U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended August 31, 1997.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
------------ -----------
COMMISSION FILE NUMBER: 0-15482
WAVETECH, INC.
----------------------------------------------
(Name of small business issuer in its Charter)
New Jersey 22-2726569
- ---------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711-4410
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number: (520) 750-9093
Securities to be registered under Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities to be registered under Section 12(b) of the Act:
Common Stock $.001 par value
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form,
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $865,571.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of November 28, 1997 was approximately $5,187,772 based on the
average high and low bid prices for such Common Stock as reported on the Nasdaq
SmallCap System.
The number of shares of Common Stock outstanding as of November 28, 1997
was 15,141,364. The aggregate number of Redeemable Common Stock Purchase
Warrants outstanding as of November 28, 1997 were 3,119,630.
Documents Incorporated by Reference - Various like numbered exhibits from
the Company's 1987 Registration Statement File No. 33-8353; Post-Effective
Amendment No. 1 to Form S-18 Registration Statement, SEC File No. 33-8353 filed
September 2, 1988; Form 10-K for the fiscal year ending August 31, 1991.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS," INCLUDING STATEMENTS REGARDING, AMONG OTHER ITEMS, THE COMPANY'S
GROWTH STRATEGY AND ANTICIPATED TRENDS IN ITS BUSINESS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S NEED FOR ADDITIONAL
FINANCING, INTENSE COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS AND VARIOUS
OTHER FACTORS DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE HEREIN, AS WELL AS
THE COMPANY'S PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
(A) BUSINESS DEVELOPMENT
COMPANY PROFILE
Wavetech, Inc. (hereinafter referred to as the "Company" or "Wavetech") was
incorporated in the State of New Jersey on July 10, 1986. The Company became
subject to the reporting requirements of the Securities Exchange Act of 1934
(the "Exchange Act") by filing and registering with the Securities and Exchange
Commission a Form S-18 under the Securities Act of 1933; 400,000 units, each
unit consisting of three shares of Common Stock and one Class A and one Class B
redeemable Common Stock purchase warrant. Its Registration Statement became
effective on February 11, 1987. A total of 400,000 units were sold at the
offering price of $6.75 per unit for gross total proceeds of $2,700,000. The
Company's Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"ITEL."
WAVETECH SUBSIDIARIES
INTERNATIONAL ENVIRONMENTAL SERVICES CORPORATION. On June 6, 1991, Wavetech
acquired all of the outstanding stock of International Environmental Services
Corporation (hereinafter referred to as "IES"), a privately held Delaware
corporation, in exchange for 8,000,000 shares (400,000 shares after the 1-20
split) of the company and a $5 per cubic yard royalty payment on IES's future
operations, if any. IES has not derived any revenue from its operations.
IES was incorporated in 1988 and at the time of its acquisition reported as
its sole asset approximately 1,000 acres of real property located in Carroll
County, Ohio. The property was acquired by IES for the purpose of converting
all, or a portion thereof, to a non-hazardous sanitary landfill facility. In
November 1995, Wavetech was advised that all of the land was sold to satisfy
real estate taxes in arrears by Carroll County, Ohio. This tax sale was
consummated in April 1994. The Company intends to pursue legal recourse to
recover the value of the land from responsible parties.
2
<PAGE>
Following the acquisition of IES, Wavetech was comprised of two divisions:
An Environmental Laboratory Testing and Engineering Division through a
wholly-owned subsidiary, Applied Environmental Technology, Inc. ("Applied") and
a Landfill Development & Management Division ("IES"). During the year ended
August 31, 1995, Wavetech, with the then President abstaining, voted to sell the
stock of Applied to the father of the then President. This divestiture occurred
before March 8, 1995, during the year ended August 31, 1995, resulting in
Wavetech having no further liabilities nor assets on its balance sheet
associated with Applied.
INTERPRETEL, INC. On March 8, 1995, Wavetech, Inc. ("Wavetech") entered
into an agreement with Interpretel, Inc. ("Interpretel") pursuant to which
Wavetech agreed to issue 6,000,000 shares of its Common Stock in exchange for
100% of the outstanding 1,532,140 shares of Common Stock of Interpretel. The
transaction resulted in the former shareholders of Interpretel owning
approximately 80% of the outstanding shares of Wavetech. The Acquisition
agreement also provides that during the three year period following the March 8,
1995 closing, former shareholders of Interpretel are entitled to receive an
additional 7,500,000 Common Shares of Wavetech through an "earn-out" based upon
before tax net profit. During the two year period following closing, former
shareholders of Interpretel could earn up to 3,750,000 Common Shares of Wavetech
for every $0.50 net profit before taxes, and an additional 3,750,000 Common
Shares of the Wavetech for every $1.00 of cumulative total net profit before
taxes. During the third year following closing, any shares not previously issued
pursuant to this agreement can be earned at $1.50 net profit before taxes per
share. To date, no additional shares have been issued pursuant to the "earn
out."
Interpretel is a facilities based telecommunication company using an
advanced computer telephony platform to deliver enhanced calling card services.
Incorporated in the state of Arizona in September of 1993, the Company was
formed to create a simple calling card product featuring direct access to
over-the-phone language interpreters with services provided by AT&T Language
Line. Employing a digital computer/telephony integrated platform (switch) as a
back-bone, the company's products and services have evolved significantly to
capitalize on features and capabilities of the system. The Company now focuses
on highly customized and branded, enhanced calling cards, virtual office and
interactive marketing applications. Since its inception, Interpretel has focused
on creating an infrastructure to support product development, administration,
sales, marketing, and customer support.
Following the acquisition of Interpretel by Wavetech, the former principals
of Interpretel were elected to serve as the management for the newly-structured
corporation.
INTERPRETEL (CANADA) INC. On March 10, 1995, Interpretel (Canada) Inc. was
incorporated under the laws of the Province of Ontario as a wholly owned
subsidiary of Interpretel, Inc. It was formed to secure a long distance
reseller's registration and license in that country through the Canadian Radio
and Television Commission (CRTC), which is the equivalent of the FCC in Canada.
This reseller's license qualifies Interpretel (Canada) Inc. to operate as a
reseller of long distance services and secure contracts with Canadian
corporations and organizations as a Canadian entity. Interpretel (Canada) Inc.
is essentially a sales and customer service operation.
3
<PAGE>
TELPLEX INTERNATIONAL COMMUNICATIONS, INC. On January 1, 1997, the Company
acquired certain intangible assets of Telplex, Inc., an Arizona corporation, in
exchange for $25,000 in cash. These assets, which consisted primarily of
goodwill, an international long distance wholesaler's license, a few customer
contracts for the resale of switchless international long distance numbers, as
well as a non-compete agreement from the owner of Telplex, Inc., were acquired
by the Company through its new wholly-owned subsidiary Telplex International
Communications, Inc. ("Telplex"). The Company did not assume any of the
liabilities of Telplex, Inc.
(B) BUSINESS OF ISSUER AND SUBSIDIARIES
The Company conducts most of its operations through its wholly-owned
subsidiary, Interpretel. Interpretel is a facilities based telecommunication
company using an advanced computer telephony platform to deliver enhanced
calling card services. The Company's products are highly customized and branded
for specific distributor applications and feature a single point of access, via
any touch-tone telephone, to a suite of information and communication services.
Sample services include: world-wide direct calling; instant conference
calling; over-the-phone language interpretation supporting over 100 languages;
fax-based language translation; news, weather and sports headlines; integrated
voice and fax mail; integration with customer call centers; and in Canada, Dun &
Bradstreet Express business services, and legal consultations and referrals. All
services are billed on a post-pay basis directly to the subscriber, usually via
a credit card.
Positioned as an added-value service, principal benefits to distributors
include: cost-effective information distribution and interactive marketing and
promotion capability. The product also becomes a customer retention vehicle and
new profit center.
