<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-56019
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DATAWAVE SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
BRITISH COLUMBIA, CANADA 4812 98-0186455
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
101 WEST 5TH AVENUE
VANCOUVER, BRITISH COLUMBIA
CANADA V5Y 1H9
(604) 874-1302
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CLIVE BARWIN
PRESIDENT
DATAWAVE SYSTEMS INC.
101 WEST 5TH AVENUE
VANCOUVER, BRITISH COLUMBIA
CANADA V5Y 1H9
(604) 874-1302
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO: THOMAS FURLONG, ESQ.
MORGAN P. GUENTHER, ESQ. GRAY CARY WARE & FREIDENRICH LLP
PAUL, HASTINGS, JANOFSKY & WALKER LLP 400 HAMILTON AVENUE
345 CALIFORNIA STREET PALO ALTO, CALIFORNIA 94301
SAN FRANCISCO, CALIFORNIA 94104 (650) 328-6561
(415) 835-1600
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(2)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares (no par 3,617,133
value)................ shares $7.265 $26,278,471 $6,126
===================================================================================
</TABLE>
(1) Includes 471,800 Common Shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Fees of $5,010 were previously paid on June 4, 1998 as calculated in
accordance with Rule 457(c) and based on a proposed offering price per
share of $5.50 and an offering of 3,087,750 shares. An additional 529,383
shares are being registered for a fee based on the average of the high and
low prices reported on the OTC Bulletin Board on July 17, 1998 and
adjusted to reflect a 1-for-5 reverse stock split to be effected prior to
the Offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 22, 1998
3,145,333 COMMON SHARES
[LOGO OF DATAWAVE SYSTEMS, INC. APPEARS HERE]
-----------
Of the 3,145,333 Common Shares offered hereby, 3,000,000 shares are being
sold by DataWave Systems Inc. ("DataWave" or the "Company") and 145,333 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Shares are currently traded on the Vancouver Stock Exchange (the
"VSE") under the symbol "DTV" and on the Over-the-Counter Electronic Bulletin
Board (the "OTCBB") in the United States under the symbol "DWVSF." On ,
1998, the last reported sale price of the Common Shares, as reported on the
VSE, was US$ per share, based upon an exchange rate of US$ to C$ , and
as adjusted to reflect a 1-for-5 reverse stock split to be effected prior to
this offering (the "Offering"). See "Price Range of Common Shares." See
"Underwriting" for factors to be considered in determining the Offering price.
The Company has applied for listing of its Common Shares on the Nasdaq National
Market under the symbol "DWAVF."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share... $ $ $ $
- -------------------------------------------------------------------------------
Total(4).... $ $ $ $
===============================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of $1,140,000 payable by the Company.
(3) The Proceeds to Selling Shareholders does not include the reimbursement of
underwriting discounts and commissions payable by the Company to one of the
Selling Shareholders.
(4) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
471,800 additional Common Shares on the same terms and conditions as set
forth above. If all such shares are purchased by the Underwriters, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The Common Shares are offered by the several Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
Underwriters' right to withdraw, cancel or modify such offer and reject any
order in whole or in part. It is expected that delivery of the Common Shares
will be made on or about , 1998.
MORGAN KEEGAN & COMPANY, INC. LAIDLAW GLOBAL SECURITIES INC.
The date of this Prospectus is , 1998
<PAGE>
[SCHEMATIC DIAGRAM OF THE DATAWAVE NETWORK SYSTEM ON FOLD-OUT PAGE;
MAP OF NORTH AMERICA DISPLAYING THE LOCATION OF THE COMPANY'S
INSTALLED DATAWAVE TELECARD MERCHANDISERS ("DTM") AND
OVER-THE-COUNTER "SWIPE" UNITS ("OTC");
PHOTOGRAPHS OF DTMS AND ANOTC AND
PICTURES OF AT&T-BRANDEDPREPAID
CALLING CARDS]
THESE SECURITIES ARE NOT QUALIFIED FOR SALE IN ONTARIO OR ELSEWHERE IN CANADA
AND, SUBJECT TO CERTAIN EXCEPTIONS, MAY NOT BE OFFERED OR SOLD DIRECTLY OR
INDIRECTLY IN ONTARIO OR ELSEWHERE IN CANADA.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
"DATAWAVE" TOGETHER WITH DESIGN IS A REGISTERED TRADEMARK OF THE COMPANY. ALL
TRADEMARKS AND TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE OWNERS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
all information in this Prospectus assumes that the Underwriters' over-
allotment option will not be exercised and gives effect to (a) the 1-for-5
reverse stock split (the "Reverse Stock Split") to be effected prior to the
Offering, (b) an assumed Offering price of $7.50 per Common Share and (c) no
exercise of options and other warrants outstanding as of July 20, 1998 to
purchase 1,051,247 Common Shares. Unless otherwise indicated, all monetary
amounts in this Prospectus are expressed in United States dollars and, if
converted from Canadian dollars, have been converted at historical monthly
average rates. The exercise prices for unexercised options and warrants of the
Company have been determined based upon the exchange rate applicable on March
31, 1998. See "Exchange Rate Information." Fiscal year references are to the
fiscal years ended March 31. All references to the "Company" or "DataWave"
refer to DataWave Systems Inc. and its consolidated subsidiaries.
THE COMPANY
DataWave Systems Inc. ("DataWave" or the "Company") designs, develops,
produces, owns and manages a proprietary, intelligent, automated direct-
merchandising network (the "DataWave System"). The Company uses the DataWave
System to distribute prepaid calling cards, primarily under the AT&T brand. The
DataWave System is scalable and flexible and can be modified to offer other
premium prepaid products such as paging and overnight courier services, which
are currently being tested, and cellular telecommunications services.
The DataWave System is comprised of DataWave Telecard Merchandisers ("DTMs"),
which are free-standing "smart" machines capable of dispensing multiple prepaid
products and services, and over-the-counter "swipe" units ("OTCs"), for point-
of-sale prepaid retailing, both of which are connected to the Company's
proprietary server and database software through a wireless and/or land line
wide area network. As of June 30, 1998, the DataWave System consisted of 688
DTMs and 455 OTCs. The DataWave System has been designed to work both with the
telephone switches of other parties as well as switches operated by the
Company, if any. In the United States, the Company has elected to operate
solely with other parties' switches, such as those of AT&T and other long
distance carriers, while in Canada the Company participates in a joint venture
which operates its own switch.
The United States prepaid calling card market has grown from approximately
$75 million in sales in 1994 to almost $1.0 billion in 1996, and is expected to
grow to approximately $2.6 billion in sales by 2001 according to industry data
from The Yankee Group, an independent research company. The predominant
channels of distribution for prepaid calling cards are through retail
establishments and traditional vending machines, most of which sell "live"
prepaid calling cards purchased in bulk. "Live" prepaid calling cards are
preactivated with telephone time prior to sale to the retailer or placement in
a machine.
In comparison to other prepaid calling card distribution methods, the
DataWave System distributes unactivated prepaid calling cards which are
activated only upon purchase by the consumer. Because the cards are not
preactivated, the Company avoids certain costs incurred by distributors of
"live" prepaid calling cards, such as paying for long distance telephone time
prior to sale to consumers, losses due to theft and other costs associated with
the management of inventory. The DataWave System also features: (i) real-time
remote monitoring of DTMs, including cash balances, card inventory and machine
functioning; (ii) remote adjustable pricing of prepaid products and services at
each DTM location; (iii) consumer convenience by permitting purchases of
customer selected dollar amounts of long distance time, by cash or credit card,
and providing detailed receipts and multilingual instructions; and (iv)
scalability, enabling the Company to increase the number of DTMs with limited
hardware and software upgrades and to offer multiple future prepaid products
and services at existing and future locations.
3
<PAGE>
In January 1998, the Company entered into a series of agreements with AT&T
Corp. ("AT&T") providing for, among other things, the purchase of long distance
telephone service from AT&T, the right to resell the service under AT&T's brand
name and the joint marketing and promotion of AT&T-branded prepaid calling
cards (the "AT&T Prepaid Cards") and the DataWave System in the United States.
The Company believes its relationship with AT&T will enable the Company to
create and implement a marketing program that will bring the advantages of
DataWave's technology and the AT&T brand to consumers within the United States
and to provide businesses with a national merchandising program for AT&T
Prepaid Cards. The Company believes that its relationship with AT&T will
provide it with competitive advantages in the prepaid calling card market due
to the national recognition of the AT&T brand, the quality long distance
telephone and customer service provided by AT&T, the support of AT&T's sales
and marketing capabilities and the development of joint relationships with
current and future AT&T customers. In addition, the Company believes that
working with AT&T will help DataWave gain access to additional sites and
locations where AT&T has a presence. For example, AT&T has a significant
presence as a telephone service provider to the hospitality industry, which the
Company believes represents a significant segment of the prepaid calling card
market.
The Company's business strategy is to deliver premium prepaid products and
services such as calling cards, cellular telecommunications, paging and
overnight courier services through the DataWave System. Elements of the
strategy include increasing the Company's penetration of premier site
locations, expanding its strategic relationship with AT&T, delivering new,
premium prepaid product and service offerings, developing relationships with
other providers of premium prepaid products and services, and maintaining its
electronic distribution network technological leadership.
To pursue its business strategy in Canada, effective April 1, 1998, the
Company combined its prepaid calling card business operations in Canada, Phone
Line International (PLI) Inc. ("PLI"), with those of DCI Telecommunications,
Inc. ("DCI") to create PhoneLine Cardcall International Inc. ("PhoneLine"), a
joint venture operating as an independent, switch-based provider of prepaid
calling cards. PhoneLine's primary distribution channel for these prepaid
calling cards is directly through retail sites. The Company's objective with
respect to PhoneLine is to utilize the DataWave System in conjunction with
PhoneLine's current distribution operations to become a leading prepaid calling
card provider in Canada. A substantial majority of the prepaid calling cards
sold by PhoneLine are preactivated and are not sold through the DataWave
System. As such, PhoneLine incurs certain of the same costs incurred by other
sellers of "live" prepaid cards, such as losses due to theft and other costs
associated with the management of inventory. In fiscal 1998, approximately 33%
of the Company's revenues came from the sale of preactivated calling cards.
In April 1998, the Company acquired Metrophone Telecommunications, Inc.
("Metrophone"), which owns and operates "intelligent" pay phones in Washington,
California, Arizona and Oregon. As of June 30, 1998, Metrophone owned 357
intelligent pay phones and has agreed to install and manage an additional 774
pay phones pursuant to agreements with members of the National Association of
RV Parks and Campgrounds ("ARVC"). The Company plans to bundle its service
offerings by including DTMs and OTCs at certain existing and future pay phone
locations.
The Company's principal executive offices are located at 101 West 5th Avenue,
Vancouver, British Columbia, Canada, V5Y 1H9. The Company's telephone number is
(604) 874-1302.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Shares offered by the Company................ 3,000,000 shares
Common Shares offered by the Selling Shareholders... 145,333 shares
Common Shares to be outstanding after the Offering.. 8,374,675 shares(1)
Use of proceeds..................................... To repay indebtedness and
for general corporate
purposes, primarily
expansion of the DataWave
System and purchase of
intelligent pay phones.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............. DWAVF
</TABLE>
- --------
(1) Excludes 1,051,247 Common Shares reserved for issuance upon exercise of
options and warrants outstanding as of July 20, 1998.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARES OUTSTANDING)
The following summary consolidated financial information should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ -- $ 511 $ 1,263 $ 3,149 $ 9,676
Cost of revenues excluding
depreciation and
amortization............. -- 431 1,076 3,439 6,211
Other operating costs and
expenses................. 667 1,259 2,470 3,003 3,034
Operating (loss) income... (667) (1,029) (2,283) (3,293) 431
Net (loss) income......... $ (693) $ (1,052) $ (2,328) $ (3,626) $ 65
======= ========= ========= ========= =========
Net (loss) income per
Common Share(1):
Basic.................... $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.02
======= ========= ========= ========= =========
Diluted.................. $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.01
======= ========= ========= ========= =========
Weighted average number of
Common Shares
outstanding.............. 485,743 1,564,186 2,464,398 3,266,755 4,091,411
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
---------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).......................... $ (43) $ 18,721
Total assets....................................... 5,094 23,360
Long-term obligations, excluding current portion of
long-term debt.................................... 1,021 --
Shareholders' equity............................... 1,614 21,399
</TABLE>
- --------
(1) For information concerning the number of shares used in the computation of
net (loss) income per Common Share, see Note 2(l) of Notes to the
Consolidated Financial Statements.
(2) As adjusted to give effect to the sale of 3,000,000 Common Shares offered
by the Company hereby assuming an Offering price of $7.50 per share, the
payment of underwriting discounts and commissions and estimated Offering
expenses and the application of net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in evaluating an
investment in the Common Shares offered by this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties.
Discussions containing such forward-looking statements may be found in the
material set forth under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." In addition, when used in this Prospectus, the words "believes,"
"expects," "anticipates," "intends," "estimates," "should," "will likely,"
"considers that" and similar expressions are intended to identify such
forward-looking statements. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. Because such forward-looking
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company began offering merchandising services in 1994 and first offered
prepaid calling card services in 1996. Accordingly, the Company has a limited
operating history upon which investors may base an evaluation of the Company's
performance. As a result of operating expenses and development expenditures,
the Company has incurred net losses prior to the fiscal year ended March 31,
1998, in which the Company recorded net income of $65,099. Net losses for the
fiscal years ended March 31, 1996 and 1997 were $2,328,186 and $3,626,411,
respectively. The Company expects that its operating expenses will increase
with the expansion of its installed base of DTMs and OTCs and with increasing
marketing and development of its prepaid products and services. There can be
no assurance that the Company's revenues will increase sufficiently to support
the Company's anticipated expenditures or that the Company will be able to
achieve sustainable profitability. The Company incurred a loss of
approximately $70,000 during the fourth quarter of fiscal 1998 and a loss of
approximately $484,000 is expected for the first quarter of fiscal 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON AT&T
In the United States, the Company relies primarily on its relationship with
AT&T for prepaid long distance telephone service, as well as for joint
marketing of the AT&T Prepaid Card and the DataWave System. A significant
portion of the prepaid calling cards sold in the United States by the Company
are AT&T Prepaid Cards, and the Company utilizes the AT&T brand name as the
primary identity on most of its DTMs. Because the Company's relationship with
AT&T commenced in January 1998, there is limited history on which to evaluate
the current and future success of the relationship. During fiscal 1998,
approximately 2.4% of the Company's revenues arose from AT&T-related business;
during the first quarter of fiscal 1999, this percentage increased to
approximately 46% of the Company's revenues, and the Company expects that a
substantial portion of its revenues in future quarters will be derived from
AT&T-related business. The Company obtains long distance telephone time from
AT&T pursuant to an agreement which requires the Company to purchase a minimum
of $5.25 million of long distance time per year. If the Company does not
purchase such minimum amount, it incurs a shortfall charge consisting of the
cost of the time not purchased and a penalty. The failure to meet the minimum
purchase requirements may adversely affect the Company's relationship with
AT&T and could have a material adverse effect on the Company's business,
financial condition and results of operations. From March 1, 1998, the
effective date of the agreement, to June 30, 1998, the Company had purchased
approximately $650,000 of long distance time from AT&T which represents
approximately 12% of the total purchase commitment. Although the Company
believes it will meet its minimum purchase requirement for this contract year,
there can be no assurance to that effect. The current agreements for marketing
and long distance time with AT&T expire in March 2000 unless terminated
earlier by either party for breach of such agreements. If the Company were to
terminate such agreements prior to that time, it would be obligated to pay a
termination fee. In addition, if either the Company or AT&T terminated the
existing agreements, the Company would be required to obtain long distance
service from other long distance carriers. See "--Risk of
6
<PAGE>
Termination of Carrier Arrangements; Dependence on Telecommunications
Providers." The agreements with AT&T are non-exclusive and AT&T has entered
into agreements with other distributors of prepaid calling cards. The Company
expects to place many of its DTMs and OTCs pursuant to subcontracting and
similar arrangements with AT&T or with existing and future AT&T customers. If
the contracts between AT&T and such customers or AT&T and the Company are
terminated or in the event AT&T elects not to retain the Company as a provider
of prepaid services, there could be a substantial decrease in DTM and OTC
placements. In addition, the Company has focused its marketing and strategic
development activities on the AT&T relationship and promoting the AT&T Prepaid
Card, including joint marketing efforts with certain AT&T sales personnel to
promote the DataWave System. The termination of the AT&T relationship would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Risk of Termination of Site Contracts" and
"Business--Strategic Relationship with AT&T."
RISK OF TERMINATION OF CARRIER ARRANGEMENTS; DEPENDENCE ON TELECOMMUNICATIONS
PROVIDERS
The Company does not own a transmission network in the United States and,
accordingly, depends on interexchange carriers, local exchange carriers and
long distance carriers for transmission of local and long distance calls made
using its prepaid calling cards and its pay phones. The Company's agreements
with its carriers are generally short-term (e.g., two year) contracts subject
to termination by either party. In the past, agreements between the Company
and its carriers have been terminated. In October 1997, an agreement with
Frontier Communications International Inc. ("Frontier") was terminated when
Frontier sold its prepaid calling card business to a competitor of DataWave.
In December 1997, an agreement between the Company and MCI Telecommunications
Corporation ("MCI") was terminated, although the Company continues to provide
distribution of MCI-branded prepaid calling cards. The Company did not
experience any interruption of service due to these terminations; however,
there can be no assurance that the Company will not experience such an
interruption if its current or future carrier arrangements are terminated. The
Company's ability to maintain and expand its business depends, in part, upon
its ability to continue to obtain services at favorable rates and terms from
its current or alternate carriers. In addition, regulatory changes,
competitive pressures and changes in access charges may adversely affect the
charges imposed upon the Company by telecommunications providers, some of
which may be applied retroactively. No assurance can be given that the Company
will continue to be able to obtain origination, transport or termination
services at favorable rates and terms. The failure to obtain such services, an
interruption of service, material increases in the prices at which the Company
obtains such services or the imposition of any retroactive charges could have
an adverse effect on the Company's business, financial condition and results
of operations. See "Business--Products and Services; Existing Products and
Services" and "--Strategic Relationship with AT&T."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
The Company's revenues and operating results are subject to significant
variation from quarter to quarter due to a number of factors, including:
variations in sales generated from each DTM, OTC and retail location;
additions or reductions in the number of DTMs, OTCs and retail locations;
competitive pricing pressure; limitations on pricing imposed by long distance
tariffs; changes in the telephone rates paid by the Company to its telephone
carriers; changes in operating expenses; the timing of the introduction of new
products and services; the mix of products and services sold and the mix of
channels through which they are sold; changes in legislation and regulations
which affect the competitive environment for the Company's products and
services; and other competitive conditions and economic conditions in the
markets served by the Company. The Company believes that sales of prepaid
calling cards are seasonal, as many consumers purchase the cards while
traveling during the peak travel months of July, August and September. Sales
decrease during spring and fall and are lowest in the winter. A significant
proportion of the Company's operating expenses are fixed in advance for a
quarter and therefore, if the Company's sales are below expectations in a
particular quarter, this could have a material adverse effect on the Company's
financial condition and results of operations. The Company believes that
period-to-period statements of its operating results are not necessarily
meaningful, should not be relied upon as indications of future performance and
may result in volatility in the price of the Common Shares. Due to the
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foregoing factors, among others, the Company's operating results may from time
to time be below the expectations of analysts and investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ESCROW SHARES AND COMPENSATION EXPENSE
As a condition of the Company's acquisition of DataWave Vending (Canada)
Inc. ("DVI") in January 1994, the VSE and the British Columbia Securities
Commission ("BCSC") required 625,500 Common Shares to be placed in escrow
including 469,500 Common Shares owned by current Directors, officers and
employees of the Company and 156,000 Common Shares held by outside
shareholders. These escrow shares will remain restricted from trading unless
released from escrow as and if the Company meets certain net income and
positive cash flow requirements. The requirements for release of the escrow
shares had not been met as of the date of this Prospectus. On July 16, 1998,
the Company received approval from the VSE and the BCSC to release all of the
escrow shares following the Offering, provided the gross proceeds of the
Offering are at least $20,000,000. In the event the gross proceeds of the
Offering are less than $20,000,000, the same conditions currently applicable
to release of the escrow shares will continue to apply. In accordance with
Securities and Exchange Commission ("SEC") positions on similar escrow
arrangements, this arrangement has been deemed to be compensatory for 469,500
Common Shares contributed to escrow. Accordingly, the Company will record a
non-recurring, non-cash expense equal to the fair value of the shares at the
time of their release from escrow. Based on the assumed Offering price of
$7.50 per share, the total amount of this charge would be $3,521,250. In the
event that all of the escrow shares are not released based on the gross
proceeds raised in the Offering, then the Company will record a recurring,
non-cash expense equal to the fair value of the shares when released from
escrow as the Company meets the net income and positive cash flow requirements
of the escrow agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
RISK OF TERMINATION OF SITE CONTRACTS
The contracts pursuant to which the Company places DTMs and OTCs in site
locations are generally short-term and easily terminable by either party.
There can be no assurance that contracts to place DTMs and OTCs will not be
terminated at any time. A significant portion of the Company's site contracts
involve a single DTM or OTC. However, the Company has also entered into
several contracts providing for multiple DTM or OTC placements which are also
generally short-term and easily terminable by either party. In addition, the
Company also has placed multiple DTMs in anticipation of entering into
contracts, while certain other DTMs are being operated under expired
contracts. The Company anticipates that in the future more DTMs and OTCs will
be placed pursuant to single contracts with large clients such as hotel chains
or pursuant to subcontracting arrangements. The termination of a contract or
other arrangement with a provider of multiple sites would significantly reduce
the installed base of DTMs and OTCs and limit access to prime site locations
in the future. Such a termination could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the Company's relationship with AT&T may preclude the Company from
contracting with potential large corporations which have contracted with other
long distance service providers. See "Business--Strategic Relationship with
AT&T" and "--Business Strategy."
SUBSTANTIAL COMPETITION
The prepaid calling card market is highly competitive and is served by
numerous international, national and local firms. In the United States, the
Company competes with major long-distance providers, including but not limited
to WorldCom, MCI and Sprint, as well as with other prepaid calling card
distributors, including but not limited to, IDT Corporation, Pacific Gateway
Exchange, Inc., RSL Communications, SmarTalk Teleservices, Inc., Star
Telecommunications, Inc., and Telegroup, Inc. In Canada, the Company's
competitors include BayLine Communications, Canada Telecom Network, Inc.,
Cardinal VoiceCard, Ltd., Channel Telecom, Gold Line Telemanagement, Inc. and
Phonetime International, Inc. The Company also competes with AT&T in certain
locations where AT&T offers prepaid calling cards directly or through other
distributors. In addition, as the use
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of cellular phones and calling charge cards increases, the Company faces
increased competition from providers of these products. Many of these
competitors have significantly greater financial, technical and marketing
resources, and much larger distribution networks, and generate greater
revenues and have greater name recognition than the Company. These competitors
may be able to institute and sustain price wars, or imitate the features of
the Company's DataWave System products, resulting in a reduction of the
Company's share of the market and reduced price levels and profit margins. In
addition, there are relatively low barriers to entry into the prepaid calling
card market, and the Company has faced, and expects to continue to face,
additional competition from new entrants. In the United States, the Company
also competes with prepaid calling card distributors which own and operate
switch and transmission platforms. Such distributors may provide long distance
services at lower cost than the Company, and offer additional bundled features
not available from the Company's long-distance provider such as voicemail and
facsimile services. The barriers to entry into the independent pay phone
provider market are also low and there is substantial competition in this
market from both other independent pay phone providers and from the large
telecommunication carriers who dominate the pay phone market. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside its control, including the reliability of
competitors' products and services, the ability of competitors to hire, retain
and motivate qualified personnel, the price at which competitors offer
comparable services and the extent of competitors' responsiveness to customer
needs. There can be no assurance that the Company will be able to compete
effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not materially adversely affect
the Company's business, financial condition and results of operations. See
"Business--Competition."
RISKS APPLICABLE TO INVESTMENT IN PHONELINE
The Company holds a 40% interest in PhoneLine, a Canadian joint venture
engaged in the marketing and sale of prepaid calling cards in Canada. Because
the Company controls only 50% of the Board of Directors of PhoneLine, the
Company does not control PhoneLine's operations. Pursuant to the joint venture
agreement, the Company and DCI each made loans and contributed certain assets
of their subsidiaries to PhoneLine. The Company and DCI also agreed not to
compete otherwise in the Canadian prepaid calling card market. In addition,
the Company and DCI each have the right to initiate, at any time, a buy-out of
the other party's interest in PhoneLine. As a result, the Company may in the
future own all or no interest in PhoneLine. The joint venture agreement
provides that capital calls may be made on either party upon 30 days prior
notice. In June 1998, the Company contributed approximately $300,000 to
PhoneLine pursuant to such a capital call. There are no capital calls
outstanding as of the date of this Prospectus; however, the Company
anticipates there may be additional capital calls in fiscal 1999 of up to
$250,000. There can be no assurance that these capital calls will or will not
be made, will not be more than $250,000 or that additional capital calls will
not be made. Any capital call would reduce the Company's liquid assets and, if
significant, could have a material adverse effect on the Company's business,
financial condition and results of operations. Failure to meet a capital call
requirement could result in a reduction of the Company's equity interest in
PhoneLine. The Company also participates in joint marketing efforts with
PhoneLine, and works to recruit, maintain and motivate a network of
independent distributors through whom substantially all of PhoneLine's prepaid
calling cards are distributed in Canada. The inability to maintain and grow
this distribution network would have a material adverse effect on PhoneLine
and consequently, the Company. PhoneLine's agreements with retail site
locations for the distribution of prepaid calling cards are generally on a
month-to-month basis. Because there are few long-term retail agreements,
PhoneLine competes continually with other prepaid calling card providers for
retail locations. Currently, a substantial majority of the prepaid calling
cards sold by PhoneLine are preactivated and are not sold through the DataWave
System. As such, PhoneLine incurs certain of the same costs incurred by other
sellers of "live" prepaid cards, such as losses due to theft and other costs
associated with the management of inventory. PhoneLine is a switch-based
reseller of prepaid long distance time. Any disruption to PhoneLine's switch
and transmission facilities due to fire, natural disaster, power loss or other
event could materially adversely affect PhoneLine's operations. See
"Business--Canadian Operations."
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BUSINESS INTERRUPTIONS AND DEPENDENCE ON LIMITED FACILITIES
The Company's primary operations, including engineering, assembly,
information systems (including the server and databases for the DataWave
System), customer service and general administration, are housed in a single
facility in Vancouver, British Columbia (the "Vancouver Facility"). Any
disruption in the Company's operations at the Vancouver Facility due to fire,
natural disaster or otherwise, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's operations are also dependent on the integrity of the DataWave
System. In the event that the DataWave System (including the wireless and
landline networks of other parties used by the DataWave System) experiences
substantial down time due to power loss, technical failure, unauthorized
intrusion or other interruptions, the Company's business and operations could
be materially adversely affected. The Company has implemented procedures to
reduce business interruptions due to network failure such as redundancy for
most components susceptible to failure, multiple on-site and off-site storage
of mission-critical data, and is in the process of implementing a backup
network system at its New Jersey offices. As of June 30, 1998, part of the
backup system is operational, and the Company estimates that the backup system
will be fully implemented during its third fiscal quarter. However, there can
be no assurance that the procedures the Company has implemented to reduce
business interruptions will be effective. PhoneLine, the Company's joint
venture providing prepaid calling card services in Canada, is a switch-based
distributor of prepaid calling cards. PhoneLine's switch and transmission
facilities are housed in a single location in Toronto, Ontario. Any disruption
in switch operations due to fire, natural disaster, power loss or other event
could materially affect PhoneLine's operations which could have a material
adverse effect on the Company. See "Business--Facilities" and "--Canadian
Operations."
ABILITY TO MANAGE GROWTH; NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF;
RELIANCE ON INDEPENDENT SERVICES
The Company's growth has placed, and is expected to continue to place,
significant demands on all aspects of the Company's business including its
management, financial, technical and administrative personnel and systems. The
Company's future operating results will depend upon its ability to manage
growth, including improving and implementing new systems and attracting,
retaining, training, managing and motivating skilled employees, particularly
managers and other senior technical personnel. There can be no assurance that
a sufficient number of skilled employees will continue to be available to the
Company or that the Company will be successful in training, retaining and
motivating current or future employees or that such employees will achieve
expected levels of performance. In addition, as the Company increases its
service offerings and expands its target markets, there will be additional
demands on its sales and marketing resources. The Company also relies on
outside contractors to install and maintain its DTMs. The inability of the
Company to find and contract with sufficiently experienced contractors could
have a material adverse effect on the Company's operations, including
decreased DTM placements and increased machine servicing costs. See
"Business--Employees" and "Management."
RISKS ASSOCIATED WITH ACQUISITIONS
Since May 1997, the Company has completed four acquisitions. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, technologies and products of the acquired companies, the diversion
of management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience, risks of non-disclosed liabilities and the
potential loss of key employees of the acquired company. Moreover, there can
be no assurance that the anticipated benefits of an acquisition will be
realized. There can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions or assimilating
acquisitions. The Company's acquisitions to date have resulted in, and future
acquisitions by the Company could also result in, potentially dilutive
issuances of equity securities, the incurrence of debt and unknown liabilities
and amortization expenses related to goodwill and other intangible assets, all
of which could materially adversely affect the Company's business, financial
condition and results of operations.
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DEPENDENCE ON A SINGLE PRODUCT; RAPID TECHNOLOGICAL CHANGE
Currently the Company derives substantially all of its revenues from prepaid
calling cards. The prepaid products and services industry is characterized by
rapid technological change, new products and services, new sales channels,
evolving industry standards and changing client preferences. The Company's
success will depend, in significant part, upon its ability to make timely and
cost-effective enhancements and additions to its technology and to introduce
new products and services that meet customer demands. The Company expects new
products and services to be developed and introduced by other companies that
compete with its products and services. The proliferation of new
telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including prepaid calling cards. There can be no assurance that the Company
will be successful in responding to these or other technological changes, to
evolving industry standards or to new products and services offered by the
Company's current and future competitors. In addition, the Company may not
have access to sufficient capital for its research and development needs in
order to develop new products and services. See "Business--Competition" and
"--Products and Services."
DISRUPTION IN MANUFACTURING SUPPLIES; INABILITY TO MANUFACTURE SUFFICIENT DTMS
Production of DTMs consists of the assembly and testing by the Company of a
high volume of quality components manufactured by third parties. The Company
is dependent on a limited number of suppliers for certain of its key
components, such as radio modems. The Company purchases component parts on a
purchase order basis and has no supply commitments from any of its suppliers.
The Company's reliance on certain vendors, as well as industry supply
conditions generally, subject it to various risks, including the possibility
of a shortage or a lack of availability of key components, quality control
problems, increases in component costs and reduced control over delivery
schedules, any of which could adversely affect the Company's manufacturing and
assembly process and thus its business and results of operations. In
situations where the Company is unable to rectify supply or quality problems
associated with one or more components from particular vendors, redesign of
the Company's products may be required and costly delays could result.
Although the Company believes that its current manufacturing capabilities will
be able to produce sufficient DTMs through fiscal 1999, there can be no
assurance that the process will be adequate for unanticipated future growth.
The Company expects that it may be required to expand its manufacturing
capabilities or outsource such capabilities after fiscal 1999. See "Business--
Manufacturing and Supply."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend in large part
upon the efforts and abilities of a number of key employees, including its
President and Chief Executive Officer, Clive Barwin, its Chief Operating
Officer, Chief Financial Officer and Secretary, Peter Hough, and the Vice
President of Sales and Marketing of a subsidiary of the Company, Joshua
Emanuel. The loss of the services of any of Messrs. Barwin, Hough or Emanuel
or of one or more of the Company's other key personnel could have a material
adverse effect on the Company's business. Although the Company has entered
into an employment agreement with Mr. Emanuel and plans to enter into
employment agreements with each of Messrs. Barwin and Hough upon the closing
of this Offering, such employment agreements are terminable at any time by the
employee. See "Management--Employment Agreements."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS
Although the Company has not obtained patent protection for any of its
products, the Company has sought to protect its proprietary technology through
a combination of copyright, trademark and trade secret laws, non-disclosure
agreements and other forms of intellectual property protection. The Company
has filed two patent applications with the United States Patent and Trademark
Office ("PTO"), including one for the DTM and its method of operation, which
were denied because the PTO found previously developed technology ("prior
art") prevented patenting of the Company's technology. On May 13, 1997, the
Company filed a continuation of the application for the DTM and its method of
operations with the PTO. On June 1, 1998, the PTO denied the
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application because of prior art and notified the Company that any comments in
response to the PTO's decision must be submitted by September 1, 1998. The
Company intends to continue pursuing the application; however, there can be no
assurance that the application will be successful. In addition, the Company
has filed a patent application with the PTO for its overnight courier pack
dispensing mechanism. As of the date of this Prospectus, no communication had
been received from the PTO regarding this application. There can be no
assurance that any of the Company's pending patent applications will issue and
if issued, whether the claims allowed are or will be sufficiently broad to
protect the Company's technology. The Company owns a United States federal
registration for the trademark "DATAWAVE" and design. There can be no
assurance that the Company's operations do not or will not violate the
intellectual property rights of others, that the Company's intellectual
property rights would be upheld if challenged or that the Company, would, in
such an event, not be prevented from using such intellectual property rights,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, failure of the Company to obtain needed licenses from third
parties for other technology and intellectual property could delay or prevent
the development, manufacture or sale of products. Although the Company relies,
in part, on contractual provisions to protect its trade secrets and
proprietary know-how, there is no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Although no lawsuits against the
Company regarding infringement of any existing patents or other intellectual
property rights are pending, there can be no assurance that any such lawsuits
will not be asserted by third parties in the future. There also can be no
assurance in the event of such claims of infringement that the Company will be
able to obtain licenses on reasonable terms. On May 5, 1998, the Company
received notice that a third party holds certain patented technology
applicable to point-of-sale activation and recharging of prepaid telephone
calling cards. Based on a preliminary review of the relevant patents, the
Company does not believe its DataWave System directly infringes such patents.
However, if a claim of infringement is asserted and it is determined that the
DataWave System infringes any of these patents, such determination could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's involvement in any intellectual property
dispute or action to protect trade secrets and know-how, including actions
brought by the Company, could result in a material adverse effect on the
Company's business. Adverse determinations in litigation in which the Company
may become involved could subject the Company to significant liabilities to
third parties, require the Company to grant licenses to or seek licenses from
third parties and prevent the Company from manufacturing and selling its
products. Any of these situations could have a material adverse effect on the
Company's business, financial condition and results of operations.
THEFT OF SERVICES; CREDIT CARD FRAUD
Although the Company has not experienced any material losses from theft to
date, prepaid calling card users may attempt to obtain calling card services
without rendering payment to the Company by unlawfully using the Company's
access numbers and PINs. The Company attempts to manage these theft and fraud
risks through its internal controls and its monitoring and blocking systems.
The Company utilizes national credit card clearance systems for electronic
credit card settlement. The Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by unauthorized use, disputes, theft or fraud. To minimize
its financial exposure, the Company limits the total amount that a customer
may charge to purchase a prepaid calling card and also limits the amount that
a customer may charge within a specified time frame using any DTM. Although
the Company believes that its risk management practices and bad debt reserves
are adequate, there can be no assurance that such practices and reserves will
protect the Company from theft of services, fraud and credit card losses, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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YEAR 2000 ISSUES
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have a time-sensitive software that recognizes a date using "00" as
the Year 1900. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, activate prepaid calling cards, or engage
in similar normal business activities. The Company has completed a preliminary
assessment and will have to modify portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The total Year 2000 cost is not expected to be material to the
Company's financial position or operating results and will be expensed as
incurred. The project is estimated to be completed no later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software, the Year 2000
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 could have a material impact on the
operations of the Company. The Company's most significant risk on the Year
2000 issue relates to interfacing the DataWave System with the networks of
other business entities, such as AT&T. The Company has initiated preliminary
communications with AT&T to determine the extent of Year 2000 issues. There is
no guarantee that the systems of AT&T on which the Company's distribution
network rely will be converted on a timely basis and would not have an adverse
effect on the Company's systems. The cost of the project and the date on which
the Company believes it will complete the Year 2000 modification are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION
The telecommunications industry is highly regulated in the United States at
the federal, state and local levels and in Canada at the federal level.
Various international authorities also may seek to regulate the services
provided or to be provided by the Company. In the United States, federal laws
and the regulations of the Federal Communications Commission ("FCC") generally
apply to interstate telecommunications, while state public utility
commissions, public service commissions or other state regulatory authorities
generally exercise jurisdiction over telecommunications that originate and
terminate within the same state. The Company is a switchless distributor of
long distance telephone time purchased from carriers such as, but not limited
to, AT&T and MCI. The Company believes that it is not regulated as a carrier
because the Company's name is not on its prepaid calling cards and the
telephone number on the prepaid calling cards is that of the underlying,
regulated carrier and not that of the Company. Accordingly, the Company has
not obtained any federal or state authorizations. To the extent that federal
or state regulators interpret or enforce applicable laws and regulations
differently, the Company may be found in violation of such laws or regulations
and may be required to alter its business strategy.
The Company recently determined that, in certain instances during calendar
1998, the Company's rates for telecommunications services were above those
specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. However,
based on the Company's review of its product offerings and the history of
federal and state enforcement efforts in the applicable jurisdictions, the
Company does not believe that the failure to be in compliance with the tariffs
of the underlying carriers will have a material adverse effect on the
Company's business, financial condition and results of operations. In July
1998, the Company adjusted its rates for prepaid
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calling card services to fall within those specified in the long distance
tariffs of its underlying carriers and therefore believes it is currently
compliant with the foregoing regulatory requirements.
In addition, the regulation of prepaid calling card providers, particularly
by state regulators, is unsettled. Even where the Company's rates do not
exceed the tariffed rate, state and federal regulators might attempt to assert
jurisdiction over the Company's operations. Certain states in which the
Company operates, such as Florida and Louisiana, have promulgated specific
laws or regulations regarding prepaid calling cards. Such laws or regulations
may require, among other things, that the cards specify cost-per-minute, extra
fees, expiration dates, and toll-free customer service telephone numbers.
Although the Company believes that it is or will be able to comply with state
laws and regulations, there can be no assurance that such laws or regulations
will not have a material adverse effect on the Company's business, financial
condition or results of operation.
The Company's wholly owned subsidiary, Metrophone, is a pay phone service
provider ("PSP") and is subject to certain rules of the FCC, including rules
regarding rates and the provision of services such as unrestricted access to
operators. Some state commissions also regulate certain aspects of PSP
activity such as the location of pay phones and quality of service standards.
There can be no assurance that the Company's operations will not become
subject to increased federal and state regulation or be able to comply with
any applicable regulations. Failure to comply with applicable regulations may
have a material adverse effect on the Company's business, financial condition
and results of operations.
In Canada, federal laws and the regulations and rulings of the Canadian
Radio-Television and Telecommunications Commission ("CRTC") generally apply to
telecommunications companies. In Canada, PhoneLine is a reseller of long-
distance telephone time purchased from long distance carriers and is thus
required to register with the CRTC but is not otherwise directly regulated as
a carrier by the CRTC or provincial regulatory authorities. The business of
PhoneLine may become subject to increased or adverse regulation or regulatory
requirements, which may have a material adverse effect upon it. See
"Business--Government Regulation."
There is currently a 3% excise tax assessed on the retail value of the long
distance telephone time resold by the Company as well as a 4.4% universal tax
assessed on the wholesale price of long distance telephone time by federal
regulation. These taxes are included in the cost to the Company of its
purchase of long distance time from AT&T. The taxation of prepaid telephone
card sales and use is evolving and is not specifically addressed by the laws
of many of the states in which the Company does business. Some states and
localities charge a tax on the point-of-sale purchase of prepaid telephone
cards while others charge a tax on usage of prepaid telephone cards. While the
Company believes that it has adequately reserved for any taxes it may
ultimately be required to pay, there can be no assurance that this will be the
case. In addition, certain authorities may enact legislation which
specifically provides for taxation of prepaid telephone cards or other
services provided by the Company or may interpret current laws in a manner
resulting in additional tax liabilities to the Company.
VOLATILITY OF STOCK PRICE; VANCOUVER STOCK EXCHANGE; OVER-THE-COUNTER
ELECTRONIC BULLETIN BOARD
The Common Shares are currently traded on the VSE under the symbol "DTV" and
on the OTCBB under the symbol "DWVSF." The Offering price of the Common Shares
offered hereby will be determined through negotiations between the Company and
the Representatives of the Underwriters, and may be different from recent
trading prices of the Common Shares on the VSE and OTCBB. See "Underwriting."
The Company intends to list the Common Shares on the Nasdaq National Market
upon commencement of the Offering. The Company intends to delist its shares
from trading on the VSE promptly following completion of the Offering. The
Company also intends to delist its shares from trading on the OTCBB concurrent
with the Offering. There can be no assurance that an active trading market in
the United States will develop and continue after completion of this Offering
or that the trading price of the Common Shares on the Nasdaq National Market
will not decline below the Offering price or recent trading prices on the VSE
and OTCBB. During fiscal 1998, the price of the Company's Common Shares as
reported on the VSE ranged from a low of $0.63 to a high of $10.60. See "Price
Range of Common Shares." Future announcements concerning the Company or its
competitors, technological
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innovations, new product and service offerings, changes in government
regulations, conditions in the Company's market segment or changes in earnings
estimates by analysts may cause the price of the Common Shares to fluctuate
substantially. In addition, stock prices for many technology and
telecommunications companies fluctuate widely for reasons that may be
unrelated to their operating results. These fluctuations, as well as general
economic, political and market conditions, may adversely affect the trading
price of the Common Shares.
CONTROL OF COMPANY
Upon the consummation of the Offering, the Company's Directors, officers and
affiliates will own approximately 13.9% of the outstanding Common Shares
including options and warrants exercisable within sixty days of July 20, 1998
(13.2% if the Underwriters' over-allotment option is exercised in full).
Accordingly, such persons, acting in concert, may be able to influence Company
matters requiring shareholder approval, including the election of Directors
and the approval of significant corporate transactions. See "Certain
Transactions" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Shares offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value per share at
March 31, 1998 of $4.99 at an assumed Offering price of $7.50 per share, after
deducting underwriting discounts and commissions. In addition, as of July 20,
1998, the Company had issued warrants to purchase 323,557 Common Shares and
options to purchase 727,690 Common Shares. If such warrants and options are
exercised in full, purchasers of the Common Shares offered hereby would
experience an immediate and substantial dilution in the pro forma net tangible
book value per share of $5.04. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
After the completion of this Offering, 8,374,675 Common Shares will be
outstanding, assuming no exercise of the Underwriters' over-allotment option.
Of such outstanding Common Shares, the 3,145,333 Common Shares sold pursuant
to this Offering and 3,902,102 additional Common Shares will be eligible for
immediate sale in the public market. The remaining 1,327,240 Common Shares are
restricted securities as that term is defined under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act. As a result of Rules 144, such
Restricted Shares will be available for sale in the public market as follows:
(i) 493,870 Restricted Shares will be eligible for sale pursuant to Rule 144
upon completion of the Offering and (ii) the remaining 833,370 Restricted
Shares will be eligible for sale from time to time thereafter upon expiration
of their respective one-year holding periods under Rule 144. In addition, the
Directors and executive officers of the Company as well as the Selling
Shareholders, who collectively hold 815,870 Common Shares, have agreed not to
offer to sell, sell, contract to sell, grant any option to sell, encumber,
pledge or otherwise dispose of, or exercise any demand rights with respect to,
any Common Shares or securities convertible into or exercisable or
exchangeable for Common Shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Morgan Keegan & Company, Inc.
