the Registration Rights Agreement, Telemonde is obligated to issue
to Communications Collateral an additional number of shares of its Common Stock
equal to 1.5% of its outstanding common stock. The Registration Rights Agreement
provides for the issuance of such shares as a penalty for failing to register
the shares of Telemonde common stock held by Communications Collateral under the
Securities Act prior to November 11, 1999. At the end of each thirty-day period
following November 11, 1999 during which the common stock held by Communications
Collateral has not been registered under the Securities Act, the number of
shares which Communications Collateral is entitled to receive increases by one-
half of one percent (0.5%) of Telemonde's outstanding common stock, subject to a
maximum of six percent of Telemonde's outstanding common stock. No consideration
will be received by Telemonde for the issuance of such shares to Communications
Collateral. As of January 14, 2000 no shares of Telemonde's common stock had
been issued pursuant to this provision.
61
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table and biographies sets forth information concerning the
directors and executive officers of Telemonde.
<TABLE>
<CAPTION>
Expiration of
Name Age Position Term as Director
---- --- -------- ----------------
<S> <C> <C> <C>
Kevin F.H. Maxwell (1) 41 Chairman and Director 2002
Adam N. Bishop 40 President, Chief Executive Officer, Treasurer and Director 2001
Andrew J. Hedges 31 Executive Vice President and Chief Operating Officer N/A
Harry D. Pomeroy 45 President of EquiTel N/A
Nicholas Topham 42 Chief Executive Officer of EquiTel N/A
Larry S. Trachtenberg 47 Executive Vice President and Managing Director of EquiTel N/A
Count Gottfried A. von Bismarck 37 Vice President, Secretary and Director 2000
Mark G. Hollo (1) (2) 49 Director 2002
Miguel D. Tirado (1) (2) 56 Director 2001
</TABLE>
(1) Member of the audit committee.
(2) Member of the compensation committee.
Kevin F.H. Maxwell, 41, Chairman and Director
Mr. Maxwell, a co-founder of Telemonde, joined Telemonde and has served as
Chairman of the Board and a director of Telemonde since May 1999, when Telemonde
Investments acquired Pac-Rim in a reverse acquisition, creating Telemonde. From
1993 to 1999, Mr. Maxwell was a self-employed strategic business development
consultant affiliated with Westbourne Communications Limited ("Westbourne"), a
UK consulting firm. Through Westbourne, he provided advice and consultancy
services to a range of telecommunications-related clients. In particular, prior
to joining Telemonde, he provided through Westbourne advice to Telemonde on its
early development and on corporate finance issues. Until 1991, Mr. Maxwell was
Deputy Chairman and Deputy Chief Executive Officer of Maxwell Communication
Corporation plc, and its subsidiary Macmillan, Inc. and a director of Mirror
Group Newspapers (together, the "Maxwell Group"). The Maxwell Group, which was
controlled by Mr. Maxwell's late father, Robert Maxwell, collapsed in December
1991. In 1992, Mr. Maxwell was declared bankrupt as a result of the civil
litigation arising from the collapse of the Maxwell Group. This bankruptcy was
discharged in 1995. In 1996, Mr. Maxwell was acquitted of all criminal charges
related to the collapse of the Maxwell Group.
62
<PAGE>
Adam N. Bishop, 40, President, Chief Executive Officer, Treasurer and Director
Mr. Bishop, a co-founder of Telemonde and EquiTel, joined Telemonde Networks
Limited in March 1999, and has served as the President, Treasurer and a director
of Telemonde since May 1999, when Telemonde Investments acquired Pac-Rim in a
reverse acquisition, creating Telemonde. From 1996 until 1999, Mr. Bishop served
as a consultant to various telecommunications companies, including EquiTel, to
which he provided advice in relation to the development of its route management
business. During this period, Mr. Bishop also served for a time as chief
executive officer of North American Gateway, Ltd., a wholesale voice telephony
carrier and a division of North American Gateway, Inc., where he established the
parent company's operations in Europe. From 1991 to 1996 Mr. Bishop was employed
by British Telecommunications, plc, a leading international telecommunications
company ("British Telecom"), where he was head of new business development in
international carrier services.
Andrew J. Hedges, 31, Executive Vice President and Chief Operating Officer
Mr. Hedges joined Telemonde in November 1999 and has served as Chief Operating
Officer since then. Prior to joining Telemonde, he gained substantial experience
in commercial operations, sales and marketing and international services from
his previous positions at leading telecommunications companies. From 1997 to
1999, he was the Managing Director of First Telecom plc, the largest independent
telecommunications retailer in the United Kingdom. From 1994 to 1997, he was
Commercial Operations Manager in the United Kingdom for MFS WorldCom, now MCI
WorldCom, a leading international telecommunications company ("MCI WorldCom").
Prior to joining MCI WorldCom, he worked at Gemini Submarine Cable Systems
Limited, a trans-Atlantic fiber-optic cable construction and sales company, and
British Telecom.
Harry D. Pomeroy, 45, President of EquiTel
Mr. Pomeroy, a co-founder of Telemonde and EquiTel, joined EquiTel in September
1998 upon its incorporation and has served as President and a Director of
EquiTel since then. He joined Telemonde in November 1999, upon the acquisition
of EquiTel by Telemonde. He is one of the small number of experts with extensive
experience and knowledge of the traditional carrier marketplace, new telecom
carriers, and the emerging wholesale telecommunications marketplace. Prior to
joining EquiTel, Mr. Pomeroy was the head of Commercial Carrier Operations at
MCI WorldCom from 1996 to 1998. From 1985 to 1996 he held various sales and
marketing positions at British Telecom, becoming Group Sales Manager for Global
Accounts in 1993 and later the head of International Carrier Marketing
Operations.
Nicholas Topham, 42, Chief Executive Officer of EquiTel
Mr. Topham joined EquiTel in May 1999 and has served as Chief Executive Officer
and a Director of EquiTel since then. He joined Telemonde in November 1999, upon
the acquisition of EquiTel by Telemonde. He specializes in international
wholesale communications and telecommunications strategic development. Prior to
joining EquiTel, Mr. Topham was a director of the Global Communications and
Entertainment Global Practice of Arthur Andersen, a leading international
accounting firm, from 1997 to 1999. Prior to joining Arthur Andersen, he spent
13 years at British Telecom from 1984 to 1997, becoming head of Business
Development and Strategy for International Wholesale Services.
63
<PAGE>
Larry S. Trachtenberg, 47, Executive Vice-President and Managing Director of
EquiTel
Mr. Trachtenberg, a co-founder of EquiTel, joined EquiTel in September 1998 and
has served as Managing Director of EquiTel since November 1998. He joined
Telemonde in November 1999, upon the acquisition of EquiTel by Telemonde. Mr.
Trachtenberg has extensive management experience in the telecommunications,
Internet, new media and financial services industries. Prior to joining EquiTel,
from 1992 to 1998 he was a consultant to a number of companies, including
Telemonde, and prior to that held senior management positions in communications
and financial services businesses. In 1991, Mr. Trachtenberg was Managing
Director of Maxwell Central & East European Partners plc, a subsidiary of Robert
Maxwell Group plc., a private company. The Maxwell Group, controlled by the late
Mr. Robert Maxwell, collapsed in December 1991. In 1996, Mr. Trachtenberg was
acquitted of all criminal charges related to the collapse of the Maxwell Group.
Count Gottfried A. von Bismarck, 37, Vice President, Secretary and Director
Count von Bismarck joined Telemonde and has served as Vice President, Secretary
and a director of Telemonde since May 1999, when Telemonde Investments acquired
Pac-Rim in a reverse acquisition, creating Telemonde. From December 1998 until
he joined Telemonde, he was a Director of London International Development
Corporation, an international investment business with interests in the
telecommunications sector in central Asia and India, among other investments.
From September 1997 until December 1998, he was Director of Fund Management for
AURORA Kapital Limited, a German investment business. From May 1995 to August
1997, Count von Bismarck served as an advisor to the Minister of Privatization
of Croatia, where he developed and implemented the Croatian Mass Privatization
Program, strategies for the privatization of public utilities, including
telecommunications, and infrastructure projects. Prior to his work with the
Croatian Minister, from 1993 to 1995 Count von Bismarck worked as a management
consultant specializing in business turn-around management in the former East
Germany and in the Czech Republic. From 1991 to 1993 he worked for the State
Privatization Agency (Treuhandanstalt) of the Federal Republic of Germany,
managing a portfolio of 28 large and medium sized companies in the electronics
communications sector.
Mark G. Hollo, 49, Director
Mr. Hollo became a director of Telemonde in November 1999. Mr. Hollo has served
as a Managing Director of Investment Banking for Sands Brothers & Company, Ltd.,
a securities and investment banking firm and member of the New York Stock
Exchange since 1992. Pursuant to an engagement letter with Sands Brothers dated
October 27, 1999, as amended, Telemonde has agreed to use its best efforts to
elect a designee of Sands Brothers to the Telemonde Board for a period of three
years. Mr. Hollo has been appointed to the Board as such designee.
Miguel D. Tirado, Ph.D., 56, Director
Dr. Tirado became a director of Telemonde in November 1999. Since 1986, Dr.
Tirado has been the Dean of Graduate Studies and Research and a Professor of
Management Systems at California State University, Monterey Bay. He has been a
Senior Fellow at
64
<PAGE>
the Institute for Defense Education and Analysis at the Naval Post Graduate
School in Monterey, California since 1996. Dr. Tirado also currently is Managing
Director of Tirado and Associates, a management consulting firm advising clients
in California's Silicon Valley. Prior to joining the faculty of California State
University, Monterey Bay, he was the European Marketing Director for Pacific
Telesis, a US-based telecommunications company and now a subsidiary of SBC
Communications, Inc.
Management Structure
The executive officers listed above, with the exception of Count von Bismarck,
are responsible for the control and oversight of all Telemonde operations,
including those conducted by Telemonde Networks, EquiTel, Telemonde Investments
Limited and telemonde.net. Telemonde intends to expand its executive officers
group by recruiting a Chief Financial Officer in the first half of 2000.
Telemonde's executive officers are supported by a management team with extensive
experience in the telecommunications industry. Telemonde's key management
includes:
Ray Pritchard, 34, President, Telemonde.net
Mr. Pritchard joined Telemonde in May 1999 and has served as President of
telemonde.net since its formation. Since 1982, he has developed an in-depth
background in international telecommunications by working at all levels of the
industry, from technician to senior management, and has extensive knowledge of
Internet multimedia businesses. Prior to joining Telemonde, Mr. Pritchard was
Director of Products and Services of Unisource Carrier Services, a European
second-tier telecommunications carrier, where he was responsible for development
of Internet carrier platforms. He is a former director of the European
Competitive Telecommunication Association, an association of independent
European telecommunications carriers. He was responsible for the market launch
of interactive multimedia with British Telecom prior to joining Unisource.
Susan Connabeer, 41, Legal Services Director, Telemonde Group
Ms. Connabeer joined Telemonde in August 1999 and is responsible for the
provision and coordination of legal services for both Telemonde and EquiTel. She
has considerable legal and commercial experience within the global
telecommunications industry, having specialized in telecommunications
outsourcing within the banking and financial sector. Recently, she has worked
for Warburg Dillon Read, a leading investment bank, MCI WorldCom and BT
Syncordia, a subsidiary of British Telecom.
Andrew Hardy, 35, Business Development Director, Telemonde Networks
Mr. Hardy joined Telemonde in October 1999. Mr. Hardy has accumulated 14 years
of telecommunications industry experience in both Europe and the Far East. He
was employed by MCI WorldCom from March 1994 until he joined Telemonde, where he
most recently was Director of Broadband Sales. Prior to working at MCI WorldCom,
he was employed by Nortel Networks, Inc., a leading manufacturer of
telecommunications network equipment.
65
<PAGE>
Jason Peacock, 39, Technological and Operations Director, Telemonde Networks
Mr. Peacock joined Telemonde in March 1999. He has substantial international
telecommunications experience, especially in voice solutions and telephony
service offerings. He worked for British Telecom from 1982 to 1999, and was its
Commercial Manager, Voice Solutions from 1997 until he joined Telemonde.
Sara Vale, 33, Customer Service Director, Telemonde Networks
Ms. Vale joined Telemonde in May 1998 and is responsible for servicing
international major accounts. From 1994 to 1997, Ms. Vale managed the customer
service team responsible for strategic accounts at MCI WorldCom. From 1990 to
1995, she worked for British Telecom, where she held management posts in
Business Development and International Customer Service.
Neil Webzell, 35, Sales Director, Telemonde Networks
Mr. Webzell joined Telemonde in February 1999. He has 15 years' experience in
international communications sales with GPT PayPhone Systems Ltd., a payphone
equipment manufacturer, Mannesmann Information Systems, Ltd., a manufacturer of
computer hardware and software for the equipment leasing and wholesale
distribution industries, and Plessey Telecommunications Ltd., a U.K.
telecommunications equipment manufacturer. He worked for British Telecom from
1991 to 1999, where he was most recently its Sales Manager of the Carrier
Service Division from 1997 until he joined Telemonde.
Ethelbert J.L. Cooper, 45, Vice President of International Operations, EquiTel
Mr. Cooper joined EquiTel in September 1999. He has extensive management and
industrial experience throughout Africa. From 1981 until he joined Telemonde, he
was chairman of a diversified project management and trading group, with
interests in transportation and telecommunications operating in Southern and
Western Africa.
Mark Willard, 42, Director of Operations, EquiTel
Mr. Willard joined EquiTel in 1998 and was appointed a director of EquiTel in
July 1999. He has wide experience in telecommunications, particularly satellite
and transmission engineering. Between 1992 and 1998, he was principal consultant
for CDI Associates, a telecommunications and information technology consulting
firm which he co-founded. Prior to founding CDI, Mr. Willard managed British
Telecom's satellite stations and developed its international corporate networks.
Board of Directors
Classified Board of Directors. Telemonde's Certificate of Incorporation divides
the board into three classes, as nearly equal in number as possible. Directors
within each class are elected to serve three-year terms and approximately one-
third of the directors sit for election at each annual meeting of stockholders.
Count von Bismarck is in Class I and has been elected to serve as director until
the 2000 annual meeting of shareholders in 2000. Mr. Bishop and Mr. Tirado are
in Class II and have been elected to serve as directors until the 2001
shareholder meeting. Mr. Maxwell and Mr. Hollo are in Class III and have been
elected to serve as directors until the 2002 shareholder meeting.
66
<PAGE>
Board Relationships. We are not aware of any family relationships between any
directors or executive officers of Telemonde. No director of Telemonde currently
serves as a director of any other United States public company.
Board Committees. The Board of Directors has appointed an Audit Committee and a
Compensation Committee.
Audit Committee. The Audit Committee was initially established in November of
---------------
1999 and consists of Mr. Maxwell, Mr. Hollo and Mr. Tirado. The Audit Committee
has the authority and responsibility to:
. Hire one or more independent public accountants to audit our books,
records and financial statements and to review our systems of accounting
(including our systems of internal control);
. Discuss with such independent public accountants the results of such audit
and review;
. Conduct periodic independent reviews of the systems of accounting
(including systems of internal control); and
. Make reports periodically to the full Board of Directors with respect to
its findings.
Compensation Committee. The Compensation Committee initially was established in
----------------------
November of 1999 and consists of Mr. Hollo and Mr. Tirado. The Compensation
Committee is responsible for fixing the compensation of our executive officers
and will decide other compensation matters including the operation of any stock
option plans, management bonus plans, and awards.
67
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The table and notes below show the annual, long-term and other compensation for
services in all capacities to Telemonde, EquiTel and their subsidiaries paid
during the years ended December 31, 1999 and December 31, 1998 to the Chief
Executive Officer and the other four most highly compensated executive officers
of Telemonde during the year ended December 31, 1999 (the "named executive
officers"):
<TABLE>
<CAPTION>
Annual Compensation
--------------------------
Year Salary (2) Bonus (2)
Name Position (1) ($) ($)
---------------------- ---------------------------- ---- ---------- ---------
<S> <C> <C> <C> <C>
K.F.H. Maxwell (3) Chairman 1999 220,529.93 0
A.N. Bishop (3) Chief Executive Officer 1999 198,143.73 0
H.D. Pomeroy (4) President of EquiTel 1999 265,302.33 0
N. Topham (4) CEO of EquiTel 1999 181,968.75 0
L.S. Trachtenberg (4) Managing Director of EquiTel 1999 218,799.32 0
</TABLE>
(1) No compensation was paid by Telemonde or any of its subsidiaries for the
organization of Telemonde Investments on March 10, 1998 until December 31,
1998.
(2) Compensation figures shown reflect the conversion of compensation paid in
UK pounds sterling into U.S. dollars at $1.62 per (Pounds)1.00, the
exchange rate in effect on December 31, 1999.
(3) Disclosure for Mr. Maxwell and Mr. Bishop reflects compensation paid from
the date each became an executive officer until December 31, 1999: May 1999
for Mr. Maxwell, and March 1999 for Mr. Bishop.
(4) Disclosure for Mr. Pomeroy, Mr. Topham and Mr. Trachtenberg reflects
compensation paid to each by Telemonde from November 1999, when they became
executive officers of Telemonde following the acquisition of EquiTel, until
December 31, 1999; and compensation paid to each by EquiTel during 1999
prior to the acquisition.
The compensation amounts shown above represents the salary and other
compensation paid by Telemonde or EquiTel to the named individuals in the years
ended December 31, 1998 and December 31, 1999. The table excludes any payments
made for consulting services provided by individuals prior to joining Telemonde
or EquiTel. Any such payments are described in Item 7, "Certain Relationships
and Related Transactions."
Employment Agreements
Telemonde, Inc. has entered into an employment agreement with Mr. Maxwell,
retaining him as Telemonde's Chairman. The term of the agreement runs until June
30, 2002, after which either Mr. Maxwell or Telemonde may terminate the
agreement with six months' notice. The agreement provides for a basic salary for
Mr. Maxwell of (Pounds)240,000 per year, equal to approximately $389,000 at the
exchange rate on December 31, 1999, and private health insurance for Mr. Maxwell
and his family. No provision has been made in the agreement for bonus payments,
stock option grants, or pension contributions to Mr. Maxwell.
68
<PAGE>
Telemonde Networks Limited has entered into an employment agreement with Mr.
Bishop, retaining him as President and Chief Executive Officer of Telemonde and
Telemonde Networks Limited. The term of the agreement runs until June 30, 2002,
after which either Mr. Bishop or Telemonde Networks Limited may terminate the
agreement with six months' notice. The agreement provides for a basic salary for
Mr. Bishop of (Pounds)240,000 per year, equal to approximately $389,000 at the
exchange rate on December 31, 1999, and private health insurance for Mr. Bishop
and his family. No provision has been made in the agreement for bonus payments,
stock option grants, or pension contributions to Mr. Bishop.
At the time of Telemonde's acquisition of EquiTel, EquiTel entered into
employment agreements with Mr. Pomeroy, Mr. Topham and Mr. Trachtenberg,
retaining them as President, Chief Executive Officer, and Executive Vice
President and Managing Director, respectively, of EquiTel. The term of each
agreement runs until June 30, 2002. The agreement between EquiTel and Mr.
Pomeroy provides for a basic salary of (Pounds)240,000 per year, equal to
approximately $389,000 at the exchange rate on December 31, 1999. The agreement
with Mr. Topham provides for a basic salary of (Pounds)225,000 per year, equal
to approximately $364,500 at the exchange rate on December 31, 1999. The
agreement provides with Mr. Trachtenberg for a basic salary of (Pounds)185,000
per year, equal to approximately $300,000 at the exchange rate on December 31,
1999. No provision has been made in any of these agreements for bonus payments,
stock option grants, or pension contributions.
