Consolidated Global Investments - formerly Advantage...

Consolidated Global Investments - formerly Advantage Telecommunications. You have to hand it to Palmerno for pulling this out of the fire! Interesting viewing ahead - See below......

As a small child, Pierpont began watching movies in the days when the soundtrack had only recently been invented. His strongest memories from the Saturday matinees at the local cinema are of the cliffhangers.

A cliffhanger was a serial lasting about 10 minutes. At the end of each serial, the heroine was left clinging to the edge of a cliff, or tied to the railway tracks with an express train approaching, or bound to a chair as the fuse burned down on a bundle of dynamite sticks alongside her.

Cliffhangers were a highly efficient marketing tool because each Saturday Pierpont would have to return to the cinema to find out how the heroine escaped the cliff or the railway train or the dynamite. She was always rescued in the nick of time by the hero, of course, usually without even smudging her make-up.

Pierpont cannot help thinking about those celluloid heroines every time a reader asks him for an update on Advantage Telecommunications. Every time Pierpont looks at the books of this company, it is hanging on to the edge of a financial cliff with a heroic rescuer about to snatch it from the jaws of doom. But what makes AdvanTel more exciting is that the rescuer doesn't always turn up.

Pierpont was reminded of AdvanTel last week when it managed to hold the last annual meeting of any listed company in 2003. While the rest of us were planning our New Year's Eve orgy, AdvanTel was holding its annual meeting in Perth on December 30 at 10am.

Given the time of year, Pierpont is amazed that this function attracted a total of 15 shareholders. If any of them care to contact Pierpont, he would be interested to know how the meeting went. Your correspondent knows only that all motions were passed, which meant that shareholders have approved (a) AdvanTel's share issues of 2003 and (b) a proposed convertible note issue.

That represents another possible rescue for AdvanTel's precarious finances, although Pierpont has yet to be persuaded that its salvation is permanent. AdvanTel seems to almost enjoy inhabiting the cliff edge.

AdvanTel provides international switched telephony services to the carrier market across Europe, Hong Kong and China.

Its last annual report said there had been substantial growth in traffic and revenue through the company's London and Hong Kong facilities in 2002-03.

The annual report also noted that 2002-03 had been a difficult year for the global telecommunications industry owing to "overly negative market sentiment created in the sector". This sentiment had an impact on AdvanTel even though the company's operational business continued to flourish.

AdvanTel's customer base had grown from 50 to 120 customers and by year's end AdvanTel had expanded its operations to take in the United States, Germany, Cambodia, Sri Lanka, Mauritius, Bangladesh, Mongolia, Macau, Pakistan, Vietnam, Indonesia and Taiwan.

All jolly positive, eh? But shareholders who valued their peace of mind should not have gone on to read the Ernst & Young audit report, which said there was significant uncertainty about whether AdvanTel was a going concern.

The problem is that AdvanTel's worldwide expansion has consumed piles of cash, to the point where it appears to be living hand to mouth.

Clients pay AdvanTel a line rental to send their calls around the world. Last financial year, these line rentals more than doubled, generating $15million. Unfortunately, transmission costs also more than doubled, rising to $16 million. Add in a few other expenses, such as paying the staff, and AdvanTel suffered a loss of $12 million.

It looks to your correspondent as though AdvanTel has been gaining market share by selling its services for less than they cost. And the results of that are the same in telecommunications as in any other industry.

The $12 million loss left AdvanTel's balance sheet looking as though it had been run over by an express train. AdvanTel finished June 30 with negative equity of $4.6million. That is, liabilities exceeded assets by that amount.

In the first five months of this financial year, AdvanTel chewed through $362,000 cash and had just under $200,000 left at November 30.

Pierpont's knowledge of telecommunications is slight, but this does not seem a large sum to finance a worldwide telephone network - especially when you start off with a $4.6 million deficit. AdvanTel has tried various stratagems to raise money over the past year, but none has yet succeeded.

A proposed takeover of First National Telecommunications failed, leaving AdvanTel with the need for additional capital. AdvanTel tried to make a 1-for-1 rights issue at 1¢ but hit heavy going. For a while its rescuer looked like being Colt Financial LLC, a private investment partnership owned by US and Hong Kong investors. Colt was going to underwrite part of the issue, but that negotiation fell over too. So our heroine was running perilously short of rescuers.