Since its inception, Interpretel has focused primarily on the development
of product specifications, proprietary application software (including
call-processing, billing, membership and customer service database software),
execution of vendor contracts, development of corporate infrastructure
(including customer service, sales and marketing divisions, regional sales
staff), design and printing of product and marketing brochures, and strategic
planning for international business development. The Company's software packages
are tightly integrated into a state-of -the-art communications system creating a
platform network that can be duplicated throughout the world as the Company
proceeds with its international expansion plans.
The Company has issued a tariff, bearing F.C.C. Tariff No. 2, filed in
compliance with the requirements of the Communication Act of 1934, as amended,
with the Federal Communications Commission.
4
<PAGE>
Interpretel has a staff of five employees, of which four were employed on a
full-time basis. The Company currently has operations underway in the United
States and Canada, and in Australia through a licensing agreement with Switch
Telecommunications Pty Ltd.
FEATURES AND CAPABILITIES OF THE COMPANY'S INTERACTIVE SYSTEM
The Company's call-processing architecture is a UNIX-based multi-tasking
digital call-processing system integrated with a Tandem database server, which
provides the ability to manage a wide range of diverse applications on a single
platform. The Company believes that its systems computer telephony integration
technology is "leading edge," is highly robust, modularly designed and can
support virtually limitless expansion and capacity. The system offers direct
T-1/DS-3 connectivity with the public telephone network and is networked
remotely for customer service/database management.
The Company's database management system is currently managed and
administered from its corporate offices in Tucson, Arizona, with the call
processing platforms located in Lincoln, Nebraska. Plans are currently underway
to locate call processing platforms in Toronto to support Canadian operations.
In Sydney, Australia, a fully operational system is supporting customer traffic
for the Company's first international licensing partner, Switch
Telecommunications Pty Ltd.
From 1994 through 1997, the Company remained focused on the development of
the infrastructure for its call-processing and data management systems. Although
the Company has signed major distributor agreements over the last three years,
results are not expected to be commercially realized until at least early 1998.
The Company currently offers the following programs:
1. THE INTERPRETEL TRAVELER CARD. Designed for worldwide business and
travel use, this application offers voice and fax mail with pager notification;
over-the-phone language interpretation; fax-based document translation; 12-way
conference calling; news and sports headlines; and access to domestic and
international calling card long distance service. Line charges are billed to the
subscriber's credit card of choice. The Company is considering distribution of
this program through a direct mail initiative or promotional program.
2. THE AFFINITY CARD PROGRAM. Building on the Interpretel Card, this
program allows a company to brand and fully customize services including
integration of Interpretel's communication features with their own services. The
Company currently has Affinity Card programs with Diners Club International and
Delta Hotels and Resorts, among others. The Affinity Card Program constitutes
the cornerstone of the Company's current marketing and sales initiatives.
5
<PAGE>
3. THE VIRTUAL OFFICE PROGRAM. Built as a customized "affinity" product
and featuring many of the same services as the Interpretel Traveler Card, this
product is positioned for the Small Office/Home Office (SOHO) market and uses a
private `888' number for access. Unique to this program is a "follow-me"
function which dials and searches multiple phone numbers locating the
subscriber. As a new initiative, during fiscal 1998, the Company intends to
commence marketing this product to multi-level sales organizations.
4. THE INTERACTIVE MARKETING PROGRAM. The Company's advanced
call-processing system can be used for non-card based applications, including
interactive voice response, fax-backs, surveys/polling and meet-me conferencing
systems. The modular call-processing architecture allows easy creation of
applications with virtually no limit. As the Company builds its sales and
marketing infrastructure, this program will receive greater attention in the
future.
STRATEGIES FOR THE FUTURE
The Company believes it is positioned to significantly expand its customer
base and penetrate new markets. The Company's proprietary interactive
call-processing software and related systems are designed to address the needs
of the international customer and be easily integrated into foreign
telecommunication networks. The Company intends to develop additional licensing
agreements similar to the agreement signed with Switch Telecommunications Pty
Ltd for Southeast Asia.
As companies are shifting from mass-marketing initiatives to "one-on-one
interactive" marketing, the Company believes it is uniquely and strategically
positioned for growth by enabling businesses to customize and personalize their
marketing initiatives using the Company's interactive telecommunication systems.
The Company intends to aggressively pursue the following growth strategies:
SEEK OUT ATTRACTIVE ACQUISITION, MERGER AND JOINT VENTURE
OPPORTUNITIES. The Company believes there exist several unaffiliated
third parties whose operations or assets would complement the
Company's products and services. The Company intends to seek out
potential acquisitions, mergers, joint ventures or other partnerships
as they arise. However, to date, the Company has no binding agreements
for any such opportunities. See "Risk Factors--Uncertainty of
Strategic Relations," "--Potential Acquisitions" and "--Need for
Additional Financing."
FOCUS ON EXPANSION INTO INTERNATIONAL MARKETS. The Company intends to
aggressively seek expansion into international markets. To date, the
Company has executed a licensing agreement with Switch
Telecommunications Pty Ltd for use of the Company's platforms in
Southeast Asia. Switch Telecommunications is operational and is
currently marketing and distributing products and services from the
Interpretel System. The Company expects to receive royalty payments on
6
<PAGE>
the sales of these products and services over the next year, however,
that amount, if any, is not yet readily determinable. The Company
believes that its technology can be readily adaptable to a variety of
foreign communications networks and that significant demand exists in
international markets for the Company's services. See "Risk
Factors--Risks Associated with International Expansion."
EXPAND SALES AND MARKETING EFFORTS. The Company's operations to date
have consisted principally of developing its technology and product
offerings. The Company intends to increase revenues by expanding its
base of users through direct sales and marketing efforts, as well as
through affiliations with other third parties. See "Risk
Factors--Competition."
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its office and administrative space at 5210 E. Williams
Circle, Suite 200, Tucson, Arizona 85711. The lease expires November 30, 2001,
and requires the Company to make payments thereunder in an average amount of
approximately $8,400 per month over the term of the lease.
ITEM 3. LEGAL PROCEEDINGS
Applied Environmental Technology, Inc. (Applied') was named as a defendant
in a lawsuit filed by Long Beach Memorial Hospital (the "Hospital") on July 30,
1992 and, in December 1994, Wavetech, Inc. was added as a party defendant in the
filing of an Amended Complaint. The Hospital alleges to have sustained damages
as a result of certain errors and emissions by Applied in performing the
engineering of asbestos removal for the Hospital. Litigation counsel for Applied
believes that there are adequate defenses to the action and now believe that the
action will be dismissed. Litigation counsel has also advised Wavetech, Inc.
that the applicable statute of limitations has expired on this action.
On March 14, 1996, Steven A. Ezell ("Ezell"), a former officer of the
Company, sued the Company and two of its current officers and directors in the
Superior Court of the State of Arizona in an action titled EZELL VS. WAVETECH,
INC., GERALD I. QUINN AND TERENCE E. BELSHAM. The Complaint alleges that the
Company breached its employment contract with Ezell and that Messrs. Quinn and
Belsham tortiously interfered with Ezell's employment contract with the Company.
The complaint seeks unspecified compensatory damages, including costs and
attorney's fees. The Company believes Ezell's claims have no merit and intends
to vigorously defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR THE COMPANY'S SECURITIES
The Company's Common Stock is quoted on the Nasdaq SmallCap Market. The
high and low bid prices of the Company's Common Stock as reported by Nasdaq from
September 1, 1995 through August 31, 1997 by fiscal quarters (i.e. 1st Quarter =
September 1 through November 30) were as follows:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------------ ------------ ------------ ------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1996
Common Stock 2 1/16 3/4 1 3/8 3/4 2 1/8 3/4 2 3/4
1997
Common Stock 1 1/16 17/32 1 1/32 1/4 15/16 11/32 3/4 5/16
The bid and the asked price of the Company's Common Stock on November 28,
1997 were 15/32 and 7/16, respectively.