Board Compensation
Non-employee directors, including Mr. Hollo and Mr. Tirado, will receive
$100,000 per year for their services. In addition, they have the right to
receive common stock worth $250,000 upon appointment to the board, and
additional stock distributions equal to $250,000 for each additional year they
serve on the board of directors. Other than reimbursements for reasonable
expenses incurred, directors do not receive any additional compensation for
serving on board committees. Employee directors do not receive any additional
compensation for acting as directors.
Telemonde has a consulting agreement with Count Gottfried von Bismarck under
which he is responsible for developing Telemonde's business relationships in
German-speaking areas. The term of the agreement is one year and provides for a
fee of $120,000 per year, payable in monthly installments. The agreement
automatically is renewed for additional three-month terms, unless notice of
termination is given by Telemonde or Count von Bismarck 60 days before the
expiration of the then-current term.
The directors of Telemonde Investments Limited from its inception were Mr.
Michael Collins and Ms. Susan Williams. Telemonde Investments Limited made
payments totaling $225,000 in 1999 and $37,000 in 1998 for directors and
consulting services to companies controlled by Mr. Collins.
69
<PAGE>
Compensation Committee Interlocks and Insider Participation
The compensation committee of the Board was initially established in November of
1999 and consists of Mr. Hollo and Mr. Tirado. Neither Mr. Hollo nor Mr. Tirado
are or ever have been officers or employees of Telemonde. No executive officer
of Telemonde serves as a member of the board of directors or compensation
committee of another entity that has one or more executive officers that serve
as a member of the Telemonde board or the Telemonde compensation committee.
Prior to the appointment of the compensation committee, executive compensation
was set by Telemonde's full board of directors.
Although neither the full board of directors nor the compensation committee has
a specific compensation policy which is used to establish executive
compensation, when making compensation decisions, the committee considers such
factors as:
. Telemonde's need to recruit, motivate and retain high quality
executives; and
. Market salary comparisons for experienced executives in the
telecommunications industry.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EquiTel and its Acquisition
Telemonde and EquiTel have had a close relationship since their respective
inceptions, on March 10, 1998 and September 17, 1998. Even before Telemonde's
acquisition of EquiTel on November 8, 1999, their principals and management
overlapped, they used shared premises and services and, in circumstances where
it was mutually beneficial, they made joint presentations to potential
customers. However, prior to the acquisition, the two businesses were legally
separate. Therefore, a significant part of the following discussion relates to
transactions between the two companies and their respective management teams.
Acquisition of EquiTel. Telemonde acquired EquiTel Communications Limited on
November 8, 1999. EquiTel's total assets at September 30, 1999 were $1,830,000.
The maximum aggregate value of the consideration payable by Telemonde to the
shareholders of EquiTel is $69 million. Telemonde's valuation of EquiTel was
based on the historic price/earnings ratios of similar telecommunication
companies, applied to the anticipated future after-tax earnings of EquiTel. The
maximum aggregate value of the consideration payable reflected that the
consideration was payable wholly in Telemonde shares and that the majority of
the consideration was deferred and dependent on earn-outs through EquiTel
achieving its anticipated future earnings.
At the time of the acquisition, Mr. Maxwell and Mr. Bishop were executive
officers and directors of Telemonde and were beneficial owners of EquiTel
shares. In view of Mr. Maxwell's and Mr. Bishop's potential conflicts of
interest regarding the acquisition of EquiTel, Telemonde's negotiations with
EquiTel were conducted, and the terms of the
70
<PAGE>
acquisition were approved by, Count von Bismarck. Count von Bismarck and the
board of directors of Telemonde appointed Gouldens, Solicitors, London, United
Kingdom to advise Telemonde on the legal and contractual aspects of the
acquisition, and appointed Brown, Shipley & Co., Investment Bankers, London,
United Kingdom to advise Telemonde on the valuation of and consideration in
respect of EquiTel.
The purchase price for the acquisition of EquiTel will be paid as follows:
. On November 8, 1999, the initial consideration of $19 million was
satisfied by the issuance to the EquiTel shareholders of 4,947,917
restricted shares of common stock of Telemonde.
. On approximately June 30, 2001, a sum not exceeding $30 million in the
aggregate will be paid to the former EquiTel shareholders, in
proportion to their respective interests in EquiTel, by the issue of
restricted shares of Telemonde common stock.
. On approximately June 30, 2002, a sum not exceeding $50 million, less
the amount paid on June 30, 2001, will be paid to the former EquiTel
shareholders in the aggregate, in proportion to their respective
interests in EquiTel, by the issue of restricted shares of Telemonde
common stock.
The deferred consideration to be paid in future years to the EquiTel
shareholders will be decreased if EquiTel does not achieve certain specified
performance goals during 2000 and 2001. The number of Telemonde shares to be
issued will determined by a previously determined formula, based upon the market
price of Telemonde common stock over a fixed number of trading days prior to
issuance. Using this formula, the value of the shares issued as initial
consideration was set at $3.84 per share.
Interests of Certain Persons in EquiTel. As a result of EquiTel acquisition,
Mr. Maxwell and Mr. Bishop, who were beneficial owners of EquiTel, have received
shares of Telemonde common stock, and are entitled to receive additional shares
of Telemonde common stock when additional consideration is paid to the former
EquiTel stockholders. Mr. Pomeroy, Mr. Topham and Mr. Trachtenberg, who were
executive officers, directors and beneficial owners of EquiTel shares prior to
its acquisition, also have received shares of Telemonde common stock and are
entitled to receive additional shares of Telemonde common stock when additional
consideration is paid to the former EquiTel stockholders.
71
<PAGE>
The table below sets out the beneficial shareholdings in EquiTel previously
owned by Telemonde's executive officers, and the maximum amount of value of
shares in Telemonde Inc. to which they might be entitled.
<TABLE>
<CAPTION>
Maximum Aggregate Resulting
Ownership in Initial Consideration Consideration Beneficial
EquiTel (1) Received to be Received (2) Ownership
Shares Percentage Shares Value Shares Value in Tele-
Name (#) (#) ($) (#) ($) monde (3)
<S> <C> <C> <C> <C> <C> <C> <C>
K.F.H. Maxwell (4) 860 8.6% 426,702 1,638,536 2,237,228 5,938,536 5.6%
A.N. Bishop 2,000 20.0 989,583 3,800,000 5,200,109 13,800,000 5.9
H.D. Pomeroy 2,000 20.0 989,583 3,800,000 5,200,109 13,800,000 5.9
N. Topham 1,380 13.8 682,812 2,622,000 3,588,075 9,522,000 4.1
L. Trachtenberg 980 9.8 484,402 1,860,104 2,547,560 6,760,104 2.9
Telcoworld Limited (4) 2,580 25.8 1,277,552 4,905,799 6,709,131 17,805,799 7.6
</TABLE>
(1) EquiTel has an authorized share capital of 10,000 Ordinary Shares of
(Pounds)1 each, which were issued to EquiTel's beneficial owners at the
time of its inception and were purchased by Telemonde on November 8, 1999
at the time of the acquisition of EquiTel by Telemonde.
(2) These columns set out the number of shares of Telemonde common stock that
would be issued to the named former stockholders of EquiTel and the value
of the shareholdings of each, assuming that the former EquiTel stockholders
are entitled to the full $50,000,000 in additional consideration and
assuming that the shares of Telemonde common stock so issued were valued at
$2.375, the closing price of a share of Telemonde common stock on January
14, 2000.
(3) Assuming the issuance of an aggregate of an additional 21,052,632 shares of
Telemonde common stock to the former shareholders of EquiTel (equal to
$50,000,000 divided by $2.375), and assuming no other issuance of Telemonde
common stock following January 14, 2000.
(4) Mr. Maxwell holds a 33.4% interest in Telcoworld Limited, which held a
25.8% interest in EquiTel and now holds 1,277,552 shares of Telemonde
common stock. Mr. Maxwell had no individual beneficial ownership in
EquiTel. Mr. Maxwell's indicated beneficial ownership percentage also
includes the 2,756,790 shares which he has the right to purchase from
Intelecom Corporation Limited.
Other Relationships with EquiTel. EquiTel provided management and administrative
services for the offices it shared with Telemonde, for which it was reimbursed
an aggregate of $530,000 by Telemonde before the acquisition. Telemonde also
paid EquiTel a total of $898,000 for commissions on sales of bandwidth earned by
EquiTel during 1998; no commissions were paid to EquiTel during 1999.
Mr. Maxwell was a director of EquiTel from November 18, 1998 to May 24, 1999.
While Mr. Maxwell was a director and beneficial owner of EquiTel, EquiTel
engaged Westbourne Communications Limited to provide certain consulting
services. Mr. Maxwell, through Westbourne, served as a consultant to EquiTel,
providing advice on its early development and on corporate finance issues. The
agreement between EquiTel and Westbourne terminated when Mr. Maxwell was
appointed Chairman and a director of
72
<PAGE>
Telemonde. Through May 24, 1999, EquiTel paid Westbourne a total of $138,600, of
which $77,550 was attributable to Mr. Maxwell's services.
During 1998 Adam Bishop and his wife were paid $122,513 for consulting services
provided to EquiTel in connection with the initiation and development of
EquiTel's route management business. In addition, Harry Pomeroy served as
Chairman and Director of EquiTel from its inception until the date of the
acquisition. In 1998, while serving in this capacity, Mr. Pomeroy received
$90,338 as compensation for management and consulting relating to the
introduction and development of EquiTel's route management business services.
Rhone Financial
At January 14, 2000, EquiTel had a loan of $1,000,000 from Rhone, the founding
shareholder of Telemonde Investments. These loans became obligations of
Telemonde upon the acquisition of EquiTel, which resulted in EquiTel becoming a
wholly-owned subsidiary of Telemonde. This loan bears no interest, is unsecured,
and is due and payable in full when EquiTel's resources permit. Telemonde
believes that the terms of this loan is at least as favorable to Telemonde as
could be obtained by arms-length bargaining with an unrelated party.
Promoters
In late 1997 and early 1998, Kevin Maxwell, Ray Dutton, Adam Bishop and Henry
Pomeroy agreed to organize a telecommunications business under the Telemonde
name. The Telemonde business initially consisted of both sale of bandwidth and
sale of minutes-based telecommunications. Rhone Financial Indemnity Re Limited,
an Irish investment company, acting on behalf of this group of promoters,
organized Telemonde Investments Limited, of which it owned all of the capital
stock. The understanding between Rhone and the promoters was that at a future
time, Rhone would transfer all of the stock in Telemonde Investments to the
promoters and other employees of Telemonde Investments, and would receive in
return the right to subscribe for an agreed-upon minority interest. Mr. Maxwell,
Mr. Dutton, Mr. Bishop and Mr. Pomeroy agreed that, as amongst themselves and
following the transfer of Rhone's interest, Mr. Dutton would hold approximately
25% of the stock of Telemonde Investments, Messrs. Maxwell, Bishop and Pomeroy
would hold approximately 70% of the stock, and other employees would hold
approximately 5%.
In July 1998, Messrs. Maxwell, Dutton, Bishop and Pomeroy agreed amongst
themselves to separate the bandwidth business from the minutes-based
telecommunications business. Mr. Dutton remained with the bandwidth business,
which retained the Telemonde Investments name, and Messrs. Maxwell, Bishop and
Pomeroy organized the minutes-based telecommunications business as EquiTel
Communications Limited in September, 1998.
While managing Telemonde Ltd, a United Kingdom company, Mr. Dutton began to
establish a European bandwidth network business. Telemonde Ltd. was not a
subsidiary of Telemonde Investments, but was owned by the promoters. Telemonde
Investments
73
<PAGE>
marketed and sold bandwidth capacity through Telemonde Ltd. under the terms of a
Sales and Marketing Agreement dated July 7, 1998, which provided for Telemonde
Investments to pay Telemonde Ltd. commissions of 7% of Telemonde Ltd.'s sales
receipts.
The parties agreed in January 1999 to sever their relationships entirely.
Pursuant to this agreement, Mr. Dutton terminated his relationship with
Telemonde Investments and renounced his rights to future ownership of Telemonde
Investments. Mr. Dutton gained control of Telemonde Ltd., and Messrs. Maxwell,
Bishop, and Pomeroy renounced their claims to it. The Sales and Marketing
Agreement between Telemonde and Telemonde Ltd. was terminated, and Telemonde
Ltd. changed its name to "Iaxis Limited."
Except for commissions received by Telemonde Ltd. (now Iaxis Limited) from
Telemonde pursuant to the former Sales and Marketing Agreement between them, in
which Mr. Dutton had an interest because of his ownership position in Telemonde
Ltd., Mr. Dutton received no other item of value as a promoter of Telemonde.
Westbourne Communications Limited
Mr. Maxwell has been Chairman and a director of Telemonde since May 1999. Prior
to his appointment to these posts, Telemonde engaged Westbourne Communications
Limited to provide certain consulting services, in particular advising on the
early development of Telemonde and on corporate finance matters. Mr. Maxwell,
through Westbourne, served as a consultant to Telemonde prior to his appointment
as Chairman and director. Prior to May 24, 1999, Telemonde had paid Westbourne a
total of $452,450 for its services, of which $158,400 was attributable to
services rendered by Mr. Maxwell. On May 24, 1999, Westbourne's engagement was
terminated when Mr. Maxwell became Chairman and director.
Westbourne continues to provide Telemonde with consulting services, which are
governed by a new agreement signed on June 20, 1999. The agreement provides for
Telemonde to pay Westbourne (Pounds)12,000 per month, equal to approximately
$230,000 per year. The term of the agreement is for one year; it may be, but is
not required to be, renewed by the parties. As of January 14, 2000, Telemonde
had not determined whether it would seek to renew the agreement. Mr. Kevin
Maxwell does not benefit from this agreement, nor does he provide any services
under it. Amongst Westbourne's consultants is Mr. Ian R.C. Maxwell, the brother
of Mr. Kevin Maxwell.
Telemonde Relationships
Prior to joining Telemonde as President in March 1999, Mr. Bishop was a
consultant for North American Gateway. North American Gateway signed two sales
contracts with Telemonde in April and May 1998. Mr. Bishop declared his
interest at the time and took no part in the negotiation of or decision on the
Telemonde contracts.
Mr. Trachtenberg has been Executive Vice President and Managing Director of
EquiTel since November 1998. During 1998, through Hyperactive Productions, Mr.
Trachtenberg, provided consulting services to Telemonde. Telemonde paid
Hyperactive
74
<PAGE>
$141,526 for services rendered during 1998, of which $70,763 was attributable to
Mr. Trachtenberg's services.
Mr. Hollo is a director and shareholder of Telemonde and a Managing Director of
Sands Brothers & Co., Ltd. Prior to Mr. Hollo's appointment to Telemonde's
Board, Telemonde engaged Sands Brothers to provide financial and consulting
services. Pursuant to that agreement, Sands Brothers will receive a placement
fee equal to 10% of the total consideration raised in any financing facilitated
by Sands Brothers. Sands Brothers or its designee(s) will also have the right to
subscribe, at par value, for 1,750,000 shares of Telemonde common stock upon the
completion of the first tranche of financing. Sands Brothers will also have the
right to subscribe, at par value, for an additional 200,000 shares of common
stock for each $1,000,000 of financing facilitated by Sands Brothers and
accepted by Telemonde. Telemonde has also agreed to pay Sands Brothers a
transaction fee equal to five (5) percent of the consideration paid in any
completed acquisition or business transaction that was facilitated by Sands
Brothers. In addition to Mr. Hollo, trusts established for the benefit of the
families of certain affiliates of Sands Brothers have the right to receive, in
the aggregate, 875,000 shares of Telemonde common stock.
Communications Collateral Limited
Communications Collateral is an investment company, owned by fourteen third-
party investors, with which Telemonde has no relationship, other than pursuant
to the agreements set forth below. In April 1999, Telemonde, through its now
wholly owned subsidiary, Telemonde Investments Limited, entered into a series of
agreements with Communications Collateral Limited, including, among others,
agreements for:
. the sale of an IRU for bandwidth to Communications Collateral for $6.5
million;
. the grant of an option to Communications Collateral which, among other
things, required Telemonde to repurchase the bandwidth for $6.5 million
upon Communications Collateral's request;
. a $1 million loan by Communications Collateral to Telemonde due in
August 1999;
. the issuance to Communications Collateral of a warrant for an additional
7% of the shares of Telemonde, Inc., as calculated immediately prior to
a Telemonde equity offering that raises at least $10 million;
. the registration with the SEC of such shares issued and issuable to
Communications Collateral within six months of the Pac-Rim acquisition
or the issuance of up to 6% of the issued share capital of Telemonde on
a continuing basis for one year or until all shares granted pursuant to
these agreements are registered.
On January 13, 2000 Telemonde signed a Forbearance Agreement with Communications
Collateral Limited. Under this Agreement, Communications Collateral Limited
agreed
75
<PAGE>
not to exercise its rights of default under the foregoing agreements until
February 15, 2000, in consideration of various obligations of Telemonde.
Pursuant to the warrant and the registration rights agreement, as of January 14,
2000, Communications Collateral had the right to acquire up to 8.5% of
Telemonde's common stock, equal to approximately 6,042,660 shares if the warrant
were exercised in full on January 14, 2000, and all of the shares to which
Communications Collateral is entitled under the Registration Rights Agreement
were to be issued.
One of the individual investors in Communications Collateral, Mr. Barry
Nathanson, has provided executive recruitment services to Telemonde. Telemonde
issued Mr. Nathanson with 50,000 shares of common stock as compensation for his
services.
ITEM 8. LEGAL PROCEEDINGS
The Company is not presently subject to any legal claims or proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Dividend Policy
We have never declared or paid any dividends on our common stock and we do not
anticipate paying cash dividends on the common stock in the foreseeable future.
We do not expect to generate any net income in the foreseeable future but
anticipate that future earnings generated from operations, if any, will be
retained to finance the expansion and continued development of our business. Any
future dividends will be at the discretion of the board of directors and will
depend upon, among other things, our operations, capital requirements and
surplus, general financial condition, contractual restrictions and such other
factors as the board of directors may deem relevant.
Price Range of Common Stock
Our common stock is traded on the NASD Over-the-Counter Bulletin Board under the
symbol "TLMD." The following table provides the reported high and low sales
prices for our common stock on the NASD Over-the-Counter Bulletin Board for the
quarterly periods indicated. The prices reflect inter-dealer prices and do not
include retail markups, markdowns or commissions. The stock is not traded on any
foreign public trading markets.
High Low
---- ---
Fiscal 2000
First Quarter (January 1 to January 14) $2.69 $1.81
Fiscal 1999
Fourth Quarter 4.25 2.13
Third Quarter 7.63 3.19
Second Quarter (May 19 (1) to June 30) 8.50 6.00
First Quarter N/A N/A
76
<PAGE>
(1) Date our Common Stock began trading as "TLMD" following our acquisition of
Pac-Rim.
On January 14, 2000, the last reported sale price of our stock was $2.375.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of Telemonde which were not registered under the Securities Act of
1933, as amended (the "Securities Act") have been sold by Telemonde Inc.,
Telemonde Investments Limited or Pac-Rim Consulting, Inc. except as follows:
(a) On March 10, 1998, Telemonde Investments, a British Virgin Islands company,
issued and sold 28,000 shares of its stock to Rhone Financial Indemnity Re
Ltd., an Ireland company, for a purchase price of $165,000. Exemption from
registration is claimed because neither party to the sale used the
jurisdictional means to offer or sell such shares in the United States.