Upon expiration of the 180-day period, 516,537 of such Common Shares will be
eligible for immediate resale under the Securities Act, subject, in certain
cases, to certain volume, manner of sale and other requirements of Rule 144
promulgated under the Securities Act. The Company may file one or more
registration statements on Form S-8 immediately following this Offering,
registering under the Securities Act Common Shares issued under the Company's
1997 and 1998 Stock Option Plans. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Shares prevailing from time
to time. Sales of substantial amounts of Common Shares, or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Common Shares. See "Principal and Selling Shareholders," "Shares Eligible
for Future Sale" and "Underwriting."
15
<PAGE>
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN BRITISH COLUMBIA, CANADA;
CERTAIN ANTI-TAKEOVER EFFECTS
The Company is organized under the laws of British Columbia, Canada.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, Directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of shareholders as, those that would apply
if the Company were incorporated in a jurisdiction within the United States.
Effective upon the closing of the Offering, the Company's Altered Memorandum
and Articles, as approved at the Company's Annual General Meeting held on July
20, 1998, will provide, among other things, that (i) the Board may increase
the number of Directors by up to one-third of the then existing number of
Directors without shareholder approval; (ii) the Board may appoint an
executive committee with authority to take action on any matter on which the
Board could act; and (iii) the Company's President must be a Director. In
addition, (i) shareholders holding five percent of the Common Shares may call
a shareholder's meeting; and (ii) the affirmative vote of the holders of 75%
of the Common Shares present at a meeting in which a quorum is present is
required for the approval of certain fundamental corporate changes. Certain of
these provisions could render more difficult or discourage an attempt to
obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. In addition, the courts of British Columbia, Canada may
not enforce liabilities predicated upon United States federal securities laws.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company is organized under the laws of British Columbia, Canada where
the Company's principal executive office is located. The Company has appointed
DataWave Services (US) Inc. as its agent upon whom process may be served in
any action brought against the Company under the securities laws of the United
States. However, outside the United States, it may be difficult for investors
to enforce judgments against the Company obtained in the United States in any
such actions, including actions predicated upon civil liability provisions of
federal securities laws. In addition, most of the Company's officers and all
of its Directors reside outside the United States and nearly all of the assets
of these persons and of the Company are located outside of the United States.
As a result, it may not be possible for investors to effect service of process
within the United States upon such persons or to enforce against the Company
or such persons judgments predicated upon the liability provisions of the
United States securities laws. There is substantial doubt as to the
enforceability against the Company or any of its Directors and officers
located outside the United States in original actions or in actions of
enforcement of judgments of United States courts or liabilities predicated on
the civil liability provisions of United States federal securities laws.
CANADIAN TAX MATTERS
Under the Income Tax Act (Canada) (the "Tax Act"), a nonresident of Canada
is subject to Canadian withholding tax at the rate of 25% on dividends paid or
deemed to have been paid by a corporation resident in Canada. The Canada-
United States Income Tax Convention (1980) (the "Convention") limits the rate
to 15% if the shareholder is a resident of the United States and the dividends
are beneficially owned by and paid to him, and to five percent if the
shareholder is also a corporation that beneficially owns at least ten percent
of the voting stock of the payor corporation.
U.S. citizens and individual residents and domestic corporations are taxed
on their worldwide income. Therefore, dividends and capital gains of U.S.
taxpayers will also be subject to U.S. income tax. U.S. shareholders should
consult their own tax advisors regarding specific questions as to U.S.
federal, state or local taxes. See "Description of Capital Stock--Certain
Canadian Federal Income Tax and Other Law Considerations."
16
<PAGE>
THE COMPANY
The Company was incorporated in 1986 and was initially a mining and
development company. In January 1994, the Company acquired North American
Photo Vending Inc. (which was subsequently renamed DataWave Vending (Canada)
Inc.).
The Company's principal executive offices are located at 101 West 5th
Avenue, Vancouver, British Columbia, Canada V5Y 1H9. The Company's telephone
number is (604) 874-1302.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 Common Shares
offered hereby are estimated to be approximately $19.785 million, after
deducting underwriting discounts and commissions and estimated Offering
expenses payable by the Company. The Company intends to use such proceeds to
repay indebtedness and for general corporate purposes, primarily expansion of
the DataWave System and purchase of intelligent pay phones.
The indebtedness to be repaid includes:
(i) approximately $1.2 million to repay Applied Telecommunications
Technologies Inc. ("ATTI") pursuant to an equipment financing agreement
entered into in October 1996 (the "ATTI Equipment Financing"). The ATTI
Equipment Financing bears interest at an effective annual rate of
approximately 33%. The ATTI Equipment Financing matures, as to specific loans,
on dates ranging from June 2000 to July 2001;
(ii) approximately $1.9 million to repay ATTI under a line of credit
extended subsequent to April 1998 by ATTI (the "ATTI Line of Credit"). The
annual interest rate on amounts advanced is 14%. The term of the ATTI Line of
Credit matures on the earlier of August 31, 1998 or the date by which the
Company is able to raise capital in excess of $8,000,000; and
(iii) approximately $120,000 to repay Manufacturers Bank pursuant to a
lease financing agreement for certain equipment. The agreement provides for an
effective annual rate of approximately 42% and matures in October 1999.
The Company regularly evaluates acquisition opportunities and may use a
portion of the net proceeds for future acquisitions, although there are no
present agreements or commitments with respect to any such transaction.
Pending such uses, the Company intends to invest the remaining net proceeds of
this Offering in investment-grade securities, including short-term, interest-
bearing money market funds.
17
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares are traded on the VSE under the symbol "DTV" and on the
OTCBB under the symbol "DWVSF."
The following table sets forth, for the fiscal quarters indicated, the high
and low closing prices for the Common Shares on the VSE as reported by the VSE
and the high and low bid information for the Common Shares, as regularly
quoted on the OTCBB. All closing prices reported by the VSE have been
converted to U.S. dollars based upon the exchange rates in effect on the date
of the transactions. All quotations for the OTCBB reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Trading on the OTCBB commenced in the second
quarter of fiscal 1998. ALL OF THE FOLLOWING PRICES HAVE BEEN ADJUSTED TO
REFLECT THE 1-FOR-5 REVERSE STOCK SPLIT.
<TABLE>
<CAPTION>
VSE OTCBB
----------- -----------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fiscal 1997
First Quarter........................................ $4.84 $3.46 $ -- $ --
Second Quarter....................................... 5.11 3.33 -- --
Third Quarter........................................ 3.68 1.84 -- --
Fourth Quarter....................................... 3.08 0.80 -- --
Fiscal 1998
First Quarter........................................ 1.31 0.74 -- --
Second Quarter....................................... 2.96 0.63 2.95 0.60
Third Quarter........................................ 4.39 2.10 4.40 0.63
Fourth Quarter....................................... 10.60 2.59 10.30 2.69
Fiscal 1999
First Quarter........................................ 9.70 6.35 9.95 6.55
Second Quarter (to July 20, 1998).................... 8.35 7.45 8.75 7.50
</TABLE>
On July 20, 1998, the last reported sales price on the VSE was $7.50 per
share and the last reported bid price on the OTCBB was $7.65 per share. As of
July 20, 1998, the Common Shares were held by approximately 169 holders of
record.
18
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Shares.
The ATTI Equipment Financing and the ATTI Line of Credit contain restrictions
on the Company's ability to pay cash dividends. The Company currently intends
to retain its earnings, if any, to fund the development and growth of its
business and does not anticipate declaring or paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on an actual basis as adjusted to give effect to the sale of
3,000,000 Common Shares offered by the Company hereby assuming an Offering
price of $7.50 per share, the payment of underwriting discounts and
commissions and estimated Offering expenses and the application of net
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds" and
"Description of Capital Stock."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities:
Current portion of long-term debt......................... $ 498 $ --
Long-term debt, excluding current portion................. 1,021 --
------- --------
Total long-term liabilities............................. 1,519 --
------- --------
Shareholders' equity:
Common Shares, no par value, 10,000,000 shares authorized,
5,287,632 shares issued and outstanding actual; 8,287,632
shares issued and outstanding as adjusted(1)............. 9,711 29,496
Share warrants............................................ 63 63
Accumulated deficit....................................... (8,160) (8,160)
------- --------
Total shareholders' equity................................ 1,614 21,399
------- --------
Total capitalization ................................... $ 3,133 $ 21,399
======= ========
</TABLE>
- --------
(1) Excludes 1,051,247 Common Shares reserved for issuance upon exercise of
options and warrants outstanding as of July 20, 1998. See "Description of
Capital Stock."
19
<PAGE>
DILUTION
The net tangible book value of the Common Shares as of March 31, 1998 was
$1,057,900 or $0.20 per share. "Net tangible book value per share" represents
the amount of net tangible book value (total tangible assets less total
liabilities), divided by the number of Common Shares outstanding. After giving
effect to the sale of the 3,000,000 Common Shares offered hereby by the
Company, and after deducting underwriting discounts and commissions and
estimated Offering expenses payable by the Company and receipt of the net
proceeds therefrom by the Company, the pro forma net tangible book value of
the Company as of March 31, 1998 would have been $20,842,900, or $2.52 per
share, representing an immediate increase in pro forma net tangible book value
of $2.31 per share to existing shareholders and an immediate dilution of $4.99
per share to purchasers of Common Shares in this Offering. The following table
illustrates the resulting per share dilution:
<TABLE>
<S> <C>
Assumed Offering price per share....................................... $7.50
Net tangible book value per share at March 31, 1998.................. $0.20
Increase per share attributable to new shareholders.................. $2.31
Pro forma net tangible book value per share after Offering............. $2.51
Dilution of net tangible book value per share to new shareholders...... $4.99
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value and dilution per share to new investors would be
$2.76 and $4.74, respectively.
The foregoing computations assume no exercise of stock options or warrants
prior to completion of the Offering. Options to purchase an aggregate of
727,690 Common Shares at exercise prices ranging from C$1.50 (US$1.06) to
C$11.25 (US$7.90) per share, with a weighted average exercise price of C$2.49
(US$1.75) per share, and warrants to purchase an aggregate of 323,557 Common
Shares at exercise prices ranging from C$1.00 (US$0.70) to C$11.65 (US$8.20),
with a weighted average exercise price of C$3.72 (US$2.62) per share, will be
outstanding and unexercised upon completion of the Offering. If all of such
stock options and warrants had been exercised at March 31, 1998, the pro forma
net tangible book value per share after the Offering would be $2.46
representing an increase in pro forma net tangible book value of $2.26 per
share and dilution to new shareholders of $5.04 per share.
The following table summarizes the difference between existing shareholders
and new shareholders with respect to the number of Common Shares purchased
from the Company, the total consideration paid to the Company before deducting
estimated underwriting discounts and commissions and estimated Offering
expenses and the weighted average price paid per share by the existing
shareholders and by new shareholders purchasing Common Shares in the Offering,
at an assumed Offering price of $7.50 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 5,229,342 62% $ 10,379,821 31% $ 1.98
New investors............... 3,145,333 38 23,589,998 69 7.50
--------- --- ------------ --- ------
Total..................... 8,374,675 100% $ 33,969,819 100% $ 4.06
========= === ============ === ======
</TABLE>
The foregoing information assumes no exercise of the Underwriters' over-
allotment option or the exercise of options and warrants to purchase 1,051,247
Common Shares outstanding as of July 20, 1998.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARES OUTSTANDING)
The selected consolidated financial data set forth below as of and for the
fiscal years ended March 31, 1996, 1997 and 1998 have been derived from the
Consolidated Financial Statements of the Company which have been audited by
Deloitte & Touche, independent auditors. The selected consolidated financial
data for the fiscal years ended March 31, 1994 and 1995 is unaudited. The
Selected Consolidated Financial Data should be read in conjunction with, and
are qualified by, the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ -- $ 511 $ 1,263 $ 3,149 $ 9,676
Cost of revenues
excluding depreciation
and amortization........ -- 431 1,076 3,439 6,211
Other operating costs and
expenses................ 667 1,259 2,470 3,003 3,034
Operating (loss) income
........................ (667) (1,029) (2,283) (3,293) 431
Net (loss) income ....... $ (693) $ (1,052) $ (2,328) $ (3,626) $ 65
======= ========= ========= ========= =========
Net (loss) income per
Common Share(1):
Basic................... $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.02
======= ========= ========= ========= =========
Diluted................. $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.01
======= ========= ========= ========= =========
Weighted average number
of Common Shares
outstanding............. 485,743 1,564,186 2,464,398 3,266,755 4,091,411
<CAPTION>
AS AT MARCH 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital (defi-
cit).................... $ 298 $ 1,233 $ 793 $ (285) $ (43)
Total assets............. 459 1,702 2,850 2,378 5,094
Long-term obligations,
excluding current
portion of long-term
debt.................... 8 -- 520 589 1,021
Shareholders' equity..... 357 1,314 1,695 486 1,614
</TABLE>
- --------
(1) For information concerning the number of shares used in the computation of
net (loss) income per Common Share, see Note 2(l) to Notes to Consolidated
Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
DataWave designs, develops, produces, owns and manages a proprietary,
intelligent, automated direct-merchandising network known as the DataWave
System. The Company uses the DataWave System to distribute prepaid calling
cards, primarily under the AT&T brand. The DataWave System is scalable and
flexible and can be modified to offer other premium prepaid products such as
cellular telecommunications, paging and overnight courier services. The
DataWave System is comprised of DTMs, which are free-standing "smart" machines
capable of dispensing multiple prepaid products, and OTCs, for point-of-sale
prepaid retailing, both of which are connected to the Company's proprietary
server and database software through a wireless and/or land line wide area
network.
The Company was incorporated in 1986 and was initially a mining and
development company. In January 1994, the Company acquired North American
Photo Vending Inc. (which was subsequently renamed DataWave Vending (Canada)
Inc.). The management of DVI assumed managerial control of the Company and
initiated development of the DTM, which was first placed in operation in
fiscal 1996. Since the Company began selling prepaid calling cards utilizing
the DataWave System, revenues have increased substantially.
DataWave's operations were primarily based in the United States until June
1997, when the Company expanded its operations in Canada through its
acquisition of PLI. Effective April 1, 1998, the Company contributed the
assets of PLI pursuant to an agreement with DCI to create PhoneLine, a joint
venture operating a switch-based telecommunications platform in Canada (See
Note 6 to the Consolidated Financial Statements). PhoneLine's revenues are
primarily derived from the direct sale of "live" prepaid calling cards to
retailers.
The Company has derived, and believes that it will continue to derive,
substantially all of its revenues from the resale of prepaid long distance
telephone time supplied by long distance carriers. During the fiscal years
ended March 31, 1997 and 1998, the resale of prepaid long distance telephone
time supplied by MCI accounted for approximately 69% and 65% of revenues,
respectively. In December 1997, the Company's exclusive agreement with MCI was
terminated, although the Company continues to provide distribution of MCI-
branded prepaid calling cards. In January 1998, the Company entered into non-
exclusive agreements with AT&T, primarily to purchase long distance telephone
service from AT&T, which replaced its long distance supply relationship with
MCI. During fiscal 1998, approximately 2.4% of the Company's revenues arose
from AT&T-related business; during the first quarter of fiscal 1999, this
percentage increased to approximately 46% of the Company's revenues, and the
Company expects that a substantial portion of its revenues in future quarters
will be derived from AT&T-related business. The Company's future growth is
substantially dependent upon its relationship with AT&T, and termination or
non-renewal of its agreements with AT&T would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Consolidated Financial Statements for the fiscal years ended March 31,
1996, 1997 and 1998, included herein, were previously prepared under Canadian
generally accepted accounting principles and stated in Canadian dollars. These
Consolidated Financial Statements have been restated to conform with United
States generally accepted accounting principles and are stated in United
States dollars.
22
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of revenues for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues............................................ 100% 100% 100%
------ ------ ------
Operating costs and expenses:
Cost of revenues excluding depreciation and amorti-
zation............................................. 85 99 64
Write-down of inventory............................. 28 10 --
General and administrative......................... 58 50 14
Selling and marketing.............................. 51 25 6
Research and development........................... 16 5 1
Depreciation and amortization...................... 10 14 9
(Gain) loss on foreign exchange.................... (1) 1 1
Loss on investment in limited partnership.......... 19 -- --
Loss on termination of distribution agreements .... 14 -- --
------ ------ ------
Total operating expenses............................ 280 204 95
------ ------ ------
Operating (loss) income............................. (180) (104) 5
Interest expense.................................... (4) (11) (4)
------ ------ ------
Net (loss) income................................... (184)% (115)% 1%
====== ====== ======
</TABLE>
The following table lists the number of DTM, OTC and non-networked machine
unit placements, and the retail locations, in which the Company's prepaid
calling cards are sold for each of the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1996 1997 1998 1998
------ ------ ------ --------
<S> <C> <C> <C> <C>
DTMs....................................... 335 623 670 688
OTCs....................................... 146 407 439 455
Non-networked machines..................... 0 179 189 179
Retail locations........................... 0 270 893(1) 287(2)
</TABLE>
--------
(1) For fiscal 1998, includes site contracts for 602 retail locations held
by PLI and contributed to PhoneLine effective April 1, 1998.
(2) Excluding site contracts for retail locations held by PhoneLine.
The Company's revenues have been and will continue to be substantially
dependent upon the number of unit placements and locations offering prepaid
calling cards, and will also be dependent on the Company's relationship with
AT&T. The Company has experienced several significant changes in expenses in
individual years during the three fiscal years ended March 31, 1998. In
particular, the Company incurred write-downs of inventory and other charges in
fiscal 1996 relating to discontinuation of a line of equipment which preceded
the DTMs. In addition, the Company began an expense-cutting effort in fiscal
1997, which continued during 1998, particularly with respect to selling and
marketing and general and administrative expenses. As a result of the
Company's increased revenues over the past three fiscal years and because its
principal operating expenses have not been consistent over sequential periods,
period-to-period expenses as percentages of revenues have varied
significantly. These percentages should not be relied upon as indications of
future performance.
23
<PAGE>
REVENUES
DataWave's revenues are primarily generated from the resale of prepaid long
distance telephone time. The Company recognizes revenue on the sale of prepaid
calling cards at the date of sale.
Revenues increased $6,527,869, or 207%, to $9,676,434 in fiscal 1998 from
$3,148,565 in fiscal 1997, and increased $1,885,404, or 149%, in fiscal 1997
from $1,263,161 in fiscal 1996. The substantial growth in revenues from fiscal
1996 to fiscal 1998 is primarily due to a greater number of units and
locations at which the Company's prepaid calling cards are sold and improved
utilization of the DataWave System as a result of reduced downtime. Revenue in
fiscal 1998 from the sale of prepaid calling cards through the DataWave System
increased 87% from the prior fiscal year. Growth in the number of units and
locations was partially achieved through acquisitions. Acquisitions accounted
for 7% of revenues in fiscal 1997 and 25% of revenues in fiscal 1998. A
substantial portion of the increase in revenues from fiscal 1997 to fiscal
1998 is also attributable to the introduction of the Grand Union Company
("Grand Union") promotional program and the expansion of the Holiday Station
Stores. For the fiscal year ended March 31, 1998, Grand Union accounted for
approximately 11% of the Company's revenues. Although the Company has
experienced significant revenue growth in the past three fiscal years, there
can be no assurance that such revenue growth will continue.
Prior to fiscal 1998, substantially all of the Company's revenues were
generated in the United States. For the fiscal year ended March 31, 1998, the
Company's Canadian operations, which consisted of PLI, accounted for
approximately 22% of the Company's revenues. Effective April 1, 1998, the
Company contributed assets of PLI to PhoneLine. The Company's 40% interest in
PhoneLine will be recorded using the equity method and the revenues of PLI
will not be included in the Company's revenues in future periods.
COST OF REVENUES EXCLUDING DEPRECIATION AND AMORTIZATION
DataWave's cost of revenues excluding depreciation and amortization consists
principally of payments to carriers who provide long distance telephone time,
commissions to landlords and site agents for DTM and OTC placements and
commissions paid to retailers in Canada. Cost of revenues excluding
depreciation and amortization also includes various service-related and supply
costs to maintain the DataWave System.
Cost of revenues excluding depreciation and amortization increased
$3,101,238 to $6,211,310, or 64% of revenues, in fiscal 1998, from $3,110,072,
or 99% of revenues, in fiscal 1997, and increased $2,033,694 in fiscal 1997
from $1,076,378, or 85% of revenues, in fiscal 1996. The reduction in cost of
revenues excluding depreciation and amortization as a percentage of revenues
in fiscal 1998 as compared to fiscal 1997 is due to a reduction in the charges
for cost of time and other direct costs as a percentage of revenues. Cost of
time and other direct costs account for 33% and 31% of revenues, respectively,
in fiscal 1998 as compared to 42% and 57% of revenues, respectively, in fiscal
1997. The reduction in charges for cost of time is due to an increase in the
resale of promotional telephone time which is typically purchased by the
Company at a lower cost per minute, a lower cost per minute for revenues
generated by PLI and a reduction in the cost per minute due to a
reconciliation of final charges on long distance time purchased from
telecommunication carriers. The reduction in other direct costs is due
primarily to a reduction in the commissions paid to landlords and site agents
and reduced service-related and supply costs as a result of the reduced
downtime associated with the DataWave System. The increase in cost of revenues
excluding depreciation and amortization as a percentage of revenues for fiscal
1997 from fiscal 1996 is due primarily to greater upgrade and service costs
associated with the DataWave System.
GENERAL AND ADMINISTRATIVE
General and administrative expenses ("G&A") consist primarily of managerial
and administrative salaries and wages and other general expenses, which
include rent and legal, investor relations, office supplies and travel
expenses.
G&A decreased $160,827 to $1,425,578, or 14% of revenues in fiscal 1998,
from $1,586,405, or 50% of revenues in fiscal 1997, and increased $854,626 in
fiscal 1997 from $731,779, or 58% of revenues in fiscal 1996.
24
<PAGE>
The increase in the G&A from fiscal 1996 to fiscal 1997 is principally due to
greater payroll and office operating expenses to support the Company's growth
in revenues, including expenses related to the opening of its U.S. sales and
marketing office. During the fourth quarter of fiscal 1997, the Company
commenced an expense-cutting effort, including reducing payroll and relocating
its U.S. sales and marketing office. Although the Company was able to sustain
substantial growth in revenues for fiscal 1998 without an increase in G&A, the
Company hired six additional employees in the fourth quarter of fiscal 1998
and expects that its G&A will increase in the future as it continues to add
personnel and infrastructure. In addition, the annual compensation for Mr.
Barwin, Chief Executive Officer and President of the Company, and Mr. Hough,
Chief Operating Officer, Chief Financial Officer and Secretary of the Company,
will increase upon completion of the Offering, causing G&A to increase in
fiscal 1999. See "Management--Employment Agreements."
SELLING AND MARKETING
Selling and marketing expenses consist primarily of salaries and commissions
to its sales and marketing personnel and advertising and travel expenses.
Selling and marketing expenses decreased $222,096 to $551,599, or 6% of
revenues in fiscal 1998, from $773,695, or 25% of revenues in fiscal 1997, and
increased $135,049 in fiscal 1997, from $638,646, or 51% of revenues in fiscal
1996. In the fourth quarter of fiscal 1996, the Company increased its sales
force and opened a U.S. sales and marketing office, thereby increasing its
selling and marketing expenses during the same quarter and for all of fiscal
1997. Additionally, during fiscal 1997, an advance of $300,000 from MCI to
fund selling and marketing expenses was forgiven and was recorded as a
reduction in such expenses for that year. Also, during the fourth quarter of
fiscal 1997 selling and marketing expenses increased by $199,275 due to the
expenses of the acquisition of Interurbain and the inclusion of costs for its
sales force and sales office. The decrease in selling and marketing expenses
for fiscal 1998 reflects the Company's expense-cutting efforts that resulted
in a reduction in its sales force and the relocation of its U.S. sales office
in the fourth quarter of fiscal 1997. Although the Company was able to sustain
substantial growth in revenues for fiscal 1998 the Company began hiring
additional personnel in the latter half of fiscal 1998 and expects its selling
and marketing expenses to increase in the future.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and wages
for technical personnel.
Research and development expenses decreased $29,267 to $134,070, or 1% of
revenues in fiscal 1998 from $163,337, or 5% of revenues in fiscal 1997, and
decreased $43,372 in fiscal 1997 from $206,709, or 16% of revenues in fiscal
1996. The Company incurs research and development expenses relating to the
development of the DataWave System, and these expenses declined during fiscal
1997 and 1998 as the Company changed its primary focus from development to the
implementation and enhancement of the DataWave System. The Company, however,
began hiring additional technical personnel in the latter half of fiscal 1998,
and expects research and development expenses to increase in the future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses consist primarily of depreciation of
machinery and equipment and amortization of goodwill relating to acquisitions.
Depreciation and amortization expenses increased $448,120 to $894,765, or 9%
of revenues in fiscal 1998, from $446,645, or 14% of revenues in fiscal 1997,
and increased $316,779 in fiscal 1997, from $129,866, or 10% of revenues in
fiscal 1996. The increase in depreciation and amortization over the past two
years is primarily due to the increase in DTM and OTC placements and
amortization of acquired intangible assets from acquisitions made during these
periods. The Company expects its depreciation and amortization expenses to
increase in the future due primarily to increased DTM and OTC placements and
the capitalization of approximately $1.7 million of acquired intangible assets
in the acquisition of Metrophone in April 1998, which is expected to be
amortized over five years.
25
<PAGE>
OTHER EXPENSES
Other expenses consist of non-recurring expenses and interest expenses
pertaining to financing activities.
The loss on investment in the limited partnership, loss on termination of
distribution agreements and write-down of related inventory in the amounts of
$242,390, $179,200 and $352,258, respectively, in fiscal 1996, are
attributable to the Company's decision to discontinue a line of equipment
which preceded the DTMs. This line of business, the photographic electronic
merchandiser ("PEM"), was discontinued in fiscal 1996 because of losses being
incurred and minimal future projected growth due to factors including intense
competition, lack of adequate product sale locations and problems with the
product packaging. The losses attributable to the winding down of this
business included a write-off of the carrying value of the Company's
investment in the DataWave Vending Marketing Limited Partnership, a limited
partnership formed to raise funds for marketing the PEM, a write-off of loss
on termination of distribution agreements and a write-off of obsolete
inventory representing the cost value of the PEM equipment and supplies.
Also recorded as an operating cost for the fourth quarter of fiscal 1997 is
a $328,740 write-down for obsolete inventory. Inventory that became obsolete
included old parts for machines, unused cards related to promotional programs
and other outdated supplies.
Interest expense increased $31,936 to $365,576, or 4% of revenues in fiscal
1998, from $333,640, or 11% of revenues in fiscal 1997, and increased $288,713
from $44,927, or 4% of revenues in fiscal 1996. The increase was primarily due
to interest associated with long-term debt.
COMPENSATION EXPENSE RELATED TO ESCROW SHARES
As a condition of the Company's acquisition of DVI in January 1994, the VSE
and the BCSC required 625,500 Common Shares to be placed in escrow including
469,500 Common Shares owned by current Directors, officers and employees of
the Company and 156,000 Common Shares held by outside shareholders. These
escrow shares will remain restricted from trading unless released from escrow
as and if the Company meets certain net income and positive cash flow
requirements. The requirements for release of the escrow shares had not been
met as of the date of this Prospectus. On July 16, 1998, the Company received
approval from the VSE and the BCSC to release all of the escrow shares
following the Offering, provided the gross proceeds of the Offering are at
least $20,000,000. In the event the gross proceeds of the Offering are less
than $20,000,000, the same conditions currently applicable to release of the
escrow shares will continue to apply. In accordance with SEC positions on
similar escrow arrangements, this arrangement has been deemed to be
compensatory for 469,500 Common Shares contributed to escrow. Accordingly, the
Company will record a non-recurring, non-cash expense equal to the fair value
of the shares at the time of their release from escrow. Based on the assumed
Offering price of $7.50 per share, the total amount of this charge would be
$3,521,250. In the event that all of the escrow shares are not released based
on the gross proceeds raised in the Offering, then the Company will record a
recurring, non-cash expense equal to the fair value of the shares when
released from escrow as the Company meets the net income and positive cash
flow requirements of the escrow agreements.
INCOME TAXES
At March 31, 1998, the Company had net operating loss carryforwards of
approximately $1.9 million in the United States and $4.4 million in Canada,
which can be used to offset future taxable income. To the extent not used,
these net operating loss carryforwards expire in varying amounts beginning in
2001. Approximately $850,000 of the U.S.-based net operating loss
carryforwards are subject to significant limitations on use.
Based on the Company's history of operating losses, the impact of tax laws
which may limit the Company's ability to utilize loss carrryforwards and the
uncertainty of future profitability, the Company has concluded that some
portion or all of the benefit of its net operating loss carryforwards may not
be realized. Accordingly, a valuation allowance was recognized to offset the
potential tax recovery for the fiscal years ended March 31, 1997 and 1996 and
there was no provision for tax expense in fiscal 1998.
26
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the eight consecutive quarters ended March 31, 1998. In the opinion of
management, the unaudited information set forth below has been prepared on the
same basis as the audited information and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period. The Company expects
to incur a loss of approximately $484,000 in the first quarter of fiscal 1999.
<TABLE>
<CAPTION>
QUARTERLY RESULTS (IN THOUSANDS)
---------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ 479 $ 759 $ 843 $ 1,068 $ 1,747 $ 3,105 $ 2,636 $ 2,188
------ ------ ------ -------- ------- ------- ------- -------
Operating costs and
expenses:
Cost of revenues
excluding depreciation
and amortization........ 443 735 644 1,288 1,249 2,124 1,622 1,216
Write-down of inventory.. -- -- -- 329 -- -- -- --
General and
administrative.......... 318 338 465 465 254 329 366 477
Selling and marketing.... 184 198 (36) 428 92 155 159 146
Research and
development............. 44 40 43 36 22 19 39 53
Depreciation and
amortization............ 81 95 125 146 154 247 244 250
Loss on foreign
exchange................ 4 6 6 16 5 9 8 6
------ ------ ------ -------- ------- ------- ------- -------
Total operating expenses.. 1,074 1,412 1,247 2,708 1,776 2,883 2,438 2,148
------ ------ ------ -------- ------- ------- ------- -------
Operating (loss) income... (595) (653) (404) (1,640) (29) 222 198 40
Interest expense.......... 95 102 72 65 67 78 111 110
------ ------ ------ -------- ------- ------- ------- -------
Net (loss) income......... $ (690) $ (755) $ (476) $ (1,705) $ (96) $ 144 $ 87 $ (70)
====== ====== ====== ======== ======= ======= ======= =======
</TABLE>
The Company's revenues and operating results are subject to significant
variation from quarter to quarter due to a number of factors, including:
variations in sales generated from each DTM, OTC and retail location;
additions or reductions in the number of DTM, OTC and retail locations;
competitive pricing pressure; limitations on pricing imposed by long distance
tariffs; changes in the telephone rates paid by the Company to its telephone
carriers; changes in operating expenses; the timing of the introduction of new
products and services; the mix of products and services sold and the mix of
channels through which they are sold; changes in legislation and regulations
which affect the competitive environment for the Company's products and
services; and other competitive and economic conditions in the markets served
by the Company. The Company believes that sales of prepaid calling cards are
seasonal, as many consumers purchase the cards while traveling during the peak
travel months of July, August and September. Sales decrease during spring and
fall and are lowest in the winter. The Company believes that period-to-period
statements of its operating results are not necessarily meaningful, should not
be relied upon as indications of future performance and may result in
volatility in the price of the Common Shares. Due to the foregoing factors,
among others, the Company's operating results will from time to time be below
the expectations of analysts and investors.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations principally through the
private placement of equity securities, asset based financing, and, in fiscal
1998, cash flow from operating activities. The Company had a working capital
deficit of $285,202 and $42,564 at March 31, 1997 and 1998, respectively.
The Company's operating activities used cash of $2,058,177 and $2,652,550 in
fiscal 1996 and 1997, respectively, primarily due to losses in those years,
and provided cash of $756,391 for fiscal 1998. Net cash used for investing
activities was $759,621, $438,626 and $1,514,214 for fiscal 1996, 1997 and
1998, respectively. Cash used for investing activity was attributable to
capital expenditures for machinery and equipment for all years and for
acquisitions in fiscal 1998. Cash provided by financing activities was
$2,158,997, $2,855,580 and $1,319,051 for fiscal 1996, 1997 and 1998,
respectively. Cash provided by financing activities resulted primarily from
the issuance of equity and asset based financing.
27
<PAGE>
The Company has obtained lease financing with relatively high interest rates
due to its limited operating history at the time it first obtained financing
and its specialized equipment needs. Because the DTMs and OTCs are developed
for and connected to the DataWave System, there is an increased risk to
lessors in the event the Company were to default on its lease obligation and
thereby require the lessor to repossess and resell DTMs and OTCs that would
not be connected to the DataWave System. The Company has successfully obtained
better rates for each new lease financing although such rates remain
relatively high. In October 1996, a subsidiary of the Company entered into the
ATTI Equipment Financing for up to approximately $2 million of equipment.
Approximately $1.4 million was outstanding as of March 31, 1998 at an
effective rate of approximately 33% after taking into account interest on
funds withheld as collateral. The ATTI Equipment Financing matures as to
specific leases on dates ranging from June 2000 to July 2001 and is secured by
a first charge over the equipment and a general charge over all the assets of
the Company including its subsidiaries. As partial consideration for the
financing arrangement, the Company granted ATTI and an affiliate warrants to
purchase 80,000 Common Shares at per share exercise prices ranging from C$1.45
(US$1.03) to C$3.90 (US$2.75).
Subsequent to March 31, 1998, the Company entered into the ATTI Line of
Credit which provides for borrowings of up to $5 million in three separate
tranches at an annual interest rate of 14%. Approximately $1.9 million was
outstanding under the ATTI Line of Credit at June 30, 1998. The term of the
ATTI Line of Credit expires on the earlier of August 31, 1998 and the date on
which the Company raises equity capital in excess of $8 million (the "Maturity
Date"). Amounts outstanding on the Maturity Date are converted to a fully
amortizing 30 month loan at an annualized rate of 14%. The ATTI Line of Credit
is secured by all assets of the Company and its subsidiaries, excluding the
Company's interest in PhoneLine. As partial consideration for the ATTI Line of
Credit, the Company agreed to issue to ATTI and an affiliate warrants to
purchase up to $1 million aggregate value in Common Shares, with the number of
warrants to be determined on a pro rata basis upon approval of each of the
three funding tranches based on the average closing price for the ten business
days preceding such approval. As of the date of this Prospectus, warrants to
purchase 65,890 Common Shares have been issued to ATTI and a related entity
pursuant to the ATTI Line of Credit at a per share exercise price of C$7.80
(US$5.49).
The Company also has an equipment financing agreement to finance certain pay
phones of Metrophone with Telecapital, L.P. The lease financing provides for
an approximate annual interest rate of 15% and matures on July 2002. As of
June 30, 1998, the total borrowings under the equipment financing were
approximately $270,000. Recently, Metrophone entered into a loan and security
agreement with TeleCapital, L.P. under which Metrophone borrowed $375,000 at
an annual interest rate of 14%, and which matures on July 15, 2003. In
addition, the Company is indebted to Manufacturers Bank pursuant to a lease
financing agreement for an approximate amount of $120,000 as of June 30, 1998.
The agreement provides for an approximate effective interest rate of 42% per
annum, and matures in October 1999.
Effective April 1, 1998, the Company's contribution of certain assets of PLI
to PhoneLine resulted in a decline in working capital and capital assets in
the amount of approximately $657,000, which was offset by an increase in
investment in PhoneLine of a corresponding amount. The joint venture agreement
creating PhoneLine provides that capital calls may be made on either party
upon 30 days prior notice. In June 1998, the Company contributed approximately
$300,000 to PhoneLine pursuant to such a capital call. There are no capital
calls outstanding as of the date of this Prospectus; however, the Company
anticipates there may be additional capital calls in fiscal 1999 of up to
$250,000. There can be no assurance that these capital calls will or will not
be made, will not be more than $250,000 or that additional capital calls will
not be made. Any capital call would reduce the Company's liquid assets but
would also result in a corresponding increase in the Company's investment in
PhoneLine.
The Company obtains long distance telephone time from AT&T pursuant to an
agreement which requires the Company to purchase a minimum of $5.25 million of
long distance time per year. If the Company does not purchase such minimum
amount, it incurs a shortfall charge consisting of the cost of the time not
purchased and a penalty. From March 1, 1998, the effective date of the
agreement, to June 30, 1998, the Company had purchased approximately $650,000
of long distance time from AT&T which represents approximately 12% of the
total purchase commitment. Although the Company believes it will meet its
minimum purchase commitment for this contract year, there can be no assurance
to that effect.
28
<PAGE>
The Company's revenue growth has in the past required, and is expected in
the future to require, significant capital, primarily associated with
equipment and other expenses related to the deployment and support of the
DataWave System and the deployment of additional pay phones. The Company
believes that the net proceeds from the Offering, together with the funds
anticipated to be generated from operations, will be sufficient to finance the
Company's operations for the next 12 months. The net proceeds to the Company
from the sale of the 3,000,000 Common Shares to be sold in the Offering at an
assumed Offering price of $7.50 are estimated to be approximately $19.785
million after deducting underwriting discounts and commissions and estimated
Offering expenses payable by the Company. The Company intends to use such
proceeds to repay indebtedness and for general corporate purposes, primarily
expansion of the DataWave System and the purchase of intelligent pay phones.
Indebtedness to be paid totals approximately $3.2 million under existing
equipment financing and lines of credit. See "Use of Proceeds."
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have a time-sensitive software that recognizes a date using "00" as
the Year 1900. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, activate prepaid calling cards, or engage
in similar normal business activities. The Company has completed a preliminary
assessment and will have to modify portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The total Year 2000 cost is not expected to be material to the
Company's financial position or operating results and will be expensed as
incurred. The project is estimated to be completed no later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software, the Year 2000
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 could have a material impact on the
operations of the Company. The Company's most significant risk on the Year
2000 issue relates to interfacing the DataWave System with the networks of
other business entities such as AT&T. The Company has initiated preliminary
communications with AT&T to determine the extent of Year 2000 issues. There is
no guarantee that the systems of AT&T on which the Company's distribution
network rely will be converted in a timely manner and would not have an
adverse effect on the Company's systems.The cost of the project and the date
on which the Company believes it will complete the Year 2000 modification are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
29
<PAGE>
BUSINESS
OVERVIEW
DataWave designs, develops, produces, owns and manages a proprietary,
intelligent, automated direct-merchandising network (the "DataWave System").
The Company uses the DataWave System to distribute prepaid calling cards,
primarily under the AT&T brand. The DataWave System is scalable and flexible
and can be modified to offer other premium prepaid products such as paging and
overnight courier services, which are currently being tested, and cellular
telecommunications services.
The DataWave System is comprised of DataWave Telecard Merchandisers
("DTMs"), which are free-standing "smart" machines capable of dispensing
multiple prepaid products, and over-the-counter "swipe" units ("OTCs"), for
point-of-sale prepaid retailing, both of which are connected to the Company's
proprietary server and database software through a wireless and/or land line
wide area network. As of June 30, 1998, the DataWave System consisted of 688
DTMs and 455 OTCs. The DataWave System has been designed to work both with the
telephone switches of other parties as well as switches operated by the
Company, if any. In the United States, the Company has elected to operate
solely with other parties' switches, such as those of AT&T and other long
distance carriers, while in Canada the Company participates in a joint venture
which operates its own switch.
The Company also distributes preactivated prepaid calling cards through
machines not connected to the DataWave System. Approximately 19% of the
Company's machines are not networked and thus sell preactivated calling cards.
In fiscal 1998, approximately 33% of the Company's revenues came from the sale
of preactivated calling cards. A substantial majority of the prepaid calling
cards sold by PhoneLine are preactivated and are not sold through the DataWave
System but through retail outlets. Only 35 of PhoneLine's 96 DTMs are
connected to the DataWave System.
INDUSTRY TRENDS AND MARKET BACKGROUND
The United States prepaid calling card market has grown from approximately
$75 million in sales in 1994 to almost $1.0 billion in 1996, and is expected
to grow to approximately $2.6 billion in sales by 2001 according to industry
data from The Yankee Group. The prepaid calling card market primarily targets
two groups of potential consumers: credit-challenged consumers and persons who
make long distance calls, both domestically and internationally, when they are
away from their home or office, such as business and other travelers. The
prepaid calling card market provides growth opportunities to long distance
companies because of the potential to reach new customers and reduce credit
and fraud risk.
The predominant channels of distribution for prepaid calling cards are
through retail establishments and traditional vending machines, most of which
sell "live" prepaid calling cards purchased in bulk. "Live" prepaid calling
cards are preactivated with telephone time prior to sale to the retailer.
These traditional channels of distribution require vendors to pay long
distance telephone time costs prior to sale and expose vendors to losses due
to theft and costs associated with the financing and management of inventory.
These channels are also inconvenient for consumers in that they limit the
customer's control of the transaction, method of payment and available
denominations and time of day of purchase. In addition, because the points of
sale in these traditional distribution channels are not networked, it is
difficult to optimize the management of operating expenses in connection with
the monitoring of cash balances, card inventory and machine functioning for
such points of sale.
In recent years, there has been a consumer trend in the United States
towards the use of cost-effective, self-service, automated distribution
systems that are conveniently located. Examples of this trend are the
increased use of automated teller machines and the use of credit cards at
gasoline station pumps. There has also been a trend towards increasingly
automated distribution systems and networked distribution systems which permit
superior information about, and management of, distribution. Examples of this
trend include the tracking network established by overnight delivery services
and the point-of-sale networks used by retailers to interface with management
inventory systems.
30
<PAGE>
As consumers are increasingly looking for self-service and vendors are
increasingly looking for "smarter" distribution systems, there is an
opportunity to offer prepaid calling cards and telecommunications services as
well as other prepaid products and services via a "smart" distribution
network. The Company believes that it is well positioned to capitalize upon
the expanding prepaid calling card market and the market for other prepaid
products and services because of the features and benefits of the DataWave
System, as well as other components of the Company's strategy.