As of November 28, 1997, the Company had 173 shareholders of record of its
Common Stock. As of February 1997, the Company had 1,496 shareholders that
beneficially own the stock in the name of various brokers.
The Company has never declared a dividend and does not plan to declare a
dividend of cash on Wavetech, Inc. Common Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) The Company's business consists of developing, operating, marketing and
selling interactive communication systems through the application of
"intelligent" call processing technology and proprietary software to reflect or
target the needs of an identified audience. These systems are often used as
privatized networks for organizations and special purpose groups. During 1995
and 1994, the Company remained focused on the development of the infrastructure
for its call processing and data management systems. Operations in the USA and
Canada commenced on a limited basis in 1996. The Company signed a licensing
agreement with Switch Telecommunications Pty Ltd of Australia.
8
<PAGE>
OPERATIONS OVERVIEW
The Company, after completing the development of its back end systems
during the last quarter of 1996 and the first quarter of 1997, commenced
operations. Revenues increased to $865,571 in 1997 from $19,895 in 1996. The
increase of $474,106 was due primarily to the purchase and installation of an
Interpretel System which consisted of a computer platform and related software.
Revenues from the resale of international long distance minutes were $149,155 in
1997 due to the acquisition of Telplex, Inc. During 1997 the $200,000 licensing
fee was paid which represented the first of three payments due per the agreement
with Switch Telecommunications Pty Ltd.
COSTS AND EXPENSES
Expenses increased to $ 2,503,356 in 1997 from $1,912,876 in 1996. $378,009
of this increase was due to the cost of a computer platform and software for the
sale of an Interpretel system and $175,813 represents the cost associated with
the resale of international long distance minutes and the additional overhead
costs related to the acquisition of Telplex, Inc. Print advertising and costs
associated with the creative development and printing of the fulfillment kits
for the various cards increased to $126,665 in 1997 from $32,952 in 1996.
Investor relations and costs associated with the annual meeting represented a
100% increase of $106,000 during 1997. Depreciation and amortization expense
increased by $74,974 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1997 the Company had a working capital deficit of $579,333 as
compared to working capital of $665,483 at August 31, 1996. The Company borrowed
$122,000 from certain Board Members in order to address the working capital
needs. As a result of inadequate funds during the last quarter the Company
entered into agreements with its employees to compensate such persons' salary
with a number of shares of the Company's Common Stock with a fair market value
on the last day of a regular pay period equal to each respective employee's
salary plus a 10% premium as consideration for entering into such agreements.
All of the shares were issued as Deferred Shares pursuant to the Company's 1997
Stock Incentive Plan.
As part of this strategy to preserve capital, the Company was aggressively
pursuing a number of financing, merger and acquisition opportunities. The
Company signed an investment banking agreement with Stern, Agee and Leach to
assist in evaluating the opportunities available for re-capitalizing the
Company. Short-term debt financing was secured during this period while longer
term solutions were pursued with the investment bankers.
9
<PAGE>
INFLATION
Although the Company's operations are influenced by general economic trends
and, specifically, technology advances in the telecommunications industry, the
Company does not believe that inflation has had a material impact on its limited
operations.
(B) RISK FACTORS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS,"
INCLUDING STATEMENTS REGARDING, AMONG OTHER ITEMS, THE COMPANY'S GROWTH
STRATEGY, FUTURE PRODUCTS, SALES, ABILITY TO LICENSE FUTURE PRODUCTS AND MARKET
PRODUCTS AND ANTICIPATED TRENDS IN THE COMPANY'S BUSINESS. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE NEED FOR ADDITIONAL FINANCING,
INTENSE COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS, ITS DEPENDENCE ON THIRD
PARTY CONSULTANTS AND KEY PERSONNEL, AND OTHER FACTORS DESCRIBED IN THE "RISK
FACTORS" SECTION SET FORTH BELOW AND ELSEWHERE HEREIN.
LIMITED OPERATING HISTORY; PREVIOUS LOSSES. The Company was incorporated in
1995, however, it did not have any significant business operations until 1997.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of development ---
particularly companies in new and rapidly evolving markets such as the
Company's. To address these risks, the Company must, among other things, respond
to competitive developments, attract, retain and motivate qualified personnel
and upgrade its technologies and commercialize services utilizing such
technologies. There can be no assurance that the Company will be successful in
addressing such risks. The Company has incurred net losses of approximately
$(1,629,285), $(1,860,204) and $(1,055,099) during each of the three most recent
fiscal years. The Company recorded revenues for the quarter ended February 28,
1997, but there can be no assurance that the Company will record a profit or, if
so, will be able to sustain growth and profitability.
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. The Company's operating results have varied significantly in the past
and may vary significantly in the future. Special factors that may cause the
Company's future operating results to vary include the unique nature of
strategic relationships into which the Company may enter in the future, changes
in operating expenses resulting from such strategic relationships and other
factors, the continued acceptance of the Company's licensing program, the
financial performance of the Company's licenses, the timing of new services,
announcements, market acceptance of new and enhanced versions of the Company's
services, potential acquisitions and changes in legislation and regulation that
may affect the competitive environment for the Company's communications services
and general economic and seasonal factors, among others. In the future, revenues
10
<PAGE>
from the Company's strategic relationships may become an increasingly
significant portion of the Company's total revenues. Due to the unique nature of
each strategic relationship, these relationships may change the Company's mix of
expenses relative to revenues. In addition, the Company's royalties from Switch
Telecommunications Pty Ltd ("Switch") may be adversely affected if Switch
experiences equipment failure, cannot secure reasonable long distance rates from
an Australian telecommunications company in a highly regulated monopoly market
or its equipment becomes redundant or obsolete.
Quarterly revenues are difficult to forecast because the market for the
Company's information and telecommunications services is rapidly evolving. The
Company's expense levels are based, in part, on its expectations as to future
revenues. If actual revenue levels are below expectations, the Company may be
unable or unwilling to reduce expenses proportionately and operating results
would likely be adversely affected. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, among others, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock will likely be adversely affected.
INTENSE COMPETITION. The information and telecommunications services
industries are intensely competitive, rapidly evolving and subject to rapid
technological change. The Company expects competition to increase in the future.
Many of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and substantially
greater financial, personnel, marketing, engineering, technical and other
resources than the Company. There can be no assurance that the Company will be
able to successfully compete with such entities. As a result, such competition
could materially adversely affect the Company's business, operating results and
financial condition.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of information and communications services. A
number of other providers currently offer each of the individual services and
certain combinations of the services offered by the Company. The Company's
worldwide long distance services and features, such as conference calling,
compete with services provided by companies such as AT&T, MCI and Sprint
Corporation ("Sprint"), as well as smaller interexchange long distance
providers. The Company's voice mail services compete with voice mail services
provided by certain regional Bell operating companies ("RBOCs") as well as by
independent voice mail vendors such as Octel Communications Corporation. The
Company's proposed enhanced travel services, concierge services, new services
and electronic mail services are expected to compete with the services of other
computer telephony companies such as Premier Technologies (WorldLink), VoiceNet,
among others. The Company also expects that other parties will develop and
implement information and telecommunications service platforms similar to that
of the Company, thereby increasing competition for the Company's services.
11
<PAGE>
In addition, the Telecommunications Act of 1996 allows local exchange
carriers, including the RBOCs to provide inter-LATA long distance telephone
service, which will likely significantly increase competition for long distance
services. The new legislation also grants the Federal Communications Commission
("FCC") the authority to deregulate other aspects of the telecommunications
industry, which in the future may, if authorized by the FCC, facilitate the
offering of an integrated suite of information and telecommunications services
by regulated entities, including the RBOCs, in competition with the Company.
Such increased competition could have a material adverse effect on the Company's
business, operating results and financial position. See "--Regulation."