(b) On June 12, 1998, Telemonde Investments issued and sold 300 shares of its
outstanding common stock to Chiltern Group, PLC ("Chiltern") for an
aggregate price of $1.00. These shares were issued as partial consideration
for a $7.5 million loan made by Chiltern to Telemonde International
Bandwidth (Bermuda) Limited, a subsidiary of Telemonde Investments. The
loan was repaid on January 15, 1999, and the outstanding shares held by
Chiltern were redeemed at that time by Telemonde Investments. Exemption for
registration is claimed because neither party to the sale used the
jurisdictional means to offer or sell such shares in the United States.
(c) On July 31, 1998, Telemonde Investments issued and sold 1,630 shares of its
common stock and an option to purchase shares equal to an additional 10% of
its outstanding common stock to Chiltern. These shares were issued as
partial consideration for a $10.5 million loan made by Chiltern to
Telemonde Bandwidth (Bermuda) Limited, a subsidiary of Telemonde
Investments. The aggregate consideration for the issuance of shares and the
option was $630, plus the remainder of 290 shares of Telemonde common stock
previously issued to Chiltern in connection with the loan to Telemonde
International Bandwidth (Bermuda) Limited. The terms of the option provided
that it would be exercisable at any time between July 31 and December 31,
1998, at an exercise price of $1.8 million, for a number of shares that,
when issued, would be 10% of Telemonde's common stock on a fully diluted
basis. The loan from Chiltern was repaid on January 15, 1999, and the
outstanding shares held by Chiltern were redeemed at that time by Telemonde
Investments. Exemption from registration is claimed because neither party
to the sale used the jurisdictional means to offer or sell such shares in
the United States.
(d) In August 1998, Pac-Rim issued 400,000 shares of common stock to its Thomas
Gelfand as part of the formation of Pac-Rim. Pac-Rim subsequently
reacquired these shares. Exemption from registration is claimed pursuant to
Section 4(2) of the Securities Act.
77
<PAGE>
(e) In August 1998, Pac-Rim issued 400,000 shares of its common stock to Robert
Gelfand as part of the formation of Pac-Rim. Pac-Rim subsequently
reacquired these shares. Exemption from registration is claimed pursuant to
Section 4(2) of the Securities Act.
(f) In August 1998, Pac-Rim issued 200,000 shares of its common stock to
Josephine Lee as part of the formation of Pac-Rim. Pac-Rim subsequently
reacquired these shares. Exemption from registration is claimed pursuant to
Section 4(2) of the Securities Act.
(g) On September 24, 1998, Pac-Rim issued and sold 300,000 shares of its common
stock. These shares now total 24,000,000 shares of common stock due to a
subsequent 20:1 stock split in March 1999 and a 4:1 stock split in April
1999. Exemption from registration is claimed pursuant to Rule 504 adopted
under the Securities Act.
(h) On May 14, 1999, Pac-Rim issued and sold 35,297,000 shares of its common
stock to Rhone Financial Indemnity Re. Ltd., the sole shareholder of
Telemonde Investments Limited, in exchange for all of the issued and
outstanding shares of Telemonde Investments Limited. Exemption from
registration for the sale of Pac-Rim stock to Rhone and for the sale of
Telemonde Investments stock to Pac-Rim is claimed under Section 4(2) of the
Securities Act.
(i) On August 2, 1999, Telemonde issued 33,333 shares of its common stock to
Mr. Barry F. Nathanson as compensation for executive search services
rendered by Mr. Nathanson to the Company. Exemption from registration is
claimed under Section 4(2) of the Securities Act.
(j) On August 13, 1999, Telemonde issued and sold 200,000 shares of its common
stock to the two shareholders of TGA(UK) Limited in exchange for all of the
issued and outstanding stock of TGA. Exemption from registration is
claimed under Section 4(2) of the Securities Act.
(k) On August 25, 1999, Telemonde issued Atlantic Crossing Ltd. a warrant for
the purchase of 1,100,000 shares of Telemonde's common stock. The
consideration for the issuance of the warrant was the execution by Atlantic
Crossing of a Capacity Purchase Agreement with Telemonde Bandwidth
(Bermuda) Limited, a subsidiary of Telemonde. The exercise price of the
warrant is $5.25 per share purchased. The warrant may be exercised at any
time prior to August 25, 2000. Exemption from registration is claimed under
Section 4(2) of the Securities Act.
(l) On September 1, 1999, Telemonde issued to Communications Collateral a
warrant for the purchase of a number of shares of its common stock equal to
seven percent of the issued and outstanding common stock as of the date of
exercise. The number of shares issuable upon the exercise of the warrant
will fluctuate; if the warrant had been exercised in full on January 14,
2000, Communications Collateral would have received 5,025,831 shares of
Telemonde's common stock. The stated exercise price of the warrant, as
amended by the Forbearance Agreement between Communications Collateral and
78
<PAGE>
Telemonde, is $2.70 per share. The warrant is exercisable at any time from
September 1, 1999 until the third anniversary of the closing date of the
first transaction that raises additional capital for Telemonde of at least
$10 million through the sale of equity securities. Exemption from
registration is claimed under Section 4(2) of the Securities Act.
(m) On October 13, 1999, Telemonde issued 60,000 shares of its common stock to
IC Capital, LLC, as consideration for IC Capital's agreement to provide
investor relations services to Telemonde. Exemption from registration is
claimed under Section 4(2) of the Securities Act.
(n) On November 8, 1999, Telemonde issued and sold 4,947,917 shares of its
common stock to the shareholders of EquiTel Communications Limited in
exchange for the acquisition of all of the issued and outstanding stock of
EquiTel. These shares were issued as initial consideration for the
acquisition of EquiTel. As additional consideration for the acquisition
Telemonde is obligated to issue to the former shareholders of EquiTel an
additional number of shares valued at $50,000,000, based upon the average
price of the Telemonde common stock during certain periods, and subject to
certain conditions relating to the financial performance of EquiTel during
2000 and 2001. Assuming that the price of the Common Stock is $2.375, the
price of a share of Telemonde common stock on January 14, 2000, and
assuming that EquiTel satisfies the applicable performance criteria,
Telemonde will issue an additional 21,052,632 to the former EquiTel
shareholders. Exemption from registration is claimed under Section 4(2) of
the Securities Act.
(o) On November 10, 1999, Telemonde issued and sold 6,000,000 shares of its
common stock to the following persons in exchange for the forgiveness of an
aggregate of $16.25 million previously loaned by such persons to
subsidiaries of Telemonde and to EquiTel:
Name Shares of Common Stock
---- ----------------------
Eaglescliff Investments Limited, a British Virgin
Islands company 1,427,820
Chirone Investments Limited, a Bahamas company 1,716,360
Hamptonne Limited, a Bahamas company 1,236,180
True Blue Enterprises, Inc., a Nevis company 1,619,640
Exemption from registration is claimed under Regulation S of the Securities
Act.
(p) On November 10, 1999, Telemonde issued 166,667 shares of its common stock
to African Ventures Limited, a British Virgin Islands company, and 166,667
shares of its common stock to National Empowerment Trust Investment Fund, a
South African public company, pursuant to a Share Purchase Agreement among
Telemonde, EquiTel, African Ventures, National Empowerment Trust Investment
Fund, and NET Industrial Holdings Limited, a South African company. The
consideration for this issuance was EquiTel's purchase of 20% of the issued
share
79
<PAGE>
capital of NET Industrial Holdings Telecommunications Limited, a South
African company ("NIHT"), and EquiTel's entry into a joint venture with
NIHT. Exemption from registration is claimed under Regulation S of the
Securities Act.
(q) On November 8, 1999, Telemonde issued 400,000 shares of common stock to
Mr. Ethelbert Cooper in connection with Mr. Cooper's introduction of
EquiTel to prospective joint venture partners in Africa. Exemption from
registration is claimed under Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The following description of Telemonde's capital stock does not purport to be
complete. The rights of the holders of Telemonde's stock are set forth in
Telemonde's Certificate of Incorporation and Bylaws (copies of which are
exhibits to this registration statement), and in the applicable provisions of
the Delaware General Corporation Law ("DGCL"). This summary is qualified in its
entirety by reference to such exhibits and the DGCL.
General
Telemonde is authorized to issue 150,000,000 shares of capital stock. It
consists of 5,000,000 shares of preferred stock, $.01 par value per share, and
145,000,000 shares of common stock, $.001 par value per share. As of January 14,
2000, there were 66,771,750 shares of common stock issued and outstanding. No
shares of preferred stock are issued or outstanding. All issued and outstanding
shares of common stock are duly authorized, fully paid, and nonassessable.
Common Stock
Dividends. When the board of directors of Telemonde declare dividends, each
share of common stock is entitled to receive dividends out of funds legally
available. Dividends may be paid in cash, property, or shares of Telemonde's
stock.
Liquidation Rights. In the case of the voluntary or involuntary liquidation,
dissolution or winding up of Telemonde, all holders of common stock are entitled
to share equally on a share-for-share basis in any assets available for
distribution to stockholders.
Voting Rights. Each outstanding share of common stock entitles the holder to one
vote on all matters. There is no cumulative voting.
Other. Holders of shares of common stock in Telemonde have no preference,
conversion, exchange, sinking fund, preemptive, or redemption rights.
Merger and Consolidations. Under the Delaware General Corporate Law (the
"DGCL"), the principal terms of a merger or consolidation generally require the
approval of stockholders of each of the corporations. Unless required in the
corporation's certificate of incorporation, the DGCL does not require the
approval of the stockholders of the surviving corporation. When a stockholder
vote is needed, a majority vote of the
80
<PAGE>
outstanding stock entitled to vote is required to approve the merger or
consolidation. If there are multiple classes of stock are entitled to vote, a
majority in each class is required to approve the merger or consolidation. The
holders of common stock may have appraisal rights if Telemonde is a party to
certain types of mergers or consolidations. Such appraisal rights give
stockholders a right to a judicial determination of the "fair value" of their
stock, the payment of which is in cash.
Transfer Agent. The transfer agent and registrar for the common stock is First
Union National Bank, 230 South Tryon Street, 9th Floor, Charlotte, North
Carolina 28288-1179.
OTC Bulletin Board Trading. As of January 14, 2000, the common stock traded
on the NASD's OTC Bulletin Board under the symbol "TLMD."
Preferred Stock
Telemonde's board of directors is authorized to provide for the issuance of
preferred stock in one or more series. They can also fix the designation,
preferences, powers and relative rights for such preferred stock. This includes
the dividend rate, conversion rights, voting rights, redemption price, and
liquidation preference. Any preferred stock issued in this way may be senior to
the common stock with respect to dividends or of amounts paid upon liquidation,
dissolution or winding up. Also, preferred stocks may have class or series
voting rights. Presently, there are no shares of preferred stock outstanding and
Telemonde has no present plans to issue any preferred stock.
Certain Certificate of Incorporation and Bylaw Provisions
Classified Board of Directors. The DGCL permits, but does not require, a
classified board of directors, with staggered terms. Directors of a Delaware
corporation are elected by a majority vote of the shares present in person or
represented by proxy. Telemonde's Certificate of Incorporation provides for a
board of directors with three classes. At each annual meeting, new directors are
voted into the class of directors whose term ends at such meeting. These new
directors will serve a three-year term starting on that date. Classification of
the Board of Directors may have the effect of delaying, deferring, or preventing
a change in control of Telemonde.
Action by Written Consent. The DGCL generally allows for stockholder action by
written consent. However, Telemonde's Certificate of Incorporation provides that
no action required to be taken or which may be taken at any annual or special
meeting of stockholders of Telemonde may be taken without a meeting. This
provision precludes action by written consent of the stockholders of Telemonde.
Shareholders Proposals. Telemonde Bylaws establish an advance notice procedure
for stockholder proposals to be brought before a meeting of stockholders. This
includes proposed nominations for election to the Board of Directors.
Stockholders at a meeting may only consider proposals or nominations: (1)
specified in the notice of meeting, (2) brought before the meeting by the
direction of the Board, or (3) brought before the meeting by a stockholder who
has given Telemonde timely written notice. Although
81
<PAGE>
these provisions do not give the Board the power to approve or disapprove
stockholder proposals, they may have the effect of:
. preventing certain proposals from being presented at a meeting if the
proper procedures are not followed; or
. discouraging a potential acquirer from conducting a proxy solicitation to
elect its own slate of directors or otherwise attempting to obtain control
of Telemonde.
Common Stock Warrants and Registration Rights
Atlantic Crossing. On August 25, 1999, we issued a warrant for up to one
million, one hundred thousand (1,100,000) shares of common stock issued to
Atlantic Crossing Ltd., a Bermuda company. The holder is entitled to purchase
the shares at any time prior to August 25, 2000. The exercise price is $5.25 per
share. The exercise price and the number of shares issuable upon exercise of
this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events. Such events include, among other things, the
payment of a stock dividend, a merger or consolidation of rights, and the
issuance for consideration of rights, options or warrants (other than rights to
purchase common stock issued to stockholders generally) to acquire our common
stock. Pursuant to the warrant, Atlantic Crossing received demand and piggy-back
registration rights.
Communications Collateral Limited. Pursuant to a letter agreement dated April
13, 1999, and subsequent negotiations, Telemonde issued a warrant to
Communications Collateral Limited which entitles Communications Collateral to
purchase from Telemonde 7% of the issued share capital of Telemonde, Inc. The
warrant is exercisable until three years following the date that the Company
issues equity securities pursuant to an offering of at least $10 million. The
exercise price under the warrant is $2.70. Also, Telemonde must either register
for resale all of the shares issued to Communications Collateral Limited
(including those for which Communications Collateral Limited subscribes through
exercise of its warrants) by November 11, 1999, which it was unable to do, or
issue to Communications Collateral Limited additional shares on a continuing
basis until the shares are so registered, which amount may not exceed 6% of the
issued share capital of Telemonde.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Limitation of Liability. Pursuant to the DGCL and the Company's Certificate of
Incorporation, a director's liability to the Company or its stockholders for
monetary damages for breach of fiduciary duty has been eliminated except for:
. breach of the directors' duty of loyalty to the Company or its
stockholders,
. acts or omissions in bad faith, which involve intentional misconduct, or a
knowing violation of the law,
. unlawful dividends, redemptions, purchases of stock, or
. any transaction from which the director derived an improper personal
benefit.
In general, the liability of officers may not be eliminated or limited under
Delaware law.
82
<PAGE>
Discretionary Indemnification. The DGCL provides that a corporation may
indemnify directors and officers as well as certain other employees and
individuals. These individuals may be indemnified against expenses, judgments,
fines and amounts paid in settlement in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (except for a derivative suit). This will occur if the
individual acted:
. in good faith;
. in the manner in which he reasonably believed to be in the best interest
of the corporation; and
. with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful.
With respect to derivative suits, the DGCL provides that a corporation may
indemnify directors and officers as well as certain other employees and
individuals against expenses if he acted in good faith and in a manner which he
reasonably believed to be in the best interest of the corporation. However,
there will be no indemnification unless the court in which the action or suit
was brought or other court of competent jurisdiction determines that the person
is fairly and reasonably entitled to be indemnified.
A corporation may make a discretionary indemnification only when indemnification
is proper in the circumstance, unless it is ordered by a court or advanced prior
to the final disposition. What a "proper" circumstance is determined by the
stockholders, by a majority of the board of directors who are not party to the
action, or by independent legal counsel.
Mandatory Indemnification. Under the DGCL, to the extent that a director,
officer, employee or agent has been successful on the merits, or otherwise in
defense of any action, the corporation must indemnify him against expenses. This
includes attorneys' fees actually and reasonably incurred by him in connection
with his defense.
The DGCL expressly states that the indemnification provided by the DGCL is not
exclusive of any non-statutory indemnification rights existing under any bylaw,
agreement, vote of stockholders, or disinterested directors, or otherwise.
Telemonde's Certificate of Incorporation provides that, to the maximum extent
permitted by Delaware law, it shall indemnify against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by them. The
Company will also pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to:
. any individual who is a present or former director or officer of the
Company and who is made a party to the proceeding by reason of his service
in that capacity; or
. any individual who, while a director of the Telemonde, served another
company, as a director, officer, partner or trustee at the request of the
Company, and is made a party to the proceeding by reason of his service in
that capacity.
83
<PAGE>
This will not happen if:
. the act or omission of the director or officer was material to the matter
giving rise to the proceeding and was in bad faith or was the result of
the active dishonesty; or
. the director or officer actually received improper personal benefit; or
. in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the acts or omission was unlawful.
The Company may, with the approval of its board, indemnify and advance funds to
any person who served a predecessor of the Company in any of the above
capacities, or as employee or agent. Before Telemonde can advance funds, they
must get a written statement by or on behalf of the director or officer to repay
the amount paid if that person is not entitled to be indemnified by the Company
under Delaware law or any applicable contract.
Indemnification of Securities Act Liabilities. Under the Securities Act,
indemnification may be permitted to directors, officers and controlling persons
of the Company, unless the Company has been advised by the Securities and
Exchange Commission that such indemnification is against public policy. In
addition, indemnification may be limited by states' securities laws.
Directors and Officers Insurance. Telemonde has obtained directors and officers
liability insurance that provides world-wide coverage for Telemonde and all of
its subsidiaries. The insurance provides for coverage up to $20,000,000 per
event.
84
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED FINANCIAL STATEMENTS
Report of Moore Stephens, Independent Chartered Accountants F-1
Consolidated Statement of Income for the period from
March 10, 1998 to December 31, 1998 F-2
Consolidated Balance Sheet as at December 31, 1998 F-3
Consolidated Statement of Cash Flows for the period from
March 10, 1998 to December 31, 1998 F-4
Statement of Stockholders' Equity for the period from
March 10 1998 to December 31, 1998 F-5
Notes to Consolidated Financial Statements as of and for the
period ended December 31, 1998 F-6
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Consolidated Statement of Income for the nine months
ended September 30, 1999 F-21
Unaudited Consolidated Balance Sheet as at September 30, 1999 F-22
Unaudited Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 F-23
Notes to the Unaudited Consolidated Financial Statements September 30,
1999 F-24
PRO FORMA UNAUDITED FINANCIAL INFORMATION
Pro Forma Unaudited Combined Statement of Income for the period from
March 10, 1998 to December 31, 1998 F-34
Pro Forma Unaudited Combined Statement of Income for the nine months
ended September 30, 1999 F-35
Pro Forma Unaudited Combined Balance Sheet as at September 30, 1999 F-36
Notes to the Pro Forma Unaudited Combined Financial Information for
the nine months ended September 30, 1999 F-37
EQUITEL COMMUNICATIONS LIMITED: AUDITED FINANCIAL STATEMENTS
Company Information F-40
Directors' Report for the period ended 30 April 1999 F-41
Report of Moore Stephens, Independent Chartered Accountants F-44
Profit and Loss Account for the period from 17 September 1998 to
30 April 1999 F-45
Balance Sheet as at 30 April 1999 F-46
Notes to the Financial Statements for the period from
17 September 1998 to 30 April 1999 F-47
85
<PAGE>
EQUITEL COMMUNICATIONS LIMITED: UNAUDITED FINANCIAL STATEMENTS
Unaudited Statement of Income for the period from
September 17, 1998 to September 30, 1999 F-58
Unaudited Balance Sheet as of September 30, 1999 F-59
Unaudited Statement of Cash Flows for the period from
September 17, 1998 to September 30, 1999 F-60
Notes to the unaudited Financial Statements,
September 30, 1999 F-61
Financials on page F-1 through F-60 included in Item 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE.