THE DATAWAVE SYSTEM
The DataWave System offers unique features that benefit the Company, long
distance carriers, retail locations, consumers and other potential product and
service providers. The following features distinguish the DataWave System from
the traditional channels of distribution for prepaid products and services:
FEATURES BENEFITS
- -------------------------------------------------------------------------------
International wireless and landline .Enables international DTM and OTC
network distribution
.Permits flexibility and mobility
in site placement
- -------------------------------------------------------------------------------
Scalable and flexible network and . Enables the Company to offer a
point-of-sale architectures variety of branded products and
services and increase DTM and OTC
placements
. Permits integration into third
party switches eliminating post-
sale customer service obligations
of DataWave
- -------------------------------------------------------------------------------
Point-of-sale activation of prepaid . Reduces losses and shrinkage from
calling cards theft of "live" inventory
. Reduces inventory financing and
management control costs
- -------------------------------------------------------------------------------
Remote download of information to . Enables efficient updating of
DTMs and OTCs information including price and
tax changes
- -------------------------------------------------------------------------------
Remote self-diagnostic every three . Ensures efficient maintenance
minutes and servicing notification scheduling and reduces down time
via national paging network
- -------------------------------------------------------------------------------
Remote cash and inventory monitoring . Reduces operating expenses and
improves cash management
. Reduces down time by maintaining
inventory levels
- -------------------------------------------------------------------------------
Real-time credit card verifications, .Reduces credit risks
approval and limits
- -------------------------------------------------------------------------------
Consumer convenience: customer . Increases consumer appeal and
determined card amounts; cash or broadens potential consumer base
credit card acceptances; itemized
customer sales receipt; multi-
lingual instructions; 24 hour access
. Provides receipt for record of
charges, including taxes
- -------------------------------------------------------------------------------
Detailed audit trail of transactions . Permits timely and accurate
monthly commission payments
. Produces management information
such as DTM utilization history
and service history
31
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to become a leader in delivering premium
prepaid products and services such as calling cards, and in the future,
prepaid cellular telecommunications, paging and courier services through the
DataWave System. Key elements of the Company's business strategy are
summarized below:
. Increase penetration of premier site locations: The Company's objective
is to increase the number of DTM and OTC placements by increasing its
penetration of existing and new sites. To accomplish this objective, the
Company intends to develop new strategic relationships and expand its
current relationship with AT&T to gain access to sites such as airports,
hotel chains, shopping malls, travel plazas, supermarkets and other prime
locations.
. Expand strategic relationship with AT&T: The Company's relationship with
AT&T allows the Company to market prepaid calling card services under the
AT&T brand name, which is nationally recognized as representative of
quality telecommunications services. The Company seeks to expand its
current relationship with AT&T to contract with current and future AT&T
customers for installation of the DataWave System at client locations.
The Company also seeks to enter into additional relationships similar to
its agreement with AHA TelePLAN to market AT&T Prepaid Cards to an
estimated 5,000 American Hospital Association members throughout the
United States, including hospitals and other health care facilities. The
Company may also enter into new agreements with AT&T for the provision
and joint marketing of future products and services similar to the recent
agreement between AT&T and Metrophone for pay phone services.
. Deliver new, premium prepaid product and service offerings: The Company
believes that the trend towards convenient, self-service, cost-efficient
merchandising provides it with the opportunity to utilize the flexibility
of the DataWave System to offer new prepaid products and services. The
Company currently provides prepaid calling cards and has recently begun
testing prepaid overnight courier services and paging services. The
Company intends to offer prepaid cellular telecommunications services,
and to otherwise evaluate the market for potential new product and
service offerings.
. Develop relationships with other providers of premium prepaid products
and services: The Company is continually evaluating new strategic
relationships that will enable it to offer additional premium prepaid
products and services of brand-name vendors. For example, the Company
recently entered into an agreement with Airborne Express for the testing
of prepaid overnight courier delivery available through the DataWave
System. The six-month test will involve between 50 and 150 DTMs enhanced
with an electronic drop box to allow for automated package pickup.
. Maintain electronic distribution network technological leadership: The
DataWave System's wireless, remote, real-time monitoring capabilities
provide superior consumer convenience and risk management compared to
traditional prepaid calling card channels of distribution. The Company
intends to continue to develop its proprietary technology in order to
enhance and improve the DataWave System and maintain its unique
technological advantages.
32
<PAGE>
DATAWAVE SYSTEM
[SCHEMATIC DIAGRAM OF THE DATAWAVE NETWORK SYSTEM APPEARS HERE]
Each DTM machine is connected by a public wireless or land line network and
each OTC device is connected by land line to the Company's server, which in
turn is interfaced into credit card clearing houses and telecommunication
switches and to the Company's calling card management system. The Company's
network technology permits speed and ease of installation of DTMs and OTCs,
remote programming for price and tax rate changes, enhanced mobility and
portability, particularly when the DTM is connected by a wireless connection,
and on-line servicing and data transmission, which includes real time data
capture for transaction records used to generate monthly management and
statistic reports. The computerized management system enables the DTM to alert
the Company when accumulated cash should be picked up, when inventory levels
are low, when malfunctions occur or when other technical service is required.
The DTM is compact, can be wall mounted, counter mounted, flush wall mounted
or placed on a floor stand and holds up to 450 programmable prepaid calling
cards.
One of the principal features of the DataWave System is the ability to
activate a calling card by assigning to the calling card the amount of
telephone time purchased at the time of sale. When the appropriate amount of
cash has been deposited into the DTM (or given to retailers using the OTC
device), or when a credit card transaction has been approved, the DTM or OTC
contacts the DataWave server through its radio or land line modem, which in
turn forwards the activation request to the applicable long distance telephone
switch. The DTM or OTC reads the control number on the magnetic strip on the
back of the calling card and forwards the information to the long distance
telephone switch through the server. The long distance telephone switch
acknowledges the control number and then associates the number with the long
distance time assigned to the
33
<PAGE>
calling card. Point of sale activation by the DTM and OTC eliminates the need
for the Company or a retailer to invest in an inventory of preactivated "live"
cards. This reduces the risk of vandalism to the DTM and theft of the calling
cards since the calling cards have no value until purchased and activated,
reducing inventory carrying costs and improving management controls.
The Company has recently upgraded and enhanced the DataWave System, which
will allow the Company's computer system to support a larger number of
installed DTMs and OTCs. The Company has implemented procedures to reduce
business interruptions due to network failure such as redundancy for most
components susceptible to failure, multiple on-site and off-site storage of
mission-critical data, and is in the process of implementing a backup network
system at its New Jersey offices. As of June 30, 1998, part of the backup
system is operational, and the Company estimates that the backup system will
be fully implemented during its third fiscal quarter. However, there can be no
assurance that the procedures the Company has implemented to reduce business
interruptions will be effective.
STRATEGIC RELATIONSHIP WITH AT&T
In January 1998, the Company entered into a series of agreements with AT&T
(the "AT&T Agreements") providing for, among other things, the purchase of
long distance telephone service from AT&T, the right to resell the service
under AT&T's brand name and the joint marketing and promotion of AT&T Prepaid
Cards and the DataWave System in the United States. AT&T is one of the world's
largest telecommunications providers, processing over 240 million calls per
day, and providing services to more than 280 countries and locations
worldwide. Pursuant to the AT&T Agreements, the Company is obligated to
purchase a minimum of $5.25 million of long distance telephone time each year
at a fixed rate. If the Company does not purchase such minimum amount, it
incurs a shortfall charge consisting of the cost of the time not purchased and
a penalty. The Company has the right to produce AT&T branded cards, machine
graphics and other promotional materials on a non-exclusive basis, including
display of the AT&T logo on its DTMs. AT&T provides a toll-free number for its
prepaid calling card customers as well as customer support and service. AT&T
also has provided funds for certain joint marketing efforts. The AT&T
Agreements commenced on March 1, 1998 and their initial term is for two years.
Although the Company has only recently begun to place DTMs and OTCs in
cooperation with AT&T, the Company expects that most of its additional
locations for DTMs and OTCs will be derived from relationships originated by
AT&T from its existing customer base. In April 1998, the Company commenced
joint marketing and promotional programs with AT&T including training of
certain AT&T sales personnel and performing joint sales calls with AT&T.
CANADIAN OPERATIONS
Effective April 1, 1998, the Company entered into an agreement with DCI to
create PhoneLine, a joint venture engaged in the marketing and sale of prepaid
calling cards in Canada, which lacks a national long distance carrier offering
prepaid calling card services. Pursuant to the joint venture agreement, the
Company and DCI each made loans and contributed certain assets to PhoneLine.
In return, DCI received a 60% interest in PhoneLine and the Company received a
40% interest. The Company has an option to purchase from DCI an additional 9%
interest in PhoneLine for approximately $175,000. The Company and DCI also
agreed not to compete in the Canadian prepaid calling card market. In
addition, the Company and DCI each has a right of first refusal to purchase
shares held in PhoneLine as well as the right to initiate at anytime a buy-out
of the other party's interest in PhoneLine. At present PhoneLine sells "live"
calling cards principally through retail outlets. PhoneLine expects to expand
its base of retail outlets and also has begun to introduce DTMs into its
system.
PhoneLine operates a telecommunications switch, located in Toronto, Ontario.
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. A switch-based reseller purchases
long distance services on a variable, per-route basis from a long distance
carrier. A single international call, for example, may pass through the
facilities of multiple long distance resellers before it reaches the foreign
facilities-based carrier that ultimately terminates the call. PhoneLine is in
the process of negotiating rates with various long distance carriers in order
to obtain the lowest cost per call for its long distance services.
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PhoneLine's principal administrative offices are in Vancouver, British
Columbia. PhoneLine employs 15 full-time persons, together with 12 independent
sales representatives.
SERVICING OF THE DTMS
Each DTM performs a self-diagnostic evaluation every three minutes and
signals the DataWave System server in the event of circumstances requiring
attention. The evaluation contains information on inventory levels, cash
accumulation, machine malfunctions and when other technical service is
required. The diagnostic information generated by the DataWave System permits
the Company to evaluate and rate the urgency of the service required, thereby
permitting the efficient and economical coordination of service to the DTM.
The Company employs dedicated service personnel available by pager to
coordinate the installation, maintenance and servicing of its machines in
Texas, southern California and the northeast United States and has also
contracted with a national service provider and independent service agents to
perform these functions in other territories.
PRODUCTS AND SERVICES
EXISTING PRODUCTS AND SERVICES
Prepaid Calling Cards. In the United States, the Company distributes prepaid
calling cards primarily through the DataWave System and, to a lesser extent,
through a limited number of retailers. Prepaid calling cards can be purchased
from a DTM for any dollar denomination up to a limit of $100 using cash or a
credit card. Prepaid calling cards purchased from a retailer using an OTC
device can be purchased for specific dollar amounts up to $100 or for specific
allotments of long distance time. Calls using prepaid calling cards can be
made from any touch tone telephone by dialing a "1-800" number printed on the
back of the calling card and by providing the personal identification number
assigned to the calling card. When a calling card is used, a message informs
the user of how many prepaid telephone minutes remain on the calling card.
Once the total numbers of minutes or dollar amount on the calling card has
been used, the calling card may be discarded or, in the case of certain
carriers, recharged over any telephone. AT&T Prepaid Cards currently cannot be
recharged, although the Company expects to establish the ability to recharge
these cards in the near future. Typically, prepaid long distance calling cards
provide savings on calls made away from the office or home and provide the
same rate any time of day for domestic and international calls.
The Company also generates revenue through a loyalty prepaid calling card
program agreement with the Grand Union supermarket chain under which Grand
Union customers can earn MCI long-distance minutes each time they purchase
products at Grand Union stores. Approximately 10.2% of the Company's revenues
are derived from promotional time associated with the Grand Union program.
This promotional time involves the electronic activation of certain cards
which have been previously distributed to Grand Union customers. Upon the
request of Grand Union, the Company activates the long distance time on such
cards by electronically notifying the underlying long distance carrier's
database. Approximately 1.2% of the Company's revenues are derived from the
sale of preactivated, prepaid calling cards at Grand Union stores. The Company
also operates non-networked prepaid calling card machines, which distribute
"live" cards, that were acquired in various acquisitions. The Company also
supplies prepaid calling cards to certain retailers which are "batch"
activated with specific long distance time when the retailer calls the
Company. This is a small part of the Company's business and is provided mainly
to a single customer.
The Company purchases long distance time and services from several carriers,
although it expects that most of its future purchases will be supplied by
AT&T. See "Risk Factors--Risk of Termination of Carrier Arrangements;
Dependence on Telecommunications Providers."
"Intelligent" Pay Phone Products and Services. As part of its strategy to
increase site penetration and develop strategic relationships, the Company
acquired Metrophone in April 1998. Metrophone operates intelligent pay phones
in Washington, California, Arizona and Oregon which are networked to a
dedicated server, independent of the DataWave System. As a PSP, Metrophone
negotiates with local and long distance carriers for telecommunications
services. Long distance carriers pay Metrophone a percentage of the revenue
generated from collect and "800" number calls, and Metrophone pays a
commission or fee to the owner of the site where the pay
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phone is located. As of June 30, 1998, Metrophone owned 357 intelligent pay
phones. The Company has begun marketing its DTMs in conjunction with its pay
phones to existing and prospective sites. The Company has also entered into a
pay phone agreement with AT&T, separate from the AT&T Agreements, to provide
and advertise AT&T long distance services from its pay phones.
As of November 1997, Metrophone entered into a five year contract with ARVC
pursuant to which Metrophone has the right to market its intelligent pay
phones. As of June 30, 1998, Metrophone had entered into 256 contracts for the
placement of 774 pay phones, of which 183 have been installed. The term of
each pay phone site agreement is five years, subject to certain renewal
provisions. In May 1998, DataWave entered into a three year contract with ARVC
pursuant to which the Company has the right to market the AT&T Prepaid Card
directly to ARVC's 3,500 member sites. Although the Company believes that
Metrophone can meet member demand under the ARVC contract, there can be no
assurance that it will be able to do so.
Other Merchandising Services. The Company also operates merchandising
equipment for instant photographs, business card production and photo
stickers. These machines were obtained pursuant to the Company's acquisition
of Cardxpress Vending, Inc. and are operated in approximately 150 sites.
FUTURE PRODUCTS AND SERVICES
The DataWave System is scalable and flexible, permitting the Company to
offer new premium prepaid products and services through its network of DTMs.
The Company intends to offer the following:
Prepaid Courier Services. On April 17, 1998, the Company entered into an
agreement with Airborne Express providing for the testing of prepaid overnight
courier delivery services. Airborne Express is the third-largest air express
delivery carrier in the United States. During the six-month test period ending
in November 1998, approximately 50 to 150 of the Company's DTMs will be
equipped with an electronic drop box. Once a consumer drops a package in the
electronic drop box, a sensor will alert the Company's central computer, which
in turn will alert Airborne Express' dispatch center to pick up the package.
This system will eliminate the need for unnecessary routine pickup schedules
to those locations, thereby reducing costs. The consumer can purchase the
courier service using cash or a credit card, and will receive a tracking
number for each courier delivery request. Upon the completion of the six-month
test period, the Company and Airborne Express will decide whether to place
additional DTMs in other locations.
Prepaid Paging Services. The Company is reviewing potential strategic
relationships to enter into the prepaid paging services market, as the Company
believes that this market may provide future opportunities to utilize the
DataWave System. The Company recently entered into a letter of intent with
SkyTel Corp., a subsidiary of SkyTel Communications, Inc. ("SkyTel"), to test
market prepaid paging products and services using the Company's DTMs and
through OTC retail sales. SkyTel provides paging services to over one million
customers worldwide. During the six-month trial period, the Company will
purchase SkyTel's prepaid packages, which include both the paging device and
the service, and place the packages for sale in various locations throughout
the United States. Upon completion of the trial period, the Company and SkyTel
will decide whether to negotiate an agreement for a longer term relationship.
Postage Stamps. The Company has recently introduced a limited number of DTMs
capable of selling U.S. postage stamps and is evaluating the feasibility of
this product offering.
Prepaid Cellular Telecommunications. The Company is reviewing potential
strategic relationships to enter into the prepaid cellular telecommunications
market. The Company believes it is positioned to take advantage of the rapid
growth in the prepaid cellular, or wireless, telecommunications market, which
is expected to grow in the United States from approximately $360 million in
sales in 1997 to approximately $1.3 billion in sales in 2001, according to
industry data from the Yankee Group.
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SALES AND MARKETING
The Company employs both in-house sales and marketing personnel and
contracts with independent agents in the United States. The independent agents
generally concentrate on identifying new site locations and arranging site
contracts on behalf of the Company. The Company's sales and marketing strategy
now focuses on joint marketing efforts with AT&T. The Company has devoted five
full-time sales staff to promote such joint marketing efforts including
providing educational training and support to the AT&T sales force in
connection with the sales and marketing of the AT&T Prepaid Card and the
DataWave System. On May 4, 1998, the Company also began a telemarketing
program in support of its prepaid products and services.
COMPETITION
The prepaid calling card market is highly competitive and is served by
numerous international, national and local firms. In the United States, the
Company competes with major long-distance providers, including but not limited
to WorldCom, MCI and Sprint, as well as with other prepaid calling card
distributors including but not limited to, IDT Corporation, Pacific Gateway
Exchange, Inc., RSL Communications, SmarTalk Teleservices, Inc., Star
Telecommunications, Inc. and Telegroup, Inc. In Canada, the Company's
competitors include BayLine Communications, Canada Telecom Network, Inc.,
Cardinal VoiceCard, Ltd., Channel Telecom, Gold Line Telemanagement Inc.,
Phonetime International, Inc. The Company also competes with AT&T in certain
locations where AT&T offers prepaid calling cards directly or through other
distributors. In addition, as the use of cellular phones and calling charge
cards increases, the Company faces increased competition from providers of
these products. Many of these competitors have significantly greater
financial, technical and marketing resources, and much larger distribution
networks, and generate greater revenues and have greater name recognition than
the Company. These competitors may be able to institute and sustain price
wars, or imitate the features of the Company's DataWave System products,
resulting in a reduction of the Company's share of the market and reduced
price levels and profit margins. In addition, there are relatively low
barriers to entry into the prepaid calling card market, and the Company has
faced, and expects to continue to face, additional competition from new
entrants. In the United States, the Company also competes with prepaid calling
card distributors who also own and operate their own switch and transmission
platforms. Such distributors may provide long distance service at a lower cost
than the Company, and offer additional bundled features such as voicemail and
facsimile services.The barriers to entry into the independent pay phone
provider market are also low and there is substantial competition in this
market from both other independent pay phone providers and from the large
telecommunications carriers who dominate the pay phone market. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside its control, including the reliability of
competitors' products and services, the ability of competitors to hire, retain
and motivate qualified personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
There can be no assurance that the Company will be able to compete effectively
on pricing or other requirements with current and future competitors or that
competitive pressures will not materially adversely affect the Company's
business, financial condition and results of operations.
MANUFACTURING AND SUPPLY
Production of DTMs consists of the assembly and testing by the Company of a
high volume of quality components manufactured by third parties. The Company
is dependent on a limited number of suppliers for certain of its key
components, such as radio modems. The Company purchases component parts on a
purchase order basis and has no supply commitments from any of its suppliers.
Final assembly of the DTM and various quality control procedures are completed
at the Vancouver Facility. The Company then ships the DTM directly to the
service provider or site location where it is to be placed. OTC units are
supplied by VeriFone, Inc. The Company currently employs six persons in one
shift per day to assemble up to approximately 150 DTMs per month, and with a
second shift, the Company believes it could produce up to approximately 300
DTMs per month. Although the Company believes that its current manufacturing
capabilities will be able to produce sufficient DTMs through fiscal 1999,
there can be no assurance that the process will be adequate for unanticipated
future growth. The Company expects that it may be required to expand its
manufacturing capabilities or outsource such capabilities after fiscal 1999.
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FACILITIES
The Company occupies approximately 9,000 square feet in Vancouver, British
Columbia for its executive offices and for assembly operations under a lease
expiring on March 31, 2001. DataWave Services (US) Inc. and Cardxpress occupy
approximately 3,900 square feet in Pompton Plains, New Jersey under a lease
expiring on June 14, 1999. Metrophone, leases approximately 2,750 square feet
in Bellevue, Washington pursuant to a lease expiring on October 31, 2000. The
Company believes that its current lease arrangements provide adequate space
for its foreseeable future needs as well as those of its subsidiaries.
INTELLECTUAL PROPERTY
Although the Company has not obtained patent protection for any of its
products, the Company has sought to protect its proprietary technology through
a combination of copyright, trademark and trade secret laws, non-disclosure
agreements and other forms of intellectual property protection. The Company
has filed two patent applications with the PTO, including one for the DTM and
its method of operation, which were denied because the PTO found prior art
prevented patenting of the Company's technology. On May 13, 1997, the Company
filed a continuation of the application for the DTM and its method of
operations with the PTO. On June 1, 1998, the PTO denied the application
because of prior art and notified the Company that any comments in response to
the PTO's decision must be submitted by September 1, 1998. The Company intends
to continue pursuing the application; however, there can be no assurance that
the application will be successful. In addition, the Company has filed a
patent application with the PTO for its overnight courier pack disbursing
mechanism. As of the date of this Prospectus, no communication had been
received from the PTO regarding this application. There can be no assurance
that any of the Company's pending patent applications will issue and if
issued, whether the claims allowed are or will be sufficiently broad to
protect the Company's technology. The Company owns a United States federal
registration for the trademark "DATAWAVE" and design. There can be no
assurance that the Company's operations do not or will not violate the
intellectual property rights of others, that they would be upheld if
challenged or that the Company, would, in such an event, not be prevented from
using such Company's intellectual property rights, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, failure of the Company to obtain needed licenses from third
parties for other technology and intellectual property could delay or prevent
the development, manufacture or sale of products. Although the Company relies,
in part, on contractual provisions to protect its trade secrets and
proprietary know-how, there is no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Although no lawsuits against the
Company regarding infringement of any existing patents or other intellectual
property rights are pending, nor have any claims been asserted, there can be
no assurance that such infringement claims will not be asserted by third
parties in the future. There also can be no assurance in the event of such
claims of infringement that the Company will be able to obtain licenses on
reasonable terms. On May 5, 1998, the Company received notice that a third
party holds certain patented technology applicable to point-of-sale activation
and recharging of prepaid telephone calling cards. Based on a preliminary
review of the relevant patents, the Company does not believe its DataWave
System directly infringes such patents. However, if a claim of infringement is
asserted and it is determined that the DataWave System infringes any of these
patents, such determination could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's involvement in any intellectual property dispute or action to
protect trade secrets and know-how, including actions brought by the Company,
could result in a material adverse effect on the Company's business. Adverse
determinations in litigation in which the Company may become involved could
subject the Company to significant liabilities to third parties, require the
Company to grant licenses to or seek licenses from third parties and prevent
the Company from manufacturing and selling its products. Any of these
situations could have a material adverse effect on the Company's business,
financial condition and results of operations.
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GOVERNMENT REGULATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company can be predicted at this time.
The telecommunications industry is highly regulated in the United States at
the federal, state and local levels and in Canada at the federal level.
Various international authorities may also seek to regulate the services
provided or to be provided by the Company. In the United States, federal laws
and the regulations of the FCC generally apply to interstate
telecommunications, while state public utility commissions, public service
commissions or other state regulatory authorities generally exercise
jurisdiction over telecommunications that originate and terminate within the
same state. The FCC and state regulatory authorities may address regulatory
non-compliance with a variety of enforcement mechanisms, including monetary
forfeitures, refund orders, injunctive relief, license conditions, and/or
license revocation. In Canada, federal laws and the regulations and rulings of
the CRTC generally apply to telecommunications companies.
The regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to telecommunications
companies. There can be no assurance that future regulatory, judicial or
legislative activities will not have a material adverse effect on the
Company's business, financial condition and results of operations.
United States. The Company is a switchless distributor of long distance
telephone time purchased from carriers such as, but not limited to, AT&T and
MCI. The Company believes that it is not regulated as a carrier because the
Company's name is not on its prepaid calling cards and the telephone number on
the prepaid calling cards is that of the underlying, regulated carrier and not
that of the Company. Accordingly, the Company has not obtained any federal or
state authorizations. To the extent that federal or state regulators enforce
applicable laws and regulations differently, the Company may be found in
violation of such laws or regulations and may be required to alter its
business strategy.
The Company recently determined that, in certain instances during calendar
1998, the Company's rates for telecommunications services were above those
specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. However,
based on the Company's review of its product offerings and the history of
federal and state enforcement efforts in the applicable jurisdictions, the
Company does not believe that the failure to be in compliance with the tariffs
of the underlying carriers will have a material adverse effect on the
Company's business, financial condition and results of operations. In July
1998, the Company adjusted its rates for prepaid calling card services to the
rates specified in the long distance tariffs of its underlying carriers and
therefore believes it is currently compliant with the foregoing regulatory
requirements.
In addition, the regulation of prepaid calling card providers, particularly
by state regulators, is unsettled. Even where the Company's rates do not
exceed the tariffed rate, state and federal regulators might attempt to assert
jurisdiction over the Company's operations. Certain states in which the
Company operates, such as Florida and Louisiana, have promulgated specific
laws or regulations regarding prepaid calling cards. Such laws or regulations
may require, among other things, that the cards specify cost-per-minute, extra
fees, expiration dates, and toll-free customer service telephone numbers.
Although the Company believes that it is or will be able to
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comply with state laws and regulations, there can be no assurance that such
laws or regulations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
The sale of long distance telephone service through prepaid calling cards
may be subject to "escheat" laws in various states. These laws generally
provide that payments or deposits received in advance or in anticipation of
the provision of utility services, including telephone service, that remain
unclaimed for a specific period of time after the termination of such services
are deemed "abandoned property" and must be submitted to the state. In the
event such laws are deemed applicable, the Company may be required to deliver
such amounts to certain states in accordance with these laws, which could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Pursuant to the Telecommunications Act of 1996 (the "Communications Act"),
the FCC was granted the authority to implement certain policy objectives,
including the establishment of the Universal Service Fund. The purpose of the
Universal Service Fund is to subsidize the provision of local
telecommunications services to low-income consumers, schools, libraries,
health care providers and rural and insular areas that are costly to serve.
Pursuant to an FCC order (the "Universal Service Order"), Universal Service
Fund contributions are generally equal to approximately four percent of a
carrier's interstate and international gross revenues, and approximately one
percent of its intra-state "end user" gross revenues, effective January 1,
1998. The FCC will adjust the amount of these contributions each calendar
quarter, and they may increase significantly in future periods. The Company's
underlying carriers may pass their respective costs through to the Company.
AT&T has included a charge for the Universal Service Fund in its most recent
billing to the Company.
The Company's wholly owned subsidiary, Metrophone, provides pay phone
services in the United States. PSPs are subject to certain federal and state
regulations. The 1996 amendments to the Communications Act empowered the FCC
to promulgate rules to assure that PSPs and Independent Pay Phone Providers
("IPP") are fairly compensated for each completed intrastate and interstate
call initiated at a pay phone. This authority has been interpreted by the FCC
and a reviewing court to empower the FCC to regulate rates for pay phones,
including rates for local coin calls, and to preempt the power previously
exercised by the state regulatory commissions to set these rates. The FCC has
adopted a scheme that allows local pay phone call rates to be established by
market forces. On May 15, 1998, the United States Court of Appeals for the
District of Columbia Circuit reviewed a challenge to the compensation scheme
adopted by the FCC, and found inadequate the FCC's explanation of its market-
based rate. Recognizing the disruption that would result in the industry if
the FCC's order was vacated, the court remanded the FCC rule for further
explanation, leaving intact the current FCC rule pending the outcome of these
proceedings.
The FCC's rules governing PSPs require that local exchange carriers make
available and transmit pay phone-specific coding digits to PSPs on a tariffed
basis, and that PSPs transmit these digits from pay phones to interexchange
carriers ("IXCs") as a condition to receiving per-call compensation from IXCs
for toll-free and access code calls placed from pay phones. This requirement
has been partially waived to allow PSPs to receive compensation for such calls
pending network changes that are necessary to allow PSPs to transmit pay
phone-specific coding digits. The waiver has been the subject of litigation
and the Company cannot be certain that the waiver will be maintained for as
long as will be necessary for the Company to comply with the coding digit
requirements. Other federal regulations require PSPs to offer, among other
things, unrestricted access from their pay phones to operator service
providers ("OSP"), the prompt routing of emergency calls and keypads that
include both numbers and letters. PSPs that fail to provide unrestricted
access are not entitled to receive commissions due from OSPs. FCC regulations
also impose obligations for posting in the pay phone certain consumer
information.
Notwithstanding federal preemption of state rate authority, state
commissions continue to have authority to regulate certain aspects of PSPs'
activities, including public interest pay phone programs, reporting
requirements, the location of pay phones and quality of service standards. For
instance, PSPs may be required in certain states to install volume
amplification devices and to insure the capability of pay phones to place both
outgoing calls and receive incoming calls.
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In most states, PSPs and IPPs such as the Company may not install or offer
use of a pay phone unless that telephone has the capability of accepting an
emergency "911" call, and in some cases calls to an operator, without the need
for the caller to insert a coin or to make any other type of payment. In
certain cases, any expenses incurred in converting the capability of an
existing pay phone may be considered a cost of complying with a state's
emergency communications program, which may allow the PSP or IPP to receive
compensation from pay phone user fees upon approval of such conversion costs
by the state PUC. Some state laws assess fees for the inspection and
supervision of pay phone facilities. A state also may subject PSPs and IPPs to
pay phone taxes, and may prohibit the PSP or IPP from spreading the burden of
these taxes to all billed customers. Some state laws regulate the types of
calls which may be placed from a pay phone, particularly prohibiting calls to
700, 900, 950 or 800 numbers, other than the 800 number printed on the card.
Additionally, some states prohibit PSPs and IPPs from imposing any charge on
local directory assistance calls.
Canada. In Canada, federal laws and the regulations and rulings of the CRTC
generally apply to telecommunications companies. Because PhoneLine is a
reseller of long-distance telephone time purchased from carriers such as
Fonorola, it is required to register with the CRTC but is not otherwise
directly regulated as a carrier by the CRTC or provincial regulatory
authorities. As the CRTC regulates the carriers which supply the telephone
time resold by PhoneLine, PhoneLine is indirectly subject to CRTC decisions
applicable to those carriers.
TAX MATTERS
United States. There is currently a 3% excise tax assessed on the retail
value of the long distance telephone time resold by the Company as well as a
4.4% universal tax assessed on the wholesale price of long distance telephone
time by federal regulation. These taxes are included in the cost to the
Company of its purchase of long distance time from AT&T. The taxation of
prepaid telephone cards sales and use is evolving and is not specifically
addressed by the laws of many of the states in which the Company does
business. Some states and localities charge a tax on the point-of-sale
purchase of prepaid telephone cards while others charge a tax on usage of
prepaid telephone cards. While the Company believes that it has adequately
reserved for any state taxes it may ultimately be required to pay, there can
be no assurance that this will be the case. In addition, certain states may
enact legislation which specifically provides for taxation of prepaid
telephone cards or may interpret current laws in a manner resulting in
additional tax liabilities.
Canada. Certain Canadian provinces may impose a direct point of sale tax on
long distance telephone charges or other telecommunications services.
Depending on the jurisdiction involved, this tax may be included in the cost
to the Company of its long distance time from its long distance providers, or
the Company may be able to acquire the long distance telephone time exempt of
the tax and simply pass on the charge to its customers with the sale of
prepaid calling cards. As in the United States, the taxation of prepaid
telephone card sales and use is evolving and may not be specifically addressed
by the laws of Canada or many of the provinces in which the Company does
business. While the Company believes it has adequately reserved for any taxes
it may ultimately be required to pay, there can be no assurance that this will
be the case; and neither the Company nor its advisors have yet undertaken any
independent investigation in this regard. In addition, Canada or certain
provinces could enact legislation, which specifically provides for taxation of
prepaid telephone cards or may interpret current laws in a manner resulting in
additional tax liabilities. In addition, because the manufacturing of the
Company's DTMs and OTCs occurs in Canada for subsequent sale to the United
States, there is a possibility that either Canada or the United States taxing
authorities could take issue with the Company's agreed upon transfer price.
While the Company believes that the transfer prices charged between the
Company and its related affiliates are appropriate, there is a possibility
that additional tax could be paid in Canada if Revenue Canada takes issues
with the prices charged, and reassess on the basis that greater income should
have been realized in Canada.
EMPLOYEES
As of June 30, 1998, the Company had 69 employees, 14 in management and
administrative positions, 18 in the sales and marketing group, seven in
manufacturing and assembly positions, eight in research and
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development and 22 in a service and support capacity. None of the Company's
employees is a member of a labor union or is covered by a collective
bargaining agreement.
LEGAL PROCEEDINGS
The Company entered into an agreement with Frontier in April 1997 to provide
Frontier's services through the Company's DTMs and OTCs through August 4,
1999. In October 1997, Frontier terminated its contract to provide the Company
with long distance time and service. In 1998, the Company delivered demand
letters to Frontier stating that Frontier had breached its agreement and
requesting settlement discussions. To date no response has been received from
Frontier.
The Company is not aware of any pending legal proceedings against the
Company that, individually or in the aggregate, would have a material adverse
effect upon the Company's business, results of operations or financial
condition.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names, ages and titles of the Executive
Officers, Directors and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Clive Barwin(1)..................... 44 Chief Executive Officer, President and Director
Peter Hough(1)(2)................... 40 Chief Operating Officer, Chief Financial
Officer, Secretary and Director
Joshua Emanuel(3)................... 47 Vice President of Sales and Marketing
Garth Braun(2)(4)................... 39 Director
Louis Eisman(2)(4).................. 55 Director
</TABLE>
- --------
(1) Executive Officer.
(2) Member of Canadian Audit Committee.
(3) Mr. Emanuel is employed by DataWave Services (US) Inc.
(4) Member of United States Audit Committee and the Compensation Committee.
Mr. Barwin has been the President and a Director of the Company since
November 1993. He has served as the Company's Chief Executive Officer since
March 1997 and for the period from September 1994 to October 1996. From 1984
to 1992, Mr. Barwin was President and Chief Executive Officer of Modatech
Systems, Inc. ("Modatech"), which was involved in developing and marketing
sales force automation software for Fortune 1000 companies and other
businesses. Prior to 1984, Mr. Barwin was Chief Financial Officer of Mr. Jax
Fashions, Inc., a Canadian company specializing in the manufacturing and sale
of women's apparel. Mr. Barwin received a Bachelor of Commerce Degree from the
University of Witwatersrand, South Africa, and a Chartered Accountant
designation from Transvaal, South Africa.
Mr. Hough has been a Director of the Company since November 1993.
Additionally, he has served as the Company's Chief Operating Officer since
July 1998, the Company's Secretary since August 1997 and as the Company's
Chief Financial Officer since May 1997 and for the period from September 1994
to April 1996. From April 1996 through March 1997, Mr. Hough served as the
Company's Vice President of Operations. From 1992 to August 1994, Mr. Hough
was self-employed. Prior to 1992, Mr. Hough served as the Chief Financial
Officer and Vice President of Development and Client Services for Modatech.
Mr. Hough received a Bachelor of Commerce Degree from the University of
Witwatersrand, South Africa, and is qualified as a Chartered Accountant in
Canada.
Mr. Emanuel has been Vice President of Sales and Marketing of DataWave
Services (US) Inc. since March 1997. From 1983 to 1998, Mr. Emanuel served as
President of Colorama Photo, Inc., a privately-held company that owns and
operates one-hour photo labs. In addition from 1995 to 1998, Mr. Emanuel
served as President of Interurbain Communications, Inc., a privately-held
company previously engaged in prepaid card distribution, from which the
Company purchased substantially all of the assets in May 1997 and as Vice
President of Freemont Quality Products, Inc. a privately-held company engaged
in the distribution of sporting goods. Mr. Emanuel received a Bachelor of
Mechanical Engineering Degree from Arya-Mehr University of Technology, Iran.
Mr. Braun has been a Director of the Company since August 1997. Since
November 1992, Mr. Braun has been the Chief Executive Officer of Karmel
Capital Corporation, a Canadian real estate development company. Mr. Braun
also serves as a Director of RJZ Mining Corporation, Cabo Exploration Ventures
Inc. and Uganda Gold Mining Ltd. Mr. Braun received a Business Administration
Degree from Simon Fraser University, Canada.
Mr. Eisman has been a Director of the Company since August 1997. From 1980
through 1992, Mr. Eisman was the President and Chief Executive Officer of Mr.
Jax Fashions, Inc. Since 1980, Mr. Eisman has been a Director of Eisman
Holdings Ltd., where he manages a private venture capital investment fund.
Executive Officers of the Company are appointed by the Board and serve at
its discretion. All Directors hold office until the next annual shareholders'
meeting of the Company or until their successors have been duly
43
<PAGE>
elected and qualified. There are no family relationships between any of the
Executive Officers or Directors of the Company. The Company anticipates
appointing one additional non-employee Director within six months of this
Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board maintains two audit committees. The Canadian audit committee,
consisting of Messrs. Hough, Braun and Eisman, reviews the results and scope
of the annual audit and the services provided by the Company's independent
auditors. The United States audit committee, consisting of Messrs. Braun and
Eisman, separately reviews the results and scope of the annual audit and the
services provided by the Company's independent auditors.
The Board also maintains a compensation committee consisting of Messrs.
Braun and Eisman (the "Compensation Committee"). The Compensation Committee
establishes and administers the compensation of officers and employees of the
Company and will administer the Company's compensation programs, including the
grant of stock options. See "--Incentive Plans."
DIRECTOR COMPENSATION
The members of the Board may be reimbursed for such reasonable travel
expenses incurred in attending Board meetings. To date, the members of the
Board have not received any monetary compensation. However, on August 1, 1997
the two outside Directors, Messrs. Braun and Eisman, each received an initial
grant of options to purchase 20,000 Common Shares at an exercise price of
C$1.50 (US$1.06) per share as compensation for serving on the Board.
Immediately after completion of the Offering, Messrs. Braun and Eisman will
each receive an option for an additional 12,500 Common Shares as compensation
for serving on the Board. Outside directors who join the Board after the
Offering will receive options to purchase 20,000 Common Shares.
EMPLOYMENT AGREEMENTS
Upon the closing of this Offering, the Company plans to enter into an
employment agreement with Clive Barwin, the Chief Executive Officer and
President, for a term of three years. The agreement will provide for a minimum
annual base salary of $200,000, annual incentive compensation of up to 100% of
Mr. Barwin's then current base salary and benefits under the Company's benefit
plans. The agreement also will provide, among other things, that if Mr.
Barwin's employment with the Company is terminated (i) by the Company for
Cause (as defined in the agreement), the Company will pay to Mr. Barwin his
base salary and benefits through the date of termination; or (ii) by the
Company without Cause or by Mr. Barwin for Good Reason (as defined in the
agreement), all outstanding unvested options held by Mr. Barwin will vest
immediately and the Company will pay Mr. Barwin a lump sum amount equal to the
discounted present value of 24 months of his then current base salary plus
100% of the maximum amount of incentive compensation Mr. Barwin could have
earned during the year in which the termination occurs. Benefits substantially
similar to those set forth in clause (ii) above are provided in the event of
termination of Mr. Barwin's employment due to death or disability. Pursuant to
this agreement, Mr. Barwin also will receive an option to purchase at least
100,000 Common Shares per year at an exercise price equal to the fair market
value of such stock on the date of grant, which shall vest monthly over a two-
year period.
Upon the closing of this Offering, the Company plans to enter into an
employment agreement with Peter Hough, the Chief Operating Officer, the Chief
Financial Officer and Secretary, for a term of three years. The agreement will
provide for a minimum annual base salary of $160,000, annual incentive
compensation of up to 100% of Mr. Hough's then current base salary and
benefits under the Company's benefit plans. The agreement also will provide,
among other things, that if Mr. Hough's employment with the Company is
terminated (i) by the Company for Cause, the Company will pay to Mr. Hough his
then current base salary and benefits through the date of termination; or (ii)
by the Company without Cause or by Mr. Hough for Good Reason, all outstanding
unvested options held by Mr. Hough will vest immediately and the Company will
continue to pay Mr. Hough his base salary for an additional 24 months (unless
he obtains employment from another employer, in which
44
<PAGE>
case his compensation and benefits will be offset against his base salary) and
pay him a lump sum amount equal to 100% of the maximum amount of incentive
compensation Mr. Hough could have earned during the year in which the
termination occurs. Benefits substantially similar to those set forth in
clause (ii) above are provided in the event of termination of Mr. Hough's
employment due to death or disability. Pursuant to this agreement, Mr. Hough
also will receive an option to purchase at least 50,000 Common Shares per year
at an exercise price equal to the fair market value of such stock on the date
of grant, which vest monthly over a two-year period.
EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information concerning
compensation paid by the Company for the services rendered during the fiscal
years ended March 31, 1998, 1997 and 1996 with respect to Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- --------------------
NUMBER OF SECURITIES
NAME AND PRINCIPAL UNDERLYING
POSITION FISCAL YEAR SALARY ($)(1) BONUS ($) OPTIONS (#)
- ------------------ ----------- ------------- --------- --------------------
<S> <C> <C> <C> <C>
Clive Barwin............ 1998 $ 78,400 -- 276,050(2)
Chief Executive Officer 1997 75,062 -- --
and President 1996 62,063 -- 50,000(3)
Peter Hough............. 1998 $ 69,300 -- 276,050(4)
Chief Financial Officer 1997 67,200 -- --
and Secretary(5) 1996 53,200 -- 30,000(6)
</TABLE>
- --------
(1) Immediately upon completion of the Offering, the annual minimum base
salary for Mr. Barwin will increase to $200,000 and for Mr. Hough will
increase to $160,000. See "--Employment Agreements."
(2) This number includes options to purchase 181,050 Common Shares granted in
the fiscal year ended March 31, 1998 as well as the following repriced
options to purchase: (i) 50,000 Common Shares originally granted on
January 1, 1996, which were repriced from $4.41 to $1.06 per share on May
20, 1997 and (ii) 45,000 Common Shares originally granted in November
1993, which were repriced from $3.53 to $1.06 per share. The $1.06 value
has been calculated based upon a repriced value equal to C$1.50 and the
exchange rate on March 31, 1998. In the event the exchange rate on the
date of exercise has fluctuated from the March 31, 1998 exchange rate,
then the exercise price on the date of exercise will be different from
$1.06.
(3) As noted in footnote (2), these options were repriced in May 1997. The
$1.06 value has been calculated based upon a repriced value equal to
C$1.50 and the exchange rate applicable on March 31, 1998. In the event
the exchange rate on the date of exercise has fluctuated from the March
31, 1998 exchange rate, then the exercise price on the date of exercise
will be different from $1.06.
(4) This number includes options to purchase 221,050 Common Shares granted in
the fiscal year ended March 31, 1998 as well as the following repriced
options to purchase: (i) 30,000 Common Shares originally granted on
January 8, 1996, which were repriced from $4.58 to $1.06 per share on May
20, 1997 and (ii) 25,000 Common Shares originally granted on November 16,
1993, which were repriced from $3.53 to $1.06 per share on May 20, 1997.
The $1.06 value has been calculated based upon a repriced value equal to
C$1.50 and the exchange rate on March 31, 1998. In the event the exchange
rate on the date of exercise has fluctuated from the March 31, 1998
exchange rate, then the exercise price on the date of exercise will be
different from $1.06.
(5) Mr. Hough was named Chief Operating Officer effective July 15, 1998.
(6) As noted in footnote (4), these options were repriced in May 1997.
45
<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS
Option Grants
The following table sets forth information concerning options granted to the
Executive Officers during the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(5)
---------------------------------------------- ---------------------
VALUE AT
NUMBER OF PERCENT OF ASSUMED
SECURITIES TOTAL OPTIONS COMMON
UNDERLYING GRANTED TO EXERCISE SHARE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION VALUE OF
NAME GRANTED(1) FISCAL 1998(2) SHARE(3) DATE(4) 5% 10% $7.50
- ---- ---------- -------------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Clive Barwin............ 51,800 7.6% $ 1.06 05/16/02 $ 15,206 $ 33,601 $333,592
81,250 11.9 1.41 08/01/02 31,707 70,065 494,813
48,000 7.0 2.33 09/26/02 30,833 68,133 248,160
Peter Hough............. 33,200 4.8 1.06 05/16/02 9,746 21,536 213,808
139,850 20.4 1.41 08/01/02 54,576 120,599 851,687
48,000 7.0 2.33 09/26/02 30,833 68,133 248,160
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) The options granted to the Executive Officers were made pursuant to the
Company's 1997 Stock Option Plan ("1997 Plan"). The options granted to the
Executive Officers are not subject to a vesting period. See "--Incentive
Plans--1997 Stock Option Plan."