AdvanTel managed to hang on by its fingernails between March and June last year by placing more than 20million shares to raise $146,000. More recently, it raised $362,000 by issuing convertible notes at 12 per cent. AdvanTel is now negotiating with GlobeTel Communications Corp of Miami. The proposal is that GlobeTel will subscribe $US1.2 million ($1.56million) to a convertible note in AdvanTel. AdvanTel's annual report said the note would have a coupon rate of 12 per cent and convert into shares at 1¢ each plus a free attaching option.

Three GlobeTel directors, Przemystaw Kostro, Timothy Huff and Leigh Coleman, moved onto the AdvanTel board, but the convertible note is still not a done deal. On December 12, AdvanTel announced that GlobeTel was seeking to negotiate the payment and timing of the note. The announcement also said AdvanTel had significantly reduced costs in London and Hong Kong.

It seems pretty clear that GlobeTel is reluctant to stump up the money until it has been assured that AdvanTel's cash burn has stopped. At the speed AdvanTel lost money in 2002-03, it could have burned through $US1.2million in two months. AdvanTel tells Pierpont that it hopes to complete the GlobeTel deal within two weeks.

In Pierpont's opinion, that makes GlobeTel pretty brave because it is none too flush with cash, either. GlobeTel's balance sheet for September 30 showed just $US2.8million in net equity. Worse, GlobeTel lost nearly $US5million in the September quarter, so it's in no position to be flinging another million to an imperilled proposition such as AdvanTel.

Even assuming all these perils can somehow be overcome, there is still one question hanging over AdvanTel: what will happen if Cogent Securities asks for its money back?

Upul Anthony, a former employee of Cogent, has admitted embezzling $16million from the fund manager in 2001, of which some $9 million was lent to the AdvanTel group. Upul's statements to the police and the courts say he shared a house with two young chaps named Andrew Boyd and Hastings Singh who started a company called Advantage Telecommunications Australia.

Upul became highly enthused about the prospects for Advantage, which he believed held the only licence in the world to take international calls in and out of China through its subsidiary, Advantage Hong Kong. In early 2001, Advantage Telecommunications Australia was having trouble raising $1.6 million it needed to buy technical staff and switching equipment. Upul made an unauthorised loan to the company from Cogent, hoping it would soon become profitable and he could repay the money.

But the Hong Kong venture was a bottomless pit. If it collapsed, Upul's embezzlement would be exposed, so he had to keep pumping in money. Upul would lend Cogent money to Advantage Telecommunications Australia, which would channel it straight to the Hong Kong company. After it had swallowed $9 million, Upul gave up.

Then the Hong Kong company was taken over through a small West Australian mining company named Nugold Hill Mines and the parent company of the group was renamed Advantage Telecommunications Ltd, which is the AdvanTel Pierpont has been talking about in this column.

Last July, Cogent began recovery action for its missing $16 million, seeking money from various individuals and companies including Advantage Telecommunications Australia. Advantage Telecommunications Australia took a $7million convertible note in AdvanTel that was exercised when AdvanTel shares were 40¢.

The effect of this is that Advantage Telecommunications Australia lent $7million of the money Upul later admitted to embezzling from Cogent to AdvanTel and received shares that are now nearly worthless. Advantage Telecommunications Australia owned 11 per cent of AdvanTel after the conversion, but it has since been getting diluted by share issues and will be diluted further if the GlobeTel transaction ever goes through.

Meanwhile, Upul has admitted his guilt to the authorities and is due to be sentenced next month. In his statements, he claims that AdvanTel's chairman and company secretary, John Palermo, was aware that the Cogent loans were unauthorised. AdvanTel has said it was never involved in any wrongdoing by Upul and did not know the loans were unauthorised.

So we are left with the fascinating thought that AdvanTel's global telecommunications network may have been partly funded by Upul's embezzled money. And even though it received and spent $7million manna it was never supposed to have, it is still hanging on to the cliff edge.