None.
86
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements filed as part of this registration statement:
Audited Financial Statements
Report of Moore Stephens, Independent Chartered Accountants F-1
Consolidated Statement of Income for the period from
March 10, 1998 to December 31, 1998 F-2
Consolidated Balance Sheet as of December 31, 1998 F-3
Consolidated Statement of Cash Flows for the period from
March 10, 1998 to December 31, 1998 F-4
Statement of Stockholders' Equity for the period from
March 10, 1998 to December 31, 1998 F-5
Notes to Consolidated Financial Statements as of and for the
period ended December 31, 1998 F-6
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Consolidated Statement of Income for the six months
ended September 30, 1999 F-21
Unaudited Consolidated Balance Sheet as of September 30, 1999 F-22
Unaudited Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 F-23
Notes to the Unaudited Consolidated Financial Statements
September 30, 1999 F-24
PRO FORMA UNAUDITED FINANCIAL INFORMATION
Pro Forma Unaudited Combined Statement of Income for the period
from March 10, 1998 to December 31, 1998 F-34
Pro Forma Unaudited Combined Statement of Income for the nine months
ended September 30, 1999 F-35
Pro Forma Unaudited Combined Balance Sheet as at September 30, 1999 F-36
Notes to the Pro Forma Unaudited Combined Financial Information
for the nine months ended September 30, 1999 F-37
EQUITEL COMMUNICATIONS LIMITED: AUDITED FINANCIAL STATEMENTS
Company Information F-40
Directors' Report for the period ended 30 April 1999 F-41
Report of Moore Stephens, Independent Chartered Accountants F-44
Profit and Loss Account for the period from September 17, 1998 to
April 30, 1999 F-45
Balance Sheet as of April 30, 1999 F-46
Notes to the Financial Statements for the period from
September 17, 1998 to April 30, 1999 F-47
87
<PAGE>
EQUITEL COMMUNICATIONS LIMITED: UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Statement of Income for the period from September 17, 1998
to September 30, 1999 F-58
Unaudited Balance Sheet as of September 30, 1999 F-59
Unaudited Statement of Cash Flows for the period from September 17,
1998 to September 30, 1999 F-60
Notes to the Unaudited Financial Statements, September 30, 1999 F-61
88
<PAGE>
(b) Exhibits
Exhibit No. Description
----------- -----------
2.1* Stock Purchase Agreement among Pac-Rim Consulting, Inc., Thomas
Gelfand, Telemonde Investments Limited, and Rhone Financial
Indemnity Re Limited, dated as of May 14, 1999.
2.2* Agreement Relating to the Sale and Purchase of Shares in the
Capital of EquiTel Communications Limited among (1) Telcoworld
Limited and Others, (2) Telemonde, Inc., and (3) Harry Pomeroy
and Larry Trachtenberg, dated November 8, 1999.
2.3* Agreement and Plan of Merger of Telemonde, Inc., a Nevada
corporation, into Telemonde, Inc., a Delaware corporation, dated
October 29, 1999.
2.4* Share Purchase Agreement for the Sale and Purchase of all the
issued share capital of TGA (UK) Limited, between the
shareholders of TGA (UK) and Telemonde, Inc., dated August 9,
1999.
2.5(a)* Share Purchase Agreement for the sale and purchase of all the
issued capital shares of Carnival Enterprises Limited and 10% of
the issued share capital of ITS Europe, S.L. among (1) Market
Consultant Limited, (2) Volim Holding B.V., (3) Callaway
Continental Limited and (4) EquiTel Communications, dated October
22, 1999.
2.5(b)* Share Purchase Agreement for the sale and purchase of 400,000
shares of common stock of Telemonde, Inc. between Market
Consultant Limited and Callaway Continental Limited, dated
October 22, 1999.
3.1(a)* Certificate of Incorporation of Telemonde, Inc., filed June 29,
1999.
3.1(b)* Certificate of Merger between Telemonde, Inc., a Nevada
corporation, and Telemonde, a Delaware corporation.
3.2* By-Laws of Telemonde, Inc.
4.1* Form of Common Stock Certificate.
4.2* Registration Rights Agreement between Telemonde, Inc. and
Communications Collateral Limited, dated September 1, 1999.
89
<PAGE>
4.3* Registration Rights Agreement between Telemonde, Inc. and
Atlantic Crossing, Ltd., dated August 25, 1999.
10.1* Warrant from Telemonde, Inc. to Communications Collateral
Limited, dated September 1, 1999.
10.2* Warrant from Telemonde, Inc. to Atlantic Crossing, Ltd., dated
August 25, 1999.
10.3* Consulting Agreement between Telemonde, Inc. and Gottfried von
Bismarck, dated November 2, 1999 and effective as of July 1,
1999.
10.4* Form of Employment Agreement between Executive Officers and
Telemonde.
10.4(a)* Schedule of Employees covered by Form of Employment Agreement.
10.5* Capacity Sales Agreement between Gemini Submarine Cable System
Limited and Telemonde International Bandwidth (Bermuda) Limited,
April 3, 1998.
10.5(a)* Promissory Note from Telemonde, Inc. to Gemini Submarine Cable
System Limited, dated August 27, 1999 for $1,300,000.
10.5(b)* Promissory Note from Telemonde, Inc. to Gemini Submarine Cable
System Limited, dated August 27, 1999 for $1,400,000.
10.6* Capacity Purchase Agreement between Atlantic Crossing Ltd. and
Telemonde Bandwidth (Bermuda) Limited, dated June 10, 1998.
10.7* Transmission Capacity Agreement among MCI Worldcom Global
Networks U.S., Inc., and MFS Cableco (Bermuda) Limited, and,
EquiTel Bandwidth Limited, dated December 1998.
10.8* Transmission Capacity Agreement among MCI WorldCom Global
Networks U.S., Inc., and MCI Worldcom Global Networks Limited,
and Telemonde International Bandwidth Limited, dated March 31,
1999.
10.8(a)** MCI WorldCom Global Networks U.S., Inc. Standstill Letter to and
accepted by Telemonde, Inc., Telemonde International Bandwidth
Limited, Telemonde Networks Limited, Kevin Maxwell and Adam
Bishop, dated 31 December 1999.
90
<PAGE>
10.8(b)** MCI WorldCom Global Networks U.S., Inc. Capacity Swap Letter to
and accepted by Telemonde International Bandwidth Limited, dated
31 December 1999.
10.9* Transmission Capacity Agreement between Telemonde International
Bandwidth Limited and Communications Collateral Limited and
Capacity Option Agreement between Telemonde Investments Limited
and Communications Collateral Limited, both dated April 15, 1999.
10.10* Composite Guarantee and Debenture, among (1) Telemonde
Investments Limited, (2) Telemonde International Bandwidth
(Bermuda) Limited, Telemonde Bandwidth (Bermuda) Limited,
Telemonde International Bandwidth Limited, and (3) Communications
Collateral Limited, dated April 12, 1999.
10.11* Loan Facility Agreement between Telemonde Investments Limited and
Communications Collateral Limited, dated April 15, 1999.
10.12** Forbearance Agreement, dated 12 January 2000, entered into by and
among Communications Collateral Limited, Telemonde Investments
Limited, Telemonde International Bandwidth Limited, Telemonde,
Inc. and Kevin Maxwell.
10.13** Advisor Agreement between Sand Brothers & Co., Ltd. and
Telemonde, Inc., dated October 27, 1999, and Amendment No. 1 to
Advisor Agreement, dated November 10, 1999.
10.14*** Executive Services Agreement by and between Telemonde, Inc. and
Paul E. Donofrio, dated February 22, 2000.
21* Subsidiaries of Registrant.
27 Financial Data Schedule.
99.1* Heads of Agreement between Telemonde, Inc. and the shareholders
of Global Communications Holdings (Limited) and Telemonde, Inc.,
dated November 5, 1999.
99.2* Agreement relating to a Lease and Services Agreement between
Global Switch (London) Limited and Telemonde Networks Limited,
dated November 8, 1999.
99.3* Term Sheet for the purchase of 16% to 51% of DeserTel, dated
November 8, 1999.
* Previously filed as an exhibit to the Registration Statement on Form 10, as
filed with the SEC on November 15, 1999.
** Previously filed as an exhibit to the Registration Statement on Form 10/A-1,
as filed with the SEC on March 3, 2000.
*** Previously filed as an exhibit to the Annual Report on Form 10-K, as filed
with the SEC on March 30, 2000.
91
<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, thereunto duly authorized on July 6, 2000.
TELEMONDE, INC.
By: /s/ Larry S. Trachtenberg July 6, 2000
------------------------- ____________
Larry S. Trachtenberg Date
Managing Director
This registration statement has been signed by the following persons in the
capacity and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
* Chairman and Director July 6, 2000
--------------------------------
Kevin Maxwell
* President, Chief Executive July 6, 2000
-------------------------------- Officer, Treasurer and Director
Adam Bishop
* Director and Secretary July 6, 2000
--------------------------------
Count Gottfried von Bismarck
* Director July 6, 2000
--------------------------------
Miguel D. Tirado
* Director July 6, 2000
--------------------------------
Mark Hollo
By: /s/ Larry S. Trachtenberg Director July 6, 2000
---------------------------
Attorney-in-fact
</TABLE>
92
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Telemonde Investments Limited
We have audited the accompanying consolidated balance sheet of Telemonde
Investments Limited and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, cash flows and shareholder's equity for the
period from March 10, 1998 (date of inception) to December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Telemonde Investments Limited and its subsidiaries as of December 31, 1998, and
the consolidated results of their operations and their cash flows for the period
from inception (March 10,1998) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 12 to the
financial statements, the Company has incurred a net loss of $11.7 million and
at December 31, 1998, total liabilities exceeded total assets by $11.7 million.
Management plans in this regard are also disclosed in note 12. There is
substantial doubt about the ability of the company to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability of recorded assets, or the amounts of liabilities, that might be
necessary in the event the company cannot continue in existence.
Moore Stephens November 11, 1999
Chartered Accountants
St. Paul's House (Notes 10 and 12 as of
London EC4P 4BN January 14, 2000)
F-1
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Consolidated Statement of Income
Period from March 10, 1998 (date of inception) to December 31, 1998
(US Dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Note 1998
---- ----
<S> <C> <C>
Operating revenues
Bandwidth revenues $ 29,331
---------
Operating revenues 29,331
---------
Operating expenses
Line costs 32,510
Cost of contract cancellation 11(e) 6,094
Selling, general & administrative expenses 1,055
Loan arrangement fees 1,321
---------
Operating expenses 40,980
---------
Operating loss (11,649)
---------
Other income (expense)
Interest income 247
Interest expense (330)
---------
Other expense (83)
---------
Net loss $ (11,732)
=========
Earnings per share
- Basic and fully diluted $ (529)
=========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Consolidated Balance Sheet
As at December 31, 1998
(US Dollars expressed in thousands)
<TABLE>
<CAPTION>
Note 1998
---- -------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,655
Trade accounts receivable 9,518
Inventory 7 77,515
--------
Total assets $ 89,688
========
Liabilities and shareholders' equity
Trade accounts payable 7 76,888
Accrued expenses 20,902
Deferred income 3,600
--------
Total liabilities 101,390
--------
Contingent liabilities and commitments 9 -
Minority interest -
Shareholders' equity (deficit)
Share capital 8
Authorised
50,000 ordinary shares of (Pounds)1 each -
Issued
29,630 ordinary shares of (Pounds)1 each 30
Retained earnings (deficit) (11,732)
--------
Total shareholders' deficit (11,702)
--------
Total liabilities and shareholders' equity (deficit) $ 89,688
========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Consolidated Statement of Cash Flows
Period from March 10, 1998 (date of inception) to December 31, 1998
(US Dollars expressed in thousands)
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Operating activities
Net Loss $(11,732)
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in trade accounts
receivable (9,518)
(Increase) decrease in inventory (77,515)
Increase (decrease) in trade accounts payable 76,888
Increase (decrease) in accrued expenses 20,902
Increase (decrease) in deferred income 3,600
--------
Net cash provided by operating activities 2,625
--------
Financing activities
Proceeds from long term debt 18,340
Repayment of long-term debt (18,340)
Increase in share capital 30
--------
Net cash provided by (used in)
financing activities 30
--------
Net increase in cash and cash
equivalents and at end of year $ 2,655
========
Supplemental disclosure of cash flow information:
Interest paid $ 330
========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Statement of Shareholders' Equity
Period from March 10, 1998 (date of inception) to December 31, 1998
(US Dollars expressed in thousands)
<TABLE>
<CAPTION>
Share Retained
Capital Earnings Total
------- -------- -----
<S> <C> <C> <C>
At March 10, 1998 - - -
Loss for the period - (11,732) (11,732)
Share capital issued 30 - 30
---- -------- --------
At December 31, 1998 $ 30 $(11,732) $(11,702)
==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statement
F-5
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements
As of December 31, 1998
1. Description of business and organization
Telemonde Investments Limited was incorporated in the British Virgin Islands
on March 10, 1998. The Company, through its operating subsidiaries, is a
Bermuda based telecommunications carrier supplying fiber optic bandwidth and
added value services to the global telecommunications industry.
During the period the Company operated in a single market, the supply of
fiber optics bandwidth and related maintenance services. All services
relate to bandwidth on fiber optic cables between the United States and
Europe.
2. Accounting policies
(a) Basis of accounting
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
The preparation of financial statements in accordance 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 period. Actual results could differ from those estimates.
Estimates are used when accounting for allowance for doubtful debts,
long term contracts, accrued line costs and contingencies.
The following are the significant accounting policies adopted by the
Company:
(b) Consolidation
The consolidated financial statements incorporate the assets and
liabilities of the Company and its subsidiaries. All intercompany
balances and transactions have been eliminated upon consolidation.
Minority interest in the results of operations and share of net assets
is recognized unless the relevant subsidiary has a net asset deficit and
there is no binding obligation on the minority to make good the deficit.
F-6
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
2. Accounting policies (continued)
(c) Revenues
Customers of the Corporation enter into capacity sales agreements to
acquire an Indefeasible Right of Use in units of capacity from the
Corporation's inventory of fiber optic cable capacity. The Corporation
regards the capacity sales agreements as direct financing leases as
defined by SFAS 13. The difference between the gross investment in the
capacity sales agreement and the cost of the capacity is initially
recorded as deferred income. Deferred income is amortized to income so
as to produce a constant periodic rate of return on the net investment
in the capacity sales agreement. Under the terms of substantially all
capacity sales agreements, the purchase price is due in full when the
capacity is ready for service. In such cases, revenue is recognised
when the capacity is ready for service. Customers who have entered into
capacity sales agreements have paid deposits toward the purchase price
and such amounts have been included as deferred revenue in the
consolidated balance sheet. Maintenance revenues due under capacity
sales agreements are recognised over the period services are rendered.
(d) Expenses
Line costs include the costs of acquiring submarine bandwidth capacity
and related costs including inland line costs and local network costs.
Line costs are recorded when the bandwidth capacity is sold.
(e) Inventory
Bandwidth capacity acquired under capital leases is initially recorded
as an obligation at an amount equal to the present value at the
beginning of the lease term of minimum lease payments during the lease
term. Thereafter it is stated at the lower of carrying value and fair
value.
(f) Fair value of financial instruments
The carrying amounts for cash, cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair value.
F-7
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
2. Accounting policies (continued)
(g) Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, demand
and time deposits with original maturities of three months or less are
considered equivalent to cash.
(h) Foreign Currencies
The corporation's functional currency is the U.S. Dollar as the majority
of revenues are received in U.S. Dollars and the majority of operating
expenditures are made in U.S. Dollars. Transactions in foreign
currencies are translated into U.S. Dollars at the rates of exchange in
effect at the date of transaction. Foreign currency monetary assets and
liabilities are translated using rates of exchange at the balance sheet
date.
3. Adoption of new accounting standards
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
how it is designated. For example, gains or losses related to changes in
the fair value of a derivative, not designated as a hedging instrument, are
recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive
income until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of
the beginning of a fiscal quarter. On that date, hedging relationships must
be designated anew and documented pursuant to the provisions of SFAS No.
133. Earlier application of all of the provisions of SFAS No. 133 is
encouraged, but it is permitted only as of the beginning of any fiscal
quarter. SFAS No. 133 is not to be applied retroactively to financial
statements of prior periods. The Company believes that the adoption of this
standard will not have a material effect on the Company's consolidated
results of operations or financial position. The FASB has delayed the
effective date of SFAS No. 133 by one year to years beginning after June 15,
2000 by the issuance of SFAS no. 137.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 provides guidance on the financial reporting of start-
up costs and organization costs, and requires that such costs to be expensed
as incurred. SOP 98-5 applies to all non-governmental entities and is
generally effective for fiscal years beginning after December 15, 1998.
Earlier application is encouraged in fiscal years for which annual financial
statements previously have not been issued. The adoption of SOP 98-5 is not
expected to have a material impact on results of operations, financial
position, or cash flows of the Company as the Company's current policy is
substantially in accordance with SOP 98-5.
In June 1999 the Financial Accounting Standards Board issued Interpretation
No. 43 ("FIN43") which states that SFAS 66 applies to all sales of real
estate, including real estate with property improvements or integral
equipment.
The corporation adopted FIN 43 on July 1, 1999. As a result, capacity sales
agreements entered into subsequent to June 30, 1999 are bifurcated into an
equipment portion and a real estate portion. The real estate portion is
classified as an operating lease. Revenues are recognized on a straight line
basis over the life of the agreement. The equipment portion of a capacity
sales agreement is classified as a direct financing sub lease. The
difference between the gross investment in the capacity sales agreement and
the cost of the capacity is initially recorded as deferred interest income.
Deferred interest income is amortized to interest income so as to produce a
constant periodic rate of return on the net investment in the capacity sales
agreement. Under the terms of substantially all capacity sales agreements,
the purchase price is due in full when the capacity is ready for service. In
such cases, revenue is recognized when the capacity is ready for service.
Capacity purchase agreements entered into subsequent to June 30, 1999 are
bifurcated into an equipment portion and a real estate portion. The real
estate portion is classified as an operating lease. Leasing costs are
recognized on a straight line basis over the life of the agreement. The
equipment portion of a capacity purchase agreement is classified as a
capital lease. Capacity acquired under capital leases is initially recorded
as an obligation at an amount equal to the present value at the beginning of
the lease term of minimum lease payments during the lease term. Thereafter
it is stated at the lower of carrying value and fair value.
F-8
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
4. Bandwidth Income and Expenditure
During the period the Company acted as a provider of worldwide long distance
telecommunications facilities and related services, and as such is engaged
in only one business and geographical segment. The following are the
customers, together with their country of incorporation, that comprise 10%
or more of operating revenues:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Carrier 1 (Switzerland) $10,318,000
North American Gateway Inc (Canada) $ 8,206,000
Unisource Carrier Services AG (Switzerland) $10,807,000
</TABLE>
The Company has entered into CPAs with two suppliers of trans-atlantic
bandwidth. All inventory and $23,672,000 of line costs is attributable to
these two suppliers.
The Company is exposed to concentrations of credit risk to the extent that
it has a limited number of customers, all of which operates in the
telecommunications sector. The Company performs on-going evaluations of its
customers' financial condition.