(2) Based on options to purchase an aggregate of 685,200 Common Shares granted
to Directors, employees and Executive Officers in the fiscal year ended
March 31, 1998.
(3) The exercise prices were established at fair market value as determined in
accordance with the 1997 Plan.
(4) The options may be exercised at any time up until the expiration date
subject to certain early termination provisions. See "--Incentive Plans--
1997 Stock Option Plan."
(5) This column shows the hypothetical gains on the options granted based on
assumed annual compound stock appreciation rates of 5% and 10% over the
full five-year term of the options. The assumed rates of appreciation are
mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future prices of its Common Shares.
Option Exercises and Holdings
The following table sets forth certain information regarding option
exercises during the fiscal year ended March 31, 1998 and the value of
unexercised options held as of March 31, 1998 by the Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
NUMBER OF SECURITIES VALUE OF UNEXERCISED AT MARCH 31, 1998 AT
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ASSUMED COMMON SHARE
SHARES OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998(2) VALUE OF $7.50(3)
ACQUIRED VALUE ------------------------- ------------------------- -------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Clive Barwin....... 50,000 $ 63,750 226,050 -- $ 1,756,093 -- $ 1,365,027 --
Peter Hough........ 50,000 63,750 226,050 -- 1,735,582 -- 1,344,516 --
</TABLE>
- --------
(1) The value realized is based on the closing price of $2.34 for the Common
Shares on the VSE on the exercise date, less the exercise price of the
option.
(2) The value of unexercised in-the-money options is calculated based on the
difference between the closing price of $9.23 of the Common Shares on the
VSE on March 31, 1998 and the option exercise price for each such option.
(3) The value of unexercised in-the-money options at an assumed Common Share
value of $7.50 is calculated based on the difference between $7.50 and the
option exercise price for each such option.
46
<PAGE>
INCENTIVE PLANS
The Company is in the process of implementing the Company's 1998 Stock
Option Plan (the "1998 Plan") to become effective on July 31, 1998. On that
date, the 1997 Plan will automatically terminate and, in accordance with
Canadian securities law, options granted under the 1997 Plan will be assumed
by the 1998 Plan.
1998 Stock Option Plan. The purpose of the 1998 Plan is to provide the
Company with a share-related mechanism to attract, retain and motivate
qualified Directors and employees, to reward such of those Directors,
employees, and consultants as may be awarded options under the 1998 Plan by
the Board from time to time for their contributions toward the long-term goals
of the Company and to enable and encourage such Directors and employees to
acquire shares as long-term investments. This includes options granted prior
to the implementation of the 1998 Plan, which were assumed under the 1998
Plan. The Board will, from time to time and in its sole discretion, determine
those Directors and employees, if any, to whom the options are to be awarded.
The aggregate number of options granted to consultants of the Company will not
exceed two percent of the issued and outstanding share capital as of the award
date. However, in no case will an optionee be granted an option where the
number of shares that may be purchased pursuant to that option exceed, when
added to the number of shares available for purchase pursuant to options
previously granted to the optionee which remain exercisable, five percent of
the Company's issued and outstanding share capital as of the award date of the
option being granted. Approximately 1,075,000 Common Shares were reserved for
issuance under the 1998 Plan, and approximately 345,000 Common Shares are
available for issuance.
The 1998 Plan will be administered by the Compensation Committee, acting as
administrator under the terms of the 1998 Plan. Options granted under the 1998
Plan are not transferable by an optionee, and each option is exercisable
during the lifetime of an optionee only by such optionee; provided, however,
that an optionee's personal representative may exercise an optionee's options
within the exercise period. The expiration date of each option will be fixed
by the Board, provided that such date will be no later than the tenth
anniversary of the award date of the option (except in the case of a
consultant, where the expiration date will be no later than the fifth
anniversary of the award date of the option).
In general, the options will terminate 30 days following an optionee's
termination of service, except in the following instances: (i) if termination
resulted from death, the option will expire one year after death, or (ii) if
termination of service results from cause, the option will expire the date the
optionee ceases to be an employee of the Company. As set forth in the 1998
Plan, the exercise price for each option will be not less than the minimum
prescribed by the organized trading facilities on which the shares trade. The
VSE currently requires that the exercise price of each option will not be less
than 100% of the fair market value on the date of grant, and generally will be
determined by reference to the market price for the shares of the Company for
the ten trading days immediately preceding the day on which the VSE receives
the required notice that the Board granted the option.
In granting the options under the 1998 Plan, the Board may provide for
additional terms and conditions, including without limitation, that all
outstanding options shall accelerate and be immediately exercisable in full
upon certain corporation transactions, such as a merger or amalgamation.
The 1998 Plan has been approved by the Board and by the Company's
shareholders at the AGM on July 20, 1998. The effective date of the 1998 Plan
is July 31, 1998, subject to approval by the VSE. The Board may terminate the
1998 Plan at any time provided that such termination will not alter the terms
or conditions of any option or impair any right of any optionee pursuant to
any option awarded prior to the date of such termination, which will continue
to be governed by the provisions of the 1998 Plan.
1997 Stock Option Plan. The purpose of the 1997 Plan is to provide the
Company with a share-related mechanism to attract, retain and motivate
qualified Directors and employees, to reward such of those Directors and
employees as may be awarded options under the 1997 Plan by the Board from time
to time for their
47
<PAGE>
contributions toward the long term goals of the Company and to enable and
encourage such Directors and employees to acquire shares as long term
investments. This includes options granted prior to the implementation of the
1997 Plan, which were assumed under the 1997 Plan. The Board will, from time
to time and in its sole discretion, determine those Directors and employees,
if any, to whom the options are to be awarded. The aggregate number of options
granted to consultants of the Company will not exceed two percent of the
issued and outstanding share capital as of the award date. However, in no case
will an optionee be granted an option where the number of shares that may be
purchased pursuant to that option exceed, when added to the number of shares
available for purchase pursuant to options previously granted to the optionee
which remain exercisable, five percent of the Company's issued and outstanding
share capital as of the award date of the option being granted. 903,800 Common
Shares were reserved for issuance under the 1997 Plan and no Common Shares are
available for issuance. The 1997 Plan will terminate once the 1998 Plan is in
effect and all outstanding options under the 1997 Plan will be assumed under
the 1998 Plan.
The 1997 Plan is currently administered by the Secretary of the Company on
the instructions of the Board. Options granted under the 1997 Plan are not
transferable by an optionee, and each option is exercisable during the
lifetime of an optionee only by such optionee; provided, however, that an
optionee's personal representative may exercise an optionee's options within
the exercise period. The expiration date of each option will be fixed by the
Board, provided that such date will be no later than the tenth anniversary of
the award date of the option.
In general, the options will terminate 30 days following an optionee's
termination of service, except in the following instances: (i) if termination
resulted from death, the option will expire one year after death, or (ii) if
termination of service results for cause, the option will expire the date the
optionee ceases to be an employee of the Company. As set forth in the 1997
Plan, the exercise price of each option generally will not be less than the
market price for the shares of the Company for the ten trading days
immediately preceding the day on which the VSE receives the required notice
that the Board granted the option.
In granting the options under the 1997 Plan, the Board may provide for
additional terms and conditions, including without limitation, that all
outstanding options shall accelerate and be immediately exercisable in full
upon certain corporate transactions, such as a merger or amalgamation.
The 1997 Plan was approved by the Board and shareholders and became
effective on August 1, 1997. The Board may terminate the 1997 Plan at any time
provided that such termination will not alter the terms or conditions of any
option or impair any right of any optionee pursuant to any option awarded
prior to the date of such termination, which will continue to be governed by
the provisions of the 1997 Plan.
48
<PAGE>
CERTAIN TRANSACTIONS
Common Shares totalling 625,000 are currently subject to escrow agreements
(the "Escrow Agreements") by and among the Company, the Montreal Trust Company
of Canada ("Montreal Trust"), Messrs. Barwin and Hough, and certain other
individuals. Pursuant to the terms of the Escrow Agreements, the Common Shares
subject to the Escrow Agreements are restricted from trading until released
from escrow as the Company meets certain net income and positive cash flow
requirements. Companies in which Messrs. Barwin and Hough hold an interest
have made offers (the "Escrow Offers") to purchase an aggregate of 42,000
Common Shares, or 70%, of the escrow shares held by two shareholders (the
"Escrow Vendors") for a nominal amount (C$1.00) and the release of the Escrow
Vendors' remaining shares in escrow. In addition, the Escrow Offer provides
that for each share released to the Escrow Vendors, Messrs. Barwin and Hough
will place an equal number of their unrestricted Common Shares in escrow. Upon
completion of the Escrow Offer, Messrs. Barwin and Hough will each own 246,250
Common Shares subject to the Escrow Agreements. The Company has received
approval for the early release of the escrow shares contingent on certain
events. See "Description of Capital Stock--Common Shares" and "Risk Factors--
Escrow Shares and Compensation Expense."
On March 11, 1997, Messrs. Hough, Barwin and Braun participated in a private
placement of 300,000 units. Each unit consisted of one Common Share and one
non-transferrable share purchase warrant, at a price of $0.73 per unit, which
price was determined based on the average ten-day trading price of the Common
Shares on the VSE. Each warrant entitled the purchaser to subscribe for one
additional Common Share at a price of $0.70 per share until March 11, 1998,
and thereafter at a price of $0.81 per share until March 11, 1999. Messrs.
Hough, Barwin and Braun purchased 53,000, 35,000 and 16,000 units,
respectively.
In 1995, the Company entered into a letter agreement and lease financing
agreement with Financial Solutions Designed, Inc. ("FSD") concerning the
financing and leasing of DTMs. The first phase of the lease financing was
arranged by FSD through Norwest Equipment Financing, Inc. ("Norwest") and
Manufacturers' Bank. Both FSD and Ted Steffien, founder and chief executive
officer of FSD and, at the time, a Director of the Company, guaranteed the
lease financing. In October 1996, the Company repurchased the outstanding
balance on the Norwest portion of the lease financing.
In September 1995, the Company agreed to subscriptions from Clive Barwin and
Peter Hough to purchase 30,000 and 45,000 Common Shares, respectively, from
the Company at a price of $4.63 per share. Messrs. Barwin and Hough abstained
from voting on this transaction.
The Company believes that each of the above transactions was made on terms
no less favorable to the Company than it could have obtained from unaffiliated
third parties. All future transactions between the Company and its officers,
Directors, principal shareholders and their affiliates will be approved by a
majority of the Board, including a majority of the independent and
disinterested outside Directors on the Board, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
49
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of July 20, 1998 certain information
regarding the beneficial ownership of Common Shares held by (i) each Director
and Executive Officer of the Company, (ii) all the Directors and executive
officers as a group, (iii) each person who is known by the Company to be the
owner (or beneficial owner) of 5.0% or more of the outstanding Common Shares
and (iv) each of the Company's current shareholders who is offering to sell
Common Shares in this Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP SHARES TO BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) BE SOLD AFTER THE OFFERING(1)
--------------------------- IN THE ------------------------
SHARES PERCENT OFFERING SHARES PERCENT
------------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS(2):
- -----------------------
Clive Barwin(3)......... 598,868 10.6% 26,000 572,868 6.6%
Peter Hough(4).......... 609,402 10.7 26,000 583,402 6.7
Garth Braun(5).......... 83,700 1.6 16,000 67,700 *
Louis Eisman(6)......... 36,000 * 8,000 28,000 *
All Directors and
Executive Officers
as a Group (4
persons)(7)............ 1,327,970 22.1 76,000 1,251,970 13.9
OTHER PRINCIPAL AND
SELLING SHAREHOLDERS:
- ----------------------
Joshua Emanuel(8)....... 117,366 2.2 10,000 107,366 1.3
David Emanuel(9)........ 123,333 2.3 10,000 113,333 1.4
Freemont Quality
Products, Inc.(10)..... 40,000 * 24,000 16,000 *
Applied
Telecommunications
Technologies IV,
N.V.(11)............... 145,891 2.6 25,333 120,558 1.7
</TABLE>
- --------
* Less than one percent.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all Common Shares beneficially owned by them. For purposes of
the table, Common Shares are considered beneficially owned by a person if
such person has or shares voting or investment power with respect to such
share. As a result, the same security may be beneficially owned by more
than one person and, accordingly, in some cases, the same shares are
listed opposite more than one name in the table.
(2) Unless otherwise indicated, the address of each of the named individuals
is c/o DataWave Systems Inc., 101 West 5th Avenue, Vancouver, British
Columbia, Canada V5Y 1H9.
(3) Mr. Barwin is the President, Chief Executive Officer and a Director of
the Company. The total number of Common Shares beneficially owned by Mr.
Barwin includes (i) options to purchase 226,050 Common Shares,
(ii) warrants for 35,000 Common Shares, (iii) 26,666 Common Shares held
by Clive Barwin Computer Consultants, Inc., which is owned equally by Mr.
Barwin and his wife, (iv) 216,250 Common Shares held in escrow pursuant
to certain escrow agreements and (v) 21,000 Common Shares to be purchased
within the next 60 days pursuant to the Escrow Offer. See "Description of
Capital Stock" and "Certain Transactions."
(4) Mr. Hough is the Chief Operating Officer, Chief Financial Officer,
Secretary and a Director of the Company. The total number of Common
Shares beneficially owned by Mr. Hough includes (i) options to purchase
226,050 Common Shares, (ii) warrants for 53,000 Common Shares and (iii)
21,000 Common Shares to be purchased within the next 60 days pursuant to
the Escrow Offer. In addition, the total number of Common Shares
beneficially owned by Mr. Hough includes 241,830 Common Shares which are
held by Marble Arch Development Corp. ("Marble Arch"). 216,250 of these
shares are held in escrow pursuant to the Escrow Agreements. See
"Description of Capital Stock" and "Certain Transactions." Mr. Hough and
his wife equally own Marble Arch.
50
<PAGE>
(5) Mr. Braun is a Director of the Company. The total number of Common Shares
beneficially owned by Mr. Braun includes options to purchase 20,000
Common Shares.
(6) Mr. Eisman is a Director of the Company. The total number of Common
Shares beneficially owned by Mr. Eisman includes options to purchase
20,000 Common Shares.
(7) The total number of Common Shares beneficially owned by the Directors and
Executive Officers as a group includes options and warrants to purchase
580,100 Common Shares and a right to purchase 42,000 Common Shares within
the next 60 days pursuant to the Escrow Offer. See "Description of
Capital Stock" and "Certain Transactions."
(8) Mr. Joshua Emanuel is the Vice President of Sales and Marketing of
DataWave Services (US) Inc. The total number of Common Shares
beneficially owned by Mr. Emanuel includes (i) options to purchase 27,366
Common Shares and (ii) warrants for 10,000 Common Shares.
(9) Mr. David Emanuel is an employee of DataWave (US). The total number of
Common Shares beneficially owned by Mr. Emanuel includes (i) options to
purchase 3,333 Common Shares and (ii) warrants for 10,000 Common Shares.
(10) Freemont Quality Products, Inc., c/o 231 West Parkway, Pompton Plains,
New Jersey 07444. A 25% ownership interest in Freemont Quality Products,
Inc. is held by each of Messrs. Joshua Emanuel and David Emanuel.
(11) Applied Telecommunications Technologies IV, N.V. ("ATT IV"), B.
Gorsiraweg, Curacao, Netherlands Antilles. This number includes (i)
warrants for 108,989 Common Shares and (ii) warrants for 11,569 Common
Shares held by ATTI, an affiliate of ATT IV.
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DESCRIPTION OF CAPITAL STOCK
As of July 20, 1998, the authorized capital stock of the Company consisted
of 12,500,000 Common Shares, without par value, and 5,374,675 Common Shares
were outstanding and held by 169 holders of record. At the AGM on July 20,
1998, the Company received approval from its shareholders to increase the
Company's authorized capital stock to 50,000,000. The following summary does
not purport to be complete and is subject to and qualified in its entirety by
the provisions of the Company's Altered Memorandum and Articles, copies of
which are attached as exhibits to the Registration Statement of which this
Prospectus is a part, and by the provisions of applicable law.
COMMON SHARES
Generally. Each Common Share entitles the holder to one vote on all matters
submitted to a vote of the shareholders. The Board may from time to time
declare and authorize payment of such dividends, if any, as they may deem
advisable out of funds or assets properly available. There are no pre-emptive
rights to subscribe for any additional shares that the Company may issue and
there are no redemption provisions or sinking fund provisions applicable to
the Common Shares, nor are the Common Shares subject to calls or assessments
by the Company. All outstanding Common Shares are, and all Common Shares to be
outstanding upon completion of this Offering will be, legally issued, fully
paid and nonassessable.
Escrow Shares. As of July 20, 1998, there were 625,500 Common Shares (the
"Escrow Shares") held in escrow by Montreal Trust, as escrow agent, pursuant
to the Escrow Agreements with certain shareholders, including Messrs. Barwin
and Hough. Holders of the Escrow Shares generally hold all voting and other
rights applicable to Common Shares; however, such holders have waived their
rights to vote to cancel the Escrow Shares, to receive dividends on the Escrow
Shares and to participate in the assets and property of the Company on a
winding up or a dissolution of the Company with respect to the Escrow Shares.
On July 16, 1998, the Company received approval from the VSE and BCSC to
release all of the Escrow Shares following the Offering, provided the gross
proceeds of the Offering are at least $20,000,000. In the event the gross
proceeds of the Offering are less than $20,000,000, the Escrow Shares are
eligible for release as the Company meets certain net income and positive cash
flow requirements. See "Certain Transactions" and "Risk Factors--Escrow Shares
and Compensation Expense."
Pooling Agreements. Pursuant to pooling agreements dated November 16, 1993,
February 9, 1996 and June 30, 1997 between the Company, Montreal Trust and
certain shareholders of the Company, such shareholders have agreed to place
141,550 of the Escrow Shares released from escrow in a pool (the "Pooled
Shares"), which provides for a time based release of the Pooled Shares to the
shareholders. Of the total Pooled Shares, 76,800 will be released from the
pool in equal annual installments over a four year period. The remaining
Pooled Shares will be released from the pool in equal annual installments over
a three year period.
REGISTRATION RIGHTS
As of July 20, 1998, ATTI and ATT IV held non-transferable share purchase
warrants to purchase an aggregate of 120,558 Common Shares. Under the terms of
these warrants, ATTI and ATT IV may require the Company to register Common
Shares held by them in connection with a registration statement filed by the
Company for the public offering of its shares or shares held by another
shareholder. The Company will pay all expenses of such registration including,
under the terms of certain warrants, fees and disbursements of counsel for
ATTI and ATT IV and underwriters discounts applicable to their shares.
Upon completion of this Offering, the Company will issue warrants to
purchase an aggregate of up to 314,533 Common Shares to Morgan Keegan &
Company, Inc. and Laidlaw Global Securities Inc. (the "Representatives"). The
Representatives may require the Company to register these Common Shares with a
registration statement filed by the Company for the public offering of its
Common Shares or the Common Shares held by another shareholder of the Company.
The Company will pay all expenses of such registration.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Altered Memorandum and Articles of the Company limit the liability of
the Directors to the fullest extent permitted by the British Columbia Company
Act. In addition, the Altered Memorandum and Articles provide that the Company
shall indemnify Directors and officers of the Company to the fullest extent
permitted by such law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is ChaseMellon
Shareholder Services, L.L.C. ("ChaseMellon"). ChaseMellon's address is 235
Montgomery Street, 23rd Floor, San Francisco, California 94104, and its
telephone number is (415) 743-1421. The co-transfer agent for the Common
Shares is Montreal Trust. Montreal Trust's address is 510 Burrard Street, 4th
Floor, Vancouver, British Columbia, Canada, V6C 3B9, and its telephone number
is (604) 661-9400.
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN BRITISH COLUMBIA, CANADA
The Company is organized under the laws of British Columbia, Canada.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, Directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of, shareholders as those that would apply
if the Company were incorporated in a jurisdiction within the United States.
Effective upon the closing of the Offering, the Company's Altered Memorandum
and Articles, as approved at the Company's Annual General Meeting held on July
20, 1998, will provide, among other things, that (i) the Board may increase
the number of Directors by up to one-third of the then existing number of
Directors without shareholder approval; (ii) the Board may appoint an
executive committee with authority to take action on any matter on which the
Board could act, and (iii) the Company's President must be a Director. In
addition, (i) shareholders holding five percent of the Common Shares may call
a shareholder's meeting; and (ii) the affirmative votes of the holders of 75%
of the Common Shares present at a meeting in which a quorum is present is
required for the approval of certain fundamental changes. Certain of these
provisions could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the courts of British Columbia, Canada may not enforce
liabilities predicated upon United States federal securities laws.
CERTAIN CANADIAN FEDERAL INCOME TAX AND OTHER LAW CONSIDERATIONS
A brief description is included below of certain taxes, including
withholding taxes, to which United States security holders are subject under
existing tax laws and regulations of Canada. The consequences, if any, of
provincial taxes are not considered. The following information is general and
security holders should seek the advice of their own tax advisors, tax counsel
or accountants with respect to the applicability or effect on their own
individual circumstances of the matters referred to herein.
U.S. citizens and individual residents and domestic corporations are taxed
on their worldwide income. Therefore, dividends and capital gains of U.S.
taxpayers will also be subject to U.S. income tax. U.S. shareholders should
consult their own tax advisors regarding specific questions as to U.S.
federal, state or local taxes.
The discussion under this heading summarizes the principal Canadian federal
income tax consequences of acquiring, holding and disposing of Common Shares
by a shareholder of the Company who is not a resident of Canada but is a
resident of the United States and who will acquire and hold Common Shares as
capital property for the purposes of the Tax Act. This summary does not apply
to a shareholder who carries on business in Canada through a "permanent
establishment" situated in Canada or performs independent personal services in
Canada. This summary is based on the provisions of the Tax Act and the
regulations thereunder and on an understanding of the administrative practices
of Revenue Canada, and takes into account all specific proposals to amend the
Tax Act or regulations made by the Minister of Finance of Canada as of the
date hereof. It has been assumed
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that there will be no other relevant amendment of any governing law although
no assurance can be given in this respect. This discussion is general only and
is not a substitute for independent advice from a shareholder's own Canadian
and U.S. tax advisor.
The provisions of the Tax Act are subject to income tax treaties to which
Canada is a party, including the Convention.
Dividends on Common Shares. Under the Tax Act, a nonresident of Canada is
subject to Canadian withholding tax at the rate of 25% on dividends paid or
deemed to have been paid by a corporation resident in Canada. The Convention
limits the rate to 15% if the shareholder is a resident of the United States
and the dividends are beneficially owned by and paid to him, and to five
percent if the shareholder is also a corporation that beneficially owns at
least ten percent of the voting stock of the payor corporation.
The Convention generally exempts from Canadian income tax dividends paid to
a religious, scientific, literary, educational or charitable organizations if
the organization is a resident of the United States and such dividend income
is exempt from income tax under the laws of the United States or to an
organization constituted and operated exclusively to administer a pension,
retirement or employee benefit fund or plan.
Disposition of Common Shares. Under the Tax Act, a taxpayer's capital gain
or capital loss from the disposition of Common Shares of the Company is the
amount, if any, by which his proceeds of disposition exceed (or are exceeded
by, respectively) the aggregate of his adjusted cost base of such shares and
reasonable expenses of disposition. Three-quarters of a capital gain (the
"taxable capital gain") is included in income, and three-quarters of a capital
loss in a year (the "allowable capital loss") is deductible from taxable
capital gains realized in the same year. The amount by which a shareholder's
allowable capital loss exceeds the taxable capital gain in a year may be
deducted from a taxable capital gain realized by the shareholder in the three
previous or any subsequent year, subject to certain restrictions in the case
of a corporate shareholder and subject to adjustment when the capital gains
inclusion rate in the year of disposition differs from the inclusion rate in
the year the deduction is claimed.
If a Common Share is disposed of to the Company other than in the open
market in the manner in which shares would normally be purchased by the
public, the proceeds of disposition will be considered as limited to the paid-
up capital of the share as defined in the Tax Act and the balance will be
deemed to be a dividend and subject to withholding tax as discussed above. In
the case of a shareholder that is a corporation, the amount of any capital
loss otherwise determined will be reduced by the amount of dividends
previously received in respect of the shares disposed of, unless the
corporation owned the shares for at least 365 days prior to sustaining the
loss and (together with corporations, persons and other entities, with whom
the corporation was not dealing at arm's length) did not own more than five
percent of the shares of any class of the corporation from which the dividend
was received. These loss limitation rules may also apply where a corporation
is a member of a Partnership or a beneficiary of a trust that owned the shares
disposed of, and to, certain individuals who have received capital dividends.
Under the Tax Act, a nonresident of Canada is subject to Canadian tax on
taxable capital gains, and may deduct allowable capital losses, realized on a
disposition of "taxable Canadian property." Common Shares will constitute
taxable Canadian property of a shareholder at a particular time if the
shareholder used the shares in carrying on business in Canada, or if at any
time in the five years immediately preceding the disposition 25 percent or
more of the issued shares of any class or series in the capital stock of the
Company belonged to one or more persons in a group comprising the shareholder
and persons with whom the shareholder did not deal at arm's length.
The Convention relieves United States residents from liability for Canadian
tax on capital gains derived on a disposition of shares unless
(a) the value of the shares is derived principally from "real property" in
Canada, including the right to explore for or exploit natural resources
and rights to amounts computed by reference to production,
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(b) the shareholder was resident in Canada for 120 months during any period
of 20 consecutive years preceding, and at any time during the ten years
immediately preceding, the disposition and the shares were owned by him
when he ceased to be resident in Canada, or
(c) the shares formed part of the business property of a "permanent
establishment" that the holder has or had in Canada within the 12
months preceding the disposition.
When a holder dies holding Common Shares, such holder will be deemed for
Canadian tax purposes to have disposed of such Common Shares for an amount
equal to the fair market value thereof immediately before such holder's death
and will be subject to the tax treatment with respect to dispositions
described above. Any person who acquires such Common Shares as a consequence
of the death of such holder will be deemed to have acquired such shares for
the fair market value at that time. There is currently no Canadian federal
estate tax.
Investment Canada Act. The Investment Canada Act (the "ICA") prohibits the
acquisition of control of a Canadian business by non-Canadians without review
and approval of the Investment Review Division of Industry Canada, the agency
that administers the ICA, unless such acquisition is exempt from review under
the provisions of the ICA. The Investment Review Division of Industry Canada
must be notified of such exempt acquisitions. The ICA covers acquisitions of
control of corporate enterprises, whether by purchase of assets, shares or
"voting interests" of an entity that controls, directly or indirectly, another
entity carrying on a Canadian business. The ICA will have no effect on the
acquisition of shares covered by this Prospectus.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian
law or the Company's Memorandum or Articles. There are no other decrees or
regulations in Canada that restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends,
interest or other payments to nonresident holders of the Company's Common
Shares, except as discussed elsewhere herein.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company expects to have 8,374,675
Common Shares outstanding (assuming the Underwriters' over-allotment option is
not exercised). Of these shares, the 3,145,333 Common Shares sold in the
Offering and 3,902,102 additional Common Shares will be tradeable without
restriction under the Securities Act, except for any such shares which may be
acquired by an "affiliate" of the Company (an "Affiliate"), as that term is
defined in Rule 144 under the Securities Act ("Rule 144"), which will be
subject to the resale limitations of Rule 144. The remainder of the shares
outstanding will be unregistered but will be eligible for trading pursuant to
Rule 144, as more fully discussed below.
SALE OF RESTRICTED SHARES
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "Restricted Securities,"
as that phrase is defined in Rule 144, were acquired from the Company and the
date they are acquired from an Affiliate, then the holder of such restricted
securities (including an Affiliate) is entitled to sell a number of shares
within any three-month period that does not exceed the greater of one percent
of the then outstanding Common Shares (approximately 83,747 shares immediately
after this Offering based upon the number of Common Shares outstanding on July
20, 1998) or the average weekly reported volume of trading of the Common
Shares on the Nasdaq National Market during the four calendar weeks preceding
such sale. The holder may only sell such shares through unsolicited brokers'
transactions. Sales under Rule 144 are also subject to certain requirements
pertaining to the manner of such sales, notice of such sales and the
availability of current public information concerning the Company. Affiliates
may sell shares not constituting restricted shares in accordance with the
foregoing volume limitations and other requirements without regard to the one-
year period. As a result of Rule 144, such Restricted Shares will be available
for sale in the public market as follows: (i) 493,870 Restricted Shares will
be eligible for sale pursuant to Rule 144 upon completion of the Offering and
(ii) the remaining 833,370 Restricted Shares will be eligible for sale from
time to time thereafter upon expiration of their respective one-year holding
periods under Rule 144.
Under Rule 144(k), if a period of at least two years has lapsed between the
later of the date Restricted Shares were acquired from the Company and the
date they were acquired from an Affiliate, as applicable, a holder of such
Restricted Shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least 90 days prior to the sale would be entitled to
sell the shares immediately without regard to the volume limitations and other
conditions described above.
OPTIONS AND WARRANTS
In addition, the Common Shares issuable upon the exercise of options to
purchase 727,690 Common Shares and warrants to purchase 323,557 Common Shares
will, in each case, be eligible for sale from time to time upon expiration of
the respective one-year holding periods after the date of exercise of such
options or warrants, as the case may be, in accordance with Rule 144.
LOCK-UP AGREEMENTS
Notwithstanding the foregoing, the Company, and certain of its Directors,
executive officers and shareholders will enter into lock-up agreements ("Lock-
up Agreements"). The Lock-up Agreements prohibit sales, offers to sell,
contracts to sell and otherwise prohibit the disposition of any Common Shares
or securities convertible into or exercisable or exchangeable for Common
Shares for a period of 180 days after the date of the Offering. 815,870 Common
Shares held by the Selling Shareholders will be subject to the Lock-up
Agreements.
ESCROW SHARES
As of July 20, 1998, 625,500 Common Shares were held in escrow by Montreal
Trust pursuant to the Escrow Agreements with certain shareholders, including
Messrs. Barwin and Hough. If the gross proceeds from the Offering are at least
$20,000,000, all of the Escrow Shares will be released from escrow. In the
event the gross proceeds from the Offering are less than $20,000,000, the same
conditions currently applicable to release of the Escrow Shares will continue
to apply. Upon any such release, certain shares will remain subject to
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voluntary pooling agreements, while the holders of the remaining Escrow Shares
would be able to sell such shares on the public market pursuant to the
conditions and limitations of Rule 144 and subject to any Lock-up Agreements.
See "Certain Transactions," "Description of Capital Stock" and "Risk Factors--
Escrow Shares and Compensation Expense."
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of
the Common Shares in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk Factors--
Shares Eligible for Future Sale" and "Principal and Selling Shareholders."
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the Company and the Selling Shareholders have
agreed to sell to each of the Underwriters named below, and each of such
Underwriters, for whom Morgan Keegan & Company, Inc. and Laidlaw Global
Securities Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholders the
respective number of Common Shares set forth opposite each Underwriter's name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Morgan Keegan & Company, Inc. ..................................
Laidlaw Global Securities Inc...................................
---------
Total....................................................... 3,145,333
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
obligations of the several Underwriters to pay for and accept delivery of the
Common Shares offered hereby are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares offered hereby (other than those
covered by Underwriters' over-allotment option described below), if any such
shares are taken.
The Underwriters initially propose to offer part of the Common Shares
directly to the public at the public offering price set forth on the cover
page of this Prospectus, and part to certain securities dealers at a price
that represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
brokers and dealers. After the Common Shares are released for sale to the
public, the Offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 471,800
additional Common Shares at the public offering price set forth on the cover
of this Prospectus, less underwriting discounts and commission. To the extent
such option is exercised, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage of such
additional Common Shares as the number set forth next to such underwriters
name in the preceding table, bears to the 3,145,333 Common Shares offered
hereby. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
Common Shares offered hereby.
The Company has agreed to pay the Representatives a financial advisor fee of
$150,000 upon consummation of this Offering. The Company has also agreed to
issue to the Representatives warrants to purchase from the Company up to
314,533 Common Shares at an exercise price per share equal to 135% of the
Offering price (the "Underwriters' Warrants"). The Underwriters' Warrants are
exercisable for a period of four years beginning one year from the date of
this Prospectus. The Underwriters' Warrants may not be sold, transferred,
assigned, pledged or hypothecated by any person for a period of one year
following the effective date of the Offering,
except (i) by operation of law or in the event of the reorganization of the
Company or (ii) a transfer to any underwriter participating in the Offering
and the bona fide officers or partners thereof and the Common Shares issuable
upon exercise of the Underwriters' Warrants may be so transferred, if all
securities so transferred or received remain subject to the same restrictions
on transfer for the remainder of the initially applicable time period.
Thereafter, the Underwriters' Warrants are transferable, subject to compliance
with applicable securities laws. The Underwriters' Warrants will also contain
provisions for appropriate adjustments in the event of stock splits, stock
dividends, combinations, reorganizations or recapitalizations. In addition,
the Company has granted certain rights to the holders of the Underwriters'
Warrants to register the Common Shares underlying the Underwriters' Warrants
under the Securities Act.
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See "Shares Eligible for Future Sale" for a description of certain
arrangements by which the officers, Directors, and certain shareholders of the
Company have agreed not to sell or otherwise dispose of Common Shares or
convertible securities of the Company for up to 180 days after the date of
this Prospectus without the prior consent of Morgan Keegan & Company, Inc. The
Company has agreed in the Underwriting Agreement that it will not, offer,
pledge, issue, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, or announce any offer, pledge, sale, grant of any option
to purchase or other disposition, directly or indirectly, any Common Shares or
securities convertible into, exercisable or exchangeable for, Common Shares,
for up to 180 days after the date of this Prospectus without the prior consent
of Morgan Keegan & Company, Inc.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of the Common Shares, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriters may over-allot the
Common Shares in connection with this Offering, creating a short position in
the Common Shares for their own account. In addition, to cover over-allotments
or to stabilize the price of the Common Shares, the Underwriters may bid for,
and purchase, the Common Shares in the open market. The Underwriters may also
reclaim selling concessions allowed to an underwriter or a dealer for
distributing Common Shares in this Offering, if the Underwriters repurchase
previously distributed Common Shares in transactions to cover their short
positions, in stabilization transactions or otherwise. Finally, the
Underwriters may bid for, and purchase, the Common Shares in market making
transactions and impose penalty bids. Any of these activities may stabilize or
maintain the market price of the Common Shares above the market level that may
otherwise prevail. The Underwriters are not required to engage in these
activities, and may terminate any such activities at any time.
Prior to this Offering, the public market for the Common Shares has been in
Canada on the VSE and in the United States on the OTCBB. The Offering price
will be negotiated among the Company and the Representatives. Among the
factors to be considered in determining the Offering price of the Common
Shares, in addition to prevailing market conditions, will be the Company's
current share price as posted on the VSE and the OTCBB, historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
The Company has applied for listing of its Common Shares on the Nasdaq
National Market under the symbol "DWAVF."
The Company and each Selling Shareholder have agreed to indemnify the
several Underwriters against, or contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Common Shares offered hereby and certain other matters
will be passed upon for the Company by Paul, Hastings, Janofsky & Walker LLP,
San Francisco, California and Campney & Murphy, Vancouver, British Columbia.
Certain legal matters will be passed upon for the Underwriters by Gray Cary
Ware & Freidenrich LLP, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of DataWave Systems Inc. as of March
31, 1998, 1997 and 1996, and for the years then ended appearing in this
Prospectus and the Registration Statement have been audited by Deloitte &
Touche, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The Financial Statements of Metrophone Telecommunication Inc. as of March
31, 1998 and December 31, 1997 and for the year ended December 31, 1997 and
the three month period ended March 31, 1998 have been audited by Deloitte &
Touche, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 13 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files certain reports with the SEC. The Company has
filed with the SEC a Registration Statement on Form S-1 (together with all
amendments thereto, the "Registration Statement") under the Securities Act,
with respect to the Common Shares offered hereby. This Prospectus, filed as
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain portions of which are omitted as permitted by the rules and
regulations of the SEC. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract, agreement or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Shares offered hereby, reference is made to any reports filed with the SEC in
accordance with the Exchange Act, the Registration Statement and to the
exhibits and schedules thereto, which may be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the regional offices of the SEC at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World
Trade Center, Suite 1300, New York, New York 10048 at prescribed rates. The
SEC maintains a web site (http://www.sec.gov) that contains material regarding
issuers that file electronically with the SEC. Prior to the filing of the
Registration Statement, the Company has not filed any reports or documents
electronically with the SEC.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants.
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ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company is organized under the laws of British Columbia, Canada where
the Company's principal executive office is located. The Company has appointed
DataWave Services (US) Inc. as its agent upon whom process may be served in
any action brought against the Company under the securities laws of the United
States. However, outside the United States, it may be difficult for investors
to enforce judgments against the Company obtained in the United States in any
such actions, including actions, predicated upon civil liability provisions of
United States securities laws. In addition, most of the Company's officers and
all of its Directors reside outside the United States and nearly all of the
assets of these persons and of the Company are located outside of the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon such persons, or to enforce against the
Company or such persons judgments predicated upon the liability provisions of
the United States securities laws. There is substantial doubt as to the
enforceability against the Company or any of its Directors and officers
located outside the United States in original actions or in actions of
enforcement of judgments of United States courts of liabilities predicated on
the civil liability provisions of United States federal securities laws.
EXCHANGE RATE INFORMATION
All monetary amounts in this Prospectus are expressed in United States
dollars except where otherwise indicated. The following table sets forth the
exchange rates, based on the noon buying rates in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York, for the conversion of United States dollars
into Canadian dollars in effect at the end of the following periods, and the
average exchange rates (based on the average of the exchange rates on the last
day of each month in such periods) and the range of high and low exchange
rates for such periods. Stated in terms of U.S. Dollars per one Canadian
Dollar.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
High............................ US$0.792 US$0.740 US$0.743 US$0.746 US$0.732
Low............................. 0.733 0.708 0.726 0.722 0.683
Average......................... 0.764 0.724 0.734 0.735 0.713
-------- -------- -------- -------- --------
Period End...................... 0.733 0.710 0.732 0.722 0.705
</TABLE>
On July 20, 1998, the noon rate of exchange, as reported by the Federal
Reserve Bank of New York for the conversion of U.S. Dollars into Canadian
Dollars, was US$0.672 to C$1.00.
61
<PAGE>
DATAWAVE SYSTEMS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of DataWave Systems Inc.
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Shareholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to the Consolidated Financial Statements........................... F-8
Financial Statements of Metrophone Telecommunications, Inc.
Independent Auditors' Report............................................. F-22
Balance Sheets........................................................... F-23
Statements of Loss and Deficit........................................... F-24
Statements of Cash Flows................................................. F-25
Notes to the Financial Statements........................................ F-26
Unaudited Pro Forma Consolidated Financial Information..................... F-29
Pro Forma Consolidated Balance Sheet..................................... F-30
Pro Forma Consolidated Statement of Operations .......................... F-31
Notes to the Pro Forma Consolidated Financial Information................ F-32
</TABLE>
F-1
<PAGE>
The accompanying Consolidated Financial Statements give effect to the
completion of the 1-for-5 reverse split of the Company's outstanding common
shares which will take place prior to the Offering. The following report is in
the form which will be furnished by Deloitte & Touche upon completion of the
reverse stock split of the Company's outstanding common shares described in
Note 14 to the Consolidated Financial Statements and assuming that, from June
4, 1998 to the date of such event, no other events have occurred which would
alter the accompanying Consolidated Financial Statements and Notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Directors of
DataWave Systems Inc.:
We have audited the consolidated balance sheets of DataWave Systems Inc. as
at March 31, 1998 and 1997 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
three year period ended March 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March 31,
1998 and 1997 and the results of its operations and cash flows for each of the
years in the three year period ended March 31, 1998 in accordance with
accounting principles generally accepted in the United States.