Telecommunication companies often compete for consumers based on price,
with major long distance carriers conducting extensive advertising campaigns to
capture market share. Many of the Company's competitors can offer lower rates to
consumers as a result of higher gross revenues. As a result, the Company may be
required to reduce the prices at which it offers services in order to remain
competitive. A decrease in the rates charged for communications services by the
major long distance carriers or other competitors, whether caused by general
competitive pressures or the entry of the RBOCs and other local exchange
carriers into the long distance market, could have a material adverse effect on
the Company's business, operating results and financial condition.
The Company expects that the information and telecommunications services
markets will continue to attract new competitors and new technologies, possibly
including alternative technologies that are more sophisticated and cost
effective than the Company's technology. The Company does not have the
contractual right to prevent its subscribers from changing to a competing
network, and the Company's subscribers may generally terminate their services
with the Company at will. If the Company is unable to compete with emerging
technologies or services, it may lose customers and, as a result, its business
and operating results may be materially adversely affected.
The personal telecommunications products industry is intensely competitive
and subject to rapid change. The Company believes that the principal competitive
factors affecting the markets for its products include customer service,
content, quality, price, marketing, distribution, uninterrupted service and
proprietary technology. In addition, consumer demand for particular
telecommunications products may be adversely affected by the increasing number
of competitive products from which to choose, making it difficult to predict the
Company's future success in producing personal telecommunications products for
the retail market.
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES. The information and
telecommunications services markets are characterized by rapid technological
change, frequent new product introductions and evolving industry standards. The
Company's future success will depend in significant part on its ability to
anticipate industry standards, continue to apply advances in technologies,
enhance its current services, develop and introduce new services on a timely
basis, enhance its software and call processing platform and successfully
compete with products and services based on evolving or new technology. The
Company expects new products and services, and enhancements to existing products
12
<PAGE>
and services, to be developed and introduced which will compete with the
services currently offered or planned by the Company. The Company is also aware
that products currently exist which allow text-to-voice electronic mail
conversion and provide "meet me" services, and that several communications
companies are developing or have developed services, that would compete with the
Company's proposed devices. The Company currently intends to introduce and
market new and enhanced services in 1998, such as a Virtual Office product and
an integrated messaging service.
The Virtual Office will allow subscribers to enter up to three different
telephone numbers into the system including a pager number. A caller will be
able to instruct the system to leave a voice or fax message for the subscriber
or direct the system to search for the subscriber at one of the designated
numbers. If the caller leaves a message for the subscriber, he will then be
paged and be notified of a voice or fax message. This type of service is
sometimes referred to as a "follow me" service. The Integrated Messaging Service
will allow a subscriber to access e-mail and fax messages off the Internet via
telephone using text-to-voice conversion. The same application will allow a
subscriber to access all the different Wavetech/Interpretel services via a
laptop computer. Development of these services will require the implementation
of new technologies and the integration of these technologies into the Company's
call processing platform. Rapid changes in technology and product obsolescence
require the Company to develop or acquire new products and to enhance its
existing products on a timely basis. There is no assurance that the Company will
be able to predict such changes or have the resources required or otherwise be
able to respond to market or technological changes or to compete successfully in
the future.
There can be no assurance that the Company will be successful in developing
and marketing service enhancements or new services that respond to these or
other technological changes or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of its services, or that its new
services, and the enhancements thereto, will adequately meet the requirements of
the marketplace and achieve market acceptance. Delays in the introduction of new
services, the inability of the Company to develop such new services or the
failure of such services to achieve market acceptance could have a material
adverse effect on the Company's business, operating results and financial
condition.
UNCERTAINTY OF STRATEGIC RELATIONSHIPS. A principal element of the
Company's growth strategy is the creation and maintenance of strategic
relationships that will enable the Company to offer its services to a larger
customer base than the Company could otherwise reach through its direct
marketing efforts. The Company has entered into or initiated strategic
relationships with several companies, including Switch, DonTon Travel, Inc.,
TeamMark and GroupMark. These relationships were formed recently, and have not
produced significant revenues to date. The Company is unable to predict their
success or failure due to limited operating experience with these strategic
partners. Although the Company intends to continue to expand its direct
marketing channels, the Company believes that strategic partner relationships
may offer a potentially more effective and efficient marketing channel.
13
<PAGE>
Consequently, the Company's success depends in part on the ultimate success of
these relationships and on the ability of these strategic partners to
effectively market the Company's services. Failure of one or more of the
Company's strategic partners to successfully develop and sustain a market for
the Company's services, or the termination of one or more of the Company's
relationships with a strategic partner, could have a material adverse effect on
the Company's overall performance due to the possibility of more costly direct
marketing expenditures by the Company and other factors.
Although the Company views its strategic relationships as a key factor in
its overall business strategy and in the development and commercialization of
its services, there can be no assurance that its strategic partners view their
relationships with the Company as significant for their own businesses or that
they will not reassess their commitment to the Company in the future. The
Company's arrangements with its strategic partners do not establish minimum
performance requirements for the Company's strategic partners, but instead rely
on the voluntary efforts of these partners in pursuing joint goals. Certain of
these arrangements prevent the Company from entering into strategic
relationships with other companies in the same industry as the Company's
strategic partners, either for specified periods of time or while the
arrangements remain in force. In addition, even when the Company is without
contractual restriction, it may be restrained by business considerations from
pursuing alternative arrangements. The ability of the Company's strategic
partners to incorporate the Company's services into successful commercial
ventures will require the Company, among other things, to continue to
successfully enhance its existing services and develop new services. The
Company's inability to meet the requirements of its strategic partners or to
comply with the terms of its strategic partner arrangements could result in its
strategic partners failing to market the Company's services, seeking alternative
providers of communication and information services or canceling their contracts
with the Company, any of which could have a material adverse impact on the
Company.
DEPENDENCE ON LICENSING RELATIONSHIPS. The Company has an active licensing
relationship with one company, Switch Telecommunications Pty Ltd in Australia.
The Company intends to increase its number of licenses and the volume of its
licensee transactions volume. However, the telecommunications industry is
intensely competitive and rapidly consolidating while the majority of companies
that chose to outsource communications card services to the Company are small or
medium-sized telecommunications companies that may be unable to withstand the
intense competition in the telecommunications industry. The inability of the
Company to attract larger or more licensee transactions, the failure of one or
more of the Company's licensees to develop and sustain a market for the
Company's services, or termination of one or more of the Company's licensing
relationships, could have a material adverse effect on the Company's business,
operating results and financial condition.
ABILITY TO MANAGE GROWTH. The Company expects to experience substantial
growth in 1998 and thereafter as it begins to operate its call processing
networks. This growth, if any, can be expected to place significant demands on
14
<PAGE>
all aspects of the Company's business, including its administrative, technical
and financial personnel and systems. In addition, expansion by the Company may
strain the Company's management, financial and other resources. There can be no
assurance that the Company's systems, procedures, controls and existing
resources will be adequate to support expansion of the Company's operations. The
Company's future operating results will substantially depend on the ability of
its officers and key employees to manage changing business conditions and to
implement and improve its technical, administrative, financial control and
reporting systems. If the Company is unable to respond to and manage changing
business conditions, then the quality in the Company's services, its ability to
retain key personnel and its results of operations could be materially adversely
affected. At certain stages of growth in network usage, the Company is required
to add capacity to the call processing platform, thus requiring the Company
continuously to attempt to predict growth in its network usage and add capacity
to its system accordingly. Difficulties in managing continued growth, including
difficulties in predicting the growth in network usage, could have a material
adverse effect on the Company, its business and results of operations.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL. The Company's success is
largely dependent upon its executive officers, the loss of one or more of whom
could have a material adverse effect on the Company. The Company believes that
its continued success will depend to a significant extent upon the efforts and
abilities of Gerald I. Quinn, President and CEO, and Richard P. Freeman, Vice
President. The loss of services of any of these individuals could have a
material adverse effect upon the Company. Mr. Quinn has entered into an
employment agreement with the Company which expires in May, 1998. Mr. Freeman
has entered into an employment agreement with the Company which is automatically
renewed on an annual basis. The Company does not currently maintain key man life
insurance on the lives of any of these persons.