5. Taxation
The Company operates in jurisdictions where it does not have a taxable
presence. The Company has incurred operating losses which relate to non-
taxable jurisdictions. In the event that the Company has taxable earnings in
the future, operating losses incurred in 1998 would not expect to be applied
against future taxable earnings. Accordingly, no tax provisions or deferred
tax benefit was recorded in 1998.
6. Earnings per share
1998
----
Net loss $(11,732,000)
Average common shares
Issued and outstanding 22,179
Earnings per share
- basic and fully diluted $ (528.97)
============
F-9
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
7. Inventory
Inventory consists of IRUs acquired under capital leases which have not been
sold at the balance sheet date. The Company may have drawndown the capacity
or have an obligation to do so by a set date. At December 31, 1998
inventory consisted of the following:
<TABLE>
<CAPTION>
Atlantic
Capacity
-----------
<S> <C>
IRU's committed to be drawndown within one year 55,440,000
IRU's committed to be drawndown within one
to two years 19,440,000
-----------
Total undrawn bandwidth 74,880,000
Capacity drawndown $ 2,635,000
-----------
$77,515,000
===========
</TABLE>
Included within trade accounts payable is $74,880,000 due to suppliers under
capital leases, falling due within two years.
Under the CPAs the Company has the right to acquire additional IRUs on
favorable terms. These options are at the Company's instigation and will be
activated if favorable market conditions apply. The terms of the options
vary but generally at a capped price, are non-specific as to quantity and
the price is dependent on the quantity taken. No guarantee is given that
such capacity will be available.
Subsequent to the balance sheet date the market value of the Atlantic
capacity has declined, however the Company has reached agreement in
principle but is yet to sign final agreements with its principal suppliers
to replace the old capacity with new capacity on higher value networks in
the Atlantic, Pacific, Europe and South America. The management are of the
opinion that the carrying value of the new capacity is equivalent to the
cost of the old capacity and that the final agreements will be signed within
a reasonable time on terms already agreed in principle.
8. Share capital
Share capital is as follows:
1998
----
Authorized:
50,000 ordinary shares of $1 each $50,000
=======
Issued
29,630 ordinary shares of $1 each $29,630
=======
F-10
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
9. Contingent liabilities and commitments
(a) H.M. Customs & Excise in the United Kingdom are considering whether the
Company has a liability to register for Value Added Tax (`VAT') in the
United Kingdom (`UK)'. If the Company has a liability to register it
will be required to charge VAT at 17 1/2% on sales to UK customers and
to non-UK customers where the supplies are used and enjoyed in the UK.
A further liability to register and account for VAT in other European
Union countries will arise if the supplies are used and enjoyed in those
countries unless the customer is registered for VAT in those countries
in which case he would account for VAT. This latter liability exists
whether or not the Company is ruled to have a UK establishment. The
maximum potential liability on 1998 revenues is approximately $5
million, less deduction for the recovery of VAT on operating expenses
and recoveries from customers.
The management are of the opinion that no liability exists and
accordingly no provision has been made.
(b) The Company makes provision for inland line costs and local network
costs based on the present value of future payments required to be made
by the Company for such capacity over the life of the network. Under
the terms of the CSA's, the Company is liable for such ongoing costs
over the life of the network which may be up to 25 years.
10. Subsequent events
(a) On January 15, 1999 the Company terminated its Sales and Marketing
agreement with Telemonde Limited (subsequently renamed Iaxis Limited).
The latter company is independently owned. Telemonde Networks Limited
was incorporated on February 16, 1999 to perform the sales and marketing
functions previously undertaken by Telemonde Limited.
(b) On January 15, 1999 the Company granted a loan facility to Telemonde
Limited for $500,000. Interest rate is 10% and repayment is due when
the Company is refinanced. The loan was never drawndown and the
facility has subsequently been terminated.
(c) Under the terms of a CPA dated March 31, 1999, the Company acquired an
IRU in a transmission channel for US $13 million plus charges of US
$350,000 per annum. The Company granted an IRU over STM-1 of the
capacity to Communications Collateral Limited, although Communications
Collateral Limited has an option to require the Company to repurchase
the capacity. Communications Collateral Limited has granted the Company
a facility of US $1 million (of which $500,000 has been used to pay a
facility fee) and the Company has granted collateral over certain assets
to Communications Collateral Limited.
F-11
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
10. Subsequent events (Continued)
Communications Collateral Limited is entitled to purchase from the
Company's parent shares equal to 7% of the issued share capital of the
parent at the time of issuance. The exercise price is the lesser of (i)
$5.25 per share or (ii) if the price per share is below $5.25 for 20
consecutive trading days prior to an equity offering by the Company of
at least $10 million, the average of the per share price during such 20
day period. An associated Registration Rights Agreement, provides that
Communications Collateral Limited may participate as a selling
shareholder in the parent company's first underwritten public offering
of at least $10 million. In addition, Communications Collateral Limited
may have certain additional demand and piggyback registration rights.
It is anticipated that the financing costs associated with the issue of
warrants will amount to $6.6 million.
(d) Under the terms of a deed dated March 31, 1999, the Company agreed to
assign its rights under CSAs to the capacity supplier as security for
the performance of its obligations under the CPAs entered into on the
same day (note 11(c)).
(e) On April 16, 1999 the Company terminated a CPA. Under the CPA the
Company was committed to drawing down capacity over a three year period.
Under the termination agreement the commitment, other than the capacity
already drawndown, has been cancelled. All costs connected with the
termination agreement have been expensed within the operating statement
to December 31, 1998 as the decision to terminate the CPA was made in
1998.
(f) On May 14, 1999, the Company acquired Pac-Rim Consulting Inc, a Nevada
corporation ("Pac-Rim") in a stock purchase transaction. Pac-Rim was
publicly traded on the NASD's Over the Counter Bulletin Board. Pursuant
to the Stock Purchase Agreement, Pac-Rim issued 35,297,000 shares of
Pac-Rim's common stock to the sole shareholder of the Company, in
exchange for all of the issued and outstanding shares of the Company
(the "Reverse"). As a result of the Reverse, the company became a
wholly owned subsidiary of Pac-Rim. Following the Reverse, Pac-Rim
changed its name to Telemonde Inc.
The Reverse will be accounted for as a reverse purchase acquisition of
Pac-Rim by the Company. Although Telemonde, Inc. (Pac-Rim was the
surviving legal entity in the Reverse, the Company is considered to be
the acquirer in the transaction because:
. the sole shareholder of the Company prior to the Reverse became the
majority shareholder of Pac-Rim following the Reverse;
. the management of Pac-Rim following the Reverse is substantially the
same as the management of the Company prior to the Reverse; and
. Pac-Rim was a new entity with limited transactions rather than an
operating business.
F-12
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
10. Subsequent events (continued)
(g) On November 8, 1999, the Corporation acquired the entire issued share
capital of EquiTel Communications Limited, a telecommunications services
company incorporated in the United Kingdom. The combination will be
accounted for under the purchase method. Under the terms of the
Purchase Agreement, the consideration payable to the vendors will be $19
million issued on completion. The purchase price is expected to be
allocated to the identifiable assets of EquiTel as follows:
<TABLE>
<S> <C>
Assets $ 000
Cash and cash equivalents 43
Trade accounts receivable -
Other receivables 535
Property, plant and equipment 214
Investment in joint venture 1,038
-------
Total assets 1,830
=======
Liabilities and shareholders' equity
Trade accounts payable 571
Other payables 1,700
Accrued expenses 147
Other loans 300
Shareholder loans 5,289
-------
Total liabilities 8,007
-------
Net liabilities (6,177)
Goodwill 20,379
Customer base 3,898
Skilled workforce 900
-------
Consideration payable 19,000
-------
</TABLE>
Goodwill will be amortised over 10 years under the straight line method.
The customer base will be amortised over 5 years under the straight line
method. The skilled workforce will be amortised over 5 years under the
straight line method.
F-13
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
10. Subsequent events (continued)
The Corporation issued 4,947,917 shares of its common stock to the
shareholders of EquiTel Communications Limited in exchange for the
acquisition of all of the issued and outstanding stock of EquiTel.
These shares were issued as initial consideration for the acquisition of
EquiTel. As additional consideration for the acquisition, Telemonde is
obligated to issue to the former shareholders of EquiTel an additional
number of shares valued at $50 million based upon the average price of
the Telemonde common stock during certain periods, and subject to
certain conditions relating to the financial performance of EquiTel
during 2000 and 2001. Assuming that the price of the common stock is
$0.75, the price of a share of Telemonde common stock on March 8, 2000
and assuming that EquiTel satisfies the applicable performance criteria,
Telemonde will issue an additional 66,666,667 shares to the former
EquiTel shareholders. Exemption from registration is claimed under
Section 4 (2) of the Securities Act.
Telemonde will record the current fair value of the consideration
issuable as additional cost of the acquired company. The additional
cost of goodwill will be amortised over the remaining life of the asset.
The vendors include Janet Pomeroy, Adam Bishop and Telcoworld Limited.
Kevin Maxwell is associated with Telcoworld Limited. Kevin Maxwell and
Adam Bishop are directors of Telemonde Inc. Kevin Maxwell was a
director of EquiTel Communications Limited and Harry Pomeroy is a
director of EquiTel Communications Limited.
The operations of the acquired company will be included from the date of
acquisition onward.
On May 25, 1999 EquiTel Communications Limited entered into a share
purchase agreement to acquire a 20% equity interest in Net Industrial
Holdings Telecommunications Limited, a South African company established
to develop opportunities in the Sub-Sahara telecommunications sector.
The consideration will be cash of $2,000,000 and the equivalent of
$3,250,000 shares in Telemonde Inc. The purchase has not yet taken
effect.
(h) On November 10, 1999 Telemonde issued and sold 6,000,000 shares of its
common stock to the following persons in exchange for the forgiveness
of an aggregate of $16.25 million previously loaned by such persons to
subsidiaries of Telemonde and to EquiTel:
F-14
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
10. Subsequent events (continued)
<TABLE>
<CAPTION>
Shares of Common
-----------------
Name Stock
---- -----------------
<S> <C>
Eaglescliff Investments Limited, a British Virgin Islands company 1,427,820
Chirone Investments Limited, a Bahamas company 1,716,360
Hamptonne Limited, a Bahamas company 1,236,180
True Blue Enterprises Inc., a Nevis company 1,619,640
</TABLE>
Exemption from registration is claimed under Regulation S of the
Securities Act.
Telemonde will record a reduction in loans and an increase in
stockholders' equity of $16.25 million.
(i) On August 25, 1999 the Company's parent, Telemonde Inc., issued warrants
to a supplier of bandwidth capacity, which entitle the warrant holder to
purchase 1,100,000 shares of Telemonde Inc. common stock at a price of
$5.25 per share. The warrants expire on August 25, 2000. The warrants
have been valued at $ 2,376,000 using the Black Scholes option pricing
model. This will be amortized in full in 1999.
The valuation model is based on the prevailing stock price of $ 6.25 per
share and a 65 % volatility factor. The exercise price is subject to
adjustment in the event of, amongst other things, a merger or issuance
of warrants. The compensation expense will be adjusted in the period
any such event occurs.
(j) On November 5, 1999 Telemonde Inc. entered into a Heads of Agreement to
acquire Global Communications (Holding) Limited, a UK internet, e-
commerce and telecommunications business, for (Pounds)100,000,000 ($ 165
million) to be satisfied by cash of (Pounds) 500,000 ($ 825,000), loan
notes of (Pounds) 49.5 million ($ 81.7 million) and shares of (Pounds)
50 million ($ 82.5 million). The acquisition has not taken effect and
may not take effect under the terms of the Heads of Agreement.
(k) On November 8, 1999 Telemonde Networks Limited entered into an agreement
to lease a telehouse facility at an annual cost of approximately
(Pounds)750,000 ($ 1.2 million).
(l) On October 15, 1999 the Company agreed to issue 1,750,000 shares of
common stock to designees of Sands Brothers & Co in compensation for
commitments to raise equity finance. There will be no impact on the
income statement since the compensation expense will be dealt with in
the statement of shareholders equity.
F-15
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
10. Subsequent events (continued)
(m) On November 10, 1999 the Company issued 333,334 shares of common stock
to African Ventures Limited and National Empowerment Trust Fund as
partial consideration for EquiTel's purchase of the issued share capital
of Net Industrial Holdings Telecommunications Limited, and EquiTel's
joint venture with Net Industrial Holdings Telecommunications Limited.
The shares will be valued at market value at the date of issue and
accounted for as part of EquiTel's investment.
(n) On November 8, 1999, the Company also issued 400,000 shares of common
stock to Ethelbert Cooper in connection with introductions to
prospective joint venture partners in the African continent. The
transaction took place prior to the acquisition of EquiTel as a result
of a commitment entered into by EquiTel. Since the commitment reduced
the fair value of assets acquired, it had the effect of increasing
goodwill on the acquisition of EquiTel.
(o) On December 31, 1999 the Company signed a Standstill Letter and Capacity
Swap Agreement with one of its bandwidth suppliers. Under the Standstill
Letter the supplier will not enforce its rights of default in
consideration of various obligations and under the Capacity Swap
Agreement Telemonde can swap the bandwidth purchased under its original
capacity purchase agreements for new bandwidth on the supplier's
European network.
(p) On January 1, 2000 the Company signed an agreement to take its profit
share in Desertel Telecommunications Services LLC (an Omani joint
venture between EquiTel and a local partner) from 50% to 75%. The
consideration for this transaction was satisfied by the issue of
1,250,000 shares of common stock of Telemonde Inc.
(q) On January 13, 2000 Telemonde executed a Forbearance Agreement with
Communications Collateral Limited. Under this Agreement, Communications
Collateral Limited agreed not to exercise its rights of default under
the foregoing agreements until February 15, 2000, in consideration of
various obligations of Telemonde.
(r) On October 13, 1999, Telemonde issued 60,000 shares of its common stock
to IC Capital, LLC, as consideration for IC Capital's agreement to
provide investor relations services to Telemonde.
11. Related party transactions
(a) Under the terms of a Sales and Marketing agreement with Telemonde
Limited dated July 7, 1998, the Company appointed Telemonde Limited as
exclusive sales and marketing agent. Commissions were payable based on
7% of sales receipts. As described in note 11(a) this agreement has
been terminated.
F-16
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
11. Related party transactions (Continued)
(b) On June 12, 1998 the Company entered into a loan agreement with Chiltern
Group Plc. The loan of $7,500,000 was repaid in December 1998 with
interest at 7% per annum. The loan was guaranteed by individuals
including Adam Bishop and Harry Pomeroy, directors of the Company's
parent and secured by a fixed and floating charge and a pledge over the
shares of a subsidiary. An arrangement fee of $500,000 was paid on the
date of drawdown. Under the terms of the loan agreement, 300 shares
representing 3% of the issued share capital of Telemonde International
Bandwidth (Bermuda) Limited, an operating subsidiary, were purchased by
Chiltern Group Plc for $1 per share. In the opinion of the directors
the fair value of the shares on the date of transfer was insignificant.
In consideration for $1, Chiltern Group Plc granted the Company the
right to repurchase the shares at the higher of $750,000 or fair value.
By subsequent agreement, the Company re-acquired the shares on July 30,
1999 (290 shares) and May 12, 1999 (10 shares). The consideration was
1,000 shares in the Company and $1 per share respectively.
(c) On July 31, 1998 the Company entered into a second loan agreement with
Chiltern Group Plc. The loan of $10,500,000 was repaid in December 1998
with interest at 7% per annum. The loan was secured by a fixed and
floating charge and a pledge over the Company's shares. An agreement
fee of $500,000 was paid on the date of drawdown.
Under the terms of the loan agreement, 10 shares representing less than
1% of the issued share capital of Telemonde Bandwidth (Bermuda) Limited,
an operating subsidiary, were purchased by Chiltern Group Plc for $1 per
share. In the opinion of the directors the fair value of the shares on
the date of issue was insignificant. The call option granted to the
Company under 10(c) above was terminated. By subsequent agreement the
Company re-acquired the shares for $1 per share on May 12, 1999.
Under the terms of the loan agreement Chiltern Group Plc was allotted
630 shares in the Company for $1 per share and 1,000 shares in the
Company in exchange for 290 shares in Telemonde International Bandwidth
(Bermuda) Limited. In the opinion of the directors the fair value of
the shares at the date of allotment was insignificant. The shares were
transferred to Rhone Financial Indemnity Re Limited on February 10, 1999
at $1 per share.
In consideration of $1, the Company granted Chiltern Group Plc an option
to acquire shares representing 10% of the issued shares of the Company
prior to December 31, 1999 for $1,800,000. In the opinion of the
directors the fair value of the option at the date of grant was
insignificant. By subsequent agreement, the option was cancelled for
nil consideration.
(d) On October 9, 1998 the Company entered into a loan agreement with
Chiltern International Finance Limited. Under the terms of the loan
agreement, the loan of $340,000 was repayable on November 30, 1998 with
interest at the London Inter-Bank offered rate. The loan was guaranteed
by Rhone Financial Indemnity Re Limited, the Company's shareholder. An
arrangement fee of US $20,000 was paid on the date of drawdown.
F-17
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
11. Related party transactions (Continued)
(e) During the period the Company made payments to Argonaut Limited and
Harley Consultants Limited amounting to $37,000 for directors and
consultancy services to the company. Mr. Michael Collins, a director of
the Company, is a director of both Argonaut Limited and Harley
Consultants Limited and has a controlling interest in Argonaut Limited.
(f) During the period payments amounting to $452,000 were made to Westbourne
Communications Limited for the services of an executive and a consultant
and as reimbursement for expenses paid by Westbourne Communications
Limited on behalf of the Company.
(g) During the year the Company made payments to EquiTel Communications
Limited amounting to $898,000 for commissions earned on sales contracts.
As described in note 10(g) the directors and shareholders of EquiTel
Communications Limited include directors of Telemonde Inc.
12. Liquidity
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, the company incurred a net
loss of $11.7 million which has resulted in a deficit of $11.7 million as at
the balance sheet date. Net cash provided by operating activities amounted
to $2.7 million.
The Company's ability to fund its commitments to draw down capacity in 2000
is dependent on its ability to sell capacity and raise finance to cover
working capital requirements.
Of note:
(a) In the nine months to September 30, 1999 the Company incurred a net loss
of $57.1 million which has resulted in a deficit of $58.1 million as at
the balance sheet date. Net cash used in operating activities amounted
to $20.0 million and cash provided by financing activities amounted to
$18.2 million. At September 30, 1999 the Company had net cash of $0.1
million.
(b) At December 31, 1999 the Company had liabilities of $78.3million to
capacity suppliers. The Company is currently behind with its payments
based upon the existing contracts and is relying on the suppliers'
flexibility in rescheduling payment terms. The events of default under
the existing contracts could endanger the Company's existence.
(c) Subsequent to the balance sheet date the market value of the Atlantic
capacity has declined.
(d) The Company has failed to meet its obligations to Communications
Collateral Limited which at December 31, 1999 amounted to $4.5 million.
As a result Communications Collateral Limited has a right to foreclose
on substantially all of the Company's assets.
F-18
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
12. Liquidity (Continued)
Management plans to address the above issues include:
(a) The Company has reached agreement in principle but is yet to sign final
agreements with its principal suppliers to replace the Atlantic capacity
with new capacity on higher value networks in the Atlantic, Pacific,
Europe and South America. The management are of the opinion that the
carrying value of the new capacity is equivalent to the cost of the old
capacity and that the final agreements will be signed within a
reasonable time on terms already agreed in principle.