Deloitte & Touche
Chartered Accountants
Vancouver, British Columbia, Canada
June 4, 1998
F-2
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
------------------------
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................... $ 326,162 $ 860,247
Inventories (Note 4)............................... 380,481 769,338
Accounts receivable................................ 209,300 557,800
Prepaid expenses................................... 102,532 228,418
----------- -----------
Total current assets............................. 1,018,475 2,415,803
ADVANCES AND DEPOSIT ON ACQUISITION (Note 3(d))...... -- 438,330
MACHINERY AND EQUIPMENT, NET (Note 5)................ 1,171,098 1,476,466
INVESTMENT IN JOINT VENTURE (Note 6)................. -- 207,001
ACQUIRED INTANGIBLE ASSETS, NET...................... 188,669 470,664
OTHER ASSETS......................................... -- 85,543
----------- -----------
TOTAL ASSETS......................................... $ 2,378,242 $ 5,093,807
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable................................... $ 947,299 $ 1,666,689
Other accrued liabilities.......................... 108,094 266,644
Security deposits.................................. 51,787 27,193
Current portion of long-term debt (Note 7)......... 196,497 497,841
----------- -----------
Total current liabilities........................ 1,303,677 2,458,367
LONG-TERM DEBT, LESS CURRENT PORTION (Note 7)........ 588,514 1,021,333
----------- -----------
TOTAL LIABILITIES.................................... 1,892,191 3,479,700
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
SHAREHOLDERS' EQUITY:
Common Shares, no par value, 10,000,000 shares
authorized, 4,177,305 and 5,287,632 shares issued
and outstanding at March 31, 1997 and March 31,
1998, respectively (Note 8)....................... 8,058,492 9,711,122
Share warrants..................................... -- 62,952
Shares to be issued................................ 652,625 --
Accumulated deficit................................ (8,225,066) (8,159,967)
----------- -----------
Total shareholders' equity....................... 486,051 1,614,107
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $ 2,378,242 $ 5,093,807
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES.............................. $ 1,263,161 $ 3,148,565 $ 9,676,434
------------ ------------ -----------
OPERATING COSTS AND EXPENSES
Cost of revenues excluding
depreciation and amortization...... 1,076,378 3,110,072 6,211,310
General and administrative.......... 731,779 1,586,405 1,425,578
Selling and marketing............... 638,646 773,695 551,599
Research and development............ 206,709 163,337 134,070
Depreciation and amortization....... 129,866 446,645 894,765
(Gain) loss on foreign exchange..... (10,806) 32,442 28,437
Write-down of inventory (Note 4).... 352,258 328,740 --
Loss on investment in limited
partnership........................ 242,390 -- --
Loss on termination of distribution
agreements ........................ 179,200 -- --
------------ ------------ -----------
Total operating expenses.......... 3,546,470 6,441,336 9,245,759
------------ ------------ -----------
OPERATING (LOSS) INCOME............... (2,283,259) (3,292,771) 430,675
------------ ------------ -----------
Interest expense...................... (44,927) (333,640) (365,576)
------------ ------------ -----------
NET (LOSS) INCOME..................... $ (2,328,186) $ (3,626,411) $ 65,099
============ ============ ===========
NET (LOSS) INCOME PER SHARE (Note
2(l))
BASIC............................... $ (0.94) $ (1.11) $ 0.02
============ ============ ===========
DILUTED............................. $ (0.94) $ (1.11) $ 0.01
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING... 2,464,398 3,266,755 4,091,411
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
TOTAL
COMMON SHARE SHARES TO ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT WARRANTS BE ISSUED DEFICIT EQUITY
--------- ----------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1,
1995................... 2,255,438 $ 1,991,955 $ 1,592,919 $ -- $ (2,270,469) $ 1,314,405
Shares issued for cash.. 316,000 1,388,866 -- -- -- 1,388,866
Conversion of special
warrants............... 666,667 1,592,919 (1,592,919) -- -- --
Shares issued on
purchase of
partnership............ 72,056 232,411 -- -- -- 232,411
Shares issued on
exercise of share
purchase warrants...... 298,410 1,052,141 -- -- -- 1,052,141
Shares issued on
exercise of stock
options................ 9,734 35,526 -- -- -- 35,526
Net loss................ -- -- -- -- (2,328,186) (2,328,186)
--------- ----------- ----------- --------- ------------ -----------
BALANCE AT MARCH 31,
1996................... 3,618,305 6,293,818 -- -- (4,598,655) 1,695,163
Shares issued on
exercise of share
purchase warrants...... 75,000 178,636 -- -- -- 178,636
Shares issued on
exercise of stock
options................ 4,000 14,598 -- -- -- 14,598
Shares to be issued on
acquisition of
Interurbain assets..... -- -- -- 652,625 -- 652,625
Shares issued on
exercise of special
warrants (net of issue
expenses of $205,943).. 480,000 1,571,440 -- -- -- 1,571,440
Net loss................ -- -- -- -- (3,626,411) (3,626,411)
--------- ----------- ----------- --------- ------------ -----------
BALANCE AT MARCH 31,
1997................... 4,177,305 8,058,492 -- 652,625 (8,225,066) 486,051
Shares issued for cash.. 300,000 213,888 -- -- -- 213,888
Warrants issued to ATTI
(Note 7)............... -- -- 85,543 -- -- 85,543
Shares issued on
exercise of share
purchase warrants...... 186,333 164,831 (22,591) -- -- 142,240
Shares issued on
acquisitions (Note 3).. 424,494 934,414 -- (652,625) -- 281,789
Shares issued for costs
relating to the joint
venture (Note 6)....... 33,000 147,591 -- -- -- 147,591
Shares issued on
exercise of stock
options................ 166,500 191,906 -- -- -- 191,906
Net income.............. -- -- -- -- 65,099 65,099
--------- ----------- ----------- --------- ------------ -----------
BALANCE AT MARCH 31,
1998................... 5,287,632 $ 9,711,122 $ 62,952 $ -- $ (8,159,967) $ 1,614,107
========= =========== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................... $ (2,328,186) $ (3,626,411) $ 65,099
Adjustments to reconcile net (loss)
income to net cash (used in) pro-
vided by operating activities:
Depreciation and amortization...... 129,866 446,645 894,765
Write-down of inventory............ 352,258 328,740 --
Loss on investment in limited part-
nership........................... 242,390 -- --
Net change in non-cash working capi-
tal items:
Inventory.......................... (534,693) (198,868) (259,552)
Accounts receivable................ 26,541 (168,100) (51,321)
Prepaid expenses................... (69,319) (24,735) (125,886)
Accounts payable................... 158,511 488,017 114,769
Other accrued liabilities.......... 38,213 50,371 143,111
Security deposits.................. (73,758) 51,791 (24,594)
------------ ------------ -----------
Net cash (used in) provided by operat-
ing activities....................... (2,058,177) (2,652,550) 756,391
------------ ------------ -----------
INVESTING ACTIVITIES
Purchase of machinery and equip-
ment............................... (750,861) (438,626) (804,096)
Acquisition of businesses, net of
cash acquired (Note 3)............. -- -- (212,378)
Investment in limited partnership... (8,760) -- --
Advances and deposit on acquisi-
tion............................... -- -- (438,330)
Investment in joint venture......... -- -- (59,410)
------------ ------------ -----------
Net cash (used in) investing activi-
ties................................. (759,621) (438,626) (1,514,214)
------------ ------------ -----------
FINANCING ACTIVITIES
Proceeds from long-term debt........ 753,852 839,160 1,209,244
Repayment of long-term debt......... (77,971) (176,699) (438,227)
Amount paid on cancellation of
lease.............................. -- (556,756) --
Term deposit used for collateral on
debt............................... (985,200) 985,200 --
Issue of common shares.............. 2,476,533 1,764,675 548,034
Repayment of other loans............ (8,217) -- --
------------ ------------ -----------
Net cash provided by financing activi-
ties................................. 2,158,997 2,855,580 1,319,051
------------ ------------ -----------
Effect of Exchange Rate Changes....... 5,912 (6,505) (27,143)
------------ ------------ -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.......................... (652,889) (242,101) 534,085
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR.............................. 1,221,152 568,263 326,162
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................. $ 568,263 $ 326,162 $ 860,247
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest................ $ 43,928 $ 301,585 $ 319,722
============ ============ ===========
Cash paid for income taxes............ $ -- $ -- $ --
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
(CONTINUED):
Common shares issued to acquire assets and
businesses (Note 3)........................ $ -- $ -- $ 934,579
=========== ========== ==========
Obligation to issue shares incurred in
exchange for specified assets (Note 3)..... $ -- $ 652,625 $ --
=========== ========== ==========
Common shares issued for costs in connection
with formation of the joint venture (Note
6)......................................... $ -- $ -- $ 147,591
=========== ========== ==========
Share purchase warrants granted to ATTI
(Note 7)................................... $ -- $ -- $ 85,543
=========== ========== ==========
Conversion of share warrants outstanding to
common shares ............................. $ 1,592,919 $ -- $ 22,591
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. NATURE OF OPERATIONS
DataWave Systems Inc. designs, develops, produces, owns and manages a
proprietary, intelligent, automated direct merchandising network (the
"DataWave System"). The Company uses the DataWave System to distribute prepaid
calling cards. The DataWave System is comprised of DataWave Telecard
Merchandisers ("DTMs"), which are free-standing "smart" machines capable of
dispensing multiple prepaid product offerings, and over-the-counter "swipe"
units ("OTCs") for point-of-sale prepaid retailing, all of which are connected
to the Company's proprietary server software and databases through a wireless
and/or land line wide area network. Effective January 15, 1997, the Company
changed its name from DataWave Vending Inc. to DataWave Systems Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United States and include
the following significant accounting policies:
(a) Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Principles of consolidation
The Consolidated Financial Statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated.
(c) Revenue and cost recognition
The Company's revenues are primarily generated from the resale of prepaid
long distance telephone time, principally from the sale of prepaid calling
cards. Revenue and the related costs are recognized on the sale of prepaid
calling cards at the date of sale because the proceeds and direct costs are
determinable, collection is reasonably assured and the Company does not
provide nor control the provision of the related telephone time. The liability
for telephone time cost is recorded at the date that the prepaid calling card
is activated. On April 1, 1998, the Company transferred its Canadian
operations into a joint venture, PhoneLine (see Note 6). PhoneLine owns its
own switch to control the provision of telephone service and the Company
therefore intends to recognize its 40% interest in the operations of PhoneLine
after adjustment to recognize PhoneLine's calling card revenue on the same
basis as the related telephone time is utilized.
(d) Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid money
market instruments with original terms to maturity of less than 90 days.
(e) Inventories
Inventories include prepaid preactivated calling cards, parts and supplies
and work-in-progress for DTM and other machines being assembled, all of which
are valued at the lower of cost and net realizable value.
F-8
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Machinery and equipment
Machinery and equipment are recorded at cost less accumulated depreciation.
Depreciation is calculated over the estimated useful lives of machinery and
equipment as follows:
Computer equipment and software 30% declining balance
Office equipment 20% declining balance
Other machinery and equipment 30% declining balance
Vending, DTM and OTC equipment 3 years straight-line
Leasehold improvements 4 years straight-line
(g) Acquired intangible assets
Acquired intangible assets consist of the acquired contracts, rights and
workforce obtained in recent acquisitions by the Company and are being
amortized on a straight line basis over three years. Amortization of acquired
intangible assets for the fiscal years ended March 31, 1998, 1997 and 1996
amounted to $175,618, $16,944 and $0, respectively.
(h) Long-lived assets
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 121 establishes accounting standards for the measurement
and impairment of long-lived assets, certain identifiable intangibles and
goodwill. The Company periodically reviews long-lived assets, including
acquired intangibles, to assess recoverability and records impairment losses
when indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amounts. In performing this assessment, the Company considers whether the
long-lived asset should be completely or partially written off or the
amortization period accelerated.
(i) Income taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred income taxes are recorded using tax laws and
enacted rates for the years in which the taxes are expected to be paid.
Deferred income taxes are recorded for items when there is a temporary
difference in recording such items for financial reporting and income tax
reporting.
(j) Foreign currency translation
The Company's functional currency is the U.S. dollar since it is the
currency of the primary economic environment in which the Company and its
subsidiaries operate.
Assets and liabilities denominated in foreign currencies have been
translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenues and expenses denominated in foreign currencies have been
translated at rates approximating exchange rates in effect at the time of the
transactions. Exchange gains or losses arising from foreign currency
transactions have been included in the statement of operations.
(k) Stock-based compensation plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Effective fiscal 1996, the Company adopted the disclosure only option of SFAS
No. 123, Accounting for Stock-based Compensation. SFAS No. 123 requires that
companies
F-9
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which do not choose to account for stock-based compensation as prescribed by
the statement shall disclose the pro forma effects on earnings and earnings
per share as if SFAS No. 123 had been adopted.
(l) Net (loss) income per share
In February 1997, FASB issued SFAS No. 128, Earnings per Share (SFAS No.
128), which established new standards for computing and presenting earnings
per share effective for both interim and annual periods ending after December
15, 1997. With SFAS No. 128, primary earnings per share is replaced by basic
earnings per share which is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding for the
period. In addition, SFAS No. 128 requires the presentation of diluted
earnings per share which includes the potential dilution that could occur if
potentially dilutive securities were exercised or converted into common
shares. Potentially dilutive securities are excluded from the computation if
their effect is anti-dilutive. The Company has applied SFAS No. 128 in its
computation of (loss) income per share.
(m) Recent pronouncements
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
(SFAS No. 130) which is required to be adopted for fiscal years beginning on
or after December 15, 1997. SFAS No. 130 establishes standards for the
reporting of comprehensive income and its components in financial statements.
Reclassification of financial statements for earlier periods presented is
required. The impact of SFAS No. 130 on the Company's financial statements is
not expected to be material.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, (SFAS No. 131) which is required to be
adopted for fiscal years beginning on or after December 15, 1997. SFAS No. 131
establishes new standards for the reporting of segmented information in annual
financial statements and requires the reporting of certain selected segmented
information on interim reports to shareholders. The Company adopted SFAS No.
131 during fiscal 1998 (Note 9).
(n) Fair value of financial instruments
The Company estimates that the carrying values of its cash and cash
equivalents, accounts receivable, advances and deposit on acquisition,
accounts payable, other accrued liabilities, and security deposits approximate
fair value at March 31, 1997 and 1998. The fair value of long-term debt has
been estimated at $2,031,306 as of March 31, 1998 (March 31, 1997--$829,214)
as compared to net carrying value of $1,519,174 (March 31, 1997--$785,011).
3. ACQUISITIONS
(a) On June 10, 1997, the Company purchased all of the issued and
outstanding shares of Phone Line International (PLI) Inc. ("PLI"), a company
which distributes prepaid calling cards, for cash of $252,890, the issue of
101,351 common shares of the Company at a value of $270,954, and the payment
of costs associated with the acquisition of $19,328. The purchase agreement
specified the value of the common share consideration as $270,954 with the
number of shares to be issued to be determined based on a formula of dividing
the foregoing by 80% of the average trading price of the Company's common
shares on the Vancouver Stock Exchange for the last 20 trading days in the
month of November 1997. The acquisition was accounted for by the purchase
method and the results of operations of PLI have been consolidated from June
10, 1997.
(b) On November 17, 1997, the Company acquired all the issued and
outstanding shares of Cardxpress Vending, Inc. ("Cardxpress"), a company which
operates vending equipment, for cash of $156,914 and 3,142
F-10
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common shares of the Company valued at $11,000. The value of common shares
issued was based on the closing price of the Company's common shares on the
day that the Company agreed to acquire Cardxpress. The acquisition was
accounted for by the purchase method and the results of operations of
Cardxpress have been consolidated from November 17, 1997.
(c) Effective January 1, 1997, the Company purchased certain assets and
rights of Interurbain Communications, Inc. ("Interurbain") for 320,000 common
shares of the Company at a value of $652,625. These shares were originally
scheduled to be issued in four tranches of 42,000, 42,000, 118,000 and 118,000
shares on April 1, July 1, October 1, 1997 and January 1, 1998, respectively.
The exact number of shares to be issued were subject to adjustment in the
event of certain conditions including the extent to which the weighted average
trading price of the Company's common shares exceeded a specified threshold.
All shares were issued at the originally agreed amounts during the fiscal year
ended March 31, 1998 and the value of the shares was determined based on the
closing price of the Company's shares on December 31, 1996, as specified in
the acquisition agreement.
In connection with the acquisition, the Company also granted to specified
principals of Interurbain warrants to acquire an aggregate of 40,000 common
shares of the Company at an exercise price of $C5.00 (US$3.71) for a period of
two years following closing. The Company also agreed to grant employee stock
options to certain former Interurbain employees who were being retained by the
Company to acquire an aggregate of 40,000 common shares at a price of $C5.00
(US$3.71) for a period of 5 years following the date of closing. These options
vest in four semi-annual tranches commencing six months from the date of
closing. The employee stock options granted are considered a stock
compensation arrangement and under APB 25 are not recorded as compensation
expense.
The Company has recorded the Interurbain acquisition by the purchase method
during the year ended March 31, 1997. The assets acquired and related
operating results have been consolidated from January 1, 1997.
(d) Effective April 21, 1998, the Company purchased all of the issued and
outstanding shares of Metrophone Telecommunications Inc. ("Metrophone"), a
company that operates payphones, for $1.3 million, consisting of cash of
$700,000 and 67,432 common shares at a value of $8.90 per share, which,
pursuant to the acquisition agreement, was calculated as the average of the
closing prices of the Company's shares for the ten day period preceding the
date the agreement was finalized.
At March 31, 1998, an initial deposit of $150,000 and cumulative advances to
Metrophone of $288,330 have been accounted for at cost as the closing date of
the acquisition was April 21, 1998 and the assets and operations of Metrophone
were not acquired until that date. In addition, in April 1998, 10,000 common
shares at a value of $5.10 per share were issued as consideration for a
finder's fee in connection with the acquisition. These shares were valued
based on the closing price of the Company's shares on the date the initial
letter of intent was signed, being the date the service was deemed rendered.
The acquisition of Metrophone was recorded by the purchase method in April
1998 and included the purchase of intangible assets with an estimated fair
value of approximately $1.7 million. These assets consist principally of long
term contracts to provide pay phone service to specified locations and will be
amortized on a straight line basis over five years commencing on the date of
acquisition.
(e) The following pro forma information combines the consolidated results
of operations of the Company and the unaudited results of operations of PLI,
Interurbain and Cardxpress for the years ended March 31, 1997 and 1998, as if
PLI, Interurbain and Cardxpress had been purchased by the Company on April 1,
1996, after including the impact of the pro forma adjustment for revised
amortization expense due to recording of goodwill and the fair value of assets
acquired on each acquisition.
F-11
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues............................................ $ 5,762,685 $ 10,541,338
Net (loss) income for the year...................... $ (3,849,653) $ 78,308
Basic and diluted (loss) income per common share.... $ (0.95) $ 0.02
</TABLE>
The pro forma results of operations are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for the
entire period presented and are not intended to be a projection of future
results.
4. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
--------- ---------
<S> <C> <C>
Prepaid preactivated calling cards......................... $ 73,962 $ 147,706
Parts and supplies......................................... 140,635 479,056
Work-in-progress........................................... 165,884 142,575
--------- ---------
$ 380,481 $ 769,337
========= =========
</TABLE>
During the fiscal years ended March 31, 1997 and 1996 the Company recognized
write-downs in the value of inventory in the amount of $328,740 and $352,258,
respectively. The 1997 write-down represents the decline in net realizable
value of obsolete parts and supplies for DTM and other machines and unused
cards and supplies relating to discontinued promotional programs. The 1996
provision represents the write-off of obsolete parts and supplies relating to
a photographic electronic merchandiser which was discontinued.
5. MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
1997 MARCH 31, 1998
----------- ------------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST DEPRECIATION VALUE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Computer equipment and
software................ $ 81,342 $ 189,119 $ 107,781 $ 81,338
Office equipment......... 34,436 65,933 22,999 42,934
Other machinery and
equipment............... 5,423 38,004 6,803 31,201
Vending, DTM and OTC
equipment............... 1,048,804 2,425,291 1,120,596 1,304,695
Leasehold improvements... 1,093 18,818 2,520 16,298
----------- ----------- ----------- -----------
$ 1,171,098 $ 2,737,165 $ 1,260,699 $ 1,476,466
=========== =========== =========== ===========
</TABLE>
6. INVESTMENT IN JOINT VENTURE
Effective April 1, 1998, the Company entered into a corporate joint venture
with DCI Telecommunications, Inc. ("DCI"), which was incorporated under the
Canada Business Corporations Act under the name Phone Line CardCall
International Inc. ("PhoneLine"). In connection with the formation of
PhoneLine, on March 31, 1998, the Company issued 33,000 common shares at a
value of $147,591 to a third party as consideration for a finders fee and
incurred additional costs of $59,410 on behalf of PhoneLine for an aggregate
cost to March 31, 1998 of $207,001.
F-12
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the agreement, a subsidiary of DCI provided initial
capital of $280,958; $42,144 for 60,000 common shares of PhoneLine and
$238,814 by way of loan (the "DCI Loan"). DCI also contributed specified
assets with an attributed value of $238,814. DataWave provided initial capital
of $449,533; $28,096 for 40,000 common shares of PhoneLine, and $421,440 by
way of loan (the "DW Loan"). The Company also contributed specified assets
with an attributed value of $421,440 for cash.
The DW Loan and DCI Loan rank pari passu, bear interest at 12% per annum and
are repayable as the directors of PhoneLine may determine.
The Company has a 40% interest in the joint venture. For a period of two
years from the closing date the Company shall also have the right to purchase
9,000 of the PhoneLine shares held by DCI at a price of C$27.77 (US$19.56) per
share which, if exercised, would increase the Company's interest in PhoneLine
to 49%.
PhoneLine has a board of six directors, three of whom shall be nominees of
DCI and three of whom shall be nominees of the Company.
The Company's investment in PhoneLine will be recorded on the equity basis
whereby the investment is initially recorded at cost and the carrying value
adjusted thereafter to include the Company's pro rata share of the earnings or
loss of PhoneLine.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1998
--------- -----------
<S> <C> <C>
Applied Telecommunications Technologies Inc.............. $ 604,935 $ 1,390,841
Manufacturers Bank....................................... 180,076 128,333
--------- -----------
785,011 1,519,174
Less: current portion.................................... 196,497 497,841
--------- -----------
$ 588,514 $ 1,021,333
========= ===========
</TABLE>
(a) In December 1996, a subsidiary of the Company entered into a financing
arrangement with Applied Telecommunications Technologies Inc. ("ATTI") to
finance up to approximately $2 million of equipment at effective interest
rates approximating 33% with varying terms to July 2001. On December 23, 1996,
ATTI assigned the arrangement to an affiliate. Funding was received in a
series of tranches and is secured by a first charge over the equipment and a
general charge over all the assets of the Company including its subsidiaries.
As partial consideration for the financing arrangement, the Company granted
ATTI and/or an affiliate non-transferable share purchase warrants to acquire
80,000 common shares of the Company. The exercise price of the warrants was
determined by calculating the average trading price of the Company's common
shares for the 10 business days preceding each funding. To March 31, 1998, the
Company had granted warrants to purchase 80,000 shares at exercise prices
between C$1.45 (US$1.03) and C$3.90 (US$2.86) per share. At March 31, 1998,
warrants to purchase 54,666 common shares were outstanding. The fair value of
the warrants issued to ATTI was determined using the Black-Scholes option
pricing model assuming a risk-free rate of interest of 6% and an expected
volatility at the dates of issuance between 35% and 131% and is recorded as
deferred financing charges at the date of issuance and amortized as additional
interest expense over the term of the related loan.
F-13
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) In April 1996, a subsidiary of the Company entered into a financing
arrangement with Manufacturers Bank to finance approximately $165,000 of
equipment at an effective interest rate of approximately 42% repayable in
monthly installments of $6,290 until September 1999. The arrangement is
secured by a first charge over the related equipment.
(c) The following are the minimum payments due in each of the succeeding
years:
<TABLE>
<S> <C>
1999............................................................ $ 836,903
2000............................................................ 823,543
2001............................................................ 425,699
2002............................................................ 51,967
-----------
Total........................................................... 2,138,112
Less Interest................................................... (618,938)
-----------
$ 1,519,174
===========
</TABLE>
8. COMMON SHARES
(a) Escrow and pooling arrangements
As at March 31, 1998, 1997 and 1996, there were 625,500 common shares
held in escrow by the Company's registrar and transfer agent. The escrow
shares will be released from escrow pro rata to the holders of the shares
as, and if, the Company meets certain net earnings and cash flow
requirements. The escrow shares are entitled to vote and are included in
the number of issued and outstanding shares at March 31, 1997 and 1998 as
disclosed on the balance sheet, however, they have been excluded from
consideration in the calculation of earning (loss) per share on the basis
that they are considered contingently issuable shares under FAS 128.
Pursuant to pooling agreements dated November 16, 1993, February 9, 1996
and June 30, 1997 between the Company, Montreal Trust Company of Canada and
certain shareholders of the Company, such shareholders have agreed to place
141,550 of the shares released from escrow in pool. Under the terms of the
agreements, Montreal Trust will retain custody of the pooled share
certificates and the shareholders will be precluded from selling or
transferring the shares, subject to specified exceptions, until such time
as the shares are released from pool. A total of 76,800 of the pooled
shares will be released on the basis of 25% one year from the initial
release of the pooled shares from escrow and a further 25% each year
thereafter. The remaining pooled shares will be released from the pool on
the basis of 33 1/3% one year from the initial release of the pooled shares
from escrow and a further 33 1/3% each year thereafter.
Subsequent to March 31, 1998, certain shareholders and officers of the
Company have offered to purchase 70% of the escrow shares held by the other
escrow shareholders for a nominal amount. Such purchased escrow shares
would be released from escrow subject to a hold period , one third of such
shares to be released on the first day of each consecutive month following
the closing of the transaction. Concurrent with the release of the shares,
two officers of the Company will place into escrow pursuant to the Escrow
Agreements a number of their unrestricted common shares equal to the number
of the shares being released from escrow. Any escrow shares that are
released from escrow and that are subject to voluntary pooling agreements
will continue to be subject to those agreements. The Company has received
regulatory approval to release the 625,500 common shares from escrow
following the offering described in Note 15, provided the gross proceeds of
the offering are at least $20,000,000. In the event that the gross proceeds
of the offering are less than $20,000,000, the same conditions currently
applicable to release of the escrow shares will continue to apply.
In accordance with the provisions in APB 25 for recording the value of
contingently issuable shares, the Company will record a compensation
expense for 469,500 shares presently included in escrow which
F-14
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are held by directors, officers and employees of the Company, on such date
as the Company meets the specified net earnings and cash flow requirements
referred to above or the shares are otherwise released from escrow by the
regulatory authorities.
(b) Share purchase warrants
On June 7, 1995 the Company issued in a private placement special
warrants to purchase an aggregate of 666,667 common shares. Each warrant
was convertible into one common share at no additional consideration and
one warrant to purchase one half a common share at an exercise price of
C$6.25 (US$4.54).
On October 5, 1995 the Company issued a warrant to purchase 28,000 shares
at an exercise price of C$6.25 (US$4.54) per share to an agent in
connection with a private placement of the Company's shares.
On July 10, 1996 the Company issued special warrants to purchase an
aggregate of 480,000 common shares for cash consideration, net of issue
expenses, of $1,571,440. The agents to this offering were issued warrants
to purchase 30,000 common shares at an exercise price of C$5.75 (US$4.56)
per share.
Since October 1996 the Company has granted warrants to purchase an
aggregate of 80,000 shares to a lender, as described in Note 7, at exercise
prices between C$1.45 (US$1.03) and C$3.90 (US$2.86) per share.
On May 12, 1997, pursuant to an agreement dated March 11, 1997, the
Company issued an aggregate of 300,000 shares, together with warrants to
purchase an additional 300,000 shares for cash consideration of $213,888.
The warrants have an exercise price of C$1.15 (US$1.02) per share.
Pursuant to the acquisition of Interurbain as described in Note 3, the
Company granted warrants to specified principals of Interurbain to acquire
an aggregate of 40,000 common shares at a price of C$5.00 (US$3.71) for a
period of five years following closing.
As at March 31, 1998, there were outstanding share purchase warrants to
purchase an aggregate of 257,667 common shares. Each warrant entitles the
holder to purchase common shares of the Company at prices between C$1.00
(US$0.70) and C$5.75 (US$4.05) per share and expire at various dates to
December 14, 1999.
The Company accounts for share purchase warrants and options issued to
consultants or third parties by determining the fair value of such warrants
and options at the date of grant using a Black-Scholes pricing methodology
consistent with SFAS 123. The Company records such value as a charge to
operations or capital expenditure depending on the nature of services
provided.
(c) Share purchase options
During the year ended March 31, 1998, the Company announced that 191,000
shares of its capital stock have been reserved for incentive stock options
to be granted to employees and directors of the Company at a price of
$C1.50 (US$1.06) for a period of five years expiring on May 20, 2002. In
addition, the exercise price of certain previously granted employee and
director stock options for 223,800 shares were reduced to $C1.50 (US$1.06)
per share, the then fair value of the Company's common shares.
(i) Stock Option Plan
1998 Stock Option Plan. The purpose of the 1998 Plan is to provide the
Company with a share-related mechanism to attract, retain and motivate
qualified Directors and employees, to reward such of those Directors and
employees as may be awarded options under the 1998 Plan by the Board from
time to time for their contributions toward the long-term goals of the
Company and to enable and encourage such Directors and employees to acquire
shares as long-term investments. This includes options granted prior to the
implementation of the 1998 Plan, which were assumed under the 1998 Plan.
The Board will, from time
F-15
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to time and in its sole discretion, determine those Directors and
employees, if any, to whom the options are to be awarded. The aggregate
number of options granted to consultants of the Company will not exceed 2%
of the issued and outstanding share capital as of the award date. However,
in no case will an optionee be granted an option where the number of shares
that may be purchased pursuant to that option exceed, when added to the
number of shares available for purchase pursuant to options previously
granted to the optionee which remain exercisable, 5% of the Company's
issued and outstanding share capital as of the award date of the option
being granted. Approximately 1,075,000 Common Shares were reserved for
issuance under the 1998 Plan and approximately 345,000 Common Shares are
available for issuance.
The 1998 Plan will be administered by the Secretary of the Company on the
instructions of the Board. Options granted under the 1998 Plan are not
transferable by an optionee, and each option is exercisable during the
lifetime of an optionee only by such optionee; provided, however, that an
optionee's personal representative may exercise an optionee's options
within the exercise period. The expiration date of each option will be
fixed by the Board, provided that such date will be no later than the tenth
anniversary of the award date of the option (except in the case of a
consultant, where the expiration date will be no later than the fifth
anniversary of the award date of the option).
In general, the options will terminate 30 days following an optionee's
termination of service, except in the following instances; (i) if
termination resulted from death, the option will expire one year after
death, or (ii) if termination of service results from cause, the option
will expire the date the optionee ceases to be an employee of the Company.
As set forth in the 1998 Plan, the exercise price for each option will be
not less than the minimum prescribed by the organized trading facilities on
which the shares trade. The VSE currently requires that the exercise price
of each option will not be less than 100% of the fair market value on the
date of grant, and generally will be determined by reference to the market
price for the shares of the Company for the ten trading days immediately
preceding the day on which the VSE receives the required notice that the
Board granted the option.
In granting the options under the 1998 Plan, the Board may provide for
additional terms and conditions, including without limitation, that all
outstanding options shall accelerate and be immediately exercisable in full
upon certain corporation transactions, such as a merger or amalgamation.
The 1998 Plan is scheduled for approval by the Board and by the Company's
shareholders at the AGM on July 20, 1998. The effective date is scheduled
to be July 31, 1998, subject to approval by the Vancouver Stock Exchange.
The Board may terminate the 1998 Plan at any time provided that such
termination will not alter the terms or conditions of any option or impair
any right of any optionee pursuant to any option awarded prior to the date
of such termination, which will continue to be governed by the provisions
of the 1998 Plan.
1997 Stock Option Plan. The purpose of the 1997 Plan is to provide the
Company with a share-related mechanism to attract, retain and motivate
qualified Directors and employees, to reward such of those Directors and
employees as may be awarded options under the 1997 Plan by the Board from
time to time for their contributions toward the long term goals of the
Company and to enable and encourage such Directors and employees to acquire
shares as long term investments. This includes options granted prior to the
implementation of the 1997 Plan, which were assumed under the 1997 Plan.
The Board will, from time to time and in its sole discretion, determine
those Directors and employees, if any, to whom the options are to be
awarded. The aggregate number of options granted to consultants of the
Company will not exceed 2% of the issued and outstanding share capital as
of the award date. However, in no case will an optionee be granted an
option where the number of shares that may be purchased pursuant to that
option exceed, when added to the number of shares available for purchase
pursuant to options previously granted to the optionee which remain
exercisable, 5% of the Company's issued and outstanding share capital as of
the award date of the option being granted. Approximately 730,000 Common
Shares were reserved for issuance under the 1997 Plan and no Common Shares
are available for issuance. The 1997 Plan will terminate once the 1998 Plan
is in effect and all outstanding options under the 1997 Plan will be
assumed under the 1998 Plan.
F-16
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 1997 Plan is currently administered by the Secretary of the Company
on the instructions of the Board. Options granted under the 1997 Plan are
not transferable by an optionee, and each option is exercisable during the
lifetime of an optionee only by such optionee; provided, however, that an
optionee's personal representative may exercise an optionee's options
within the exercise period. The expiration date of each option will be
fixed by the Board, provided that such date will be no later than the tenth
anniversary of the award date of the option.
In general, the options will terminate 30 days following an optionee's
termination of service, except in the following instances: (i) if
termination resulted from death, the option will expire one year after
death, or (ii) if termination of service results for cause, the option will
expire the date the optionee ceases to be an employee of the Company. As
set forth in the 1997 Plan, the exercise price of each option generally
will not be less than the market price for the shares of the Company for
the ten trading days immediately preceding the day on which the VSE
receives the required notice that the Board granted the option.
In granting the options under the 1997 Plan, the Board may provide for
additional terms and conditions, including without limitation, that all
outstanding options shall accelerate and be immediately exercisable in full
upon certain corporate transactions, such as a merger or amalgamation.
The 1997 Plan was approved by the Board and shareholders and became
effective on August 1, 1997. The Board may terminate the 1997 Plan at any
time provided that such termination will not alter the terms or conditions
of any option or impair any right of any optionee pursuant to any option
awarded prior to the date of such termination, which will continue to be
governed by the provisions of the 1997 Plan.
The following table summarizes stock option activity for each of the three
years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE(1)
---------------- ------------------
<S> <C> <C>
Balance, April 1, 1995...................... 195,600 $2.82--$4.58
Granted................................... 178,600 $3.66--$4.58
Exercised................................. (9,733) $3.52
Cancelled................................. (44,867) $3.52--$4.40
-------- ------------
Balance, March 31, 1996..................... 319,600 $2.82--$4.58
Granted................................... 158,200 $1.06--$4.19
Exercised................................. (4,000) $3.52
Cancelled................................. (103,400) $3.52--$4.38
-------- ------------
Balance, March 31, 1997..................... 370,400 $1.06--$4.58
Granted................................... 792,200 $1.06--$2.92
Exercised................................. (166,500) $1.06--$3.52
Cancelled................................. (240,800) $1.06--$4.40
Re-priced to $1.06/share.................. (223,800) $2.82--$4.58
Re-priced to $1.06/share.................. 223,800 $1.06
-------- ------------
Balance, March 31, 1998..................... 755,300 $1.06--$3.66
======== ============
</TABLE>
- --------
(1) The exercise price of options is denominated in Canadian dollars and is
converted into U.S. dollars for the purposes of this table at an exchange
rate of 1C$=0.7045 US$.
F-17
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As at March 31, 1998, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE EXPIRY DATES
--------- --------------- ---------------------------------------------
<S> <C> <C>
328,100 C$1.50 (US$1.06) Between November 16, 1998 and August 1, 2002
221,100 C$2.00 (US$1.41) August 1, 2002
183,100 C$3.30 (US$2.32) Between August 1, 2002 and September 26, 2002
20,000 C$4.15 (US$2.92) January 28, 2003
2,000 C$5.20 (US$3.66) June 26, 2000
1,000 C$5.00 (US$3.52) November 16, 1998
-------
755,300
=======
</TABLE>
On May 20, 1997, the Company re-priced 223,800 employee and director,
stock options, which originally entitled the holders to acquire common
shares of the Company at prices between C$4.00 (US$2.82) and C$6.50
(US$4.58) per common share, such that they now could acquire common shares
at $1.06 per share. The other terms and vesting provisions of the options
were not amended. This re-pricing was treated as an issue of new options
for the purpose of determining the pro forma disclosure of the effect of
stock-based compensation as described in Note 8(c)(ii).
Subsequent to March 31, 1998, 8,110 common shares were issued on exercise
of options for proceeds of $16,104 and options to acquire an additional
22,000 shares were granted at an exercise price of C$11.25 (US$7.92) per
share and an expiry date of May 12, 2003 and options to acquire 40,000
shares originally exercisable at C$1.50 (US$1.06) per share were cancelled.
(ii) Pro forma disclosure of the effect of stock-based compensation
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest
rate of 6 percent, dividend rate of zero percent and expected volatility of
between 25 and 128 percent depending on the date of grant. Using these
assumptions, the additional compensation expense based on the fair value of
the stock options granted and/or repriced in fiscal 1996, 1997 and 1998
amounts to $461,136, $94,335 and $1,019,029, respectively. Had compensation
cost been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net (loss) income and net (loss)
income per share would have been increased or decreased to the following
pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Net (loss) income
As reported....................... $ (2,328,186) $ (3,626,411) $ 65,099
Pro forma......................... (2,789,322) (3,720,746) (953,930)
Basic (loss) income per share
As reported....................... $ (0.94) $ (1.11) $ 0.02
Pro forma......................... (1.13) (1.14) (0.23)
Diluted (loss) income per share
As reported....................... $ (0.94) $ (1.11) $ 0.01
Pro forma......................... (1.13) (1.14) (0.23)
</TABLE>
9. SEGMENTED GEOGRAPHIC INFORMATION
(a) Segmented information
The Company manufactures and operates prepaid calling card merchandising
machines and re-sells long distance telephone time through prepaid calling
cards distributed through its machines and at retail locations. In accordance
with SFAS No. 131 the Company considers its business to consist of one
reportable operating segment.
F-18
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Geographic information
The Company has long-lived assets and has earned revenue from sales to
customers in the following geographic locations:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States........... $ 1,091,954 $ 818,506 $ 3,055,827 $ 1,263,897 $ 7,905,936 $ 1,451,318
Canada.................. 171,207 100,880 92,738 95,870 1,770,498 495,812
</TABLE>
Long-lived assets consist of capital assets and acquired intangible assets.
10. INCOME TAXES
The difference in income tax expense (recovery) due to differences between
the statutory federal income tax rate and the Company's effective income tax
rate applied to (loss) income before income taxes was as follows for the years
ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Income taxes (recovery) based on
statutory Canadian federal tax rate
of 45.4%........................... $ (1,056,996) $ (1,646,391) $ 29,555
Tax loss and related benefit not
recognized in the period of the
loss............................... 1,006,106 1,560,457 225,019
Tax benefit realized from previously
unrecognized prior year loss
carryforward....................... -- -- (250,763)
Lower rate on loss (income) of U.S.
affiliates......................... 40,390 78,273 (32,327)
Other permanent differences......... 10,500 7,661 28,516
------------ ------------ ---------
Income taxes at the Company's
effective rate..................... $ -- $ -- $ --
============ ============ =========
</TABLE>
The major components of deferred tax assets arising from temporary
differences at March 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Non-current
Depreciation and amortization.................... $ (17,511) $ 6,654
Net operating loss carryforwards................. 2,731,060 2,717,766
Other............................................ 344,169 283,487
----------- -----------
Subtotal......................................... 3,057,718 3,007,907
Valuation allowance.............................. (3,057,718) (3,007,907)
----------- -----------
Net non-current deferred tax assets.............. $ -- $ --
=========== ===========
</TABLE>
F-19
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had net operating loss carryforwards of approximately $6,357,249
and $6,400,608 at March 31, 1998 and 1997, respectively. To the extent not
used, net operating loss carryforwards expire in varying amounts beginning in
the year 2001. In addition, approximately $850,000 of the U.S. based net
operating loss carryforwards are subject to significant limitations on use.
Based on available evidence, including the Company's history of operating
losses, the uncertainty of future profitability and the impact of tax laws
which may limit the Company's ability to utilize such loss carryforwards,
management has recorded valuation allowances against the realization of the
deferred tax assets.
11. TELECOMMUNICATIONS SERVICE AGREEMENTS
On January 30, 1998, the Company entered into certain non-exclusive
telecommunications service agreements with AT&T Corp. (the "AT&T Agreements")
which provides for, among other things, the purchase of long distance
telephone service from AT&T, the right to resell the service under AT&T's
brand name and the joint marketing and promotion of branded AT&T prepaid cards
and the DataWave System in the United States. Under the AT&T Agreements, the
Company is obligated to purchase $5.25 million of long distance time each year
over the two-year term of the agreement. If the Company does not purchase the
minimum, it incurs a shortfall charge consisting of the cost of the time not
purchased and a penalty.
Termination or non-renewal of the AT&T Agreements or failure to meet the
minimum annual purchase commitment set forth therein could have a material
adverse effect on the Company's business, financial condition and results of
operations.
12. COMMITMENTS AND CONTINGENCIES
(a) The Company has the following future minimum payments with respect to
operating leases for office space, computer and office equipment:
<TABLE>
<S> <C>
1999............................................................... $ 122,346
2000............................................................... 81,583
2001............................................................... 72,836
2002............................................................... 6,518
---------
$ 283,283
=========
</TABLE>
The Company has recorded rent expense for premises in the amount of $46,725,
$101,692 and $116,627 for the fiscal years ended March 31, 1996, 1997 and
1998, respectively.
(b) The Company recently determined that, in certain instances during
calendar 1998, the Company's rates for telecommunications services were above
those specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. In July
1998, the Company adjusted its rates for prepaid calling card services to fall
within those specified in the long distance tariffs of its underlying carriers
and therefore believes it is compliant with the foregoing regulatory
requirements. The Company has not recorded a provision for any fines or
penalties which might be assessed as a result of this contingency and believes
that the amount of possible loss, if any, is not determinable.
13. CREDIT CONCENTRATION
The Company's largest customer accounted for 11.3% of revenues during fiscal
1998.
F-20
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. REVERSE STOCK SPLIT
In connection with the proposed offering of common shares in the United
States as described in Note 15, the Company intends to complete a 1-for-5
reverse stock split of the Company's common shares which will be effected
prior to the offering described in Note 15. Accordingly, all shares, per share
data and related capital amounts for all periods presented in these financial
statements reflect the effects of this reverse stock split.
15. SUBSEQUENT EVENTS
(a) Subsequent to March 31, 1998, the Company entered into the ATTI Line of
Credit which provides for borrowings of up to $5 million in three separate
tranches at an annual interest rate of 14%. Approximately $1.6 million was
outstanding under the ATTI Line of Credit at June 30, 1998. The term of the
ATTI Line of Credit expires on the earlier of August 31, 1998 and the date on
which the Company raises equity capital in excess of $8 million (the "Maturity
Date"). Amounts outstanding on the Maturity Date are converted to a fully
amortizing 30 month loan at an annualized rate of 14%. The ATTI Line of Credit
is secured by all assets of the Company and its subsidiaries, excluding the
Company's interest in PhoneLine. As partial consideration for the ATTI Line of
Credit, the Company agreed to issue to ATTI and an affiliate warrants to
purchase up to $1 million aggregate value in Common Shares, with the number of
warrants to be determined on a pro rata basis upon approval of each of the
three funding tranches based on the average closing price for the ten business
days preceding such approval. To date, warrants to purchase 58,322 Common
Shares have been issued to ATTI pursuant to the ATTI Line of Credit at an
exercise price per share of C$7.80 (US$5.49). The fair value of the warrants
issued to ATTI in the amount of $229,923 was determined using the Black-
Scholes option pricing model assuming a risk-free rate of interest of 6% and
an expected volatility at the date of issue of 120% and will be recorded as
deferred financing charges at the date of issuance and amortized as additional
interest expense over the term of the amounts advanced.
(b) On June 4, 1998 the Company filed a registration statement on Form S-1
with the United States Securities and Exchange Commission for an offering of
2,148,500 of its Common Shares, of which 2,000,000 shares will be issued and
sold by the Company and 148,000 will be sold by certain selling shareholders.
The Company has also granted to the underwriters an over-allotment option to
purchase up to 322,200 additional common shares on similar terms and
conditions. In connection with this offering, the Company has agreed to
reimburse one selling shareholder its share of underwriting discounts and
commissions in the estimated amount of $13,300. This reimbursement will be
recorded as an adjustment to the net proceeds of the offering.
(c) Subsequent to March 31, 1998, the Company contributed $300,000 to its
joint venture investment PhoneLine, pursuant to a capital call.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
Metrophone Telecommunications Inc.:
We have audited the balance sheets of Metrophone Telecommunications Inc. as
at December 31, 1997 and March 31, 1998 and the statements of loss and deficit
and cash flows for the year ended December 31, 1997 and the three month period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1997 and
March 31, 1998 and the results of its operations and cash flows for the year
ended December 31, 1997 and the three month period ended March 31, 1998 in
accordance with accounting principles generally accepted in the United States.