The Company also believes that its success depends upon its ability to hire
and retain highly qualified engineering and product development personnel.
Competition in the recruitment of highly qualified personnel in the information
and telecommunications services industry is highly intense. The inability of the
Company to identify, attract and retain such personnel may have a material
adverse effect on the Company. No assurance can be given that the Company will
be able to retain its key employees or that it will be able to attract qualified
personnel in the future.
DEPENDENCE ON CALL PROCESSING PLATFORM, DAMAGE, FAILURE AND DOWNTIME. The
Company currently maintains a single UNIX-based multi-tasking call processing
system integrated with a Tandem database server located in Lincoln, Nebraska.
The Company's network service operations are dependent upon its ability to
protect the equipment and data at its switching facility against damage that may
be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. The Company has taken
certain precautions to protect itself and its subscribers from events that could
interrupt delivery of the Company's services. These precautions include physical
security systems, an uninterruptible power supply and an on-site power generator
designed to be sufficient to continue operation of the Company's network in the
event of a power outage. The Company's network is further designed such that the
15
<PAGE>
data on each network server is duplicated on a separate network server.
Notwithstanding such precautions, there can be no assurance that a fire, act of
sabotage, technical failure, natural disaster or a similar event would not cause
the failure of a network server and its backup server, other portions of the
Company's network, or the Lincoln facility as a whole, thereby resulting in an
outage of the Company's services. Such an outage could have a material adverse
effect on the Company. While the Company has not experienced any downtime of its
network due to natural disasters or similar events, on occasion the Company has
experienced downtime due to various technical failures. When such failures have
occurred, the Company has worked to remedy the failure as soon as possible. The
Company believes that these technical failures have been infrequent and have not
resulted in any material downtime of the call processing platform since the
Company's inception. Although the Company maintains business interruption
insurance providing for aggregate coverage of approximately $25,000 per
occurrence, there can be no assurance that the Company will be able to maintain
its business interruption insurance, that such insurance would continue to be
available at reasonable prices, that such insurance would cover all such losses
or that such insurance would be sufficient to compensate the Company for losses
it experiences due to the Company's inability to provide services to its
subscribers.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY: RISKS OF INFRINGEMENT. The
Company relies primarily on a combination of copyright and trade secret laws and
contractual confidentiality provisions to protect its proprietary rights. These
laws and contractual provisions provide only limited protection of the Company's
proprietary rights. The Company has no patents or patent applications pending
and has no registered trademarks or copyrights. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's software or services or to obtain and use information that the
Company regards as proprietary. Although the Company is not aware of any current
or previous infringement upon its proprietary rights, there can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as the laws of the United
States. An inability of the Company to adequately protect its proprietary
technology or other assets could have a material adverse effect on its business
and results of operations.
To date, no actions have been filed against the Company with respect to
either alleged patent or trademark infringement claims. However, no assurance
can be given that actions or claims alleging trademark, patent or copyright
infringement will not be brought against the Company with respect to current of
future products or services, or that, if such actions are brought, the Company
will ultimately prevail. Any such claiming parties may have significantly
greater resources than the Company to pursue litigation of such claims. Any such
claims, whether with or without merit, could be time consuming, result in costly
litigation, cause delays in introducing new or improved services, require the
Company to enter into royalty or licensing agreements or cause the Company to
discontinue use of the challenged tradename, service mark or technology at
potential significant expense to the Company associated with the marketing of a
new name or the development or purchase of replacement technology, any of which
results could have a material adverse effect on the Company.
16
<PAGE>
DEPENDENCE UPON SOFTWARE. The software developed and utilized by the
Company in providing its services may contain undetected errors. Although the
Company engages in extensive testing of its software prior to introducing the
software onto its network, there can be no assurance that errors will not be
found in software after commencement of use of such software. Any such error may
result in partial or total failure of the Company's network, additional and
unexpected expenses to fund further product development or to add programming
personnel to complete a development project, and loss of revenue because of the
inability of subscribers to use Interpretel's network or the cancellation by
subscribers of their service with Interpretel, any of which could have a
material adverse effect on the Company.
DEPENDENCE UPON TELECOMMUNICATION PROVIDERS; NO GUARANTEED SUPPLY. The
Company does not own a transmission network and, accordingly, depends on MCI for
transmission of its subscribers' long distance calls. For the year ended August
31, 1997, MCI was responsible for carrying traffic representing approximately
100% of the minutes of long distance transmissions billed to the Company.
Further, the Company is dependent upon local exchange carriers for call
origination and termination. If there is an outage affecting the Company's
terminating carriers, the Company's call processing platform may not complete a
call. The Company has not experienced significant losses in the past because of
interruptions of service at terminating carriers, but no assurance can be made
in this regard with respect to the future integrity of such carriers. The
Company's ability to maintain and expand its business depends, in part, on its
ability to continue to obtain telecommunication services on favorable terms from
a long distance carrier and the cooperation of both interexchange and local
exchange carriers in originating and terminating service for its subscribers in
a timely manner. A partial or total failure of the Company's ability to receive
or terminate calls would result in a loss of revenues by the Company and could
lead to a loss of subscribers, either of which could have a material adverse
effect on the Company.
The Company obtains long distance telecommunications services pursuant to
supply agreements with Interact, Inc. of Lincoln, Nebraska, and MCI. No
assurance can be given that the Company will be able to obtain long distance
services in the future at favorable prices or at all, and the unavailability of
long distance services to the Company, or a material increase in the price at
which the Company is able to obtain long distance service, would have a material
adverse affect on the Company's business financial condition and results of
operations. The Company is not currently a party to a long distance
telecommunications services agreement, that requires the Company to purchase a
minimum amount of service each month. The Company may determine that it is
desirable to enter into agreements containing minimum purchase requirements. No
assurance can be given that demand for services in the areas covered by the
Company's transmission suppliers will exceed any minimum purchase requirement in
the future.
17
<PAGE>
REGULATION. Various regulatory factors may have an impact on the Company's
ability to compete and on its financial performance. The Company is subject to
regulation by the Federal Communications Commission ("FCC") and by various state
public service and public utility commissions. Federal and state regulations and
regulatory trends have had, and may have in the future, both positive and
negative effects on the Company and on the information and telecommunications
service industries as a whole. FCC policy currently requires interexchange
carriers to provide resale of the use of their transmission facilities. The FCC
also requires local exchange carriers to provide all interexchange carriers with
equal access to the origination and termination of calls. If either or both of
these requirements were removed, the Company would be adversely affected. These
carriers may experience disruptions in service due to factors outside the
Company's control, which may cause the Company to lose the ability to complete
its subscribers' long distance calls. The Company has made all filings with the
FCC necessary to allow the Company to provide interstate and international long
distance service. In order to provide intrastate long distance service, the
Company is required to obtain certification to provide telecommunications
services from the public service or public utility commissions of each state, or
to register or be found exempt from registration by such commissions. The
Company has not yet made any filings or taken any actions to become certified or
tariffed to provide intrastate card services to customers throughout the United
States. To date, the Company has not been denied any licenses or tariffs.
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 which will allow local exchange carriers,
including the RBOCs, to provide inter-LATA long distance telephone service and
which also grants the FCC authority to deregulate other aspects of the
telecommunications industry. The new legislation may result in increased
competition for the Company from others, including RBOCs and increased
transmission costs in the future. See "--Competition" above.