(b) Despite the technical defaults with its two bandwidth suppliers,
Telemonde has been in extensive negotiations with senior management in
both organizations towards the end of 1999 and continuing into January
2000. Whilst these discussions have been held, Telemonde has made a
number of payments to both suppliers for services rendered and both
suppliers have:
. agreed to continue to provide all services to existing Telemonde
customers, including maintenance of the cable systems;
. not taken up the option to enact the default;
. actively supported Telemonde in the development of its strategy and
network deployment;
. allowed further capacity to be taken on a leased basis to assist in
fulfilling Telemonde's order book;
As part of these negotiations, Telemonde has recently executed a
Standstill Letter from MCI WorldCom in which MCI WorldCom has agreed to
refrain from (a) taking any action to enforce payment of the sums owed
to MCI WorldCom under the capacity purchase agreements; (b) taking any
action to enforce or make a demand under any guarantee, indemnity or
security related to the capacity purchase agreements; and (c) commence
any insolvency proceedings against Telemonde or any of its subsidiaries.
The Standstill Letter expires upon the earlier of (i) the full payment
of the sums owed under the capacity purchase agreements; (ii) June 8,
2000; or (iii) Telemonde's failure to comply with a number of terms and
conditions, which includes the prohibition against the sale of assets,
dividends and the borrowing of any additional funds without the signed
written consent of MCI WorldCom's agent other than permitted borrowings.
It is the opinion of Telemonde's Management that the ongoing
negotiations with both suppliers will lead to a successful conclusion of
the outstanding defaults and provide Telemonde will much more flexible
supply contracts.
F-19
<PAGE>
TELEMONDE INVESTMENTS LIMITED
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1998
12. Liquidity (continued)
(c) On January 13, 2000 Telemonde executed a Forbearance Agreement with
Communications Collateral Limited. Under this Agreement, Communications
Collateral Limited agreed not to exercise its rights of default under
the foregoing agreements until February 15, 2000, in consideration of
various obligations of Telemonde.
(d) The Company has retained investment bankers in Europe and United States
to assist in raising finance to include equity capital and issuing debt.
During 1999 the Company has been successful in raising over $25 million
of debt of which $16.3 million has been converted to equity. Based on
the management's plans, the Company estimates that there will be new
equity of at least $15 million and at least $5 million of new debt
available in 2000.
There can be no assurance that the Company will be successful in raising
finance to cover working capital requirements and financial commitments.
Management believes that despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that
will generate sufficient financing, cash flows and revenues to continue as a
going concern.
13. Leases
As at the balance sheet date, the net investment in direct financing leases
amounted to nil. There were no future minimum lease payments. The
unguaranteed residual values accruing to the benefit of the lessor amounted
to nil. Unearned income amounted to nil. Contingent rentals receivable in
the period amounted to nil.
F-20
<PAGE>
TELEMONDE INC
Unaudited Consolidated Statement of Income
For the nine months ended September 30, 1999
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
9 months to
September 30,
1999
----
<S> <C>
Operating revenues
Bandwidth revenues 5,857
--------
Operating revenues $ 5,857
--------
Operating expenses
Line costs 5,315
Reserve for inventory 40,690
Provision for doubtful debts 924
Selling, general & administrative expenses 6,009
Amortization of financing costs 8,976
Loan arrangement fees 500
--------
Operating expenses 62,414
--------
Operating loss (56,557)
--------
Other income (expense)
Interest income 580
Interest expense (1,109)
--------
Other (expense) income (529)
--------
Net loss $(57,086)
========
Net loss per share - basic and diluted $ (1.27)
========
</TABLE>
See accompanying notes to unaudited consolidated
financial statements
F-21
<PAGE>
TELEMONDE INC
Unaudited Consolidated Balance Sheet
As at September 30, 1999
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
September 30,
-------------
1999
-------------
<S> <C>
Assets
Cash and cash equivalents 125
Trade accounts receivable, net of allowance
for doubtful debts of $924 4,237
Prepayments and other debtors 3,164
Inventory 47,190
Property, plant and equipment 706
Goodwill 1,289
--------
Total assets $ 56,711
--------
Liabilities and shareholders' equity
Trade accounts payable 85,164
Accrued expenses 11,332
Deferred income 1,139
Other loans 6,500
Shareholder loans 10,712
--------
Total liabilities 114,847
--------
Shareholders' equity
Share capital 59
Authorized
5,000,000 shares of preferred stock, $0.01 par value per share
145,000,000 shares of common stock, $0.001 par value per share
Issued
59,547,000 shares of common stock, $0.001 par value per share
Retained earnings (68,818)
Additional paid in capital 10,623
--------
Total shareholders' funds (58,136)
--------
Total liabilities and shareholders' funds $ 56,711
--------
</TABLE>
See accompanying notes to unaudited consolidated
financial statements
F-22
<PAGE>
TELEMONDE INC
Unaudited Consolidated Statement of Cash Flows
For the nine months ended September 30, 1999
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
9 months to
30 September 1999
------------------
<S> <C>
Operating activities
Net Loss (57,086)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for doubtful debts 924
Reserve for inventory 40,690
Amortization of goodwill 11
Amortization of financing costs 8,976
Depreciation 101
Fees satisfied by issuance of stock 347
(Increase) decrease in trade accounts receivable 4,357
(Increase) decrease in prepayments and other debtors (3,164)
(Increase) decrease in inventory (10,365)
Increase (decrease) in trade accounts payable 7,276
Increase (decrease) in accrued expenses (9,570)
Increase (decrease) in deferred income (2,461)
--------
Net cash provided by (used in) operating activities (19,964)
--------
Investing activities
Purchase of property, plant and equipment (807)
--------
Net cash provided by (used in) investing activities (807)
--------
Financing activities
Proceeds from shareholders loans 10,712
Proceeds from other loans 7,500
Issue of shares 29
Proceeds from long term debt -
Repayment of long term debt -
--------
Net cash provided by (used in) financing activities 18,241
--------
Net (decrease)/increase in cash and cash equivalents (2,530)
Cash and cash equivalents at start of period 2,655
--------
Cash and cash equivalents at end of period 125
--------
Supplemental disclosure of cash flow information:
Interest paid $ 10,585
========
</TABLE>
See accompanying notes to unaudited consolidated
financial statements
F-23
<PAGE>
TELEMONDE INC
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
1. Interim accounting policy
In the opinion of management of Telemonde Inc (the "Corporation"), the
accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly in accordance with accounting principles generally accepted
in the US the financial position of the Corporation and the results of
operations and cash flows for the nine months ended September 30, 1999.
Although the Corporation believes that the disclosure in these financial
statements is adequate to make the information presented not misleading,
certain information and footnote information normally included in interim
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of what operating results may be for the full year. In addition,
these unaudited consolidated financial statements and notes thereto should
be read in conjunction with the audited consolidated financial statements
presented herein.
On May 14, 1999, Telemonde Investments Limited acquired Pac-Rim Consulting
Inc, a Nevada corporation ("Pac-Rim") in a stock purchase transaction. Pac-
Rim was publicly traded on the NASD's Over the Counter Bulletin Board.
Pursuant to the Stock Purchase Agreement, Pac-Rim issued 35,297,000 shares
of Pac-Rim's common stock to the sole shareholder of Telemonde Investments
Limited, in exchange for all of the issued and outstanding shares of
Telemonde Investments Limited (the "Reverse"). As a result of the Reverse,
Telemonde Investments Limited became a wholly owned subsidiary of Pac-Rim.
Following the Reverse, Pac-Rim changed its name to Telemonde Inc. The
Reverse has been accounted for as a reverse purchase acquisition in a
manner similar to the pooling of interests method of accounting. The
financial information presented for periods prior to May 14, 1999 is for
Telemonde Investments Limited.
In June 1999 the Financial Accounting Standards Board issued Interpretation
No. 43 ("FIN43") which states that SFAS 66 applies to all sales of real
estate, including real estate with property improvements or integral
equipment.
The corporation adopted FIN 43 on July 1, 1999. As a result, capacity sales
agreements entered into subsequent to June 30, 1999 are bifurcated into an
equipment portion and a real estate portion. The real estate portion is
classified as an operating lease. Revenues are recognized on a straight
line basis over the life of the agreement. The equipment portion of a
capacity sales agreement is classified as a direct financing sub lease. The
difference between the gross investment in the capacity sales agreement and
the cost of the capacity is initially recorded as deferred interest income.
Deferred interest income is amortized to interest income so as to produce a
constant periodic rate of return on the net investment in the capacity
sales agreement. Under the terms of substantially all capacity sales
agreements, the purchase price is due in full when the capacity is ready
for service. In such cases, revenue is recognized when the capacity is
ready for service.
Capacity purchase agreements entered into subsequent to June 30, 1999 are
bifurcated into an equipment portion and a real estate portion. The real
estate portion is classified as an operating lease. Leasing costs are
recognized on a straight line basis over the life of the agreement. The
equipment portion of a capacity purchase agreement is classified as a
capital lease. Capacity acquired under capital leases is initially recorded
as an obligation at an amount equal to the present value at the beginning
of the lease term of minimum lease payments during the lease term.
Thereafter it is stated at the lower of carrying value and fair value.
2. Changes in shareholders' equity
Ordinary Retained Additional
share earnings/ Paid-in
Capital (deficit) Capital
------- --------- -------
Balance at December 31, 1998 $ 30 (11,732) -
Net (loss) - (57,086) -
Shares issued 29 - 1,300
Amortization of financing costs - - 8,976
Fees satisfied by issuance of stock - - 347
------- ------- ------
Balance at September 30, 1999 $ 59 (68,818) 10,623
======= ======= ======
F-24
<PAGE>
TELEMONDE INC
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
2. Changes in shareholders' equity (Continued)
The Company issued 200,000 shares of common stock to two shareholders of
TGA (UK) Limited on August 13, 1999 in exchange for all of the issued and
outstanding stock of TGA. The investment in TGA has been accounted for at
fair value of $1.3 million based on the prevailing price of $6.50 per
share.
The Company issued 50,000 shares of common stock as compensation for
executive search services rendered to the company. The compensation cost
has been accounted for at fair value of $283,000 based on the prevailing
price of $5.66 per share.
3. Financing
During the nine month period to September 30, 1999 the Corporation entered
into the following financing arrangements:
(a) The Corporation sold an Indefeasible Right of Use ("IRU") over STM-1
of capacity to Communications Collateral Limited, although
Communications Collateral Limited has an option to require the
Corporation to repurchase the capacity. Communications Collateral
Limited has granted the Company a facility of US $1 million (of which
$500,000 has been used to pay a facility fee) and the Corporation has
granted collateral over certain assets to Communications Collateral
Limited. In view of this option this IRU sale has been treated as a
financing transaction and shown within "other loans".
Communications Collateral Limited is entitled to purchase shares equal to
7% of the issued share capital of the Corporation at the time of issuance. The
exercise price is the lesser of (i) $5.25 per share or (ii) if the price per
share is below $5.25 for 20 consecutive trading days prior to an equity offering
by the Company of at least $10 million, the average of the per share price
during such 20 day period. An associated Registration Rights Agreement,
provides that Communications Collateral Limited may participate as a selling
shareholder in the first underwritten public offering of at least $10 million.
In addition, Communications Collateral Limited may have certain additional
demand and piggyback registration rights.
Using a Black Scholes option pricing model, this warrant has been valued at
$6.6 million. This has been treated as additional paid in capital and is being
taken to the income statement over the period of the related financing. The
valuation model is based on the prevailing stock price of $5.25 per share and a
65% volatility factor.
F-25
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
3. Financing (Continued)
(b) On August 25, 1999 the corporation issued warrants to a bandwidth
capacity supplier which entitle the warrant holder to purchase
1,100,000 shares of common stock at a price of $5.25 per share. The
warrants expire on August 25, 2000. Using a Black Scholes option
pricing model, the warrants have been valued at $2,376,000. This has
been treated as additional paid in capital and amortized in full in
the nine months ended September 30, 1999. The valuation model is based
on a prevailing stock price of $6.25 per share and a 65% volatility
factor. The exercise price is subject to adjustment in the event of,
amongst other things, a merger or issuance of warrants. The
compensation expense will be adjusted in the period any such event
occurs.
4. Earnings per share
The calculation of basic earnings per share is as follows:
9 months to
September 30,
1999
Net income available to common
shareholders (57,086,000)
Average common shares issued and
outstanding 44,828,829
Basic and diluted earnings per share $ (1.27)
===========
No adjustment to earnings per share arises on the issue of warrants as the
effect is antidilutive.
On the date of the reverse transaction referred to in Note 1 above, the
Company issued 35,297,000 shares of common stock in exchange for the 35,297
shares of common stock in Telemonde Investments Limited. For the purposes
of calculating basic earnings per share the increase in nominal share
capital was deemed to take place at the beginning of the period.
5. Operating lease commitments
The Company entered into a property operating lease agreement with future
minimum lease payments of $172,000 per annum for the next five years and
$1,005,000 in aggregate thereafter.
F-26
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
6. Contingent liabilities
H.M. Customs & Excise in the United Kingdom are considering whether the
Corporation has a liability to register for Value Added Tax (`VAT') in the
United Kingdom (`UK)'. If the Corporation has a liability to register it
will be required to charge VAT at 17 1/2% on sales to UK customers and to
non-UK customers where the supplies are used and enjoyed in the UK. A
further liability to register and account for VAT in other European Union
countries will arise if the supplies are used and enjoyed in those
countries unless the customer is registered for VAT in those countries in
which case he would account for VAT. This latter liability exists whether
or not the Corporation is ruled to have a UK establishment. The maximum
potential liability on 1999 revenues is approximately $900, less deduction
for the recovery of VAT on operating expenses and recoveries from
customers.
The management are of the opinion that no liability exists and accordingly
no provision has been made.
7. Subsequent events
(a) On November 8, 1999, the Corporation acquired the entire issued share
capital of EquiTel Communications Limited, a telecommunications
services company incorporated in the United Kingdom. The combination
will be accounted for under the purchase method. Under the terms of
the Purchase Agreement, the consideration payable to the vendors will
be $19 million issued on completion. The purchase price is expected to
be allocated to the identifiable assets of EquiTel as follows:
Assets $ 000
Cash and cash equivalents 43
Trade accounts receivable -
Other receivables 535
Property, plant and equipment 214
Investment in joint venture 1,038
-----
Total assets 1,830
=====
F-27
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
7. Subsequent events (Continued)
Liabilities and shareholders' equity
Trade accounts payable 571
Other payables 1,700
Accrued expenses 147
Other loans 300
Shareholder loans 5,289
-----
Total liabilities 8,007
=====
Net liabilities (6,177)
Goodwill 20,379
Customer base 3,898
Skilled workforce 900
------
Consideration payable 19,000
======
Goodwill will be amortised over 10 years under the straight line
method. The customer base will be amortised over 5 years under the
straight line method. The skilled workforce will be amortised over 5
years under the straight line method.
The Corporation issued 4,947,917 shares of its common stock to the
shareholders of EquiTel Communications Limited in exchange for the
acquisition of all of the issued and outstanding stock of EquiTel.
These shares were issued as initial consideration for the acquisition
of EquiTel. As additional consideration for the acquisition, Telemonde
is obligated to issue to the former shareholders of Equitel an
additional number of shares valued at $50 million based upon the
average price of the Telemonde common stock during certain periods,
and subject to certain conditions relating to the financial
performance of EquiTel during 2000 and 2001. Assuming that the price
of the common stock is $0.75, the price of a share of Telemonde common
stock on March 8, 2000 and assuming that EquiTel satisfies the
applicable performance criteria, Telemonde will issue an additional
66,666,667 shares to the former EquiTel shareholders. Exemption from
registration is claimed under Section 4 (2) of the Securities Act.
Telemonde will record the current fair value of the consideration
issuable as additional cost of the acquired company. The additional
cost of goodwill will be amortised over the remaining life of the
asset.
F-28
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
7. Subsequent events (Continued)
The vendors include Janet Pomeroy, Adam Bishop and Telcoworld Limited.
Kevin Maxwell is associated with Telcoworld Limited. Kevin Maxwell and
Adam Bishop are directors of Telemonde Inc. Kevin Maxwell was a
director of EquiTel Communications Limited and Harry Pomeroy is a
director of EquiTel Communications Limited.
The operations of the acquired company will be included from the date
of acquisition onward.
On May 25, 1999 EquiTel Communications Limited entered into a share
purchase agreement to acquire a 20% equity interest in net Industrial
Holdings Telecommunications Limited, a South African company
established to develop opportunities in the Sub-Sahara
telecommunications sector. The consideration will cash of $2,000,000
and the equivalent of $3,250,000 shares in Telemonde Inc.
(b) On November 5, 1999 the Corporation entered into a Heads of Agreement
to acquire Global Communications (Holding) Limited, a U.K. internet,
e-commerce and telecommunications business, for (Pounds)100 million
($165 million) to be satisfied by cash of (Pounds)500,000 ($825,000),
shares of (Pounds)50 million ($82.5 million) and loan notes of
(Pounds)49.5 million ($81.7 million). The acquisition has not taken
effect and is unlikely to take effect under the terms of the Heads of
Agreement.
(c) On November 8, 1999 Telemonde Networks Limited entered into an
agreement to lease a telehouse facility at an annual cost of
approximately (Pounds)750,000 ($1.2 million).
(d) On October 15, 1999 the Company agreed to issue 1,750,000 shares
of common stock to designees of Sands Brothers & Co in compensation
for commitments to raise equity finance. There will be no impact on
the income statement since the compensation expense will be dealt with
in the statement of shareholders equity.
(e) On November 10, 1999 the Company issued 333,334 shares of common stock
to African Ventures Limited and National Empowerment Trust Fund as
partial consideration for EquiTel's purchase of the issued share
capital of Net Industrial Holdings Telecommunications Limited, and
EquiTel's joint venture with Net Industrial Holdings
Telecommunications Limited. The shares will be valued at market value
at the date of issue and accounted for as part of EquiTel's
investment.
(f) On November 8, 1999, the Company also issued 400,000 shares of common
stock to Ethelbert Cooper in connection with introductions to
prospective joint venture partners in the African continent. The
transaction took place prior to the acquisition of EquiTel as a result
of a commitment entered into by EquiTel. Since the commitment reduced
the fair value of assets acquired, it had the effect of increasing
goodwill on the acquisition of EquiTel.
F-29
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
7. Subsequent events (Continued)
(g) On December 31, 1999 the Company signed a Standstill Letter and
Capacity Swap Agreement with one of its bandwidth suppliers. Under the
Standstill Letter the supplier will not enforce its rights of default
in consideration of various obligations and under the Capacity Swap
Agreement Telemonde can swap the bandwidth purchased under its
original capacity purchase agreements for new bandwidth on the
supplier's European network.
(h) On January 1, 2000 the Company signed an agreement to take its profit
share in Desertel Telecommunications Services LLC (an Omani joint
venture between EquiTel and a local partner) from 50% to 75%. The
consideration for this transaction was satisfied by the issue of
1,250,000 shares of common stock of Telemonde Inc.
(i) On January 13, 2000 Telemonde executed a Forbearance Agreement with
Communications Collateral Limited. Under this Agreement,
Communications Collateral Limited agreed not to exercise its rights of
default under the foregoing agreements until February 15, 2000, in
consideration of various obligations of Telemonde.