Deloitte & Touche
Chartered Accountants
Vancouver, British Columbia, Canada
June 1, 1998
F-22
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1997 1998
------ ------------ ---------
<S> <C> <C>
CURRENT ASSETS
Cash................................................. $ 4,869 $ 24,456
Accounts receivable.................................. 10,787 15,666
Deposits and loan fees............................... 23,269 24,632
--------- ---------
Total current assets............................... 38,925 64,754
MACHINERY AND EQUIPMENT, NET (Note 3).................. 268,751 370,507
DEFERRED FINANCING COSTS ON EQUIPMENT
FINANCING LOANS, NET.................................. 23,791 22,316
DEFERRED EXPENSES, NET (Note 4)........................ 158,299 151,708
--------- ---------
TOTAL ASSETS........................................... $ 489,766 $ 609,285
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable..................................... $ 337,465 $ 224,855
Due to DataWave Systems Inc. (Note 9)................ -- 388,869
Current portion of obligations under equipment
financing loans (Note 5)............................ 52,645 54,619
--------- ---------
Total current liabilities.......................... 390,110 668,343
OBLIGATIONS UNDER EQUIPMENT FINANCING LOANS (Note 5)... 232,393 215,295
--------- ---------
TOTAL LIABILITIES...................................... $ 622,503 $ 883,638
--------- ---------
COMMITMENTS (Note 6)
SHAREHOLDERS' DEFICIT
Preferred shares, $0.01 par value, 1,000,000
authorized, none issued and outstanding at December
31, 1997 and March 31, 1998......................... -- --
Common shares, $0.01 par value, 10 million shares
authorized, 755,000 issued and outstanding at
December 31, 1997 and March 31, 1998................ 1 1
Deficit.............................................. (132,738) (274,354)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT............................ (132,737) (274,353)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............ $ 489,766 $ 609,285
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
STATEMENTS OF LOSS AND DEFICIT
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
REVENUES............................................. $ 253,783 $ 62,091
---------- ----------
OPERATING COSTS AND EXPENSES
Costs of revenues excluding depreciation and amor-
tization.......................................... 98,181 30,376
General and administrative......................... 109,345 121,490
Selling and marketing.............................. 15,652 7,298
Depreciation and amortization...................... 37,181 19,290
Loss on write-off of machinery and equipment....... 4,944 --
---------- ----------
Total operating expenses......................... 265,303 178,454
---------- ----------
OPERATING LOSS....................................... (11,520) (116,363)
Interest and bank charges............................ (32,453) (8,537)
---------- ----------
NET LOSS............................................. (43,973) (124,900)
DEFICIT, BEGINNING OF PERIOD......................... (29,187) (132,738)
DIVIDENDS DISTRIBUTED................................ (59,578) (16,716)
---------- ----------
DEFICIT, END OF PERIOD............................... $ (132,738) $ (274,354)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (43,973) $ (124,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 37,181 19,290
Loss on write-off of machinery and equipment...... 4,944 --
Net change in non-cash working capital items:
Accounts receivable............................... 1,593 (4,879)
Deposits and loan fees............................ (17,220) (1,363)
Accounts payable.................................. 239,812 (112,610)
---------- ----------
Net cash provided by (used in) operating activi-
ties.............................................. 222,337 (224,462)
---------- ----------
INVESTING ACTIVITY
Purchase of machinery and equipment................ (27,955) (111,780)
---------- ----------
Net cash (used in) investing activity.............. (27,955) (111,780)
---------- ----------
FINANCING ACTIVITIES
Proceeds from equipment financing loans............ 71,721 --
Repayment of equipment financing loans............. (33,111) (15,124)
Increase in deferred financing costs............... (20,000) --
Increase in deferred expenses...................... (145,762) (1,200)
Dividends paid..................................... (59,578) (16,716)
Due to DataWave Systems Inc........................ -- 388,869
---------- ----------
Net cash (used in) provided by financing activi-
ties.............................................. (186,730) 355,829
---------- ----------
INCREASE IN CASH..................................... 7,652 19,587
(BANK INDEBTEDNESS) CASH, BEGINNING OF PERIOD........ (2,783) 4,869
---------- ----------
CASH, END OF PERIOD.................................. $ 4,869 $ 24,456
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................... $ 32,453 $ 8,537
========== ==========
Taxes paid........................................... $ -- $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Purchase of machinery financed through equipment fi-
nance loans......................................... $ (148,282) $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. NATURE OF OPERATIONS
The Company owns and operates pay phones located in the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and include the following
significant accounting policies:
(a) Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue recognition
The Company's revenues consist primarily of local and long distance payphone
revenue. Revenue is recognized when the customer completes the phone call and
makes payment by coin or calling card.
(c) Machinery and equipment
Machinery and equipment are recorded at cost, less accumulated depreciation.
Depreciation is calculated over the estimated useful lives of capital assets
as follows:
Computer equipment and software 3 years straight line
Office equipment 5 years straight line
Furniture and fixtures 10 years straight line
Telephone equipment 10 years straight line
Automobile 5 years straight line
(d) Long-lived assets
The Company has adopted SFAS No. 121, Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed of. SFAS No. 121
establishes accounting standards for the measurement and impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company periodically reviews the values
assigned to long-lived assets, such as telephone and other machinery,
equipment and software costs, and records impairment losses when indicators of
impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts.
(e) Deferred expenses
Deferred expenses consist of initial sign up fees on site location contracts
and deferred financing costs. The Company pays initial sign up fees to secure
exclusive rights to provide pay phone services at specified locations on
contracts that have terms ranging from five to ten years. These sign up fees
are amortized over the non-cancellable term of the contract. Deferred
financing costs consist of a 10% financing charge on equipment loans which are
due at the end of the term. These costs have been amortized over the term of
the loan contract.
F-26
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(f) Fair value of financial instruments
The Company estimates that the carrying values of its cash, accounts
receivable, accounts payable, due to DataWave Systems Inc., and obligations
under equipment financing loans approximate fair value at December 31, 1997 and
March 31, 1998.
3. MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
1997 MARCH 31, 1998
------------ --------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST DEPRECIATION VALUE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Computer equipment and
software................... $ 4,315 $ 6,537 $ 1,559 $ 4,978
Office equipment............ 2,203 2,447 367 2,080
Furniture and fixtures...... 3,143 3,309 248 3,061
Telephone equipment......... 239,112 383,793 42,273 341,520
Automobile.................. 19,978 22,199 3,331 18,868
--------- --------- -------- ---------
$ 268,751 $ 418,285 $ 47,778 $ 370,507
========= ========= ======== =========
</TABLE>
4. DEFERRED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
1997 MARCH 31, 1998
------------ --------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST AMORTIZATION VALUE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Deferred expenses.............. $ 158,299 $ 167,632 $ 15,924 $ 151,708
</TABLE>
5. OBLIGATIONS UNDER EQUIPMENT FINANCING LOANS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Telecapital L.P. ..................................... $ 285,038 $ 269,914
Less: current portion................................. 52,645 54,619
--------- ---------
$ 232,393 $ 215,295
========= =========
</TABLE>
The Telecapital equipment financing loans are repayable in aggregate average
monthly installments of approximately $7,316 including principal and interest,
bear interest at a rate of approximately 15% per annum, mature at various dates
until April 2002 and are secured by the equipment.
The following are the minimum loan payments for the aforementioned loans as
of December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $ 87,806
1999.............................................................. 87,806
2000.............................................................. 87,806
2001.............................................................. 96,097
2002.............................................................. 9,847
---------
Total minimum loan payments....................................... 369,361
Less: interest.................................................... 84,323
---------
$ 285,038
=========
</TABLE>
F-27
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
The Company has the following future minimum payments with respect to
operating leases for office space at December 31, 1997:
<TABLE>
<S> <C>
1998................................................................ $ 18,368
1999................................................................ 23,652
2000................................................................ 19,710
</TABLE>
7. INCOME TAXES
During the year ended December 31, 1997 and the three months ended March 31,
1998, the Company was a registered subchapter S corporation under United
States tax legislation. As such, income is distributed to the shareholders as
dividend distributions and income taxes are assessed upon the individual
shareholders.
8. STOCK SPLIT
On January 1, 1998, the Company's Articles were amended to effect a 7,550-
to-1 stock split on each issued and outstanding share. The number of issued
and outstanding shares at December 31, 1997 have been restated to reflect the
effect of this stock split.
9. RELATED PARTY TRANSACTIONS
Amounts due to DataWave Systems Inc. are unsecured, bear no interest and
have no specific terms of repayment.
10. SUBSEQUENT EVENTS
Effective April 21, 1998, all of the issued and outstanding shares of the
Company were sold to DataWave Systems Inc. for $1.3 million, consisting of
cash of $700,000 and 84,290 common shares of DataWave Systems Inc. payable to
shareholders of the Company.
F-28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information for the Company
set forth below gives effect to the acquisition of the shares of Metrophone
Telecommunications Inc. ("Metrophone") and the transfer of specified assets to
a corporate joint venture, Phone Line Cardcall International Inc.
("PhoneLine"). The historical financial information set forth below has been
derived from and is qualified by reference to, the financial statements of the
Company and Metrophone and should be read in conjunction with those financial
statements and the notes thereto included elsewhere herein.
The March 31, 1998 pro forma balance sheet has been prepared as if the
transactions described in Note 1 had occurred on March 31, 1998, and
represents the consolidation of the March 31, 1998 balance sheet of Metrophone
with the March 31, 1998 balance sheet of the Company. It also includes the
effect of the transfer of specified assets to PhoneLine and the resulting
investment in joint venture, being the Company's 40% interest in PhoneLine.
The pro forma statement of net loss for the year ended March 31, 1998 has
been prepared as if the transactions described in Note 1 had occurred on April
1, 1997. It represents the consolidation of the Metrophone statement of loss
for the year ended December 31, 1997 with the statement of income of the
Company for the year ended March 31, 1998, and the effect on revenues and
expenses of the Company for the year ended March 31, 1998 of the transfer of
specific assets to PhoneLine.
The adjusted pro forma balance sheet as at March 31, 1998 and adjusted pro
forma statement of net loss for the year ended March 31, 1998 includes the
effect of the aforementioned transactions and receipt of the net proceeds of
the Offering, the receipt of additional funds from a line of credit and the
repayment of a portion of long-term debt.
The pro forma consolidated financial statements are not intended to reflect
the results of operations or the financial position of the Company which would
have actually resulted had the proposed transactions described in Note 1 been
effected on the dates indicated. Further, the pro forma financial information
is not necessarily indicative of the results of operations or the financial
position that may be obtained in the future.
F-29
<PAGE>
DATAWAVE SYSTEMS INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTED PRO FORMA
DATAWAVE METROPHONE CONSOLIDATED CONSOLIDATED
MARCH 31, MARCH 31, PRO FORMA MARCH 31, MARCH 31, 1998
1998 1998 ADJUSTMENTS NOTE 1998 (NOTE 3)
--------- ---------- ------------ -------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash
equivalents........... $ 860 $ 24 $ (28) (550) 2(c) 2(a) $ 306 $ 18,571
Inventory.............. 769 -- (72) 2(c) 697 697
Accounts receivable.... 558 16 574 574
Prepaid expenses....... 229 24 253 253
------- ----- ------------ ------- --------
Total current assets... 2,416 64 (650) 1,830 20,095
MACHINERY AND EQUIPMENT,
NET.................... 1,476 371 (53) 2(c) 1,794 1,794
ACQUIRED INTANGIBLES.... 471 -- (296) 1,700 2(c) 2(b) 1,875 1,875
ADVANCES AND DEPOSIT ON
ACQUISITION............ 438 -- (438) 2(b) -- --
INVESTMENT IN JOINT
VENTURE................ 207 -- 449 2(c) 656 656
INVESTMENT IN
METROPHONE............. -- -- 1,201 (1,201) 2(b) 2(a) -- --
OTHER ASSETS............ 86 174 (174) 2(b) 86 86
------- ----- ------------ ------- --------
TOTAL ASSETS............ $ 5,094 $ 609 $ 538 $ 6,241 $ 24,506
======= ===== ============ ======= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
CURRENT LIABILITIES
Accounts payable and
accrued liabilities... $ 1,933 $ 225 $ 2,158 $ 2,158
Security deposits...... 27 -- 27 27
Due to DataWave Systems
Inc................... -- 388 (388) 2(b) -- --
Current portion of
long-term debt........ 498 55 553 55
------- ----- ------------ ------- --------
Total current
liabilities........... 2,458 668 2,738 2,240
LONG-TERM DEBT, LESS
CURRENT
PORTION................ 1,022 215 1,237 215
------- ----- ------------ ------- --------
TOTAL LIABILITIES....... 3,480 883 (388) 3,975 2,455
------- ----- ------------ ------- --------
SHAREHOLDERS' EQUITY
COMMON SHARES........... 9,711 1 651 2(a) 10,363 30,148
SHARE WARRANTS.......... 63 -- 63 63
DEFICIT................. (8,160) (275) 275 2(b) (8,160) (8,160)
------- ----- ------------ ------- --------
TOTAL SHAREHOLDERS'
EQUITY................. 1,614 (274) 926 2,266 22,051
------- ----- ------------ ------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY... $ 5,094 $ 609 $ 538 $ 6,241 $ 24,506
======= ===== ============ ======= ========
</TABLE>
F-30
<PAGE>
DATAWAVE SYSTEMS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
ADJUSTED
PRO FORMA
PRO FORMA CONSOLIDATED
DATAWAVE METROPHONE CONSOLIDATED YEAR ENDED
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31,
MARCH 31, DECEMBER 31, PRO FORMA MARCH 31, 1998
1998 1997 ADJUSTMENTS NOTE 1998 (NOTE 3)
---------- ------------ ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............... $ 9,676 $ 254 $ (1,685) 2(d) $ 8,245 $ 8,245
--------- -------- --------- --------- ---------
OPERATING COSTS AND
EXPENSES
Cost of revenues
excluding
depreciation and
amortization........ 6,211 98 (1,115) 2(d) 5,194 5,194
General and
administrative...... 1,426 109 (155) 2(d) 1,380 1,380
Selling and
marketing........... 552 16 (133) 2(d) 435 435
Research and
development......... 134 -- -- 134 134
Depreciation and
amortization........ 895 37 340 (39) 2(e) 2(d) 1,106 1,106
(127) 2(d)
Loss on foreign
exchange............ 28 -- -- 28 28
Loss on disposal of
machinery and
equipment........... -- 5 -- 5 5
--------- -------- --------- --------- ---------
Total operating
costs and
expenses.......... 9,246 265 (1,229) 8,282 8,282
--------- -------- --------- --------- ---------
INCOME (LOSS) FROM
OPERATIONS............ 430 (11) (456) (37) (37)
--------- -------- --------- --------- ---------
Earnings from joint
venture............. -- -- (127) 253 2(d) 2(d) 126 126
Interest expense..... (365) (32) (10) 2(d) (407) (32)
--------- -------- --------- --------- ---------
(365) (32) 116 (281) 94
--------- -------- --------- --------- ---------
NET INCOME (LOSS)...... $ 65 $ (43) $ (340) $ (318) 57
========= ======== ========= ========= =========
Pro forma basic and
diluted net loss per
share............... $ (0.07) $ 0.01
========= =========
Weighted average
shares used in
computing pro forma
basic and diluted
net loss per share.. 4,270,255 7,270,255
========= =========
</TABLE>
F-31
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED MARCH 31, 1998
(UNAUDITED)
1. PRO FORMA ASSUMPTIONS
The pro forma consolidated financial statements of the Company incorporate
the following pro forma assumptions:
(a) The acquisition by the Company of the issued and outstanding shares
of Metrophone for $1.3 million consisting of cash of $700,000 and 67,432
common shares at a value of $8.90 per share, which, pursuant to the
acquisition agreement, was calculated as being the average trading price of
the Company's shares in the ten days prior to the date the purchase
agreement was finalized. 10,000 common shares at a value of $5.10 per share
were also issued as consideration for a finders' fee in connection with the
acquisition. These shares were valued based on the trading price of the
Company's shares on the date the initial letter of intent was signed, being
the date the services were provided.
The transaction has been accounted for as an acquisition by the Company
and the purchase method of accounting has been applied.
The acquisition of Metrophone included the purchase of intangible assets
with an estimated fair value of $1.7 million. These assets consist
principally of long-term contracts to provide pay phone service to
specified locations and are being amortized on a straight-line basis over 5
years. The allocation of the purchase price to specific identifiable
tangible and intangible assets and liabilities and the amortization period
assigned to each asset is based on management's preliminary assessment
regarding the value of assets acquired and the period over which expected
benefits from those assets will be realized. To the extent that these
valuations are inaccurate or the related amortization period is not
appropriate, adjustments to the recorded amount of depreciation and
amortization expense, net earnings or loss from operations and the carrying
value of the related assets may be required in future periods.
(b) The investment by the Company in a corporate joint venture,
PhoneLine, with DCI Telecommunications, Inc. ("DCI"). Under the terms of
the agreement, a subsidiary of DCI provided: initial capital of $280,958;
$42,144 for 60,000 common shares of PhoneLine; and $238,814 by way of loan.
DCI also contributed specified assets with an attributed value of $238,814.
The Company provided: initial capital of $449,533; $28,096 for 40,000
common shares representing a 40% interest in PhoneLine; and $421,440 by way
of loan. The Company also contributed specified assets with an attributed
value of $421,440 for cash.
The Company's investment in PhoneLine will be recorded on the equity
basis whereby the investment is initially recorded at cost and the carrying
value adjusted thereafter to include the Company's pro rata share of the
earnings or loss of PhoneLine. The specified assets to be contributed to
PhoneLine will consist of inventory, acquired intangibles and capital
assets of Phone Line International (PLI) Inc. (PLI), a company acquired by
the Company on June 10, 1997. Accordingly, revenues, expenses, and the net
earnings relating to the specified assets of PLI for the year ended March
31, 1998, which were contributed to PhoneLine, have been reclassified to
earnings from joint venture in the pro forma statement of net loss and
reflect only the Company's 40% equity interest in the results of operations
of PhoneLine..
(c) The Company expects to record a non-recurring, non-cash compensation
charge for 469,500 shares presently included in escrow which are held by
directors, officers and employees of the Company, on such date as the
Company meets the specified net earnings and cash flow requirements
described in the escrow arrangement or the shares are otherwise released
from escrow by the Vancouver Stock Exchange. If the escrow shares are
released upon completion of this offering, the resulting compensation
charge would amount to $3,521,250, assuming a $7.50 per share stock price
on the date of release. If the escrow shares are not released upon
completion of the offering the Company will record a compensation charge
equal to the fair value of the shares on the date of their release. No
compensation charge has been included in the pro forma consolidated
financial information.
F-32
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
FOR THE YEAR ENDED MARCH 31, 1998
(UNAUDITED)
2. DETAILED PRO FORMA ADJUSTMENTS
(a) Adjustment to record the acquisition of Metrophone consisting of the
payment of $550,000 on closing, the issue of 67,432 common shares at an
aggregate value of $600,000 and the issue of 10,000 common shares at an
aggregate value of $51,000 as consideration for costs of the acquisition.
(b) Adjustment to consolidate the net assets of Metrophone at acquisition
resulting in the elimination of the advances and deposit on acquisition in
the amount of $438,000, the Metrophone deficit of $275,000 and the
investment in Metrophone of $1,201,000, offset by the recognition of the
value of acquired intangibles in the amount of $1,700,000 and the
consolidation of the Metrophone net assets with those of the Company.
(c) Adjustment to record the transfer of cash and assets to the PhoneLine
joint venture, consisting of the payment of cash of $28,096, and the
transfer of assets with an aggregate book value of $421,440 to the
"investment in joint venture."
(d) Adjustment to reclassify the revenues, cost of revenues excluding
depreciation and amortization, general and administrative, depreciation and
amortization, selling and marketing, and interest expenses of the former
operations of PLI to earnings from joint venture.
(e) Adjustment to record the amortization of acquired intangible assets
as a result of the Metrophone acquisition.
3. ADJUSTED PRO FORMA CONSOLIDATED AT MARCH 31, 1998
The adjusted pro forma consolidated balance sheet at March 31, 1998 reflects
the following transactions in connection with the offering:
(i)the receipt of net proceeds after expenses of the issue of
$19,785,000;
(ii)the receipt of proceeds of $1,900,000 drawn on the ATTI line of
credit; and
(iii)the repayment with proceeds of the Offering of the current and long
term portion of long term debt, excluding the Metrophone debt, in the
amount of $3,420,000.
F-33
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 17
Use of Proceeds.......................................................... 17
Price Range of Common Shares............................................. 18
Dividend Policy.......................................................... 19
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 30
Management............................................................... 43
Certain Transactions..................................................... 49
Principal and Selling Shareholders....................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Legal Matters............................................................ 60
Experts.................................................................. 60
Available Information.................................................... 60
Enforceability of Civil Liabilities Against Foreign Persons.............. 61
Exchange Rate Information................................................ 61
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
3,145,333 COMMON SHARES
[LOGO OF DATAWAVE SYSTEMS, INC. APPEARS HERE]
------------
PROSPECTUS
------------
MORGAN KEEGAN & COMPANY, INC.
LAIDLAW GLOBAL SECURITIES INC.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the Common Shares offered hereby, other than
underwriting discounts and commissions. The Company will bear all such
expenses. All amounts shown are estimates except for the Securities and
Exchange Commission Registration Fee, the National Association of Securities
Dealers, Inc. Filing Fee and the Nasdaq National Market Listing Fee.
<TABLE>
<CAPTION>
COMPANY
--------
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 6,126
National Association of Securities Dealers, Inc. Filing Fee..... 2,584
Nasdaq National Market Listing Fee.............................. 75,625
Printing and Engraving Expenses................................. 150,000
Blue Sky Fees and Expenses...................................... 1,000
Legal Fees and Expenses......................................... 500,000
Accounting Fees and Expenses.................................... 200,000
Transfer Agent and Registrar Fees and Expenses.................. 20,000
Miscellaneous Fees and Expenses................................. 34,665
--------
Total $990,000
========
</TABLE>
- --------
*To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 128 of the Company Act of the Province of British Columbia, Canada
(the "Company Act") provides that a corporation may, with the approval of the
court, indemnify a Director or officer, or a former Director or officer, of
the corporation or its subsidiaries against all costs, charges and expenses in
any action to which he or she is made a party by reason of being or having
been a Director or officer, subject to certain limitations. In addition,
Section 128 of the Company Act provides that a corporation may purchase and
maintain insurance for the benefit of a Director or officer, or former
Director or officer, against any liability incurred by such person as a
Director or officer.
Section 20 of the Company's Articles of Association (the "Articles")
provides that, subject to the provisions of the Company Act, the Directors
may, with the approval of the court, cause the Company to indemnify a Director
or officer, or a former Director or officer, of the Company or its
subsidiaries against all costs, charges and expenses in any action to which he
is made a party by reason of being or having been a Director or officer,
including any action or proceeding brought by the Company. Each Director of
the Company on being elected or appointed is deemed to have contracted with
the Company on the terms of the foregoing indemnity. The failure of a Director
or officer of the Company to comply with the provisions of the Company Act, or
the Altered Memorandum (the "Memorandum") and Articles of the Company will not
invalidate any indemnity to which he is entitled. In addition, the Directors
may cause the Company to purchase and maintain insurance for the benefit of
any person who is or was serving as a Director or officer of the Company or
its subsidiaries against any liability incurred by him as a Director or
officer.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its Directors and officers, certain other persons and the
Selling Shareholders, and by the Company and the Selling Shareholders of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") and affords certain
rights of contribution with respect thereto.
The Company may enter into indemnification agreements with its Directors and
officers and intends to maintain insurance for the benefit of its Directors
and officers insuring such persons against certain liabilities, including
liabilities under the securities laws.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company has issued and sold the securities
described below. For those issuances of securities to residents of the United
States, the Company relied upon the exemption from registration provided by
Section 4(2) of the Securities Act except as may otherwise be noted. The US$
figures provided herein are based upon the monthly average US-Canadian
conversion rate as of the month of the transaction; provided, however, that
the US$ figures for unexercised options and warrants are based upon the US-
Canadian conversion rates as of March 31, 1998.
1. On August 31, 1995 and January 11, January 31, April 24, June 3, June 6,
June 7, and June 13, 1996, the Company issued an aggregate of 200,000 Common
Shares, upon the exercise of warrants by nine warrant-holders, each a non-U.S.
resident, for cash consideration of C$1.98 (US$2.28) per share.
2. On October 5, 1995, the Company issued an aggregate of 316,000 Common
Shares, for cash consideration of C$6.25 (US$4.66) per share, excluding
expenses of the issuance, to 11 non-U.S. residents, including certain
executive officers of the Company, in a private placement. C.M. Oliver &
Company Limited acted as agent for the Company in connection with the private
placement of 185,000 Common Shares and received (i) a commission of $51,695,
(ii) a corporate finance fee of $26,080 and (iii) a warrant to purchase 28,000
Common Shares at an exercise price of C$6.25 (US$4.56) per share.
3. On January 19, January 30 and January 31, 1996, the Company issued an
aggregate of 173,410 Common Shares upon the exercise of certain warrants to
purchase one half of a Common Share at an exercise price of C$5.00 (US$3.60)
per share (the "January 1995 Warrants") to nine warrant-holders, each a non-
U.S. resident, for cash consideration of C$6.25 (US$4.56) per share.
4. On July 10, 1996, the Company granted special warrants to purchase an
aggregate of 480,000 Common Shares for cash consideration of C$5.00 (US$3.65)
per share to four investors. These special warrants were subsequently
exercised on or around July 1996. Marleau, Lemire Securities Inc. and
Griffiths, McBurney & Partners acted as agents in connection with this private
placement and were issued warrants to purchase 24,000 Common Shares at an
exercise price of C$5.75 (US$4.20) per share.
5. Since October 22, 1996, in connection with a lease financing agreement, the
Company has granted warrants to purchase an aggregate of 80,000 Common Shares
to Applied Telecommunications Technologies IV N.V. ("ATT IV") and Applied
Telecommunications Technologies, Inc. ("ATTI") (the "1996 ATTI Warrants"),
with exercise prices ranging from C$1.45 (US$1.03) to C$3.90 (US$2.75) per
share.
6. On May 12, 1997, pursuant to an agreement dated March 11, 1997, the Company
issued an aggregate of 300,000 Common Shares, together with warrants to
purchase an additional 300,000 Common Shares, for cash consideration of C$1.00
(US$0.71) per share (the "1997 Warrants"). The 1997 Warrants currently have an
exercise price of C$1.15 (US$0.81) per share. The Common Shares and the 1997
Warrants were offered and sold to a total of 13 investors, including certain
executive officers of the Company.
7. As consideration for the acquisition of certain assets of Interurbain
Communications, Inc. ("Interurbain"), on May 16, July 21 and October 3, 1997
and January 1, 1998, the Company issued to four shareholders of Interurbain an
aggregate of 320,000 Common Shares, valued at C$2.75 (US$2.04) per share. In
addition, the Company granted warrants to purchase an aggregate of 40,000
Common Shares, at an exercise price of C$5.00 (US$3.53) per share, to each of
the four shareholders of Interurbain.
8. As consideration for the acquisition of the issued and outstanding capital
stock of Phone Line International (PLI) Inc. ("PLI"), on December 4, 1997, the
Company issued 101,351 Common Shares, valued at C$3.70 (US$2.68) per share to
the shareholders of PLI.
9. As consideration for the acquisition of the issued and outstanding capital
stock of Cardxpress Vending Inc. ("Cardxpress"), on December 5, 1997, the
Company issued 3,142 Common Shares, valued at C$4.98 (US$3.50) per share to
the shareholders of Cardxpress.
II-2
<PAGE>
10. Effective as of March 2, 1998, the Company issued warrants to purchase
58,322 Common Shares at an exercise price of C$7.05 (US$4.96) to ATTI and ATT
IV as partial consideration for the first tranche of a new $8 million line of
credit (the "ATTI Line of Credit").
11. Upon the exercise of certain 1997 Warrants, on March 11, 1998, the Company
issued an aggregate of 161,000 Common Shares for cash consideration of C$1.00
(US$0.70) per share to six investors.
12. On March 19, 1998, the Company issued 25,333 Common Shares to ATT IV upon
the exercise of certain 1996 ATTI Warrants.
13. On March 26, 1998, the Company issued an aggregate of 33,000 Common Shares
to Arlington Worldwide Limited, a non-U.S. resident, for cash consideration of
C$6.35 (US$4.48) per share as a finder's fee in connection with the PLI joint
venture.
14. As consideration for the acquisition of the issued and outstanding capital
stock of MetroPhone Telecommunications Inc. ("Metrophone"), on April 16, 1998,
the Company issued an aggregate of 67,432 Common Shares, valued at C$12.73
(US$8.90) per share, to the shareholders of Metrophone. In addition, the
Company issued an aggregate of 10,000 Common Shares, valued at C$7.29
(US$5.10) per share to Minnie Offstein Cart, as a finders fee.
15. Upon the exercise of options to purchase Common Shares pursuant to the
Company's 1997 Plan, on August 21, August 27, August 28, September 4 and
September 25, 1997, March 10, March 17, March 30, April 6, May 11, May 13,
June 19 and June 29, 1998, the Company issued an aggregate of 173,110 Common
Shares, for cash consideration of C$1.50 (US$1.08 for options exercised in
August 1997 and September 1997, US$1.06 for options exercised in March 1998,
US$1.05 for options exercised in April 1998 and May 1998), US$1.47 for options
exercised in June 1998 per share to certain employees of the Company,
including certain executive officers of the Company. Upon the exercise of
options to purchase Common Shares pursuant to the Company's 1997 Plan, on
February 6, and April 15, 1998, the Company issued an aggregate of 12,000
Common Shares for cash consideration of C$3.30 (US$2.31 for options exercised
in February 1998 and April 1998) per share to certain employees of the
Company. Upon the exercise of options to purchase shares of Common Shares
pursuant to the Company's 1997 Plan, on March 11 and May 31, 1996 and April
24, 1998, the Company issued an aggregate of 11,400 shares of Common Shares
for cash consideration of C$5.00 (US$3.65 for options exercised in March 1996,
US$3.63 for options exercised in April 1996, and US$3.50 for options exercised
in April 1998) per share are to certain employees of the Company.
16. As of July 20, 1998, there were 727,690 options outstanding under the
Company's 1997 Plan.
17. Effective as of July 17, 1998, the Company issued warrants to purchase
7,569 Common Shares at an exercise price of C$11.65 (US$8.21) to ATTI as
consideration for the second tranche under the ATTI Line of Credit.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Altered Memorandum
3.2* Articles
4.1 Form of Common Share Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Altered Memorandum and
Articles of the Registrant defining rights of the holders of Common
Shares of the Registrant
5.1** Opinion regarding the legality of the securities being registered
10.1* Stock Option Plan dated August 1, 1997
10.2 Form of 1998 Stock Option Plan
10.3 Form of Employment Agreement between the Registrant and Clive Barwin
10.4 Form of Employment Agreement between the Registrant and Peter Hough
10.5* Form of Warrant to Purchase Common Shares of the Registrant granted
October 22, 1996 to Applied Telecommunications Technologies IV N.V.
("ATT IV") and Applied Telecommunications Technologies, Inc. ("ATTI")
10.6* Lease Financing Agreement dated October 22, 1996 between DataWave
Services (US) Inc. and ATTI
10.7* Form of Warrant to Purchase Common Shares of the Registrant granted
March 11, 1997 to certain investors
10.8 Line of Credit Agreement dated June 3, 1998 between DataWave Systems
(US) Inc. and ATTI
10.9 Form of Warrant to Purchase Common Shares of the Registrant granted
June 3, 1998 to ATT IV
10.10* Agreement and Plan of Merger dated March 25, 1998 among DataWave
Systems (US) Inc., Metrophone Telecommunications Inc. ("Metrophone"),
DW Merger Corporation and certain shareholders of Metrophone
10.11* Loan and Security Agreement dated as of April 14, 1997 between
Metrophone and TeleCapital, L.P. ("TeleCapital")
10.12* Letter of Conditional Commitment dated November 11, 1997 between
Metrophone and TeleCapital
10.13* AT&T Independent Private Payphone Owner Commission Agreement dated
March 16, 1998 between Metrophone and AT&T Corp. ("AT&T")
10.14* ARVC Contract for Telephone Services dated as of November 1, 1997
between Metrophone and the National Association of RV Parks and
Campgrounds
10.15* Share Purchase Agreement dated June 10, 1997 among the Registrant,
PhoneLine International (PLI) Inc. ("PLI") and certain shareholders of
PLI
10.16* Heads of Agreement dated as of March 1, 1998 among the Registrant,
PLI, DCI and Cardcaller Canada Inc.
10.17* Unanimous Shareholders' Agreement dated March 1, 1998 among the
Registrant, DCI Telecommunications, Inc. ("DCI") and certain
shareholders of the Registrant
10.18* License Agreement dated March 31, 1998 between the Registrant and
PhoneLine Cardcall International Inc.
10.19* Asset Purchase Agreement dated as of January 1, 1997 among the
Registrant, Interurbain Communications, Inc. ("Interurbain"), DTV
Telecommunications (US) Inc. and certain shareholders of Interurbain
10.20* Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust Company of Canada ("Montreal Trust") and certain
shareholders of the Registrant
10.21* Second Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust, and certain shareholders of the Registrant
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.22* Form of Voluntary Pooling Agreement among the Registrant, Montreal
Trust and certain shareholders of the Registrant
10.23* Form of Acknowledgment and Agreement to be Bound entered into by
certain transferees of Common Shares held in escrow pursuant to the
Escrow Agreements
10.24* Prepaid Card Co-Marketing Fund Agreement dated January 16, 1998
between the Registrant and AT&T
10.25* Professional Services Agreement dated January 30, 1998 between the
Registrant and AT&T
10.26* Contract Tariff Agreement dated January 30, 1998 between the
Registrant and AT&T
10.27* Indenture of Lease dated as of April 1, 1996 among DataWave Vending
(Canada) Inc., Haymur Enterprises Ltd. and Alexander David Macaulay
11.1 Statement re Computation of Per Share Earnings
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
23.2** Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit
5.1)
23.3** Consent of Campney & Murphy (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page)
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
Financial Statements.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Vancouver, British
Columbia, Canada, on July 22, 1998.
DATAWAVE SYSTEMS INC.
By: /s/ Peter Hough
----------------------------
Name: Peter Hough
Title: Chief Operating Officer,
Chief Financial Officer and
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chief Executive
* Officer, President July , 1998
- ---------------------------------- and Director
CLIVE BARWIN (principal
executive officer)
/s/ Peter Hough Chief Operating July 22, 1998
- ---------------------------------- Officer, Chief
PETER HOUGH Financial Officer
Secretary and
Director
(principal
financial and
accounting
officer)
* Director July , 1998
- ----------------------------------
GARTH BRAUN
* Director July , 1998
- ----------------------------------
LOUIS EISMAN
Authorized
* Representative in July , 1998
- ---------------------------------- the United States
JOSHUA EMANUEL
*By: /s/ Peter Hough July 22, 1998
- ----------------------------------
PETER HOUGH
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1* Altered Memorandum
3.2* Articles
4.1 Form of Common Share Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Altered
Memorandum and Articles of the Registrant defining rights of
the holders of Common Shares of the Registrant
5.1** Opinion regarding the legality of the securities being
registered
10.1* Stock Option Plan dated August 1, 1997
10.2 Form of 1998 Stock Option Plan
10.3 Form of Employment Agreement between the Registrant and Clive
Barwin
10.4 Form of Employment Agreement between the Registrant and Peter
Hough
10.5* Form of Warrant to Purchase Common Shares of the Registrant
granted October 22, 1996 to Applied Telecommunications
Technologies IV N.V. ("ATT IV") and Applied Telecommunications
Technologies, Inc. ("ATTI")
10.6* Lease Financing Agreement dated October 22, 1996 between
DataWave Services (US) Inc. and ATTI
10.7* Form of Warrant to Purchase Common Shares of the Registrant
granted March 11, 1997 to certain investors
10.8 Line of Credit Agreement dated June 3, 1998 between DataWave
Systems (US) Inc. and ATTI
10.9 Form of Warrant to Purchase Common Shares of the Registrant
granted June 3, 1998 to ATT IV
10.10* Agreement and Plan of Merger dated March 25, 1998 among
DataWave Systems (US) Inc., Metrophone Telecommunications Inc.
("Metrophone"), DW Merger Corporation and certain shareholders
of Metrophone
10.11* Loan and Security Agreement dated as of April 14, 1997 between
Metrophone and TeleCapital, L.P. ("TeleCapital")
10.12* Letter of Conditional Commitment dated November 11, 1997
between Metrophone and TeleCapital
10.13* AT&T Independent Private Payphone Owner Commission Agreement
dated March 16, 1998 between Metrophone and AT&T Corp.
("AT&T")
10.14* ARVC Contract for Telephone Services dated as of November 1,
1997 between Metrophone and the National Association of RV
Parks and Campgrounds
10.15* Share Purchase Agreement dated June 10, 1997 among the
Registrant, PhoneLine International (PLI) Inc. ("PLI") and
certain shareholders of PLI
10.16* Heads of Agreement dated as of March 1, 1998 among the
Registrant, PLI, DCI and Cardcaller Canada Inc.
10.17* Unanimous Shareholders' Agreement dated March 1, 1998 among
the Registrant, DCI Telecommunications, Inc. ("DCI") and
certain shareholders of the Registrant
10.18* License Agreement dated March 31, 1998 between the Registrant
and PhoneLine Cardcall International Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<C> <S> <C>
10.19* Asset Purchase Agreement dated as of January 1, 1997 among the
Registrant, Interurbain Communications, Inc. ("Interurbain"),
DTV Telecommunications (US) Inc. and certain shareholders of
Interurbain
10.20* Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust Company of Canada ("Montreal Trust") and
certain shareholders of the Registrant
10.21* Second Escrow Agreement dated November 16, 1993 among the
Registrant, Montreal Trust, and certain shareholders of the
Registrant
10.22* Form of Voluntary Pooling Agreement among the Registrant,
Montreal Trust and certain shareholders of the Registrant
10.23* Form of Acknowledgment and Agreement to be Bound entered into
by certain transferees of Common Shares held in escrow
pursuant to the Escrow Agreements
10.24* Prepaid Card Co-Marketing Fund Agreement dated January 16,
1998 between the Registrant and AT&T
10.25* Professional Services Agreement dated January 30, 1998 between
the Registrant and AT&T
10.26* Contract Tariff Agreement dated January 30, 1998 between the
Registrant and AT&T
10.27* Indenture of Lease dated as of April 1, 1996 among DataWave
Vending (Canada) Inc., Haymur Enterprises Ltd. and Alexander
David Macaulay
11.1 Statement re Computation of Per Share Earnings
21.1* Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
23.2** Consent of Paul, Hastings, Janofsky & Walker LLP (included in
Exhibit 5.1)
23.3** Consent of Campney & Murphy (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page)
27.1* Financial Data Schedule
</TABLE>
- --------
*Previously filed.
** To be filed by amendment
<PAGE>
EXHIBIT 4.1
===============================================================================
[LOGO OF DATAWAVE SYSTEMS INC]
NUMBER SHARES
INCORPORATED UNDER THE LAWS OF THE PROVINCE OF BRITISH COLUMBIA, CANADA
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
NEW YORK, NY, RIDGEFIELD PARK, NJ, CERTAIN DEFINITIONS
LOS ANGELES, CA AND VANCOUVER, BC
CUSIP
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE
==========================DATAWAVE SYSTEMS INC=================================
In the capital of the above named Company subject to the Memorandum and
Articles of the Company transferable on the share register of the Corporation
by the registered holder in person or by duly authorized attorney in writing
upon surrender of this Certificate properly endorsed. This Certificate is not
valid unless countersigned by an appropriate officer of the Transfer Agent
and the Registrar or the Co-Transfer Agent of the Company.
WITNESS the seal of the Company and the facsimile signatures of its duly
authorized officers at Vancouver, British Columbia.
Dated:
[CORPORATE SEAL
OF DATAWAVE SYSTEMS INC.]
/s/ Peter Hough /s/ Clive Barwin
____________________ ____________________
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED: COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C. MONTREAL TRUST COMPANY OF CANADA
TRANSFER AGENT AND REGISTRAR CO-TRANSFER AGENT
BY
AUTHORIZED SIGNATURE AUTHORIZED SIGNATORE
================================================================================
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
......under Uniform Transfer
(Minor)
to Minors Act...............
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell(s), assign(s)
and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
_____________________________
_____________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
registered in the name of the undersigned on the books of the Company and
represented by the within Certificate, and does hereby irrevocably constitute
and appoint
________________________________________________________________________Attorney
of the undersigned to transfer the said shares on the register of transfers
and books of the within named Company with full power of substitution
hereunder.
Dated ____________________________
X__________________________________
X__________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(e.g. BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN APPROVED
MEDALLION SIGNATURE GUARANTEE PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.2
DATAWAVE SYSTEMS INC.
STOCK OPTION PLAN
July 31, 1998
Approved by the Board of
Directors on , 1998.
Approved by the
Shareholders on July 20, 1998.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
ARTICLE 1 DEFINITIONS AND INTERPRETATION............................... 1
1.1 Definitions..................................................... 1
1.2 Choice of Law................................................... 2
1.3 Headings........................................................ 2
ARTICLE 2 PURPOSE AND PARTICIPATION.................................... 2
2.1 Purpose......................................................... 2
2.2 Participation................................................... 2
2.3 Notification of Award........................................... 3
2.4 Copy of Plan.................................................... 3
2.5 Limitation...................................................... 3
ARTICLE 3 TERMS AND CONDITIONS OF OPTIONS.............................. 3
3.1 Board to Issue Shares........................................... 3
3.2 Number of Shares................................................ 3
3.3 Term of Option.................................................. 3
3.4 Termination of Option........................................... 3
3.5 Exercise Price.................................................. 5
3.6 Additional Terms................................................ 5
3.7 Assignment of Options........................................... 6
3.8 Adjustments..................................................... 6
3.9 Public Announcement............................................. 6
ARTICLE 4 EXERCISE OF OPTION........................................... 6
4.1 Exercise of Option.............................................. 6
4.2 Issue of Share Certificates..................................... 6
4.3 Condition of Issue.............................................. 6
ARTICLE 5 ADMINISTRATION............................................... 7
5.1 Administration.................................................. 7
5.2 Interpretation.................................................. 7
ARTICLE 6 AMENDMENT AND TERMINATION.................................... 7
6.1 Prospective Amendment........................................... 7
6.2 Retrospective Amendment......................................... 7
6.3 Approvals....................................................... 7
6.4 Termination..................................................... 7
6.5 Agreement....................................................... 8
</TABLE>
-i-
<PAGE>
STOCK OPTION PLAN
-----------------
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions
-----------
As used herein, unless there is something in the subject matter or context
inconsistent therewith, the following terms shall have the meanings set forth
below:
(a) "Administrator" means, initially, the secretary of the Company and
thereafter shall mean such director or other senior officer or
employee of the Company as may be designated as Administrator by the
Board from time to time.
(b) "Award Date" means the date on which the Board awards a particular
Option.
(c) "Board" means the board of directors of the Company.
(d) "Company" means Datawave Systems Inc.
(e) "Director" means any individual holding the office of director of the
Company.
(f) "Employee" means any individual regularly employed on a full-time
basis by the Company or any of its subsidiaries and such other
individuals, such as consultants (as that term is defined under B.O.R.
#96/15 granted by the B.C. Securities Commission) of the Company and,
provided that on the date of grant of the Option the Company is an
Exchange Issuer as defined in the British Columbia Securities Act,
employees of management companies providing services (other than
investor relations) to the Company as may, from time to time, be
permitted by the rules and policies of the applicable Regulatory
Authorities to be granted options as employees or as an equivalent
thereto.
(g) "Exercise Notice" means the notice respecting the exercise of an
Option, in the form set out as Schedule "B" hereto, duly executed by
the Option Holder.
(h) "Exercise Period" means the period during which a particular Option
may be exercised and is the period from and including the Award Date
through to and including the Expiry Date.
(i) "Exercise Price" means the price at which an Option may be exercised
as determined in accordance with paragraph 3.5.
(j) "Expiry Date" means the date determined in accordance with paragraph
3.3 and after which a particular Option cannot be exercised.
(k) "Market Value" means the market value of the Company's Shares as
determined in accordance with paragraph 3.5.
-1-
<PAGE>
(l) "Option" means an option to acquire Shares, awarded to a Director or
Employee pursuant to the Plan.
(m) "Option Certificate" means the certificate, in the form set out as
Schedule "A" hereto, evidencing an Option.
(n) "Option Holder" means a Director or Employee, or former Director or
Employee, who holds an unexercised and unexpired Option or, where
applicable, the Personal Representative of such person.
(o) "Plan" means this stock option plan.
(p) "Personal Representative" means:
(i) in the case of a deceased Option Holder, the executor or
administrator of the deceased duly appointed by a court or public
authority having jurisdiction to do so; and
(ii) in the case of an Option Holder who for any reason is unable to
manage his or her affairs, the person entitled by law to act on
behalf of such Option Holder.