In conducting various aspects of its business, the Company is subject to
various laws and regulations relating to commercial transactions generally, such
as the Uniform Commercial Code, and is also subject to the electronic funds
transfer regulations embodied in Regulation E promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). Given the expansion
of the electronic commerce market, the Federal Reserve might revise Regulation E
or adopt new rules for electronic funds transfer affecting users other than
consumers. Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market, and it is possible
that Congress or individual states could enact laws regulating the electronic
commerce market. If enacted, such laws, rules and regulations could directly
regulate the Company's business and industry and could have a material adverse
affect on the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. A key component of the
Company's strategy is its planned expansion into international markets. The
Company intends to establish call processing platforms in Canada, and
potentially other countries in 1998 and beyond. If international revenues are
not adjusted to offset the expense of establishing and maintaining these
international operations, the Company's business, operating results or financial
18
<PAGE>
condition could be materially adversely affected. To date, the Company has only
limited experience in marketing and distributing its services internationally.
There can be no assurance that the Company will be able to successfully
establish the proposed international call processing platforms, or to market,
sell and deliver its services in these markets. In addition to the uncertainty
as to the Company's ability to expand its international presence, there are
certain difficulties and risks inherent in doing business on an international
level, such as burdensome regulatory requirements and unexpected changes in
these requirements, export restrictions, export controls relating to technology,
tariffs and other trade barriers, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reduction in business activity during the summer months in certain
parts of the worlds and potentially adverse tax consequences, which could have a
material adverse effect on the performance of the Company's international
operations. There can be no assurance that one or more of such factors will not
have a material adverse affect on the Company's future international operations
and, consequently, on the Company's business, operating results and financial
condition.
RISK OF LOSS FROM RETURNED TRANSACTIONS, FRAUD, BAD DEBT, THEFT OF
SERVICES. The Company utilizes Intrust Bank, N.A., principal financial payment
clearance systems for electronic fund transfers and ICVerify software for
electronic credit card settlement. In its use of these established payment
clearance systems, the Company generally bears the same credit risks normally
assumed by other users of these systems arising from returned transactions
caused by insufficient funds, stop payment orders, closed accounts, frozen
accounts, unauthorized use disputes, theft or fraud. From time to time persons
may be able to gain unauthorized access to the Company's network and obtain
services without rendering payment to the Company by unlawfully utilizing the
access numbers and personal identification numbers ("PINs") of authorized users.
Although to date the Company has not experienced material losses due to such
unauthorized use of access numbers and PINs, no assurance can be given that
future losses due to unauthorized use will not be material. The Company
currently seeks to manage these risks through its internal controls and
proprietary billing system. The Company's call processing platform prohibits a
single access number and PIN from establishing multiple simultaneous connections
to the network system, and the Company establishes preset spending limits for
each subscriber. The Company also maintains a reserve for such risks. Past
experience in estimating and establishing reserves and the Company's historical
losses are not necessarily accurate indications of the Company's future losses
or the adequacy of the reserves established by the Company in the future.
Although the Company believes that its risk management and bad debt reserve
practices are adequate, there can be no assurance that the Company's risk
management practices or reserves will be sufficient to protect the Company from
unauthorized or returned transactions or thefts of services which could have a
material adverse effect on the Company's business, operating results and
financial condition.
POTENTIAL ACQUISITIONS. The Company may in the future pursue acquisitions
of complementary services, products, technologies or businesses. Future
acquisitions may result in potentially dilutive issuances of equity securities,
19
<PAGE>
the incurrence of additional debt, the write-off of software development costs,
and the amortization of expenses related to goodwill and other intangible
assets, all of which could have a material adverse effect on the Company's
business, operating results and financial condition. Future acquisitions would
involve numerous additional risks, including those related to the assimilation
of the operations, services, products and personnel of the acquired company, the
diversion of management's attention from other business concerns, entering
markets in which the Company has little or no direct prior experience and the
potential loss of key employees of the acquired company. The Company currently
has no agreements or understandings with regard to any potential acquisitions.
NEED FOR ADDITIONAL FINANCING. The Company has significant cash
requirements in connection with its business. To date, the Company has been
unable to generate sufficient revenues to recover its costs. See "--Limited
Operating History; Previous Losses" above. In addition to its working capital
requirements, the Company must fund the production and marketing of its products
prior to the time the products are made available for sale and generate
revenues. The Company's potential receipt of revenues from product sales are
subject to substantial contingencies, and there can be no assurances concerning
the timing and amount of future revenues from product sales. Additionally, the
Company may not receive payment from its customers until a period after products
are sold to end-users.
The Company may be required to seek additional financing in the event of
delays, cost overruns or unanticipated expenses associated with a company in an
early stage of development, or in the event the Company does not realize
anticipated revenues. In addition, the Company may require additional financing
in the future to further expand its product offerings or to make strategic
acquisitions. There can be no assurance that such additional financing will be
available, or that, if available, such financing will be obtainable on terms
favorable to the Company or its stockholders. The Company currently has no
commitment for any such financing and in the event such necessary financing is
not obtained, the Company's operations will be materially adversely affected and
the Company will have to cease or substantially reduce operations. Any
additional equity financings may be dilutive to stockholders, and debt
financings, if available, may involve restrictive covenants, including limiting
the Company's ability to incur additional debt.
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS; RISK OF DELISTING. The
Company's Common Stock is currently listed on the Nasdaq SmallCap Market. Under
the rules for continued listing in the Nasdaq system, the Company must satisfy
prior to February 23, 1998 and thereafter will be required to maintain at least
$2,000,000 in net tangible assets or $35,000,000 in market capitalization, two
market-makers, a public float of at least $500,000 shares and a minimum bid
price of $1.00 per share, as well as satisfy certain corporate governance
criteria. Upon notice of a deficiency in one or more of the maintenance
requirements, the Company would be given 90 days (30 days in the case of the
number of market-makers) to comply with the maintenance standards. Failure of
the Company to meet the maintenance requirements of Nasdaq prior to February 23,
1998 could result in the Company's securities being delisted from Nasdaq, with
20
<PAGE>
the result that the Company's securities would trade on the OTC Bulletin Board
or in the "pink sheets" maintained by the National Quotation Bureau
Incorporated. As a consequence of such delisting, an investor could find it more
difficult to dispose of or to obtain accurate quotations as to the market value
of the Company's securities. Among other consequences, delisting from Nasdaq may
cause a decline in the stock price, the loss of news coverage about the Company
and difficulty in obtaining future financing.
RISK OF LOW-PRICED STOCK; PENNY STOCK REGULATIONS. If the Company's
securities were delisted from Nasdaq (See "Risk Factors--Nasdaq Listing and
Maintenance Requirements; Risk of Delisting"), they could become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of broker-dealers
to sell the Company's securities and may adversely affect the ability of
purchasers in this Offering to sell any of the securities acquired hereby in the
secondary market.
The Commission adopted regulations which generally define a "penny stock"
to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock of a disclosure schedule prepared by the Commission relating to
the penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the commission finds that such a restriction would be in
the public interest.
If the Company's securities were subject to the existing or proposed rules
on penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WAVETECH, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page Number
-----------
REPORT OF INDEPENDENT AUDITORS 24
CONSOLIDATED BALANCE SHEET - August 31, 1997 25
CONSOLIDATED STATEMENT OF OPERATIONS - 26
Periods ended August 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY - 27
Periods ended August 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS - 28
Periods ended August 31, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29
22
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
Audited Financial Statements
For the years ended August 31, 1997 and 1996
-----------
23
<PAGE>
[LETTERHEAD OF ADDISON, ROBERTS & LUDWIG, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Wavetech, Inc.
We have audited the accompanying consolidated balance sheet of Wavetech, Inc.
and subsidiaries as of August 31, 1997 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the years
ended August 31, 1997 and 1996. 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 the audits to obtain
reasonable assurance about whether the financial statements are free from
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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Wavetech, Inc. and subsidiaries as of August 31, 1997 and the results of its
operations and its cash flows for the years ended August 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company has incurred a significant
loss from operations and has a deficit that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 16. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Addison, Roberts & Ludwig, P.C.