(j) On October 13, 1999, Telemonde issued 60,000 shares of its common
stock to IC Capital, LLC, as consideration for IC Capital's agreement
to provide investor relations services to Telemonde.
(k) On November 10, 1999 Telemonde issued and sold 6,000,000 shares of its
common stock to the following persons in exchange for the forgiveness
of an aggregate of $16.25 million previously loaned by such persons to
subsidiaries of Telemonde and to EquiTel:
<TABLE>
<CAPTION>
Name Shares of Common
---- -----------------
Stock
-----
<S> <C> <C>
Eaglescliff Investments Limited, a British Virgin Islands company 1,427,820
Chirone Investments Limited, a Bahamas company 1,716,360
Hamptonne Limited, a Bahamas company 1,236,180
True Blue Enterprises Inc., a Nevis company 1,619,640
</TABLE>
Exemption from registration is claimed under Regulation S of the
Securities Act.
Telemonde will record a reduction in loans and an increase in
stockholders' equity of $16.25 million.
F-30
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
8. Liquidity
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.
The Company's ability to fund its commitments to draw down capacity in 2000
is dependent on its ability to sell capacity and raise finance to cover
working capital requirements.
Of note:
(a) In the nine months to September 30, 1999 the Company incurred a net
loss of $57.1 million which has resulted in a deficit of $58.1 million
as at the balance sheet date. Net cash used in operating activities
amounted to $20.0 million and cash provided by financing activities
amounted to $18.2 million. At September 30, 1999 the Company had net
cash of $0.1 million.
(b) At December 31, 1999 the Company had liabilities of $78.3million to
capacity suppliers. The Company is currently behind with its payments
based upon the existing contracts and is relying on the suppliers'
flexibility in rescheduling payment terms. The events of default under
the existing contracts could endanger the Company's existence.
(c) The Company has failed to meet its obligations to Communications
Collateral Limited which at December 31, 1999 amounted to $4.5
million. As a result Communications Collateral Limited has a right to
foreclose on substantially all of the Company's assets.
Management plans to address the above issues include:
(a) The Company has reached agreement in principle but is yet to sign
final agreements with its principal suppliers to replace the
Atlantic capacity with new capacity on higher value networks in the
Atlantic, Pacific, Europe and South America. The management are of
the opinion that the carrying value of the new capacity is
equivalent to the cost of the old capacity and that the final
agreements will be signed within a reasonable time on terms already
agreed in principle.
(b) Despite the technical defaults with its two bandwidth suppliers,
Telemonde has been in extensive negotiations with senior management
in both organizations towards the end of 1999 and continuing into
January 2000. Whilst these discussions have been held, Telemonde has
made a number of payments to both suppliers for services rendered
and both suppliers have:
. agreed to continue to provide all services to existing Telemonde
customers, including maintenance of the cable systems;
. not taken up the option to enact the default;
F-31
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
8. Liquidity (Continued)
. actively supported Telemonde in the development of its strategy
and network deployment;
. allowed further capacity to be taken on a leased basis to assist
in fulfilling Telemonde's order book;
As part of these negotiations, Telemonde has recently executed a
Standstill Letter from MCI WorldCom in which MCI WorldCom has agreed
to refrain from (a) taking any action to enforce payment of the sums
owed to MCI WorldCom under the capacity purchase agreements; (b)
taking any action to enforce or make a demand under any guarantee,
indemnity or security related to the capacity purchase agreements;
and (c) commence any insolvency proceedings against Telemonde or any
of its subsidiaries. The Standstill Letter expires upon the earlier
of (i) the full payment of the sums owed under the capacity purchase
agreements; (ii) May 31, 2000; or (iii) Telemonde's failure to
comply with a number of terms and conditions, which includes the
prohibition against the sale of assets, dividends and the borrowing
of any additional funds without the signed written consent of MCI
WorldCom's agent other than permitted borrowings.
It is the opinion of Telemonde's Management that the ongoing
negotiations with both suppliers will lead to a successful
conclusion of the outstanding defaults and provide Telemonde with
much more flexible supply contracts.
(c) On January 13, 2000 Telemonde executed a Forbearance Agreement with
Communications Collateral Limited. Under this Agreement,
Communications Collateral Limited agreed not to exercise its rights
of default under the foregoing agreements until February 15, 2000,
in consideration of various obligations of Telemonde.
(d) The Company has retained investment bankers in Europe and United
States to assist in raising finance to include equity capital and
issuing debt. During 1999 the Company has been successful in raising
over $25 million of debt of which $16.3 million has been converted
to equity. Based on the management's plans, the Company estimates
that there will be new equity of at least $15 million and at least
$5 million of new debt available in 2000.
There can be no assurance that the Company will be successful in
raising finance to cover working capital requirements and financial
commitments.
F-32
<PAGE>
TELEMONDE INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
(Dollars expressed in thousands)
8. Liquidity (Continued)
Management believes that despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that
will generate sufficient financing, cash flows and revenues to continue as
a going concern.
F-33
<PAGE>
TELEMONDE INC
Pro-Forma Unaudited Combined Statement of Income
Period from March 10, 1998 to December 31, 1998
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
Telemonde EquiTel Telemonde Adjustments Pro-Forma
Investments Communications Inc. (Note 2) Combined
Limited Limited
(consolidated)
<S> <C> <C> <C> <C> <C>
Operating revenues
Bandwidth revenues $ 29,331 $ - $ - $ - $ 29,331
Other revenues - 898 - (a) (898) -
-------- ----- ---- ------- ---------
Operating revenues 29,331 898 - (898) 29,331
-------- ----- ---- ------- ---------
Operating expenses
Line costs 32,510 - - (a) (898) 31,612
Cost of contract cancellation 6,094 - - 6,094
Depreciation and amortization - - (b) 2,431 2,431
Selling, general and
administrative expenses 1,055 720 2 - 1,777
Loan arrangement fees 1,321 - - - 1,321
-------- ----- ---- ------- ---------
Operating expenses 40,980 720 2 1,533 43,235
-------- ----- ---- ------- ---------
Operating profit/(loss) (11,649) 178 (2) (2,431) (13,904)
Other income (expense)
Interest income 247 - - - 247
Interest expense (330) - - - (330)
-------- ----- ---- ------- ---------
Other (expense) income (83) - - (83)
-------- ----- ---- ------- ---------
Net profit/(loss) $(11,732) $ 178 $ (2) $(2,431) $ (13,987)
======== ===== ==== ======= =========
</TABLE>
See accompanying notes to unaudited
consolidated pro forma financial statements
F-34
<PAGE>
TELEMONDE INC
Pro-Forma Unaudited Combined Statement of Income
for the nine months ended September 30, 1999
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
Telemonde EquiTel
Inc Communications Adjustments Pro-Forma
(consolidated) Limited (Note 3) Combined
<S> <C> <C> <C> <C>
Operating revenues
Bandwidth revenues $ 5,857 $ - $ - $ 5,857
Other revenues - 525 (a) (428) 97
--------- --------- ---------- --------
Operating revenues 5,857 525 (428) 5,954
--------- --------- ---------- --------
Operating expenses
Line costs 5,315 - (a) (428) 4,887
Dispute settlement costs - 4,000 - 4,000
Reserve for inventory 40,690 - - 40,690
Provision for doubtful debts 924 - - 924
Depreciation and amortization 112 31 (b) 2,248 2,391
Selling, general and
administrative expenses 5,897 2,257 - 8,154
Amortization of financing costs 8,976 - - 8,976
Loan arrangement fees 500 - - 500
--------- --------- ---------- --------
Operating expenses 62,414 6,288 1,820 70,522
--------- --------- ---------- --------
Operating loss (56,557) (5,763) (2,248) (64,568)
Other income (expense)
Share of losses of joint ventures - (582) - (582)
Interest income 580 2 - 582
Interest expense (1,109) (12) - (1,121)
--------- --------- ---------- --------
Other (expense) income (529) (592) - (1,121)
--------- --------- ---------- --------
Net loss $ (57,086) $ (6,355) $ (2,248) $(65,689)
========= ========= ========== ========
</TABLE>
See accompanying notes to unaudited
consolidated pro forma financial statements
F-35
<PAGE>
TELEMONDE INC
Pro-Forma Unaudited Combined Balance Sheet
as at September 30, 1999
(Dollars expressed in thousands)
<TABLE>
<CAPTION>
Telemonde EquiTel Adjustments Pro-Forma
Inc Communications (Note 4) Combined
(consolidated) Limited
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 125 $ 43 $ - $ 168
Trade accounts receivable 4,237 - - 4,237
Other receivables 3,164 535 (e) (1,385) 2,314
Property, plant & equipment 706 214 - 920
Investment in joint venture - 1,038 - 1,038
Inventory 47,190 - - 47,190
Goodwill 1,289 - (a) 20,379 21,668
Other tangible assets - - (a) 4,798 4,798
---------- ---------- ---------- --------
Total assets $ 56,711 $ 1,830 $ 23,792 $ 82,333
========== ========== ========== ========
Liabilities and shareholders' equity
Trade accounts payable 85,164 571 (b) (6,729) 79,006
Other payables - 1,700 (e) (1,385) 315
Accrued expenses 11,332 147 - 11,479
Deferred income 1,139 - - 1,139
Other loans 6,500 300 - 6,800
Shareholder loans 10,712 5,289 (b) (9,521) 6,480
---------- ---------- ---------- --------
Total liabilities $ 114,847 $ 8,007 $ (17,635) $105,219
---------- ---------- ---------- --------
Stockholders' equity
Share capital 59 - (c) 11 70
Retained earnings (68,818) (6,177) (d) 6,177 (68,818)
Additional paid in capital 10,623 - (b,c) 35,239 45,862
---------- ---------- ---------- --------
Total stockholders' funds (58,136) (6,177) 41,427 (22,886)
---------- ---------- ---------- --------
Total liabilities
and stockholders' funds $ 56,711 $ 1,830 $ 23,792 $ 82,333
========== ========== ========== ========
</TABLE>
See accompanying notes to unaudited
consolidated pro forma financial statements
F-36
<PAGE>
TELEMONDE INC
Notes to Pro-Forma Unaudited Combined Financial Information
for the nine months ended September 30, 1999
1. Basis of Preparation
The unaudited pro forma combined financial information has been prepared in
accordance with generally accepted accounting principles in United States
and gives effect to the following:
(a) The acquisition of all outstanding share capital of EquiTel
Communications Limited in November 1999. The combination will be
accounted for under the purchase method. Shares for the market value
of $19 million will be issued on completion.
Possible contingent consideration is listed below:
(i) An additional sum calculated by multiplying reported earnings
before interest and tax for the year ending December 31, 2000 by
6, subject to a maximum of $30 million, payable on June 30, 2001.
(ii) A further additional sum calculated by multiplying reported
earning before interest and tax for the year ending December 31,
2001 by 5, subject to a maximum of $50 million, less the amount
paid under (i) above, payable on June 30, 2002.
Any additional consideration will result in additional goodwill.
(b) A debt to equity conversion of $16,250,000.
The pro forma combined statements of income give effect to the acquisition
as if it had occurred on March 10, 1998 (date of inception of Telemonde
Investments Limited). The pro forma combined balance sheet gives effect to
the acquisition and the equity injection, as if they had occurred on
September 30, 1999.
The pro forma combined financial information does not purport to represent
what the Corporation's results of operations would have been had the
acquisitions been consummated at the beginning of fiscal 1998 nor do they
project the Corporation's results for any future period.
F-37
<PAGE>
TELEMONDE INC
Notes to Pro-Forma Unaudited Combined Financial Information
for the nine months ended September 30, 1999
2. Pro-forma unaudited combined statement of income for the period from March
10, 1998 to December 31, 1998
The pro-forma unaudited combined statements of income for the period from
March 10, 1998 to December 31, 1998 gives effect to the following pro-forma
adjustments:
(a) Elimination of fees and commissions amounting to $898,000 payable by
the Corporation to EquiTel Communications Limited.
(b) Amortization of goodwill amounting to $1,653,000 and amortisation of
other intangible assets amounting to $778,000 attributable to the
acquisition of EquiTel Communications Limited.
3. Pro-forma unaudited combined statement of income for the period from
January 1, 1999 to September 30, 1999.
The pro-forma unaudited combined statement of income for the nine months
ended September 30, 1999 gives effect to the following pro-forma
adjustments:
(a) Elimination of fees and commissions amounting to $428,000 payable by
the Corporation to EquiTel Communications Limited.
(b) Amortization of goodwill amounting to $1,528,000 and amortisation of
other intangible assets amounting to $720,000 attributable to the
acquisition of EquiTel Communications Limited.
4. Pro-forma unaudited combined balance sheet as of September 30, 1999.
The pro-forma unaudited combined balance sheet as of September 30, 1999
gives effect to the following pro-forma adjustments:
(a) Capitalization of goodwill amounting to $20,379,000 and other
intangible assets amounting to $4,798,000 arising on the acquisition
of EquiTel Communications Limited. This represents the purchase price
(excluding any contingent consideration) of $ 19million plus the fair
value of net liabilities acquired of $6,177,000. Goodwill is being
amortized over 10 years under the straight-line method. Other
intangible assets are being amortised over 5 years under the straight
line method.
F-38
<PAGE>
TELEMONDE INC
Notes to Pro-Forma Unaudited Combined Financial Information
for the nine months ended September 30, 1999
4. Pro-forma unaudited combined balance sheet as of September 30, 1999
(continued)
(b) A debt to equity conversion of $16,250,000, resulting in the issue of
6,000,000 shares.
(c) Shares valued at $19 million issued as the non-contingent
consideration to acquire EquiTel Communications Limited, resulting in
the issue of 4,947,917 shares.
(d) The elimination of pre-acquisition retained earnings in EquiTel
Communications Limited amounting to $6,177,000.
(e) The elimination of intercompany balances.
5. Contingent Liabilities
(a) H.M. Customs & Excise in the United Kingdom are considering whether
the Corporation has a liability to register for Value Added Tax
(`VAT') in the United Kingdom (`UK'). If the Corporation has a
liability to register it will be required to charge VAT at 17 1/2% on
sales to UK customers and to non-UK customers where the supplies are
used and enjoyed in the UK. A further liability to register and
account for VAT in other European Union countries will arise if the
supplies are used and enjoyed in those countries unless the customer
is registered for VAT in those countries in which case he would
account for VAT. This latter liability exists whether or not the
company is ruled to have a UK establishment. The maximum potential
liability on 1998 and 1999 revenues is approximately $6 million, less
deduction for the recovery of VAT on operating expenses and recoveries
from customers.
The management are of the opinion that no liability exists and
accordingly no provision has been made.
(b) The Corporation makes provision for inland line costs and local
network costs based on the present value of future payments required
to be made by the Corporation for such capacity over the life of the
network. Under the terms of the CSA's, the company is liable for such
ongoing costs over the life of the network which may be up to 25
years.
F-39
<PAGE>
EquiTel Communications Limited
Company Information
Directors L. Trachtenberg
H. Pomeroy
N. Topham
M. Willard
Secretary S. Connabeer
Company Number 3633818
Registered Office 5th Floor, 7-10 Chandos Street, Cavendish Square,
London W1M 9DR
Auditors Moore Stephens
St. Paul's House, Warwick Lane
London
EC4P 4BN
Business Address 40 Portman Square
London
W1H 9FH
F-40
<PAGE>
EquiTel Communications Limited
Directors' Report
for the period ended 30 April 1999
The directors present their report and financial statements for the period from
17 September 1998 to 30 April 1999.
Principal activities and review of the business
The company was incorporated on 17 September 1998. The principal activity of
the company is that of providing sales and marketing services in the
telecommunication industry.
Results and dividends
The results for the period are set out on page F-44.
The directors do not recommend payment of a dividend.
Year 2000
The Directors are continuing to review the risks associated with the Year 2000
problem, both with regard to internal use of computer systems and embedded chips
and in connection with relationships with third parties. They are satisfied
that the steps being taken will be completed in sufficient time to eliminate any
potential problems. The total costs of ensuring Year 2000 compliance have not
yet been quantified fully but are not expected to be significant.
Directors
The directors in office since incorporation were:
Appointed Resigned
--------- --------
London Law Services Limited 17 September 1998 17 September 1998
Ian Hickson 17 September 1998 20 April 1999
Kevin Maxwell 18 November 1998 24 May 1999
Larry Trachtenberg 18 November 1998 -
Harry Pomeroy 17 September 1998 -
Nicholas Topham 24 May 1999 -
Mark Willard 22 July 1999 -
F-41
<PAGE>
EquiTel Communications Limited
Directors' Report
for the period ended 30 April 1999
Directors' interests
The directors' interests in the shares of the company were as stated below:
Ordinary shares of (Pounds)1 each
30 April 1999 17 September 1998
H. Pomeroy 2 -
L. Trachtenberg - -
Mr. Pomeroy holds these shares as nominee for his wife.
Post balance Sheet Events
On 25 May 1999 the Company entered into a Share Purchase Agreement to acquire a
20% equity interest in Net Industrial Holdings Telecommunications Limited, a
South African company established to develop opportunities in the Sub-Sahara
telecommunications sector. The consideration will be cash of US $2,000,000 and
the equivalent of US $3,250,000 shares in Telemonde Inc. On the same day the
Company entered into a Joint Venture Agreement with Net Industrial Holdings
Telecommunications Limited to establish a new company ("Newco") to develop
telecommunications business in Africa. Newco will be jointly owned by the
Company and Net Industrial Holdings Telecommunications Limited. The initial
capital of Newco will be US $50,000 and both ventures have agreed to provide an
additional facility of US $100,000.
On 2 July 1999 the Company entered into a Memorandum of Understanding with Gain
Communications Inc and Gain Communications Bangladesh Limited to establish a new
company ("New Bangladesh Company") to carry on telecommunications activities in
Bangladesh. The Company will invest up to US $1 million in New Bangladesh
Company and take an equity stake of 50%.
The Company is in the process of acquiring the entire issued share capital of
Callaway Continental Limited, a company incorporated in the British Virgin
Islands with a telecommunications subsidiary in Spain. The terms of the
acquisition are to be agreed.
F-42
<PAGE>
EquiTel Communications Limited
Directors' Report
for the period ended 30 April 1999 (continued)
Liquidity
The financial statements have been prepared assuming the Company will continue
as a going concern. The Company incurred a net loss of (Pounds)2,826,718 which
has resulted in a deficit of this amount as at the balance sheet date. The
Company's ability to fund its commitments in note 21 and to meet its liabilities
as they fall due is dependent on its ability to generate positive cash flows
from operations and to raise finance to cover working capital requirements.
Subsequent to the balance sheet date the Company has received additional
shareholder advances of (Pounds)2,500,000, however the Company has reported
unaudited net losses of (Pounds)900,000 in the five months ended 30/th/
September 1999.
Directors' responsibilities
Company law requires the directors 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, the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and enable them to ensure that the financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
By order of the Board
S. Connabeer
Secretary
F-43
<PAGE>
EquiTel Communications Limited
Auditors' Report to the shareholders of EquiTel Communications Limited
We have audited the financial statements on pages F-45 to F-57 which have been
prepared under the historical cost convention in accordance with Accounting
Standards in the United Kingdom and the accounting policies set out on pages
F-47 to F-48.
Respective responsibilities of directors and auditors
As described on page F-43 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 United Kingdom 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 misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Fundamental Uncertainty
In forming our opinion, we have considered the adequacy of the disclosures made
in the financial statements concerning the need for finance to meet liabilities
as they fall due. The financial statements have been prepared on a going
concern basis, the validity of which depends on future funding being available.