(q) "Regulatory Authorities" means all stock exchanges and other organized
trading facilities on which the Company's Shares are listed and all
securities commissions or similar securities regulatory bodies having
jurisdiction over the Company.
(r) "Share" or "Shares" means, as the case may be, one or more common
shares without par value in the capital stock of the Company.
1.2 Choice of Law
-------------
The Plan is established under, and the provisions of the Plan shall be subject
to and interpreted and construed in accordance with, the laws of the Province of
British Columbia.
1.3 Headings
--------
The headings used herein are for convenience only and are not to affect the
interpretation of the Plan.
ARTICLE 2
PURPOSE AND PARTICIPATION
2.1 Purpose
-------
The purpose of the Plan is to provide the Company with a share-related mechanism
to attract, retain and motivate qualified Directors and Employees, to reward
such of those Directors and Employees as may be awarded Options under the Plan
by the Board from time to time for their contributions toward the long term
goals of the Company and to enable and encourage such Directors and Employees to
acquire Shares as long term investments.
-2-
<PAGE>
2.2 Participation
-------------
The Board shall, from time to time and in its sole discretion, determine those
Directors and Employees, if any, to whom Options are to be awarded. The Board
may, in its sole discretion, grant the majority of the Options to insiders of
the Company. The aggregate number of Options granted to any consultants of the
Company will not exceed 2% of the Company's issued and outstanding share capital
as of the Award Date. However, in no case will an Option Holder be granted an
Option where the number of Shares that may be purchased pursuant to that Option
exceed, when added to the number of Shares available for purchase pursuant to
Options previously granted to the Option Holder which remain exercisable, 5% of
the Company's issued and outstanding share capital as of the Award Date of the
Option being granted.
2.3 Notification of Award
---------------------
Following the approval by the Board of the awarding of an Option, the
Administrator shall notify the Option Holder in writing of the award and shall
enclose with such notice the Option Certificate representing the Option so
awarded.
2.4 Copy of Plan
------------
Each Option Holder, concurrently with the notice of the award of the Option,
shall be provided with a copy of the Plan. A copy of any amendment to the Plan
shall be promptly provided by the Administrator to each Option Holder.
2.5 Limitation
----------
The Plan does not give any Option Holder that is a Director the right to serve
or continue to serve as a Director of the Company nor does it give any Option
Holder that is an Employee the right to be or to continue to be employed by the
Company.
ARTICLE 3
TERMS AND CONDITIONS OF OPTIONS
3.1 Board to Issue Shares
---------------------
The Shares to be issued to Option Holders upon the exercise of Options shall be
authorized and unissued Shares the issuance of which shall have been authorized
by the Board.
3.2 Number of Shares
----------------
Subject to adjustment as provided for in paragraph 3.8 of this Plan, the number
of Shares which will be available for purchase pursuant to Options granted
pursuant to this Plan will not exceed 5,370,488 Shares. This shall include the
existing 3,645,950 Options (see Schedule "C") granted prior to the
implementation of this Plan which, by the implementation of this Plan, are
deemed to have been re-granted under this Plan. If any Option expires or
otherwise terminates for any reason without having been exercised in full, the
number of Shares in respect of which that Option expired or terminated shall
again be available for the purposes of the Plan.
-3-
<PAGE>
3.3 Term of Option
--------------
Subject to paragraph 3.4, the Expiry Date of an Option shall be the date so
fixed by the Board at the time the particular Option is awarded, provided that
such date shall be no later than the tenth anniversary of the Award Date of such
Option (except with respect to Options issued to a consultant of the Company in
which case such date shall be no later than the fifth anniversary of the Award
Date of such Option).
3.4 Termination of Option
---------------------
Subject to such other terms or conditions that may be attached to Options
granted hereunder, an Option Holder may exercise an Option in whole or in part
at any time or from time to time during the Exercise Period. Any Option or part
thereof not exercised within the Exercise Period shall terminate and become
null, void and of no effect as of 5:00 p.m. local time in Vancouver, British
Columbia on the Expiry Date. The Expiry Date of an Option shall be the earlier
of the date so fixed by the Board at the time the Option is awarded and the date
established, if applicable, in sub-paragraphs (a) to (c) below:
(a) Death
--- -----
In the event that the Option Holder should die while he or she is
still a Director (if he or she holds his or her Option as Director) or
Employee (if he or she holds his or her Option as Employee), the
Expiry Date shall be the first anniversary of the Option Holder's date
of death; or
(b) Ceasing to hold Office
--- ----------------------
In the event that the Option Holder holds his or her Option as
Director of the Company and such Option Holder ceases to be a Director
of the Company other than by reason of death, the Expiry Date of the
Option shall be, unless otherwise provided for in the Option
Certificate, the 30th day following the date the Option Holder ceases
to be a Director of the Company unless the Option Holder ceases to be
a Director of the Company as a result of:
(i) ceasing to meet the qualifications set forth in section 114 of
the Company Act, R.S.B.C. 1996, c.62; or
(ii) a special resolution having been passed by the members of the
Company pursuant to subsection 130(3) of the Company Act,
R.S.B.C. 1996, c.62; or
(iii) an order made by any Regulatory Authority having jurisdiction
to so order;
in which case the Expiry Date shall be the date the Option Holder
ceases to be a Director of the Company.
(c) Ceasing to be Employed
--- ----------------------
In the event that the Option Holder holds his or her Option as an
Employee of the Company and such Option Holder ceases to be an
Employee of the Company other than by reason of death, the Expiry Date
of the Option shall be the 30th day following the date of the Option
Holder ceases to be an Employee of the issuer unless the Option Holder
ceases to be an Employee of the Company as a result of:
-4-
<PAGE>
(i) termination for cause; or
(ii) an order made by any Regulatory Authority having jurisdiction to
so order;
in which case the Expiry Date shall be the date the Option Holder
ceases to be an Employee of the Company.
Notwithstanding anything else contained herein, in no case will an Option be
exercisable later than the tenth anniversary of the Award Date of the Option.
3.5 Exercise Price
--------------
The price at which an Option Holder may purchase a Share upon the exercise of an
Option shall be as set forth in the Option Certificate issued in respect of such
Option and in any event shall not be less than the Market Value of the Company's
Shares as of the Award Date. In this event, the Market Value of the Company's
Shares for a particular Award Date shall be determined as follows:
(a) for each organized trading facility on which the Shares are listed,
Market Value will be the closing trading price of the Shares on the
day immediately preceding the Award Date;
(b) if the Company's Shares trade on an organized trading facility outside
of Canada, then the Market Value determined for that organized trading
facility will be converted into Canadian dollars at a conversion rate
determined by the Administrator having regard for the published
conversion rates as of the Award Date;
(c) if the Company's Shares are listed on more than one organized trading
facility, then Market Value shall be the simple average of the Market
Values determined for each organized trading facility on which those
Shares are listed as determined for each organized trading facility in
accordance with subparagraphs (a) and (b) above;
(d) if the Company's Shares are listed on one or more organized trading
facility but have not traded during the ten trading day period
immediately preceding the Award Date, then the Market Value will be,
subject to the necessary approvals of the applicable Regulatory
Authorities, such value as is determined by resolution of the Board;
and
(e) if the Company's Shares are not listed on any organized trading
facility, then the Market Value will be, subject to the necessary
approvals of the applicable Regulatory Authorities, such value as is
determined by resolution of the Board.
Notwithstanding anything else contained herein, in no case will the options be
exerciseable at a price less than the minimum prescribed by each of the
organized trading facilities on which the Shares trade and as prescribed by any
other applicable Regulatory Authority as would apply to the Award Date in
question.
3.6 Additional Terms
----------------
Subject to all applicable securities laws and regulations and the rules and
policies of all applicable Regulatory Authorities, each Option shall be subject
to a vesting schedule as is determined by the Board on the Award Date and the
Board may attach other terms and conditions to the grant of a particular
-5-
<PAGE>
Option. Such terms and conditions will be referred to in a schedule attached
to the Option Certificate. These terms and conditions may include, but are not
necessarily limited to, the following:
(a) providing that an Option expires on a date other than as provided for
herein;
(b) providing that a portion or portions of an Option expire after certain
periods of time or upon the occurrence of certain events; and
(c) providing that an Option be exercisable immediately, in full,
notwithstanding that it has vesting provisions, upon the occurrence of
certain events, such as a friendly or hostile takeover bid for the
Company.
3.7 Assignment of Options
---------------------
Options may not be assigned or transferred, provided however that the Personal
Representative of an Option Holder may, to the extent permitted by paragraph
4.1, exercise the Option within the Exercise Period.
3.8 Adjustments
-----------
If prior to the complete exercise of any Option the Shares are consolidated,
subdivided, converted, exchanged or reclassified or in any way substituted for
(collectively, the "Event"), an Option, to the extent that it has not been
exercised, shall be adjusted by the Board in accordance with such Event in the
manner the Board deems appropriate. No fractional shares shall be issued upon
the exercise of the Options and accordingly, if as a result of the Event, an
Option Holder would become entitled to a fractional share, such Option Holder
shall have the right to purchase only the next lowest whole number of shares and
no payment or other adjustment will be made with respect to the fractional
interest so disregarded.
3.9 Public Announcement
-------------------
On each and every Award Date the Company will, if required by the Regulatory
Authorities, publicly announce by way of news release, the Options granted on
that Award Date.
ARTICLE 4
EXERCISE OF OPTION
4.1 Exercise of Option
------------------
An Option may be exercised only by the Option Holder or the Personal
Representative of any Option Holder. An Option Holder or the Personal
Representative of any Option Holder may exercise an Option in whole or in part
at any time or from time to time during the Exercise Period up to 5:00 p.m.
local time in Vancouver, British Columbia on the Expiry Date by delivering to
the Administrator an Exercise Notice, the applicable Option Certificate and a
certified cheque or bank draft payable to "Datawave Systems Inc." in an amount
equal to the aggregate Exercise Price of the Shares to be purchased pursuant to
the exercise of the Option.
-6-
<PAGE>
4.2 Issue of Share Certificates
---------------------------
As soon as practicable following the receipt of the Exercise Notice, the
Administrator shall cause to be delivered to the Option Holder a certificate for
the Shares so purchased. If the number of Shares so purchased is less than the
number of Shares subject to the Option Certificate surrendered, the
Administrator shall forward a new Option Certificate to the Option Holder
concurrently with delivery of the Share Certificate for the balance of Shares
available under the Option.
4.3 Condition of Issue
------------------
The Options and the issue of Shares by the Company pursuant to the exercise of
Options are subject to the terms and conditions of this Plan and compliance with
the rules and policies of all applicable Regulatory Authorities to the granting
of such Options and to the issuance and distribution of such Shares, and to all
applicable securities laws and regulations. The Option Holder agrees to comply
with all such laws, regulations, rules and policies and agrees to furnish to the
Company any information, reports or undertakings required to comply with, and to
fully cooperate with, the Company in complying with such laws, regulations,
rules and policies.
ARTICLE 5
ADMINISTRATION
5.1 Administration
--------------
The Plan shall be administered by the Administrator on the instructions of the
Board. The Board may make, amend and repeal at any time and from time to time
such regulations not inconsistent with the Plan as it may deem necessary or
advisable for the proper administration and operation of the Plan and such
regulations shall form part of the Plan. The Board may delegate to the
Administrator or any Director, officer or employee of the Company such
administrative duties and powers as it may see fit.
5.2 Interpretation
--------------
The interpretation by the Board of any of the provisions of the Plan and any
determination by it pursuant thereto shall be final and conclusive and shall not
be subject to any dispute by any Option Holder. No member of the Board or any
person acting pursuant to authority delegated by it hereunder shall be liable
for any action or determination in connection with the Plan made or taken in
good faith and each member of the Board and each such person shall be entitled
to indemnification with respect to any such action or determination in the
manner provided for by the Company.
ARTICLE 6
AMENDMENT AND TERMINATION
6.1 Prospective Amendment
---------------------
The Board may from time to time amend the Plan and the terms and conditions of
any Option thereafter to be granted and, without limiting the generality of the
foregoing, may make such amendment for the purpose of meeting any changes in any
relevant law, rule or regulation applicable to the Plan, any Option or the
Shares, or for any other purpose which may be permitted by all relevant laws,
regulations, rules and policies provided always that any such amendment shall
not alter the terms or conditions of any Option or impair any right of any
Option Holder pursuant to any Option awarded prior to such amendment.
-7-
<PAGE>
6.2 Retrospective Amendment
-----------------------
The Board may from time to time retrospectively amend the Plan and, with the
consent of the affected Option Holders, retrospectively amend the terms and
conditions of any Options which have been previously granted.
6.3 Approvals
---------
This Plan and any amendments hereto are subject to all necessary approvals of
the applicable Regulatory Authorities.
6.4 Termination
-----------
The Board may terminate the Plan at any time provided that such termination
shall not alter the terms or conditions of any Option or impair any right of any
Option Holder pursuant to any Option awarded prior to the date of such
termination which shall continue to be governed by the provisions of the Plan.
If not terminated by the Board, the Plan will terminate when all of the Options
have been granted.
6.5 Agreement
---------
THE COMPANY AND EVERY OPTION AWARDED HEREUNDER SHALL BE BOUND BY AND SUBJECT TO
THE TERMS AND CONDITIONS OF THIS PLAN. BY ACCEPTING AN OPTION GRANTED HEREUNDER,
THE OPTION HOLDER HAS EXPRESSLY AGREED WITH THE COMPANY TO BE BOUND BY THE TERMS
AND CONDITIONS OF THIS PLAN.
-8-
<PAGE>
SCHEDULE "A"
DATAWAVE SYSTEMS INC.
STOCK OPTION PLAN
-----------------
OPTION CERTIFICATE
------------------
This Certificate is issued pursuant to the provisions of the Datawave Systems
Inc. ("Datawave") Stock Option Plan (the "Plan") and evidences that is the
holder (the "Option Holder") of an option (the "Option") to purchase up to
common shares (the "Shares") in the capital stock of Datawave at a purchase
price of Cdn. $ per Share. Subject to the provisions of the Plan:
(a) the Award Date of this Option is 19 ; and
(b) the Expiry Date of this Option is 19 .
This Option may be exercised at any time and from time to time from and
including the Award Date through to and including up to 5:00 local time in
Vancouver, British Columbia on the Expiry Date by delivery to the Administrator
of the Plan an Exercise Notice, in the form provided in the Plan, together with
this Certificate and a certified cheque or bank draft payable to "Datawave
Systems Inc." in an amount equal to the aggregate of the Exercise Price of the
Shares in respect of which this Option is being exercised.
This Certificate and the Option evidenced hereby is not assignable, transferable
or negotiable and is subject to the detailed terms and conditions contained in
the Plan, the terms and conditions of which the Option Holder hereby expressly
agrees with Datawave to be bound by. This Certificate is issued for convenience
only and in the case of any dispute with regard to any matter in respect hereof,
the provisions of the Plan and the records of Datawave shall prevail.
This Option is also subject to the terms and conditions contained in the
schedules, if any, attached hereto.
The foregoing Option has been awarded this day of , 199 .
DATAWAVE SYSTEMS INC.
Per:
-------------------------------------
Administrator, Datawave Systems Inc.,
Stock Option Plan
<PAGE>
OPTION CERTIFICATE - SCHEDULE
-----------------------------
The additional terms and conditions attached to the Option represented by this
Option Certificate are as follows:
1.
2.
3.
4.
5.
DATAWAVE SYSTEMS INC.
Per:
-------------------------------------
Administrator, Datawave Systems Inc.,
Stock Option Plan
<PAGE>
SCHEDULE "B"
DATAWAVE SYSTEMS INC.
STOCK OPTION PLAN
-----------------
NOTICE OF EXERCISE OF OPTION
----------------------------
TO: The Administrator, Stock Option Plan
Datawave Systems Inc.
101 West 5th Avenue
Vancouver, British Columbia, V5Y IH9
The undersigned hereby irrevocably gives notice, pursuant to the Datawave
Systems Inc. ("Datawave") Stock Option Plan (the "Plan"), of the exercise of the
Option to acquire and hereby subscribes for (CROSS OUT INAPPLICABLE ITEM):
(a) all of the Shares; or
(b) of the Shares;
which are the subject of the Option Certificate attached hereto.
The undersigned tenders herewith a certified cheque or bank draft (CIRCLE ONE)
payable to "Datawave Systems Inc." in an amount equal to the aggregate Exercise
Price of the aforesaid shares and directs Datawave to issue the certificate
evidencing said shares in the name of the undersigned to be mailed to the
undersigned at the following address:
--------------------------
--------------------------
DATED the day of 19 .
--------------------------
Signature of Option Holder
<PAGE>
SCHEDULE "C"
DATAWAVE SYSTEMS INC.
STOCK OPTION PLAN
-----------------
LIST OF OUTSTANDING OPTIONS
---------------------------
<TABLE>
<CAPTION>
NO. OF EXERCISE
NAME OF OPTIONEE OPTIONS PRICE DATE OF GRANT EXPIRY DATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary Anderson 10,000 $1.04 June 26, 1995 June 26, 2000
- ------------------------------------------------------------------------------------------------------------
Mathais Reinprecht 50,000 $0.30 July 12, 1994 July 12, 1999
10,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
William Turner 20,000 $0.30 Nov. 16, 1993 Nov. 16, 1998
19,000 $0.30 May 20, 1997 May 16, 2002
10,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Clive Barwin 225,000 $0.30 Dec. 26, 1995 January 1, 2001
259,000 $0.30 May 20, 1997 May 16, 2002
406,250 $0.40 August 1, 1997 August 1, 2002
240,000 $0.66 Sept. 26, 1997 Sept. 26, 2002
- ------------------------------------------------------------------------------------------------------------
Peter Hough 25,000 $0.30 January 8, 1996 January 1, 2001
166,000 $0.30 May 20, 1997 May 16, 2002
699,250 $0.40 August 1, 1997 August 1, 2002
240,000 $0.66 Sept. 26, 1997 Sept. 26, 2002
- ------------------------------------------------------------------------------------------------------------
Mark Milligan 22,500 $0.30 February 28, 1996 March 1, 2001
25,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
David Kleinberg 15,000 $0.30 February 20, 1996 March 1, 2001
- ------------------------------------------------------------------------------------------------------------
Yixiang (David) Song 8,000 $0.30 March 4, 1996 March 4, 2001
- ------------------------------------------------------------------------------------------------------------
Margarita Sharn 11,250 $0.30 February 26, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Sidney Schneider 18,750 $0.30 February 20, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Lisa Moors 10,000 $0.30 February 26, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Colin Turkington 10,000 $0.30 February 26, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Dean Wadsworth 10,000 $0.30 February 26, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Kelly Foston 3,750 $0.30 February 26, 1997 March 19, 2002
- ------------------------------------------------------------------------------------------------------------
Joshua Emanuel 50,000 $0.30 May 20, 1997 May 16, 2002
150,000 $0.30 August 1, 1997 August 1, 2002
110,500 $0.66 August 1, 1997 Sept. 26, 2002
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. OF EXERCISE
NAME OF OPTIONEE OPTIONS PRICE DATE OF GRANT EXPIRY DATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Emanuel 50,000 $0.30 May 20, 1997 May 16, 2002
- ------------------------------------------------------------------------------------------------------------
Lawrence Freedberg 50,000 $0.30 May 20, 1997 May 16, 2002
- ------------------------------------------------------------------------------------------------------------
Arthur Freedberg 50,000 $0.30 May 20, 1997 May 16, 2002
- ------------------------------------------------------------------------------------------------------------
Stephen Beaton 16,700 $0.30 May 20, 1997 May 16, 2002
20,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Garth Braun 100,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Louis Eisman 100,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Carlos Bada 10,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Gordon Saisho 10,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Raymond Chow 50,000 $0.30 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
Lorraine Demers 25,000 $0.66 August 1, 1997 August 1, 2002
- ------------------------------------------------------------------------------------------------------------
John Gunn 100,000 $0.66 Sept. 26, 1997 Sept. 26, 2002
- ------------------------------------------------------------------------------------------------------------
Mike Townsend 30,000 $0.66 Sept. 26, 1997 Sept. 26, 2002
- ------------------------------------------------------------------------------------------------------------
Kirk Bryde 100,000 $0.83 January 28, 1998 January 28, 2003
- ------------------------------------------------------------------------------------------------------------
Brandon Barwin 50,000 $2.25 May 13, 1998 May 12, 2003
- ------------------------------------------------------------------------------------------------------------
Ron Ganase 60,000 $2.25 May 13, 1998 May 12, 2003
---------
- ------------------------------------------------------------------------------------------------------------
TOTAL ( , 1998): 3,645,950
=========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.3
DATAWAVE SYSTEMS INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of the
___ day of ________, 1998 between DataWave Systems Inc., a corporation organized
under the laws of British Columbia, Canada (the "COMPANY") and Clive Barwin, an
individual (the "EXECUTIVE").
In consideration of the mutual benefits derived from this Agreement
and of the agreements, covenants and provisions hereof, the parties hereto agree
as follows:
1. Employment.
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1.1. Position. During the Term (as hereinafter defined) of this
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Agreement and subject to the terms and conditions set forth herein, the Company
agrees to employ the Executive as its Chief Executive Officer and President,
reporting only to the Board of Directors of the Company (the "Board").
1.2. Election to Office. During the Term, the Company shall use its
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best efforts to sustain and continue the Executive's position and designation as
set forth in SECTION 1 hereof.
1.3. Fulfillment of Duties. As long as the Company sustains and
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continues the Executive's position and designation as set forth in SECTION 1
hereof, the Executive shall (i) devote his full-time efforts during normal
business hours to the performance of his services hereunder, except during
vacation periods and periods of illness or incapacity and except that nothing in
this Agreement shall preclude the Executive from devoting reasonable periods
required for serving as a director of, or member of a committee of, or holding
other positions in, any organization involving no conflict of interest with the
interests of the Company and (ii) perform his services hereunder faithfully,
diligently and to the best of his skill and ability.
1.4. Location. During the Term, the Executive will perform his
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duties and services at the Company's principal executive offices and any other
locations as may be reasonable and necessary in the performance of his services
hereunder.
<PAGE>
2. Compensation and Benefits.
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2.1. Salary. In consideration of and as compensation for the
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services agreed to be performed by the Executive hereunder, the Company agrees
to pay the Executive during the Term a base salary (the "BASE SALARY") of not
less than USD Two Hundred Thousand Dollars (USD200,000) (CD285,000) per year,
payable semi-monthly in accordance with the Company's regular payroll practices.
The Company may review the Executive's Base Salary and other compensation
(including bonuses and incentive compensation) from time to time during the Term
and, at the recommendation of the Compensation Committee of the Board (the
"COMMITTEE"), may increase his Base Salary or other compensation (including
bonuses and incentive compensation) from time to time. Any increase in Base
Salary or other compensation (including bonuses or incentive compensation) shall
in no way limit or reduce any other obligation of the Company hereunder and,
once established at an increased rate, the Executive's Base Salary hereunder
shall not be reduced.
2.2 Incentive Compensation. During each year of the Term, in
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addition to the Base Salary provided in SECTION 2.1 above, the Executive shall
be eligible to receive additional incentive compensation, in an amount not to
exceed One Hundred Percent (100%) of the Executive's then applicable Base
Salary, upon achievement of the performance goals set forth on EXHIBIT A
attached hereto, upon the terms and conditions set forth therein.
2.3 Stock Options. The Executive shall receive, within forty-five
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(45) days following execution of this Agreement, an option (the "OPTION") to
purchase not less than One Hundred Thousand (100,000) shares of the Company's
common stock at an exercise price equal to fair market value on the date of
grant. The Option (which shall be granted in addition to and not in lieu of
stock options previously issued to the Executive) shall vest in equal
installments, on a monthly basis, over a three-year period following the date of
grant and shall be subject to such other terms and conditions as shall be
determined by the Committee. During the second and third years of the Term, the
Executive shall be entitled to receive such additional option grants as may be
determined by the Committee, subject to a minimum annual grant of One Hundred
Thousand (100,000) shares.
2.4. Participation in Benefit Plans. During the Term, the Executive
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shall be entitled to participate in any pension plans, profit-sharing plans and
group insurance, medical, hospitalization, disability and other benefit plans
presently in effect or hereinafter adopted, which plans are generally applicable
to the most senior executives of the Company and to the extent he is eligible
under the general provisions thereof.
2.5. Reimbursement of Expenses. The Company will reimburse the
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Executive for all business expenses, including, without limitation, traveling,
<PAGE>
entertainment and similar expenses, incurred by the Executive on behalf of the
Company during the Term if such expenses are ordinary and necessary business
expenses incurred on behalf of the Company pursuant to the Company's standard
expense reimbursement policy, provided that the Executive shall provide the
Company with such itemized accounts, receipts or documentation for such expenses
as are required under the Company's policy regarding the reimbursement of such
expenses.
2.6. Vacation and Sick Leave. During the Term, the Executive will
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be entitled to five weeks of paid vacation per year. The Executive shall also
be entitled to paid sick leave in accordance with the policy applicable to the
other senior executives of the Company.
3. Term. The "TERM" of employment under this Agreement means the
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period commencing on the date hereof and expiring on the third anniversary of
this Agreement or the earlier termination hereof pursuant to SECTION 4.1 hereof.
4. Termination of Employment.
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4.1. Events of Termination. Upon the occurrence of any of the events
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described in this SECTION 4.1 during the Term, the Executive's employment
hereunder shall terminate and the Executive shall be entitled to the benefits
provided in SECTION 4.2 hereof.
(i) Termination of the Executive's employment with the Company due
to the Executive's death.
(ii) If, as a result of the Executive's incapacity due to physical or
mental illness, injury or disability, the Executive shall have been absent from
his duties with the Company on a full-time basis for three (3) consecutive
months, and within thirty (30) days after the receipt of written Notice of
Termination (as hereinafter defined) he shall not have returned to the full-time
performance of his duties, the Company may terminate the Executive's employment
for "DISABILITY". "ABSENT FROM HIS DUTIES" means, for the purposes of this
SECTION 4.1(II), that the Executive is devoting less than forty (40) hours per
week to his duties under this Agreement.
(iii) The Company shall be entitled to terminate the Executive's
employment for Cause. For purposes of this Agreement, "CAUSE" shall mean:
(A) the willful and continued failure by the Executive to
substantially perform his duties with the Company in good faith (other than any
such failure resulting from his incapacity due to physical or mental illness,
injury or disability or any such actual or anticipated failure resulting from
his termination for Good Reason (as hereinafter defined)), after a demand for
substantial performance is delivered to him by the Board of Directors of the
Company which identifies, in reasonable detail, the
<PAGE>
manner in which the Board of Directors believes that the Executive has not
substantially performed his duties in good faith;
(B) the willful engaging by the Executive in conduct which
causes material harm to the Company, monetarily or otherwise; or
(C) the Executive's conviction of a crime which is a felony
offense in the United States or an indictable offense in Canada.
For purposes of this SECTION 4.1(III), no act, or failure to act, on the
Executive's part shall be considered "WILLFUL" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company or its shareholders.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than two-
thirds of the entire membership of the Board of Directors at a meeting of the
Board of Directors called and held for such purpose (after ten (10) days notice
to him and an opportunity for him, together with his counsel, to appear before
the Board of Directors), finding that the Executive was guilty of conduct set
forth above in CLAUSES (A), (B) OR (C) of this SECTION 4.1(III) and setting
forth, in reasonable detail, the basis for such finding.
(iv) The Executive shall be entitled to terminate his employment for
Good Reason. For purposes of this Agreement, "GOOD REASON" shall, without the
Executive's express written consent, mean:
(A) the assignment to the Executive of any duties substantially
inconsistent with his status as set forth in SECTION 1.1 hereof;
(B) a reduction by the Company in the Executive's Base Salary as
in effect on the date hereof or as the same may be increased from time to time;
(C) the relocation of the Company's principal executive offices
to a location not approved by the Executive or the Company's requiring the
Executive to be based in a location not approved by the Executive;
(D) the failure by the Company to continue in effect any
pension, health, compensation or other benefit plan in which the Executive
participates or any similar plans hereafter adopted, unless an equitable
arrangement (as determined by an employee benefit consultant of national
standing selected by the Company and reasonably satisfactory to the Executive),
embodied in an ongoing substitute or alternative plan, has been made with
respect to such plan, or the failure by the Company to continue his
participation therein, or the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits or deprive the
Executive of any material fringe benefit presently enjoyed by him;
<PAGE>
(E) the failure of the Company to obtain a satisfactory
agreement from any successor (by means of merger, consolidation, sale of assets
or otherwise) to assume and agree to perform this Agreement as contemplated by
SECTION 5 hereof; or
(F) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of SECTION 4.1(V) hereof (and, if applicable, SECTION 4.1(III)
hereof); and for purposes of this Agreement, no such purported termination shall
be effective.
The Executive's right to terminate his employment pursuant to this SECTION
4.1(IV) shall not be affected by his incapacity due to physical or mental
illness, injury or disability. The Company may, solely during the period of
such incapacity, make arrangements for the discharge of any of the Executive's
duties hereunder by another officer of the Company, but any such arrangement
shall not affect or in any way diminish the Executive's rights hereunder.
(v) Any purported termination by the Company or by the Executive
shall be communicated by written Notice of Termination to the other party hereto
in accordance with SECTIONS 4.3 AND 8.1 hereof.
(vi) Notwithstanding the pendency of a Notice of Dispute (as
hereinafter defined), the Company will continue to pay the Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue his participation in
all incentive compensation, bonus, option, benefit and insurance plans in which
he was participating when the notice giving rise to the dispute was given (or
provide the Executive with benefits substantially similar, as determined by an
employee benefit consultant of national standing selected by the Company and
reasonably satisfactory to the Executive, to those under such plans), until the
dispute is finally resolved. Amounts paid under this SECTION 4.1(VI) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement or otherwise. If it
is finally determined that the Executive terminated his employment for other
than Good Reason or the Company rightfully terminated the Executive's employment
for Cause, the Executive shall reimburse the Company for all amounts paid to him
under this SECTION 4.1(VI) (less any amounts determined to be owing to the
Executive under any other provision of this Agreement), with interest thereon
calculated at a rate of six percent per annum.
4.2. Effect of Termination.
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(i) Upon the termination of the Executive's employment as a result of
his Disability, the Executive shall be entitled to receive:
<PAGE>
(A) for an additional twenty-four months after the date of such
termination, his Base Salary and any and all benefits to which he is entitled on
the date of such termination under the Company's pension, life, disability,
accident and health and other benefit plans in accordance with the provisions of
such plans; and (B) one hundred percent (100%) of the maximum amount of
incentive compensation for which the Executive could have become eligible during
the year in which such termination occurs.
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(ii) Upon the termination of the Executive's employment as a result
of his death, the Executive's heirs, devisees, executors or other legal
representatives shall receive:
(A) for an additional twenty-four months from the date of such
termination, his Base Salary and any and all benefits to which he is entitled on
the date of such termination under the Company's pension, life, disability,
accident and health and other benefit plans in accordance with the provisions of
such plans; and (B) one hundred percent (100%) of the maximum amount of
incentive compensation for which the Executive could have become eligible during
the year in which such termination occurs.
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(iii) Subject to SECTION 4.L(VI) hereof: (a) if the Executive's
employment shall be terminated for Cause as described in SECTION 4.1(III)(A),
(B) OR (C) hereto, the Company shall pay the Executive his full Base Salary and
other benefits to which he is entitled, through the Date of Termination at the
rate in effect at the time the Notice of Termination is given, and the Company
shall have no further obligations to him under this Agreement.
(iv) If the Executive's employment by the Company shall be terminated
(a) by the Company other than for Cause, Death or Disability, or (b) by the
<PAGE>
Executive for Good Reason, then the Executive shall be entitled to the benefits
provided below:
(A) the Company shall pay the Executive, not later than the
fifth day following the Date of Termination, a lump sum in cash equal to the sum
of (i) twenty-four months of Base Salary, at the rate of the Executive's Base
Salary on the Date of Termination, discounted to the then present value at a
discount rate of five percent per annum applied to each future payment from the
time it would have become payable; and (ii) one hundred percent (100%) of the
maximum amount of incentive compensation for which the Executive could have
become eligible during the year in which such termination occurs; and
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(v) The Executive shall not be required to mitigate the amount of any
payment provided for in this SECTION 4.2 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in this
SECTION 4.2 be subject to set-off or reduced by any compensation earned by him
as the result of employment by another employer or by benefits after the Date of
Termination, or otherwise.
4.3. Certain Definitions. For the purposes of this SECTION 4, the
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following terms shall have the meanings set forth in this SECTION 4.3:
(i) "NOTICE OF TERMINATION" means a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of employment under the provision so indicated.
(ii) "DATE OF TERMINATION" means (i) if employment is terminated for
Disability, thirty days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a full-
time basis during such thirty-day period), and (ii) if employment is terminated
pursuant to SECTION 4.1(III) OR (IV) hereof or for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination
pursuant to SECTION 4.1(III) hereof, shall not be less than ten days and, in the
case of a termination pursuant to SECTION 4.1(IV) hereof, shall not be more than
sixty days, respectively, from the date such Notice of Termination is given);
provided that if within thirty days after any Notice of
<PAGE>
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination (a "NOTICE OF
DISPUTE"), the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a Notice of Dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence.
5. Successors.
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5.1. Assumption by Successors. The Company shall require any
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successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as he would be entitled
hereunder if he terminates his employment for Good Reason, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
<PAGE>
6. Non-Competition and Confidentiality.
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6.1 Non-Competition. During the Executive's employment by the
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Company hereunder and during the period of one year after the termination of the
Executive's employment hereunder by the Company for Cause or by the Executive
for other than Good Reason:
(i) the Executive will not directly or indirectly (as a
director, officer, employee, manager, consultant, independent contractor,
advisor or otherwise) engage in competition with, or own any interest in or
perform any services for any business or organization which directly or
indirectly engages in competition in any material respect with the Company.
(ii) the Executive will not directly or indirectly employ or
solicit for employment any person whom he knows to be an employee of the Company
or any subsidiary of the Company.
6.2. Confidential Information.
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(a) The Executive agrees and acknowledges that the Confidential
Information of the Company (as hereinafter defined) is valuable, special and
unique to its business; that such business depends on such Confidential
Information; and that the Company wishes to protect such Confidential
Information by keeping it confidential for the use and benefit of the Company.
Based on the foregoing, the Executive agrees to undertake the following
obligations with respect to such Confidential Information:
(i) The Executive agrees to keep any and all Confidential
Information in trust for the use and benefit of the Company;
(ii) The Executive agrees that, except as required by the
Executive's duties hereunder or authorized in writing by the Company, he will
not at any time during and for three years after the termination of his
employment with the Company (or, if later, until the termination of any
applicable Confidentiality Agreement, as defined below), disclose or use,
directly or indirectly, any Confidential Information of the Company;
(iii) The Executive agrees to take all reasonable steps
necessary, or reasonably requested by the Company, to ensure that all
Confidential Information of the Company is kept confidential for the use and
benefit of the Company; and
(iv) The Executive agrees that, upon termination of his
employment by the Company or at any other time the Company may in writing so
request, he will promptly deliver to the Company all materials constituting
Confidential Information (including all copies thereof) that are in the
possession of or under the control of the Executive. the Executive further
agrees that, if requested by the Company
<PAGE>
to return any Confidential Information pursuant to this SECTION 6.2(A)(IV), he
will not make or retain any copy of or extract from such materials.
(b) For purposes of this SECTION 6.2, "CONFIDENTIAL INFORMATION"
means any and all information (i) developed by or for the Company or its
subsidiaries of which the Executive gained knowledge by reason of his employment
by the Company prior the date hereof or his employment under this Agreement that
is not generally known in any industry in which the Company is or may become
engaged or (ii) provided to the Company or its subsidiaries by third parties
pursuant to written obligations of confidentiality (a "Confidentiality
Agreement"). Confidential Information includes, but is not limited to, any and
all information developed by or for the Company concerning plans, marketing and
sales methods, materials, processes, business forms, procedures, devices used by
the Company, contractors and customers with which the Company has dealt prior to
the Executive's termination of employment with the Company, plans for
development of new products, services and expansion into new areas or markets,
internal operations, and any trade secrets and proprietary information of any
type owned by the Company or its subsidiaries together with all written, graphic
and other materials relating to all or any part of the same.
In the event that the Executive is, in the opinion of his legal counsel (which
counsel shall be acceptable to the Company acting reasonably), required to
disclose any Confidential Information to any federal, state, local or foreign
judicial, legislative, administrative or other authority, agency or
instrumentality or is required to disclose such Confidential Information by
reason of his fiduciary duties to the Company or its shareholders or by any
federal, state, local or foreign securities, blue-sky or other similar laws,
rules, regulations or ordinances, then, notwithstanding anything in this SECTION
6.2 to the contrary, the Executive may disclose such Confidential Information to
the extent, and to the persons and entities, so required without any liability
hereunder, without constituting a breach hereunder and without giving rise to a
right of the Company to terminate the Executive's employment (for Cause or
otherwise) hereunder. The Executive shall notify the Company of any disclosure
required to be made in connection with the preceding sentence as soon as
practicable after the Executive becomes aware of such required disclosure.
<PAGE>
7. Remedies.
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7.1. Injunctive Relief. The Executive acknowledges and agrees that
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the covenants and obligations contained in SECTIONS 6.1 AND 6.2 hereto relate to
special, unique and extraordinary matters and that a violation of any of the
terms of such sections will cause the Company irreparable injury for which
adequate remedy at law is not available. Therefore, the Executive agrees that
the Company shall be entitled to an injunction, restraining order, or other
equitable relief from any court of competent jurisdiction, restraining the
Executive from committing any violation of the covenants and obligations set
forth in SECTIONS 6.1 AND 6.2 hereof, in addition to any other rights and
remedies the Company may have at law or in equity.
7.2. Arbitration. Except as provided in Section 7.1, all disputes
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arising out of or in connection with this Agreement, or in respect of any
defined legal relationship associated therewith or derived therefrom, shall be
referred to and finally resolved by arbitration under the Rules of the British
Columbia International Commercial Arbitration Centre. The appointing
authorities shall be the British Columbia International Commercial Arbitration
Centre. The case shall be administered by the British Columbia International
Commercial Arbitration Centre in accordance with its "Procedures for Cases Under
the BCICAC Rules." The place of arbitration shall be Vancouver, British
Columbia, Canada.
8. Miscellaneous.
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8.1. Notices. Any written notice, required or permitted under this
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Agreement, shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight courier. Written notices must be delivered to the
receiving party at his or its address on the signature page of this Agreement.
The parties may change the address at which written notices are to be received
in accordance with this section.
8.2. Assignment. Subject to Section 5.1, neither the Company nor the
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Executive may assign, transfer, or delegate its or his rights or obligations
hereunder and any attempt to do so shall be void. This Agreement shall be
binding upon and shall inure to the benefit of the Company and its successors
and assigns.
8.3. Entire Agreement. This Agreement contains the entire agreement
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of the parties with respect to the subject matter hereof, and all
other prior agreements, written or oral, are hereby merged herein and are of no
further force or effect. This Agreement may be modified or amended only by a
written agreement that is signed by the Company and the Executive. No waiver of
any section or provision of this Agreement will be valid unless such waiver is
in writing and signed by the party against whom enforcement of the waiver is
sought. The waiver by the Company of any section or provision of this Agreement
shall not apply to any subsequent breach of this Agreement. Captions to the
various sections in this Agreement are for the convenience
<PAGE>
of the parties only and shall not affect the meaning or interpretation of this
Agreement. This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but together they shall constitute one and the same
instrument.
8.4. Severability. The provisions of this Agreement shall be deemed
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severable, and if any part of any provision is held illegal, void, or invalid
under applicable law such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If any
provision of this Agreement is held illegal, void, or invalid in its entirety,
the remaining provisions of this Agreement shall not in any way be affected or
impaired but shall remain binding in accordance with their terms.
8.5. Continuing Obligations. SECTIONS 4.2, 6.1 AND 6.2 of this
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Agreement shall continue and survive the termination of this Agreement.
8.6 Applicable Law. This Agreement and the rights and obligations
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of the Company and the Executive hereunder shall be governed by and construed
and enforced under the laws of British Columbia, without giving effect to
principles of conflicts of laws. The Company and the Executive irrevocably
submit to and accept generally and unconditionally the exclusive jurisdiction of
the courts and the appellate courts of British Columbia with respect to any
legal action or proceeding which may be brought at any time relating in any way
to this Agreement. Each of the Executive and the Company irrevocably waives any
objection it may now or in the future have to the venue of any such action or
proceeding, and any claim it may now or in the future have that any such action
or proceeding has been brought in an inconvenient forum.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DataWave Systems Inc.
By: _______________________________
Title: _______________________________
Address: 101 West 5th Avenue
Vancouver, British Columbia
Canada V5Y IH9
______________________________________
Clive Barwin
Address:
<PAGE>
EXHIBIT A
PERFORMANCE GOALS
[TO BE DEFINED]
<PAGE>
EXHIBIT 10.4
DataWave Systems Inc.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of the
___ day of _______, 1998 between DataWave Systems Inc., a corporation organized
under the laws of British Columbia, Canada (the "COMPANY") and Peter Hough, an
individual (the "EXECUTIVE").
In consideration of the mutual benefits derived from this Agreement
and of the agreements, covenants and provisions hereof, the parties hereto agree
as follows:
1. Employment.
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1.1. Position. During the Term (as hereinafter defined) of this
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Agreement and subject to the terms and conditions set forth herein, the Company
agrees to employ the Executive as its Chief Operating Officer, Chief Financial
Officer and Secretary, reporting only to the Chief Executive Officer of the
Company.
1.2. Election to Office. During the Term, the Company shall use its
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best efforts to sustain and continue the Executive's position and designation as
set forth in SECTION 1 hereof.
1.3. Fulfillment of Duties. As long as the Company sustains and
---------------------
continues the Executive's position and designation as set forth in SECTION 1
hereof, the Executive shall (i) devote his full-time efforts during normal
business hours to the performance of his services hereunder, except during
vacation periods and periods of illness or incapacity and except that nothing in
this Agreement shall preclude the Executive from devoting reasonable periods
required for serving as a director of, or member of a committee of, or holding
other positions in, any organization involving no conflict of interest with the
interests of the Company and (ii) perform his services hereunder faithfully,
diligently and to the best of his skill and ability.
1.4. Location. During the Term, the Executive will perform his
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duties and services at the Company's principal executive offices and any other
locations as may be reasonable and necessary in the performance of his services
hereunder.
1
<PAGE>
2. Compensation and Benefits.
-------------------------
2.1. Salary. In consideration of and as compensation for the
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services agreed to be performed by the Executive hereunder, the Company agrees
to pay the Executive during the Term of this Agreement a base salary (the "BASE
SALARY") of not less than USD One Hundred Sixty Thousand Dollars (USD160,000)
(CD225,000) per year, payable semi-monthly in accordance with the Company's
regular payroll practices. The Company may review the Executive's Base Salary
and other compensation (including bonuses and incentive compensation) from time
to time during the Term and, at the recommendation of the Compensation Committee
of the Board of Directors of the Company (the "COMMITTEE"), may increase his
Base Salary or other compensation (including bonuses and incentive compensation)
from time to time. Any increase in Base Salary or other compensation (including
bonuses or incentive compensation) shall in no way limit or reduce any other
obligation of the Company hereunder and, once established at an increased rate,
the Executive's Base Salary hereunder shall not be reduced.