December 4, 1997
24
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1997
-----------
ASSETS
1997
----
Current assets:
Cash and cash equivalents $ 13,329
Accounts receivable, net of allowance of $527 26,273
License fee receivable 150,000
Prepaid expenses and other assets 9,725
-----------
Total current assets 199,327
Property and equipment, net 410,182
Noncurrent assets:
Investment in Switch Telecommunications
Pty Limited 2,316,165
License fee receivable 150,000
Intangibles, net of amortization of $7,511 29,489
Deposits and other assets 35,633
-----------
Total noncurrent assets 2,531,287
-----------
Total assets $ 3,140,796
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 395,222
Accrued interest payable, noncurrent portion 5,248
Unearned revenue 150,000
Notes payable, current portion 172,071
Capital leases payable, current portion 56,119
-----------
Total current liabilities 778,660
Noncurrent liabilities:
Capital leases payable 53,892
Unearned revenue-license fee 150,000
-----------
Total liabilities 982,552
Commitments (Note 10)
Stockholders' equity:
Common stock, par value $ .001 per share;
50,000,000 shares authorized, 15,076,807
shares issued and outstanding 15,077
Additional paid-in capital 7,024,823
Accumulated deficit (4,881,656)
-----------
Total stockholders' equity 2,158,244
-----------
Total liabilities and stockholders' equity $ 3,140,796
===========
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended August 31, 1997 and 1996
-----------
1997 1996
---- ----
Revenues $ 865,571 $ 19,895
----------- -----------
Expenses:
Cost of sales 679,930 -0-
Development -0- 297,935
General and administrative 1,796,533 1,603,356
----------- -----------
Total expenses 2,476,463 1,901,291
----------- -----------
Net loss from operations (1,610,892) (1,881,396)
Other income and expense:
Interest income 8,500 32,777
Interest expense (26,893) (11,585)
----------- -----------
Total other income and expense (18,393) 21,192
----------- -----------
Net loss $(1,629,285) $(1,860,204)
=========== ===========
Net loss per common share $ (.11) $ (.17)
=========== ===========
Weighted average number of
shares outstanding 14,455,167 11,200,401
=========== ===========
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended August 31, 1997 and 1996
-----------
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances, August 31, 1995 9,455,078 $ 9,455 $1,540,223 $(1,392,167) $ 157,511
Common stock issued 4,659,363 4,659 5,207,744 5,212,403
Net loss (1,860,204) (1,860,204)
---------- ------- ---------- ----------- -----------
Balances, August 31, 1996 14,114,441 14,114 6,747,967 (3,252,371) 3,509,710
Common stock issued 962,366 963 276,856 277,819
Net loss (1,629,285) (1,629,285)
---------- ------- ---------- ----------- -----------
Balances, August 31, 1997 15,076,807 $15,077 $7,024,823 $(4,881,656) 2,158,244
========== ======= ========== =========== ===========
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 1997 and 1996
------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(1,629,285) $(1,860,204)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 211,876 136,902
Common stock issued for services 204,180 203,125
Changes in assets and liabilities:
(Increase) decrease in accounts receivable
and other current assets 1,108 (32,758)
(Increase) decrease in license
fee receivable 200,000 (500,000)
(Increase) decrease in inventory deposit 241,037 (241,037)
Increase (decrease) in accounts payable
and accrued expenses 264,507 (104,339)
Increase (decrease) in accrued interest
payable 5,248 (39,327)
Increase (decrease) in unearned revenue (499,985) 799,985
----------- -----------
Total adjustments 627,971 222,551
----------- -----------
Net cash used in operating activities (1,001,314) (1,637,653)
Cash flows from investing activities:
Purchase of property and equipment (79,020) (89,352)
Increase in deposits and other assets -0- (2,508)
Advance on notes receivable -0- (45,282)
Payment of notes receivable 45,282 -0-
Purchase of intangibles (25,000) -0-
----------- -----------
Net cash used in investing activities (58,738) (137,142)
Cash flows from financing activities:
Proceeds from payments on notes payable 172,071 (324,600)
Increase in capital lease payable 53,783 -0-
Payments on capital lease payable (29,961) (22,023)
Proceeds from common stock issued -0- 2,693,113
Proceeds from sale of warrants 20,000 -0-
----------- -----------
Net cash provided by financing activities 215,893 2,346,490
----------- -----------
Net increase (decrease) in cash (844,159) 571,695
Cash and cash equivalents, beginning of year 857,488 285,793
----------- -----------
Cash and cash equivalents, end of year $ 13,329 $ 857,488
=========== ===========
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
1. ORGANIZATION
The consolidated financial statements include the accounts of Wavetech,
Inc. (the Company) and its wholly owned subsidiaries, Interpretel, Inc.
(Interpretel), Interpretel (Canada) Inc., Telplex International, Inc. and
International Environmental Services Corporation (an inactive corporation).
All material intercompany balances and transactions have been eliminated.
As of August 31, 1997, and for the previous three years, the Company had no
operations other than its investment in Interpretel which was made on March
8, 1995. On March 10, 1995, Interpretel (Canada) Inc. was incorporated in
Ontario, Canada as a wholly owned subsidiary of Interpretel. Interpretel
(Canada) Inc. had not yet had any activities as of August 31, 1997.
Interpretel was incorporated April 15, 1993, under the laws of the state of
Arizona to develop, market and provide interactive telecommunication
systems and services to business and individual customers. The systems
incorporate interactive call processing, computer-telephony integration,
card production/fulfillment, bill services, marketing, sales support, and
customer service to provide features and services, including but not
limited to, long distance dialing, voice/fax messaging, voice/fax
broadcast, language interpretation/translation, information retrieval,
interface to existing databases, and product promotion services. Each
Interpretel system is developed to reflect or target the needs of an
identified (target) market, with services provided to individual customers
via a calling card product incorporating the use of certain trade secrets,
trademarks, service marks, and materials related thereto. In prior years,
Interpretel was deemed to be a development stage enterprise. For the year
ended August 31, 1997, Interpretel is considered to be an operating
company.
On January 1, 1997, the Company acquired certain intangible assets of
Telplex, Inc., an Arizona corporation, in exchange for $25,000 in cash.
These assets were placed in a new wholly-owned subsidiary of Wavetech, Inc.
called Telplex International Communications, Inc. ("Telplex"). The Company
did not assume any of the liabilities of Telplex. Telplex is a switchless
international long distance reseller. The acquisition of Telplex's assets
was made pursuant to an Asset Purchase Agreement dated January 22, 1997, by
the Company, although it is deemed effective as of January 1, 1997.
This acquisition has been accounted for under the purchase method of
accounting and the results of Telplex's operations since the acquisition
date have been included with those of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity of three
months or less (money market accounts and certificates of deposit) to be
cash equivalents.
29
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
All property and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets, as follows:
Furniture and fixtures 7 years
Computer equipment 5 years
Software 5 years
The costs of maintenance, repairs and minor renewals are charged to expense
in the year incurred. Expenditures which increase the useful lives of the
asset are capitalized. When items are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts and any gain or loss
is included in income.
INTANGIBLE ASSETS
Intangible assets consist of start-up costs. These costs are primarily
consulting fees and other costs incurred in connection with the development
of the Company. Management believes that these costs will be recovered with
future operations. Start-up costs are amortized over five years using the
straight-line method.
INCOME TAXES
The Company uses Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a liability
approach to accounting for deferred income taxes in that the deferred
income tax liability or benefit at the end of an accounting period should
reflect the estimated deferred tax liability or tax benefit on the
temporary book-tax differences at anticipated federal and state income tax
rates.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1997, the Company maintained a cash balance in a bank account
insured by the FDIC. The cash balance did not exceed the FDIC insurable
amount.
The Company extends credit to customers on an unsecured basis in the
ordinary course of business. The Company bills its services directly to
authorized customer credit cards as usage is incurred.
SFAS 107 requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled,
nor does the fair value amount consider the tax consequences of realization
or settlement.