The financial statements do not include any adjustments that would result from a
failure to obtain additional funding. Details of the circumstances relating to
this fundamental uncertainty are described in note 22. Our opinion is not
qualified in this respect.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30 April 1999 and of its loss for the period then
ended and have been properly prepared in accordance with the Companies Act 1985
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would not have resulted in any material adjustments to net income for the
period ended 30 April 1999 or shareholders' equity at 30 April 1999.
St. Paul's House MOORE STEPHENS
London EC4P 4BN 11 November 1999
Chartered Accountants
F-44
<PAGE>
EquiTel Communications Limited
Profit and Loss Account
for the period from 17 September 1998 to 30 April 1999
Notes
Turnover 2 804,199
Net operating expenses 3 (3,631,477)
----------
Operating loss 4 (2,827,278)
Other interest receivable & similar income 5 672
Interest payable and similar charges 7 (112)
----------
Loss on ordinary activities before taxation (2,826,718)
Tax on loss on ordinary activities 8 -
----------
Loss on ordinary activities after taxation 14 (Pounds)(2,826,718)
==========
The profit and loss account has been prepared on the basis that all operations
are continuing operations.
There are no recognized gains and losses other than those passing through the
profit and loss account.
F-45
<PAGE>
EquiTel Communications Limited
Balance Sheet
as at 30 April 1999
<TABLE>
<CAPTION>
1999
Notes (Pounds) (Pounds)
<S> <C> <C> <C>
Fixed assets
Tangible assets 9 89,484
Investments 10 62,650
----------
152,134
Current assets
Debtors 11 393,979
Cash at bank and in hand 18,136
----------
412,115
Creditors: amounts falling
due within one year 12 (2,754,603)
----------
Net current liabilities (2,342,488)
----------
Total assets less current liabilities (2,190,354)
Creditors: amounts falling due after
more than one year 12 (636,364)
----------
(Pounds)(2,826,718)
==========
Capital and reserves
Called up share capital 13 -
Profit and loss account 14 (2,826,718)
----------
Shareholders' deficit - equity interests 15 (Pounds)(2,826,718)
==========
</TABLE>
The financial statements were approved by the Board on 4 November 1999
Larry Trachtenberg
Director
F-46
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
1. Accounting policies
1.1 Accounting convention
The financial statements are prepared in accordance with Accounting
Standards in the United Kingdom and under the historical cost convention.
The company has taken advantage of the exemption in Financial Reporting
Standard No.1 from the requirement to produce a cashflow statement on the
grounds that it is a small company.
The financial statements have been prepared on the going concern basis
which assumes that the company will continue in operation for the
foreseeable future. The ability of the company to continue as a going
concern is dependent upon the ability of the company to generate operating
cash flows or raise working capital from shareholders or external sources.
1.2 Compliance with accounting standards
The accounts have been prepared in accordance with applicable accounting
standards.
1.3 Turnover
Turnover represents consultancy fees receivable, recognised when earned.
1.4 Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost less depreciation. Depreciation is
provided at rates calculated to write off the cost less estimated residual
value of each asset over its expected useful life, as follows:
Plant and machinery 33 1/3% reducing balance
Fixtures, fittings & equipment 25% reducing balance
1.5 Leasing
Rentals payable under operating leases are charged against income on a
straight line basis over the lease term.
1.6 Investments
Investments in joint ventures are accounted for under the equity method,
whereby the Company recognizes its share of profits and losses reported by
the joint venture. In cases where the company's funding commitments are
uncertain, full provision is made for 100% of losses reported by joint
ventures.
F-47
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
1.7 Deferred taxation
Deferred taxation is provided at appropriate rates on all timing
differences using the liability method only to the extent that, in the
opinion of the directors, there is a reasonable probability that a
liability or asset will crystallize in the foreseeable future.
1.8 Foreign exchange
Transactions denominated in foreign currencies are translated into Pounds
Sterling at rates of exchange prevailing on the date of transaction.
Liabilities and current assets denominated in foreign currencies are re-
converted into Sterling at rates prevailing on the balance sheet date. The
results, assets and liabilities of the company's interest in Desert
Telecommunication Services LLC have been converted into Sterling using the
closing rate method.
Exchange differences are dealt with in the profit and loss account except
for gains and losses arising on the reconversion of the company's net
investment in Desert Telecommunication Services LLC, which are dealt with
in profit and loss account reserves.
2. Turnover
The total turnover of the company for the period has been derived from its
principal activity wholly undertaken in the United Kingdom.
3. Net operating expenses
1999
(Pounds)
Administrative expenses 987,721
Exceptional item (Note 4) 2,424,242
Provision against amounts owed by
participating interests 197,097
Other operating income (33,115)
Amounts written off investments 55,532
-----------------
(Pounds)3,631,477
-----------------
F-48
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
4. Operating loss
1999
(Pounds)
Operating loss is stated after charging;
Provision against amount owed by
participating interests 197,097
Depreciation of tangible assets 2,466
Operating lease rentals 62,728
Auditors' remuneration 10,000
Exceptional item 2,424,242
Amounts written off investments 55,532
=========
The exceptional item relates wholly to the cost of resolving a dispute with
the former employer (and associated companies) of certain former employees
of the Company.
5. Other interest receivable and similar income
1999
(Pounds)
Bank interest 672
=========
6. Amounts written off investments
1999
(Pounds)
Amounts written off fixed asset investments:
- permanent diminution in value 55,532
=========
7. Interest payable
1999
(Pounds)
On bank loans and overdrafts 112
=========
F-49
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
8. Taxation
The company is not liable to corporation tax due to its net loss in the
current period.
9. Tangible fixed assets
Plant and Fixtures, Total
machinery fittings &
equipment
(Pounds) (Pounds) (Pounds)
Cost
Additions 96,101 17,500 113,601
Disposals (16,900) (4,751) (21,651)
-------------- -------------- --------------
At 30 April 1999 79,201 12,749 91,950
-------------- -------------- --------------
Depreciation
Charge for the period and
at 30 April 1999 2,200 266 2,466
-------------- -------------- --------------
Net book value
At 30 April 1999 (Pounds)77,001 (Pounds)12,483 (Pounds)89,484
============== ============== ==============
10. Fixed asset investments
Shares in
participating
interests
(Pounds)
Cost
Additions and at 30 April 1999 118,182
--------------
Provisions for diminution in value
Charge for the period and at 30 April 1999 55,532
--------------
Net book value
At 30 April 1999 (Pounds)62,650
==============
F-50
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
10. Fixed asset investments (continued)
Holdings of more than 20%
The company holds more than 20% of the share capital of the following
companies:
<TABLE>
<CAPTION>
Company Country of registration Shares held
or incorporation Class %
<S> <C> <C> <C>
Desert Telecommunication Services LLC Oman Ordinary 49
EquiTel Card Services Limited United Kingdom Ordinary 100
Teleroute Limited United Kingdom Ordinary 100
Telesource Limited United Kingdom Ordinary 100
====
</TABLE>
The United Kingdom companies are dormant. The balance sheet of Desert
Telecommunication Services LLC as at 30 April 1999 is summarized as:-
<TABLE>
<CAPTION>
US $ (Pounds)
<S> <C> <C>
Fixed assets
Plant and equipment 339,845 205,967
Current assets
Accounts receivable 9,961 6,037
Advances and prepayments 19,223 11,650
Bank balances and cash 127,064 77,008
----------- --------
156,248 94,695
----------- --------
Current liabilities
Accounts payable and accruals 176,544 106,996
Amounts due to shareholders and
companies related to shareholders 338,427 205,107
----------- --------
514,971 312,103
----------- --------
Net current liabilities (358,723) 217,408
----------- --------
Net liabilities (18,878) (11,441)
=========== ========
Capital and reserves
Share capital 388,601 241,188
Accumulated losses (407,479) (252,629)
----------- --------
(18,878) (11,441)
=========== ========
</TABLE>
F-51
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
10. Fixed asset investments (continued)
The income statement of Desert Telecommunication Services LLC for the
period from 1 March 1999 to 30 April 1999 is summarized as:-
US $ (Pounds)
Turnover 212,958 129,065
Cost of sales (182,622) (110,680)
-------- --------
Gross profit 30,336 18,385
Net operating expenses (437,815) (265,342)
-------- --------
Loss for the period (407,479) (246,957)
-------- --------
The company's share of losses reported by Desert Telecommunication Services
LLC amounts to (Pounds)123,479 however full provision has been made for
100% of reported loses on grounds of uncertainty. The company entered into
commercial contracts operated through the joint venture as prime
contractor.
11. Debtors
1999
(Pounds)
Trade debtors 68,476
Amounts owed by related undertakings 43,649
Amounts owed by participating interests -
Other debtors 261,054
Prepayments and accrued income 20,800
-------
393,979
=======
F-52
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
11. Debtors (continued)
Amounts falling due after more than one year and included in debtors above
are:
1999
(Pounds)
Other debtors 131,788
=======
This represents a rent deposit which will be repaid to the Company in
February 2004. Other debtors includes expense advances of (Pounds)6,095
made to Larry Trachtenberg, which have subsequently been cleared.
12. Creditors
<TABLE>
<CAPTION>
Amounts falling
Amounts falling due after more than
due within one year one year
(Pounds) (Pounds)
<S> <C> <C>
Trade creditors 298,438 -
Amounts owed to related undertakings 8,621 636,364
Taxes and social security costs 72,358 -
Other creditors 2,012,285 -
Other loans 158,657 -
Accruals and deferred income 204,244 -
--------- ---------
2,754,603 636,364
--------- ---------
</TABLE>
Amounts due to related undertakings comprise:
Telemonde Networks Limited 8,621
Shareholder and related parties 636,364
-------
(Pounds)644,985
-------
Kevin Maxwell and Ian Hickson were directors of Telemonde Networks Limited.
The shareholder and related party loans are unsecured and repayable when
the resources of the company permit. Interest is payable at 10 per cent per
annum.
F-53
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
13. Share capital
1999
(Pounds)
Authorized
10,000 Ordinary shares of (Pounds)1 each 10,000
==========
Allotted, not yet called up
2 Ordinary shares of (Pounds)1 each -
==========
14. Statement of movements on profit and loss account
Profit and
loss account
(Pounds)
Retained loss for the period (2,826,718)
==========
15. Reconciliation of movements in shareholders' funds
1999
(Pounds)
Loss for the financial period (2,826,718)
Proceeds from issue of shares -
----------
Net depletion in shareholders' funds (2,826,718)
==========
16. Contingent liability
The company has indemnified British Telecommunications Plc ("BT") against
all claims or legal proceedings brought or threatened against BT arising
from the provision of a satellite circuit between Oman and the United
Kingdom.
F-54
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
17. Financial commitments
At 30 April 1999 the company had annual commitments under non-cancellable
operating leases as follows:
Land and Other
buildings
(Pounds) (Pounds)
Expiry date:
Within one year 3,000 -
Between two and five years 175,718 354,216
---------- ----------
178,718 354,216
========== ==========
18. Directors' emoluments
1999
(Pounds)
Emoluments for qualifying services 133,250
==========
19. Employees
Number of employees
The average monthly number of employees (including directors) during the
period was:
1999
Number
Management and administration 11
==========
Employment costs
(Pounds)
Wages 178,128
Social security costs 21,072
----------
199,200
==========
F-55
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
20. Related party transactions
Turnover amounting to (Pounds)804,199 is attributable to operating
subsidiaries of Telemonde Inc. Kevin Maxwell is a director of Telemonde
Inc. At 30 April 1999 the amount due from the operating subsidiaries was
(Pounds)320,000.
Kevin Maxwell was a consultant retained by Westbourne Communications
Limited, a company which provided consultancy services amounting to
(Pounds)84,000 and recharged accommodation costs of (Pounds)178,448. At 30
April 1999, the amount due to Westbourne Communications Limited was
(Pounds)68,413.
21. Post Balance Sheet Events
On 25 May 1999 the Company entered into a Share Purchase Agreement to
acquire a 20% equity interest in Net Industrial Holdings Telecommunications
Limited, a South African company established to develop opportunities in the
Sub-Sahara telecommunications sector. The consideration was cash of US
$2,000,000 and the equivalent of US $3,250,000 shares in Telemonde Inc. On
the same day the Company entered into a Joint Venture Agreement with Net
Industrial Holdings Telecommunications Limited to establish a new company
("Newco") to develop telecommunications business in Africa. Newco will be
jointly owned by the Company and Net Industrial Holdings Telecommunications
Limited. The initial capital of Newco will be US $50,000 and both venturers
have agreed to provide an additional facility of US $100,000.
On 2 July 1999 the Company entered into a Memorandum of Understanding with
Gain Communications Inc and Gain Communications Bangladesh Limited to
establish a new company ("New Bangladesh Company") to carry on
telecommunications activities in Bangladesh. The Company will invest up to
US $1 million in New Bangladesh Company and take an equity state of 50%.
The Company is in the process of acquiring the entire issued share capital
of Callaway Continental Limited, a company incorporated in the British
Virgin Islands with a telecommunications subsidiary in Spain. The terms of
the acquisition are to be agreed.
It is further anticipated that operations will commence in Russia through a
joint venture.
F-56
<PAGE>
EquiTel Communications Limited
Notes to the financial statements
for the period from 17 September 1998 to 30 April 1999
22. Liquidity
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company incurred a net loss of
(Pounds)2,826,718 which has resulted in a deficit of this amount as at the
balance sheet date. The Company's ability to fund its commitments in note
21 and to meet its liabilities as they fall due is dependent on its ability
to generate positive cash flows from operations and to raise finance to
cover working capital requirements. Subsequent to the balance sheet date
the Company has received additional shareholder advances of
(Pounds)2,500,000, however the Company has reported unaudited net losses of
(Pounds)900,000 in the five months ended 30/th/ September 1999.
There can be no assurance that the Company will be successful in generating
positive cash flows from operations or in raising finance to cover working
capital requirements and financial commitments.
F-57
<PAGE>
EquiTel Communications Limited
Unaudited Statement of Income
For the period from September 17, 1998 (Date of inception) to September 30, 1999
(Dollars expressed in thousands)
Operating revenues
Telecommunications traffic revenues 54
Sales and marketing fees 898
Technical fees 428
Other revenues 43
----------
Operating revenues 1,423
----------
Operating expenses
Dispute settlement costs 4,000
Depreciation and amortisation 31
Selling, general and administrative expenses 2,977
----------
Operating expenses 7,008
----------
Operating profit (loss) (5,585)
Other income (expense)
Share of losses of joint venture (582)
Interest income 2
Interest expense (12)
----------
Other income (expense) (592)
----------
Net profit (loss) (6,177)
==========
See accompanying notes to unaudited
financial statements
F-58
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
UNAUDITED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Dollars expressed in thousands)
Assets
Cash and cash equivalents 43
Trade accounts receivable -
Other receivables 535
Property, plant and equipment 214
Investment in joint venture 1,038
----------
Total assets 1,830
==========
Liabilities and shareholders' equity
Trade accounts payable 571
Other payables 1,700
Accrued expenses 147
Other loans 300
Shareholder loans 5,289
----------
Total liabilities 8,007
----------
Shareholders' equity
Share capital -
Retained earnings (6,177)
----------
Shareholders' funds (6,177)
----------
Total liabilities and shareholders' funds 1,830
==========
See accompanying notes to unaudited
financial statements
F-59
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 17, 1998 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1999
Operating activities
Net loss (6,177)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Share of joint ventures 582
Depreciation and amortisation 31
Increase in other receivables (535)
Increase in trade accounts payable 571
Increase in other payables 1,700
Increase in accrued expenses 147
----------
Net cash used in operating activities (3,681)
----------
Investing activities
Purchase of property, plant and equipment (245)
Advances to joint venture (1,620)
----------
Net cash used in investing activities (1,865)
----------
Financing activities
Other loan advances 300
Shareholder advances 5,289
----------
Net cash provided by financing activities 5,589
----------
Net increase in cash and cash equivalents 43
Cash and cash equivalents at start of period -
----------
Cash and cash equivalents at end of period 43
==========
See accompanying notes to unaudited
financial statements
F-60
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. Interim Accounting Policy
In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly in accordance with accounting
principles generally accepted in the US the financial position of the
corporation and the results of operations and cash flows for the period from
September 17, 1998 (date of inception) to September 30, 1999 although the
Company believes that the disclosure in these financial statements is
adequate to make the information presented not misleading, certain
information and footnote information normally included in interim financial
statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of operations
for the period are not necessarily indicative of what operating results may
be for the full accounting period. In addition, these unaudited consolidated
financial statements and notes thereto should be read in conjunction with
the audited consolidated financial statements presented herein.
The Company presented audited financial statements for the period from
September 17, 1998 (date of inception) to April 30, 1999. The Company's
accounting reference date has been changed to December 31, and the next
audited financial statements will cover the period from inception to
December 31, 1999.
The Company's activities comprise international telecommunications route
management services, telephone card services, marketing and advisory
services. Revenues are recognized in the period when services are provided.
In March 1999 the Company established a joint venture in Oman to provide
telephone traffic services and telephone card services. The joint venture is
accounted for using the equity method of accounting. Although EquiTel's
participating interest amounts to 49%, the Company has provided for 100% of
losses reported by the joint venture since the company has entered into
commercial contracts operated through the joint venture as prime contractor
and there is uncertainty surrounding the Company's funding commitments.
F-61
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1999
2. Investment in joint venture
The balance sheet of Desert Telecommunication Services LLC as at September
30, 1999 is summarized:
Assets
Cash and cash equivalents 423,367
Trade accounts receivable 96,264
Prepayments 9,505
Inventory 43,259
Property, plant and equipment 346,578
-------------
$ 918,973
=============
Liabilities and Stockholders' Equity
Trade accounts payable 653,142
Other payables 164,404
Bank borrowings 294,456
-------------
Total liabilities 1,112,002
-------------
Share capital 388,601
Retained reserves (581,630)
-------------
(193,029)
-------------
$ 918,973
=============
F-62
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1999
2. Investment in Joint Venture (continued)
The income statement of Desertel Telecommunications Services LLC for the
period from March 1, 1999 (date of commencement of operations) to September
30, 1999 is:-
Operating revenues
Telephone card services 1,059,819
Cost of sales (1,045,974)
-------------
Gross profit 13,845
-------------
Operating expenses
Selling, general
and administrative (509,706)
Depreciation (80,979)
-------------
Operating expenses (590,685)
-------------
Operating loss (576,840)
Other expenses
Interest expense (4,790)
-------------
Loss for the period (581,630)
=============
3. Contingent liabilities
The company has indemnified British Telecommunications Plc against all
claims or legal proceedings brought or threatened against BT arising from
the provision of a satellite circuit between Oman and the United Kingdom.
F-63
<PAGE>
EQUITEL COMMUNICATIONS LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1999
4. Financial Commitments
The company had the following annual commitments under non-cancellable
operating leases:
Land and
Buildings Other
--------- -----
Expiring 2-5 years $ 290,000 $ 585,000
========== ==========
5. Liquidity
The financial statements have been prepared assuming the company will
continue as a going concern. The company incurred a net loss of $6,177,000
which has resulted in a deficit of this amount as at the balance sheet
date. The Company's ability to fund its commitments and to meet its
liabilities as they fall due is dependent on its ability to generate
positive cash flows from operations and to raise finance to cover working
capital requirements.
There can be no assurance that the company will be successful in generating
positive cash flows from operations or in raising finance to cover working
capital requirements and financial commitments.
F-64