2.2 Incentive Compensation. During each year of the Term, in
----------------------
addition to the Base Salary provided in SECTION 2.1 above, the Executive shall
be eligible to receive additional incentive compensation, in an amount not to
exceed One Hundred Percent (100%) of the Executive's then applicable Base
Salary, upon achievement of the performance goals set forth on EXHIBIT A
attached hereto, upon the terms and conditions set forth therein.
2.3 Stock Options. The Executive shall receive, within forty-five
-------------
(45) days following execution of this Agreement, an option (the "OPTION") to
purchase not less than Fifty Thousand (50,000) shares of the Company's common
stock at an exercise price equal to fair market value on the date of grant. The
Option (which shall be granted in addition to and not in lieu of stock options
previously issued to the Executive) shall vest in equal installments, on a
monthly basis, over a three-year period following the date of grant and shall be
subject to such other terms and conditions as shall be determined by the
Committee. During the second and third years of the Term, the Executive shall
be entitled to receive such additional option grants as may be determined by the
Committee, subject to a minimum annual grant of fifty thousand (50,000 shares).
2.4. Participation in Benefit Plans. During the Term, the
------------------------------
Executive shall be entitled to participate in any pension plans, profit-sharing
plans and group insurance, medical, hospitalization, disability and other
benefit plans presently in effect or hereinafter adopted, which plans are
generally applicable to the most senior executives of the Company and to the
extent he is eligible under the general provisions thereof.
2
<PAGE>
2.5. Reimbursement of Expenses. The Company will reimburse the
-------------------------
Executive for all business expenses, including, without limitation, traveling,
entertainment and similar expenses, incurred by the Executive on behalf of the
Company during the Term if such expenses are ordinary and necessary business
expenses incurred on behalf of the Company pursuant to the Company's standard
expense reimbursement policy, provided that the Executive shall provide the
Company with such itemized accounts, receipts or documentation for such expenses
as are required under the Company's policy regarding the reimbursement of such
expenses.
2.6. Vacation and Sick Leave. During the Term, the Executive will
-----------------------
be entitled to four weeks of paid vacation per year. The Executive shall also
be entitled to paid sick leave in accordance with the policy applicable to the
other senior executives of the Company.
3. Term. The "TERM" of employment under this Agreement means the
----
period commencing on the date hereof and expiring on the third anniversary date
of this Agreement or the earlier termination hereof pursuant to SECTION 4.1
hereof.
4. Termination of Employment.
-------------------------
4.1. Events of Termination. Upon the occurrence of any of the
---------------------
events described in this SECTION 4.1 during the Term, the Executive's employment
hereunder shall terminate and the Executive shall be entitled to the benefits
provided in SECTION 4.2 hereof.
(i) Termination of the Executive's employment with the Company due
to the Executive's death.
(ii) If, as a result of the Executive's incapacity due to physical
or mental illness, injury or disability, the Executive shall have been absent
from his duties with the Company on a full-time basis for three (3) consecutive
months, and within thirty (30) days after the receipt of written Notice of
Termination (as hereinafter defined) he shall not have returned to the full-time
performance of his duties, the Company may terminate the Executive's employment
for "DISABILITY". "ABSENT FROM HIS DUTIES" means, for the purposes of this
SECTION 4.1(ii), that the Executive is devoting less than forty (40) hours per
week to his duties under this Agreement.
(iii) The Company shall be entitled to terminate the Executive's
employment for Cause. For purposes of this Agreement, "CAUSE" shall mean:
(A) the willful and continued failure by the Executive to
substantially perform his duties with the Company in good faith (other than any
such failure resulting from his incapacity due to physical or mental illness,
injury or disability or any such actual or anticipated failure resulting from
his termination for Good Reason (as hereinafter defined)), after a demand for
substantial performance is delivered to him
3
<PAGE>
by the Board of Directors of the Company which identifies, in reasonable detail,
the manner in which the Board of Directors believes that the Executive has not
substantially performed his duties in good faith;
(B) the willful engaging by the Executive in conduct which
causes material harm to the Company, monetarily or otherwise; or
(C) the Executive's conviction of a felony crime which is a
felony offense in the United States or an indictable offense in Canada.
For purposes of this SECTION 4.1(iii), no act, or failure to act, on the
Executive's part shall be considered "WILLFUL" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company or its shareholders.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than two-
thirds of the entire membership of the Board of Directors at a meeting of the
Board of Directors called and held for such purpose (after ten (10) days notice
to him and an opportunity for him, together with his counsel, to appear before
the Board of Directors), finding that the Executive was guilty of conduct set
forth above in CLAUSES (A), (B) OR (C) of this SECTION 4.1(iii) and setting
forth, in reasonable detail, the basis for such finding.
(iv) The Executive shall be entitled to terminate his employment
for Good Reason. For purposes of this Agreement, "GOOD REASON" shall, without
the Executive's express written consent, mean:
(A) the assignment to the Executive of any duties
substantially inconsistent with his status as set forth in SECTION 1.1 hereof;
(B) a reduction by the Company in the Executive's Base Salary
as in effect on the date hereof or as the same may be increased from time to
time;
(C) the relocation of the Company's principal executive
offices to a location not approved by the Executive or the Company's requiring
the Executive to be based in a location not approved by the Executive;
(D) the failure by the Company to continue in effect any
pension, health, compensation or other benefit plan in which the Executive
participates or any similar plans hereafter adopted, unless an equitable
arrangement (as determined by an employee benefit consultant of national
standing selected by the Company and reasonably satisfactory to the Executive),
embodied in an ongoing substitute or alternative plan, has been made with
respect to such plan, or the failure by the Company to continue his
participation therein, or the taking of any action by the Company which would
directly or indirectly materially reduce any of such benefits or deprive the
Executive of any material fringe benefit presently enjoyed by him;
4
<PAGE>
(E) the failure of the Company to obtain a satisfactory
agreement from any successor (by means of merger, consolidation, sale of assets
or otherwise) to assume and agree to perform this Agreement as contemplated by
SECTION 5 hereof; or
(F) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of SECTION 4.1(v) hereof (and, if applicable, SECTION 4.1(iii)
hereof); and for purposes of this Agreement, no such purported termination shall
be effective.
The Executive's right to terminate his employment pursuant to this SECTION
4.1(iv) shall not be affected by his incapacity due to physical or mental
illness, injury or disability. The Company may, solely during the period of
such incapacity, make arrangements for the discharge of any of the Executive's
duties hereunder by another officer of the Company, but any such arrangement
shall not affect or in any way diminish the Executive's rights hereunder.
(v) Any purported termination by the Company or by the Executive
shall be communicated by written Notice of Termination to the other party hereto
in accordance with SECTIONS 4.3 AND 8.1 hereof.
(vi) Notwithstanding the pendency of a Notice of Dispute (as
hereinafter defined), the Company will continue to pay the Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue his participation in
all incentive compensation, bonus, option, benefit and insurance plans in which
he was participating when the notice giving rise to the dispute was given (or
provide the Executive with benefits substantially similar, as determined by an
employee benefit consultant of national standing selected by the Company and
reasonably satisfactory to the Executive, to those under such plans), until the
dispute is finally resolved. Amounts paid under this SECTION 4.1(vi) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement or otherwise. If
it is finally determined that the Executive terminated his employment for other
than Good Reason or the Company rightfully terminated the Executive's employment
for Cause, the Executive shall reimburse the Company for all amounts paid to him
under this SECTION 4.1(vi) (less any amounts determined to be owing to the
Executive under any other provision of this Agreement), with interest thereon
calculated at a rate of six percent per annum.
4.2. Effect of Termination.
---------------------
(i) Upon the termination of the Executive's employment as a result
of his Disability, the Executive shall be entitled to receive:
5
<PAGE>
(A) (i) for an additional twenty-four months after the date
of such termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension, life,
disability, accident and health and other benefit plans in accordance with the
provisions of such plans; and (ii) one hundred percent (100%) of the maximum
amount of incentive compensation for which the Executive could have become
eligible during the year in which such termination occurs.
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(ii) Upon the termination of the Executive's employment as a result
of his death, the Executive's heirs, devisees, executors or other legal
representatives shall receive:
(A) for an additional twenty-four months from the date of such
termination, his Base Salary and any and all benefits to which he is entitled on
the date of such termination under the Company's pension, life, disability,
accident and health and other benefit plans in accordance with the provisions of
such plans; and (B) one hundred percent (100%) of the maximum amount of
incentive compensation for which the Executive could have become eligible during
the year in which such termination occurs.
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(iii) Subject to SECTION 4.1(vi) hereof: (a) if the Executive's
employment shall be terminated for Cause as described in SECTION 4.1(iii)(A),
(B) OR (C) hereto, the Company shall pay the Executive his full Base Salary and
other benefits to which he is entitled, through the Date of Termination at the
rate in effect at the time the Notice of Termination is given, and the Company
shall have no further obligations to him under this Agreement.
6
<PAGE>
(iv) If the Executive's employment by the Company shall be
terminated (a) by the Company other than for Cause, Death or Disability, or (b)
by the Executive for Good Reason, then the Executive shall be entitled to the
benefits provided below:
(A) the Company shall pay the Executive (i) for an additional
twenty-four months from the Date of Termination, commencing on the first day of
the first month following the Date of Termination, his Base Salary, payable
semi-monthly as provided in SECTION 2.1; and (ii) a lump sum payment equal to
one hundred percent (100%) of the maximum amount of incentive compensation for
which the Executive could have become eligible during the year in which such
termination occurs, payable not later than the fifth day following the Date of
Termination; and
(B) the Option, together with any other options to purchase
Common Stock in the Company granted pursuant to any plan or otherwise, or any
equivalent or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately accelerated and
fully vested and any restrictions on such options or equivalent or similar
rights shall, to the extent permissible under applicable securities laws, fully
lapse; and the Company shall endeavor to cause any restrictions on such options
or equivalent or similar rights not lapsed by operation of this clause to so
lapse.
(v) The Executive shall not be required to mitigate the amount of
any payment provided for in this SECTION 4.2 by seeking other employment or
otherwise, provided however, that if the Executive does obtain employment from
another employer, the amount of any payment or benefit provided for in this
SECTION 4.2(iv)(A)(i) shall be subject to set-off or reduced by any compensation
earned by him and any benefits received by him as the result of such employment
after the Date of Termination. Within five days of obtaining employment from
another employer after the Date of Termination, the Executive shall notify the
Company and provide the Company with information regarding the compensation and
benefits he will receive from his new employer. Based upon that information, the
set-off amount shall be calculated by the Company and deducted from any payment
or benefit paid under this SECTION 4.2(iv)(A)(i). If the Executive receives
compensation and/or benefits from another employer in excess of the amount
provided for in this SECTION 4.2(iv), excluding any lump sum incentive
compensation payment made to the Executive under SECTION 4.2(iv)(B), the
Company's obligation to make payments under this SECTION 4.2(iv) shall
terminate.
4.3. Certain Definitions. For the purposes of this SECTION 4, the
-------------------
following terms shall have the meanings set forth in this SECTION 4.3:
(i) "NOTICE OF TERMINATION" means a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set
7
<PAGE>
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of employment under the provision so indicated.
(ii) "DATE OF TERMINATION" means (i) if employment is terminated
for Disability, thirty days after Notice of Termination is given (provided that
the Executive shall not have returned to the performance of his duties on a
full-time basis during such thirty-day period), and (ii) if employment is
terminated pursuant to SECTION 4.1(iii) OR (iv) hereof or for any other reason,
the date specified in the Notice of Termination (which, in the case of a
termination pursuant to SECTION 4.1(iii) hereof, shall not be less than ten days
and, in the case of a termination pursuant to SECTION 4.1(iv) hereof, shall not
be more than sixty days, respectively, from the date such Notice of Termination
is given); provided that if within thirty days after any Notice of Termination
is given, the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination (a "NOTICE OF DISPUTE"),
the Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a Notice of Dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence.
5. Successors.
----------
5.1. Assumption by Successors. The Company shall require any
------------------------
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as he would be entitled
hereunder if he terminates his employment for Good Reason, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
6. Non-Competition and Confidentiality.
-----------------------------------
6.1. Non-Competition. During the Executive's employment by the
---------------
Company hereunder and during the period of one year after the termination of the
8
<PAGE>
Executive's employment hereunder by the Company for Cause or by the Executive
for other than Good Reason:
(i) the Executive will not directly or indirectly (as a
director, officer, employee, manager, consultant, independent contractor,
advisor or otherwise) engage in competition with, or own any interest in or
perform any services for any business or organization which directly or
indirectly engages in competition in any material respect with the Company.
(ii) the Executive will not directly or indirectly employ or
solicit for employment any person whom he knows to be an employee of the Company
or any subsidiary of the Company.
6.2 Confidential Information.
------------------------
(a) The Executive agrees and acknowledges that the Confidential
Information of the Company (as hereinafter defined) is valuable, special and
unique to its business; that such business depends on such Confidential
Information; and that the Company wishes to protect such Confidential
Information by keeping it confidential for the use and benefit of the Company.
Based on the foregoing, the Executive agrees to undertake the following
obligations with respect to such Confidential Information:
(i) The Executive agrees to keep any and all Confidential
Information in trust for the use and benefit of the Company;
(ii) The Executive agrees that, except as required by the
Executive's duties hereunder or authorized in writing by the Company, he will
not at any time during and for three years after the termination of his
employment with the Company (or, if later, until the termination of any
applicable Confidentiality Agreement, as defined below), disclose or use,
directly or indirectly, any Confidential Information of the Company;
(iii) The Executive agrees to take all reasonable steps necessary,
or reasonably requested by the Company, to ensure that all Confidential
Information of the Company is kept confidential for the use and benefit of the
Company; and
(iv) The Executive agrees that, upon termination of his
employment by the Company or at any other time the Company may in writing so
request, he will promptly deliver to the Company all materials constituting
Confidential Information (including all copies thereof) that are in the
possession of or under the control of the Executive. the Executive further
agrees that, if requested by the Company to return any Confidential Information
pursuant to this SECTION 6.2(A)(iv), he will not make or retain any copy of or
extract from such materials.
9
<PAGE>
(b) For purposes of this SECTION 6.2, "CONFIDENTIAL
INFORMATION" means any and all information (i) developed by or for the Company
or its subsidiaries of which the Executive gained knowledge by reason of his
employment by the Company prior the date hereof or his employment under this
Agreement that is not generally known in any industry in which the Company is or
may become engaged or (ii) provided to the Company or its subsidiaries by third
parties pursuant to written obligations of confidentiality (a "Confidentiality
Agreement"). Confidential Information includes, but is not limited to, any and
all information developed by or for the Company concerning plans, marketing and
sales methods, materials, processes, business forms, procedures, devices used by
the Company, contractors and customers with which the Company has dealt prior to
the Executive's termination of employment with the Company, plans for
development of new products, services and expansion into new areas or markets,
internal operations, and any trade secrets and proprietary information of any
type owned by the Company or its subsidiaries together with all written, graphic
and other materials relating to all or any part of the same.
In the event that the Executive is, in the opinion of his legal counsel (which
counsel shall be acceptable to the Company acting reasonably), required to
disclose any Confidential Information to any federal, state, local or foreign
judicial, legislative, administrative or other authority, agency or
instrumentality or is required to disclose such Confidential Information by
reason of his fiduciary duties to the Company or its shareholders or by any
federal, state, local or foreign securities, blue-sky or other similar laws,
rules, regulations or ordinances, then, notwithstanding anything in this SECTION
6.2 to the contrary, the Executive may disclose such Confidential Information to
the extent, and to the persons and entities, so required without any liability
hereunder, without constituting a breach hereunder and without giving rise to a
right of the Company to terminate the Executive's employment (for Cause or
otherwise) hereunder. The Executive shall notify the Company of any disclosure
required to be made in connection with the preceding sentence as soon as
practicable after the Executive becomes aware of such required disclosure.
7. Remedies.
--------
7.1. Injunctive Relief. The Executive acknowledges and
-----------------
agrees that the covenants and obligations contained in SECTIONS 6.1 AND 6.2
hereto relate to special, unique and extraordinary matters and that a violation
of any of the terms of such sections will cause the Company irreparable injury
for which adequate remedy at law is not available. Therefore, the Executive
agrees that the Company shall be entitled to an injunction, restraining order,
or other equitable relief from any court of competent jurisdiction, restraining
the Executive from committing any violation of the covenants and obligations set
forth in SECTIONS 6.1 AND 6.2 hereof, in addition to any other rights and
remedies the Company may have at law or in equity.
10
<PAGE>
7.2. Arbitration. Except as provided in Section 7.1, all disputes
-----------
arising out of or in connection with this Agreement, or in respect of any
defined legal relationship associated therewith or derived therefrom, shall be
referred to and finally resolved by arbitration under the Rules of the British
Columbia International Commercial Arbitration Centre. The appointing
authorities shall be the British Columbia International Commercial Arbitration
Centre. The case shall be administered by the British Columbia International
Commercial Arbitration Centre in accordance with its "Procedures for Cases Under
the BCICAC Rules." The place of arbitration shall be Vancouver, British
Columbia, Canada.
8. Miscellaneous.
-------------
8.1. Notices. Any written notice, required or permitted under this
-------
Agreement, shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight courier. Written notices must be delivered to the
receiving party at his or its address on the signature page of this Agreement.
The parties may change the address at which written notices are to be received
in accordance with this section.
8.2. Assignment. Subject to Section 5.1, neither the Company nor
----------
the Executive may assign, transfer, or delegate its or his rights or obligations
hereunder and any attempt to do so shall be void. This Agreement shall be
binding upon and shall inure to the benefit of the Company and its successors
and assigns.
8.3. Entire Agreement. This Agreement contains the entire
----------------
agreement of the parties with respect to the subject matter hereof, and all
other prior agreements, written or oral, are hereby merged herein and are of no
further force or effect. This Agreement may be modified or amended only by a
written agreement that is signed by the Company and the Executive. No waiver of
any section or provision of this Agreement will be valid unless such waiver is
in writing and signed by the party against whom enforcement of the waiver is
sought. The waiver by the Company of any section or provision of this Agreement
shall not apply to any subsequent breach of this Agreement. Captions to the
various sections in this Agreement are for the convenience of the parties only
and shall not affect the meaning or interpretation of this Agreement. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original, but together they shall constitute one and the same instrument.
8.4. Severability. The provisions of this Agreement shall be
------------
deemed severable, and if any part of any provision is held illegal, void, or
invalid under applicable law such provision may be changed to the extent
reasonably necessary to make the provision, as so changed, legal, valid and
binding. If any provision of this Agreement is held illegal, void, or invalid
in its entirety, the remaining provisions of this Agreement shall not in any way
be affected or impaired but shall remain binding in accordance with their terms.
11
<PAGE>
8.5. Continuing Obligations. SECTIONS 4.2, 6.1 AND 6.2 of this
----------------------
Agreement shall continue and survive the termination of this Agreement.
8.6 Applicable Law. This Agreement and the rights and obligations
--------------
of the Company and the Executive hereunder shall be governed by and construed
and enforced under the laws of British Columbia, without giving effect to
principles of conflicts of laws. The Company and the Executive irrevocably
submit to and accept generally and unconditionally the exclusive jurisdiction of
the courts and the appellate courts of British Columbia with respect to any
legal action or proceeding which may be brought at any time relating in any way
to this Agreement. Each of the Executive and the Company irrevocably waives any
objection it may now or in the future have to the venue of any such action or
proceeding, and any claim it may now or in the future have that any such action
or proceeding has been brought in an inconvenient forum.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DataWave Systems Inc.
By:
-----------------------------------
Title:
--------------------------------
Address: 101 West 5th Avenue
Vancouver, British Columbia
Canada V5Y IH9
--------------------------------------
Peter Hough
Address:
13
<PAGE>
EXHIBIT A
PERFORMANCE GOALS
[TO BE DEFINED]
14
<PAGE>
EXHIBIT 10.8
- ----------------------------
- ---------------------------- 20 William Street
- ---------------------------- Wellesley, Massachusetts 02181
APPLIED (781) 239-7600
TELECOMMUNICATIONS Fax: (781) 239-0377
TECHNOLOGIES, INC.
Telecommunications Financing
April 23, 1998
Mr. Clive Barwin
President
DataWave Systems, Inc.
101 West 5th Avenue
Vancouver, B.C.
V6K 1H9
Mr. Peter Hough
Chief Operating Officer
DataWave Systems, Inc.
101 West 5th Avenue
Vancouver, B.C.
V6K 1H9
Gentlemen:
Applied Telecommunications Technologies, Inc. ("ATTI") is pleased to
propose a secured Line of Credit and financial advisory services to DataWave
Systems, Inc. ("DataWave"). The terms of this proposal are outlined below:
Lender: ATTI or its assignee
20 William Street
Wellesley, MA 02181
Borrower: DataWave Services (US), Inc.
230 West Parkway, Unit 10
Pompton Plains, NJ 07444
Guarantor: DataWave Systems, Inc.
101 West 5th Avenue
Vancouver, B.C.
V6K 1H9
<PAGE>
Page 2
April 23, 1998
Line of Credit Amount: Tranche A $1.6mm Commitment to be provided on or
before April 30, 1998.
Tranche B $2.0mm Commitment to be sought upon
utilization of 80% of Tranche A.
Tranche C $1.4mm Commitment to be sought upon
utilization of 80% of Tranche B.
Security: All assets of Borrower, Guarantor and affiliated
companies.
o Obligations and assets of Borrower, Guarantor and
affiliated companies will be cross-defaulted and
cross-collateralized except the following which will
not be subject to a security interest and will not be
subject to this transaction:
1. Interurbain assets.
2. Shares of Guarantor in joint venture (PhoneLine
Cardcall International Inc.) and assets of
PhoneLine Cardcall International Inc. (present
and future).
o Existing assets under Lease Schedules 322-1 through
322-5, including escrow fund, unless transferred to
PhoneLine Cardcall International Ltd., as detailed
below under "Canadian Machines" will constitute
security for new credit facility.
o ATTI will subordinate its interest in future, new
assets to the party providing lease financing or bank
loan to acquire such assets (purchase money
financing).
o The foregoing will be accomplished through three
separate security agreements (Borrower, Guarantor,
and together the other affiliates/subsidiaries (but
not PhoneLine Cardcall International Inc.)).
o Except for purchase money financing, DataWave and its
subsidiaries will not grant a security interest to
any other party ranking in priority to this security
interest.
Joint Venture Interest: If Guarantor sells its interest in the joint venture,
the guarantor will pay to ATTI the outstanding lease
balances on the Canadian Machines (as below defined).
Financial Covenant: Borrower agrees that if at any time during the term of
the Line of Credit, its cash and marketable securities
should fall below the sum of the next 6 months payments
due to Lender under the Line of Credit, this will
constitute an event of Default and Lender will have the
right to accelerate the Line of Credit.
<PAGE>
Page 3
April 23, 1998
Funding Dates: Monthly funding to occur commencing in April 1998. All
funding to occur before August 1, 1998.
Term: The term of this financing is projected to be the
earlier of a Qualified Financing (Borrower/Guarantor
raises capital in excess of $8mm) or August 31, 1998.
If, for any reason Borrower/Guarantor does not repay all
of the obligations under this note by August 31, 1998,
the note will convert to a senior obligation of both
parties fully amortizing over 30 months at an annualized
rate of 14%. Lessor will have the option to convert to
amortizing note. To arrive at your monthly payment
simply multiply the amount actually funded by 3.924%.
Prepayment: The Line of Credit and/or senior term loan may be
prepaid at any time without penalty. Lease Line is pre-
payable as stated therein.
Minimum Funding: ATTI will commence funding with minimum increments of
$200,000. For the period commencing with funding until
August 31, 1998, Borrower will pay interest only at an
annualized rate of 14% on a monthly basis.
Payment Terms: Monthly Wire Transfers on the first business day of the
month.
Warrants: A grant of warrants subject to Vancouver Stock Exchange
approval will be made to ATTI, ATTI related entities or
Funds managed by ATTI or its successor company (where
any of the foregoing have provided funds for inclusion
in the Line of Credit) at a strike price equal to the 10
day average closing stock price prior to the request by
Guarantor to make a particular tranche available for
funding. If the amount actually drawn under a tranche is
less than the full approved amount, the full allotment
of Warrants in respect to the original approval amount
will still be issuable. ATTI will not be issued warrants
for tranches which are not requested by the Borrower or
which are not approved by ATTI. The warrants to be
provided will equal a number which represents up to a
maximum of US $1.0mm (20% warrant coverage) at the
aforementioned strike price. Customary piggy-back
registration (U.S.) and anti-dilution rights to be
included with loan documentation. Warrants will be
issued pro rata with commitments under the Line of
Credit. Warrants will be subject to one year hold period
under the laws of British Columbia. Term of the Warrants
shall be 2 years from date of grant. Guarantor will, to
the extent permitted by law, cause the Warrants to be
registered in the United States in the event of a
change of control of the Guarantor (i.e. if more than
50% of the issued shares of the Guarantor are sold to
one person or entity).
Board Representation: ATTI will have representation on the Board of Directors
of Lessee.
<PAGE>
Page 4
April 23, 1998
Financial Advisor: With regard to equipment owned and operated by Guarantor
which is used to generate revenues, Lessee agrees to
enter into a twelve month (beginning 15 days after
approval hereof by the Vancouver Stock Exchange)
Financial Advisory Agreement providing Lessor with a
Right of First Refusal for all Lease and Equipment
Finance projects involving Lessee and/or its customer
base. ATTI will provide competitive rates. The $3.5mm in
financing for Metro Phone from TeleCapital is excluded.
Documentation: All documentation to be provided by Lender's Counsel.
The costs associated with the Line of Credit
documentation to be included as a pre-approved expense
by Guarantor.
Expenses: All pre-approved expenses incurred by Lender including,
but not limited to, costs incurred on due diligence trip
and legal costs, will borne by Guarantor in an amount
not to exceed 1% of the Line of Credit.
"Canadian Machines": Upon written application identifying not more than 100
machines under Lease 322, Schedules 1-5, ATTI will
consent to the sublease of such machines to PhoneLine
Cardcall International Inc., subject to the Lease but
not to the Line of Credit. Lessee will continue to be
primarily liable with respect to such Canadian Machines.
This commitment is subject to formal establishment of a new Investment Fund by
ATII and Board approval. Also, there may be no material adverse change prior to
any funding in the financial and operating condition of Lessee. Please execute
and return original immediately.
Sincerely,
/s/ DENNIS P. CAMERON
- ---------------------
Dennis P. Cameron
President
ACKNOWLEDGED AND ACCEPTED SUBJECT TO
APPROVAL OF BOARD AND VANCOUVER STOCK EXCHANGE
DATAWAVE SYSTEMS, INC.
By: /s/ Peter Hough By: /s/ Clive Barwin
Title: CFO Title: CEO
Date: APL 23/98 Date: APL 23/98
<PAGE>
- ----------------------------
- ---------------------------- 20 William Street
- ---------------------------- Wellesley, Massachusetts 02181
APPLIED (781) 239-7600
TELECOMMUNICATIONS Fax: (781) 239-0377
TECHNOLOGIES, INC.
Telecommunications Financing
April 23, 1998
Mr. Peter Hough
Chief Operating Officer
DataWave Systems, Inc.
101 West 5th Avenue
Vancouver, B.C.
V6K 1H9
Re: Promissory Note Dated March 31, 1998
Principal Amount $600,000
Borrower: DataWave Services (US) Inc.
Lender: Applied Telecommunications Technologies, Inc.
Dear Mr. Hough:
This letter is to acknowledge the change of the "Maturity Date" meaning April
30, 1998 referenced in the above Promissory Note to the amended "Maturity Date"
meaning May 15, 1998.
If the foregoing amendment is acceptable to you, please acknowledge your
acceptance by signing in the appropriate space below.
Very truly yours,
/s/ DENNIS P. CAMERON
- ---------------------
Dennis P. Cameron
President
ACCEPTED AND ACKNOWLEDGED
DATAWAVE SERVICES (US) INC.
By: /s/ Peter Hough
Title: CFO
Date: APL 23/98
<PAGE>
FIRST AMENDMENT TO LETTER AGREEMENT
-----------------------------------
This First Amendment to Letter Agreement (this "Amendment") is made
and executed as of June 3, 1998, between Applied Telecommunications
Technologies, Inc. ("ATTI") and DataWave Systems, Inc. ("DataWave"), with
reference to the following facts:
A. ATTI, as lender, and DataWave, as borrower, have entered into a letter
agreement dated April 23, 1998 (the "Letter Agreement"), which sets forth
the basic terms and conditions for establishing a secured line of credit
for DataWave and its subsidiaries in the amount of $5 million and certain
financial advisory services.
B. In connection with the Letter Agreement, DataWave Services (US), Inc.
executed and delivered to ATTI a promissory note dated March 31, 1998 in
the original principal amount of $600,000 (the "Note") (the Letter
Agreement, the Note, and all other documents executed and delivered in
connection with the Letter Agreement are hereinafter collectively
referred to as the "Loan Documents").
C. The parties now wish to amend and modify the Letter Agreement in certain
respects.
In consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Modification of Letter Agreement. The Letter Agreement is amended and
--------------------------------
modified as follows:
(a) The third sentence of the "Term" section of the Letter Agreement
reading "Lessor will have the option to convert to amortizing note" is deleted
in its entirety.
(b) The "Board Representation" section of the Letter Agreement reading
"ATTI will have representation on the Board of Directors of Lessee" is deleted
in its entirety and the following inserted in its place and stead:
Observation Rights. DataWave will invite a representative of ATTI to
------------------
attend all meetings of its Board of Directors in a nonvoting observer
capacity with customary observation rights until the earlier of (1)
the date of the closing of an underwritten public offering of the
securities of Borrower in the United States, or (2) the date when all
of the promissory
<PAGE>
notes which evidence the indebtedness created by the Line of Credit
have been paid in full.
2. Conforming Modifications. Each of the Letter Agreement, the Note, and the
------------------------
Loan Documents is hereby amended and modified to provide that all
references to the Letter Agreement shall be deemed to refer to the Letter
Agreement as amended herein.
3. No Change. Except as specifically amended herein, the Letter Agreement
---------
shall remain unaffected and unchanged by reason of this Amendment.
4. Prior Agreements. The Loan Documents, including this Amendment (a)
----------------
integrate all the terms and conditions mentioned in or incidental to the
Loan Documents; (b) supersede all oral negotiations and prior and other
writings with respect to the subject matter thereof; and (c) are intended
by the parties as the final expression of the agreement with respect to
the terms and conditions set forth in the Loan Documents and as the
complete and exclusive statement of the terms agreed to by the parties.
If there is any conflict between the terms, conditions, and provisions of
this Amendment and those of any of the Loan Documents, the terms,
conditions, and provisions of this Amendment shall prevail.
5. Counterparts. This Agreement may be executed in one or more counterparts,
------------
each of which shall constitute an original, but all of which when taken
together shall constitute but one agreement.
In witness, the parties have executed this Amendment as of the date first
set forth above.
APPLIED TELECOMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ DENNIS P. CAMERON
---------------------------------
Title: President
------------------------------
DATAWAVE SYSTEMS, INC.
By: /s/ Peter Hough
---------------------------------
Title: CFO
------------------------------
<PAGE>
EXHIBIT 10.9
_______ COMMON SHARES VOID AFTER
WITHOUT PAR VALUE JUNE 2, 2000.
SHARE PURCHASE WARRANT
----------------------
DATAWAVE SYSTEMS, INC.
---------------------
(the "Company")
This is to certify that, for value received, ____________________________ (the
"Warrant Holder") of ______________________________, has the right to purchase
from the Company, upon and subject to the terms and conditions hereinafter
referred to __________ common shares without par value (the "Shares") in the
capital of the Company. The Shares may be purchased at a price of $1.56
(Canadian) per Share at any time up to 5:00 p.m. local time in Vancouver, B.C.
on June 2, 2000. The right to purchase the Shares may be exercised in whole or
in part, by the Warrant Holder only, at the price set forth above (the "Exercise
Price") within the time set forth above by:
(a) completing and executing the Subscription form attached hereto for the
number of the Shares which the Warrant Holder wishes to purchase, in the
manner therein indicated;
(b) surrendering this Warrant Certificate, together with the complete
Subscription Form, to Montreal Trust Company of Canada, (the "Transfer
Agent") at 510 Burrad Street, Vancouver, British Columbia; and
(c) paying the appropriate Exercise Price, in Canadian funds, for the number of
the Shares of the Company subscribed for, either by certified cheque or
bank draft (drawn on a Canadian Chartered Bank) or money order payable to
the Company in Vancouver, British Columbia.
Upon surrender and payment, the company shall issue to the Warrant Holder or to
such other person or persons as the Warrant Holder may direct, the number of the
Shares subscribed for and will deliver to the Warrant Holder, at the address set
forth on the subscription form, a certificate or certificates evidencing the
number of the Shares subscribed for. If the Warrant Holder subscribes for a
number of Shares which is less than the number of Shares permitted by this
warrant, the Company shall forthwith cause to be delivered to the Warrant Holder
a further Warrant Certificate in respect of the balance of Shares referred to in
this Warrant Certificate not then being subscribed for.
In the event of any subdivision of the common shares of the Company (as such
common shares are constituted on the date hereof) into a greater number of
common shares while this warrant is outstanding, the number of Shares
represented by this warrant shall thereafter be deemed to be subdivided in like
manner and the Exercise Price adjusted accordingly, and any subscription by the
Warrant Holder for Shares hereunder shall be deemed to be a subscription for
common shares of the Company as subdivided.
<PAGE>
In the event of any consolidation of the common shares of the Company (as such
common shares are constituted on the date hereof) into a lesser number of common
shares while this warrant is outstanding, the number of Shares represented by
this warrant shall thereafter be deemed to be consolidated in like manner and
the Exercise Price adjusted accordingly, and any subscription by the Warrant
Holder for Shares hereunder shall be deemed to be a subscription for common
shares of the Company as consolidated.
In the event of any capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation at any time while this warrant is outstanding, the Company shall
thereafter deliver at the time of purchase of the Shares hereunder the number of
common shares the Warrant Holder would have been entitled to receive in respect
of the number of the Shares so purchased had the right to purchase been
exercised before such capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation.
In each case of any adjustment or readjustment in the common shares issuable on
the exercise of this Warrant, the Company at its expense will promptly cause its
Chief Financial Officer to compute such adjustment or readjustment in accordance
with the terms of this Warrant and prepare a certificate setting forth such
adjustment or readjustment and showing in detail the fact upon which such
adjustment or readjustment and showing in detail the fact upon which such
adjustment or readjustment is based, including a statement of the consideration
received or receivable by the Company for any additional common shares issued or
sold or deemed to have been issued or sold, the number of common shares
outstanding or deemed to be outstanding, and the Exercise Price and the number
of common shares to be received upon exercise of this Warrant, if effect
immediately prior to such adjustment or readjustment and as adjusted or
readjusted as provided in this Warrant. The Company will forthwith mail a copy
of each such certificate to the holder of the Warrant and the Transfer Agent of
the Company, and the Company will, on the written request at the time of any
holder of the Warrant, furnish to such holder a like certificate setting forth
the Exercise Price at the time in effect and showing how it was calculated.
If at any time while this, or any replacement, warrant is outstanding:
(a) the Company proposes to pay any dividend of any kind upon its common shares
or make any distribution to the holders of its common shares;
(b) the Company proposes to offer for subscription pro rata to the holders of
its common shares any additional shares of stock of any class or other
rights;
(c) the Company proposes any capital reorganization or classification of its
common shares or the merger or amalgamation of the Company with another
corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
the Company shall give the Warrant Holder at least 21 days prior written notice
(the "Notice") of the date on which the books of the Company are to close or a
record is to be taken for such
-2-
<PAGE>
dividend, distribution or subscription rights, or for determining rights to vote
with respect to such reorganization, reclassification, consolidation, merger,
amalgamation, dissolution, liquidation or winding-up. The Notice shall specify,
in the case of any such dividend, distribution or subscription rights, the date
on which holders of common shares of the Company will be entitled to exchange
their common shares for securities or other property deliverable upon any
reorganization, reclassification, consolidation, merger, amalgamation, sale,
dissolution, liquidation or winding-up, as the case may be. Each Notice shall
be delivered by hand, addressed to the Warrant Holder at the address of the
Warrant Holder set forth above or at such other address as the Warrant Holder
may from time to time specify to the Company in writing.
The holding of this Warrant Certificate of the Warrants represented hereby does
not constitute the Warrant Holder a member of the Company.
Nothing contained herein confers any right upon the Warrant Holder or any other
person to subscribe for or purchase any Shares of the Company at any time
subsequent to 5:00 p.m. local time in Vancouver, B.C. on June 2, 2000 and from
and after such time, this Warrant and all rights hereunder will be void.
The Warrants represented by this Warrant Certificate are non-transferable. Any
common shares issued pursuant to this Warrant will bear the following legend:
"The shares represented by this certificate are subject to a hold period
------------------------------------------------------------------------
expiring at midnight on June 2, 1999 and may not be traded in British
---------------------------------------------------------------------
Columbia until the expiry of the hold period except as permitted by the
-----------------------------------------------------------------------
Securities Act (British Columbia) and regulations made under the Act."
----------------------------------------------------------------------
"This warrant and the shares of Common Stock issuable upon exercise thereof
---------------------------------------------------------------------------
have not been registered under the United States Securities Act of 1933, as
---------------------------------------------------------------------------
amended or qualified under the laws of any state, and may not be sold,
----------------------------------------------------------------------
offered for sale, pledged or hypothecated unless a registration statement
-------------------------------------------------------------------------
is in effect with respect to such securities under such Act and laws or
-----------------------------------------------------------------------
unless there is provided by the holder an opinion of a counsel or other
-----------------------------------------------------------------------
evidence reasonably satisfactory to the Company that such registration is
-------------------------------------------------------------------------
not required."
--------------
If the Company proposes to register (under the laws of the United States) any of
its common shares for sale to the public for its own account or for the account
of its shareholders (other than a registration (i) on Form S-8 or any successor
to such Form or in connection with any employee or director welfare, benefit or
compensation plan, (ii) in connection with a rights offering made to existing
holders of common shares or an offering solely to employees of the Company or
its subsidiaries or (iii) relating to a transaction pursuant to Rule 145 of the
Securities Act of 1933, as amended (the "Act")), each such time it will give at
- ----------------------
least 45 days' prior written notice to the holder hereof of its intention so to
do. Upon the written request of the Warrant Holder, received by the Company
within 30 days after the giving of any such notice by the Company, to register
any of the common stock owned or to be owned by the holder hereof pursuant to
the exercise of this Warrant,
-3-
<PAGE>
the Company will cause such common shares to be covered by the registration
statement proposed to be filed by the Company. Notwithstanding the foregoing
(i) the Company may withdraw any registration statement without thereby
incurring any liability to the Warrant Holder, except as to expenses as set
forth below, (ii) if the registration relates to an underwritten public offering
on behalf of the Company and the managing underwriters of the offering determine
in good faith that inclusion of some or all of the shares owned by the holder
hereof pursuant to exercise of this Warrant cannot practicably be included in
such registration, the Company need not include such shares in the registration
and (iii) such shares owned by the holder pursuant to exercise of this Warrant
need not be included in the registration if in the opinion of counsel to the
Company registration under the Act is not required for a public distribution of
such shares.
The Company shall pay all expenses incident to the performance by it or any such
registration, including without limitation all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, and fees and expenses incurred in connection with
complying with federal or state securities or "blue sky" laws. The Company will
also pay the fees and expenses of counsel representing the Warrant Holders. The
Warrant Holder shall be responsible for the payment of any and all other
expenses incurred by them in connection with the sale of their shares pursuant
to the registration, including without limitation brokerage and sales
commissions, underwriting discounts, and any transfer taxes relating to the sale
or disposition of such shares.
Prior to such offering, the Company and the Warrant Holder will cooperate with
each other and with accountants, counsel and underwriters to furnish and review
information, including financial information and drafts or preliminary printings
of the prospectus and related documents, and will enter into such underwriting,
cross-indemnification and contribution agreements as are usual and customary
according to the practice of the jurisdictions in which such offering is to be
effective.
Time will be on the essence hereof.
This Warrant Certificate is not valid for any purpose until it has been signed
by the Company.
IN WITNESS WHEREOF, the Company has caused its common seal to be hereto affixed
and this warrant certificate to be signed by one of its directors as of the 3rd
day of June, 1998.
DATAWAVE SYSTEMS INC.
Per:
____________________________________
Authorized Signatory
-4-
<PAGE>
SUBSCRIPTION FORM
-----------------
To: DataWave Systems Inc.
And to: the directors thereof.
Pursuant to the Share Purchase Warrant made the 3rd day of June, 1998, the
undersigned hereby subscribes for and agrees to take up ________________ common
shares without pay value (the "Shares) in the capital of the Company, at a price
of $1.56 (Canadian) per Share for the aggregate sum of $_________________ (the
"Subscription Funds"), and encloses herewith a certified cheque, bank draft of
money order payable to the Company in full payment of the Shares.
The undersigned hereby requests that:
(a) the Shares be allotted to the undersigned;
(b) the name and address of the undersigned as shown below be entered in the
registers of members and allotments of the Company;
(c) the Shares be issued to the undersigned as fully paid and non-assessable
common shares of the Company; and
(d) a share certificate representing the Shares be issued in the name of the
undersigned.
Dated this _____________ day of ______________, 19___.
DIRECTION AS TO REGISTRATION:
(NAME AND ADDRESS EXACTLY AS YOU WISH THEM TO APPEAR ON YOUR SHARE CERTIFICATE
-------
AND IN THE REGISTER OF MEMBERS.)
Full Name(1): ____________________________________________________________
Full Address: ____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
Signature of Subscriber(1): ______________________________________________
Signature of Subscriber(1) guaranteed by:
If the name above differs from the
name of the Subscriber, then please
complete the following guarantee:
__________________________________________
Authorized Signature Number
NOTE: The signature to this subscription form must correspond with the name as
recorded on the warrant certificate in every particular without alteration or
enlargement or any change whatever. The signature of the person executing this
power must be guaranteed by a Bank of Trust Company or by a Member of the
Vancouver, Toronto, Montreal or New York Stock Exchange.
-5-
<PAGE>
EXHIBIT 11.1
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
Details of the calculation are as follows: Year ended March 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding: 3,089,898 3,892,255 4,716,911
less: escrow shares (625,500) (625,500) (625,500)
--------- --------- ---------
Weighted average shares outstanding
for calculation of basic EPS 2,464,398 3,266,755 4,091,411
--------- --------- ---------
Additional shares added to weighted
average shares outstanding in 1998
based on treasury stock method for
calculation of diluted EPS (1996
and 1997 is anti-dilutive)
330,259
---------
Weighted average shares outstanding
for calculation of diluted EPS 2,464,398 3,266,755 4,420,670
----------- ----------- ---------
Net (loss) income $(2,328,186) $(3,626,411) $ 65,099
----------- ----------- ---------
Basic EPS $ (0.94) $ (1.11) $ 0.02
----------- ----------- ---------
Diluted EPS $ (0.94) $ (1.11) $ 0.01
----------- ----------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"and
"Selected Confidential Financial Data" and to the use of (i) our report
relating to DataWave Systems Inc. dated June 4, 1998, and (ii) our report
relating to Metrophone Telecommunications Inc. dated June 4, 1998, each in
Amendment No. 1 and the Registration Statement on Form S-1 and related
Prospectus of DataWave Systems Inc.
/s/ Deloitte & Touche
Chartered Accountants
Vancouver, British Columbia, Canada
July 22, 1998