30
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The carrying amounts for cash and cash equivalents, accounts receivable,
license fee receivable, accounts payable and notes payable approximate fair
value because of the short maturity of these instruments. The fair value of
the common stock of Switch Telecommunications Pty Limited is estimated at
carrying value as such stock is not traded on the open market and market
price is not readily available. The Company does not hold or issue
financial instruments for trading purposes.
ADVERTISING COSTS
The cost of advertising is expensed when incurred or when the first
advertising takes place. Wavetech and Interpretel do not participate in
direct-response advertising which requires the capitalization and
amortization of related costs. The Company incurred $57,637 in advertising
costs during the year ended August 31, 1997.
INVESTMENTS
Investments in companies in which the Company has less than a 20% interest
are carried at cost. Dividends received from those companies are included
in other income. Dividends received in excess of the Company's
proportionate share of accumulated earnings are applied as a reduction of
the cost of the investment.
REVENUE RECOGNITION
Revenue from the sale of the licensing agreement is recognized when earned.
Revenue from the installation of equipment is recognized when delivered.
Revenue from the resale of minutes is recorded when incurred.
CONCENTRATION OF REVENUE
During the year ended August 31, 1997, the Company recognized revenue from
the installment of equipment of $474,160 and $200,000 from the sale of a
licensing agreement all from Switch. This represents 78% of total revenue
for the year ended August 31, 1997.
31
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
3. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Management utilized certain estimates in connection with establishing and
maintaining the value of the common stock of Switch (Note 5). It is at
least reasonably possible that these estimates may change in the near term
due to one or more future events. Such a change would change the value of
the common stock of Switch. The effect of the change could be material to
the financial statements.
4. BUSINESS COMBINATION - COMMITMENT
On March 8, 1995, the Company entered into an agreement with Interpretel
pursuant to which the Company agreed to issue 6,000,000 shares of its
common stock in exchange for 100% of the outstanding 1,532,140 shares of
common stock of Interpretel. The transaction resulted in the former
shareholders of Interpretel owning approximately 80% of the outstanding
shares of the Company. In accordance with Accounting Principles Board
Opinion No. 16 "Business Combinations," the acquisition has been accounted
for as a reverse acquisition with Interpretel deemed to be the acquiring
entity of the Company. The common shares issued in connection with the
acquisition were assigned no value because the Company had no assets or
liabilities at the date of the acquisition.
The acquisition agreement also provides that during the three year period
following the March 8, 1995 closing, former shareholders of Interpretel can
receive an additional 7,500,000 common shares of the Company through an
"earn-out" based upon before tax net profit. During the two year period
following closing, former shareholders of Interpretel shall earn up to
3,750,000 common shares of the Company for every $0.50 net profit before
taxes, and an additional 3,750,000 common shares of the Company for every
$1.00 of cumulative total net profit before taxes. During the third year
following closing, any shares not previously issued pursuant to this
agreement can be earned at $1.50 net profit before taxes per share. These
additional shares will not be considered in recording the Acquisition
transaction until such time as the earnings targets have been met.
32
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
5. INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED
During August, 1996 the Company entered into an agreement with Switch
Telecommunications Pty Limited (Switch) to exchange an equity interest in
the Company for an equity interest in Switch. The equity interests consist
of outstanding common stock of the respective companies. The Company
received five shares of Switch common stock in exchange for 1,544,110
shares of the Company's stock. These shares were pledged as collateral to a
note payable to an officer/shareholder and subsequently released as of
November 30, 1997. (Note 8)
Switch is a wholly owned subsidiary of Tech Pacific Holdings Limited (Tech
Pacific). Tech Pacific is an Australian corporation whose stock is not
publicly traded. Tech Pacific is a wholly owned subsidiary of First
Pacific, a publicly traded company on the Hong Kong stock exchange. Switch
conducts business as a telecommunications Fixed Network Service Provider
and also validates mobile telephone connections for Telestra Mobilenet in
Australia. The Company has entered into a contract appointing Switch as the
exclusive provider of Interpretel's telecommunications services in
Australia, New Zealand, the subcontinent of India and Asia (excluding Korea
and Japan) (Note 6).
Since Switch is a privately held company, the market value of the shares is
not readily ascertainable and is subject to uncertainty.
The agreement provides that when Tech Pacific completes an initial public
offering of its equity securities, the Company will have the right upon
written notice to Tech Pacific to convert its Switch common stock at its
current fair market value as determined by an independent third party into
equity securities of an equivalent value proposed to be offered by Tech
Pacific. If Tech Pacific has not completed an initial public offering
within two years from the date of the agreement, then Tech Pacific shall,
upon thirty days written notice from the Company, repurchase the Switch
common stock held by the Company at its then market value as determined by
an independent third party.
Switch has a three-year warrant to purchase up to 2,000,000 shares of the
Company's common stock at a price of $1.50 per share. The warrants expire
January 17, 2000.
6. LICENSING AGREEMENT
The Company entered into an Equipment and Software Turnkey Agreement with
Switch during August, 1996. This agreement sets forth the terms of fees and
services between Interpretel and Switch. The agreement provides for the
purchase of the Interpretel system and licensing for its use in Australia,
New Zealand, the subcontinent of India and Asia (excluding Korea and
Japan). The initial term of the license is seven years.
In the agreement, Switch contracted to purchase an Interpretel System
consisting of a computer platform and related software.
33
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
6. LICENSING AGREEMENT, CONTINUED
The agreement also provides for a licensing fee in the amount of $500,000
to be paid to Interpretel over a three-year period. Switch shall not have
an obligation to pay any fees pursuant to termination provisions in the
agreement. The licensing fees are reflected in the financial statements as
Licensing fees receivable and unearned revenue. The Company received
$200,000 of the licensing fee during the year ended August 31, 1997.
Switch agreed to pay an additional fee to Interpretel of 2% of the gross
revenues on all sales of products by Switch using the Interpretel System,
including without limitation on gross revenues derived from prepaid
applications, post-paid applications and Interactive Voice Response
Systems. The fee of 2% of gross revenues shall be paid monthly on the
fifteenth of each month based on prior month payments received by Switch.
The fee of 2% of gross revenues shall be reviewed by the parties and
increased or decreased by mutual agreement of the parties at least
annually, reviewed after the first 15,000 cards are on the Interpretel
system in Australia, and reviewed if net revenues for Switch are altered by
a change in carrier discounts and/or rates. Net revenues are defined as
gross revenues minus carrier costs only. During the year ended August 31,
1997, Switch did not pay any royalty fees to the Company. Management
believes fees are due to the Company but the amount is not yet readily
determinable; therefore no amount due is recorded in these financial
statements.
7. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 1997:
1997
----
Furniture and fixtures $ 170,415
Computer equipment 505,377
Software 112,318
---------
Total property and equipment, at cost 788,110
Less: accumulated depreciation (377,928)
---------
Net property and equipment $ 410,182
=========
34
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
8. NOTES PAYABLE
Note payable to a shareholder and officer of the
Company due on demand with interest payable at 15%
annually. Collateralized by five shares of Switch
Telecommunications Pty common stock and one share
of Interpretel (Canada) common stock. (Note 13) $ 109,071
Note payable to a shareholder and officer of the
Company due on demand with interest payable at 15%
annually. Uncollateralized. (Note 13) 13,000
Note payable to a shareholder of the Company due
and payable on demand no later than January 21, 1998.
At the option of the holder, principal and interest
can be paid in shares of common stock of Wavetech, Inc.
with an aggregate payoff value equal to the aggregate
amount of principal plus interest. Collateralized by
security interest in accounts receivable, inventory,
general intangibles, equipment, investments and
personal guarantee of corporate officers. (Note 13) 50,000
---------
Total short-term notes payable $ 172,071
=========
9. CAPITAL LEASES PAYABLE
The Company has entered into capital lease arrangements for office
furniture and equipment. The leases require monthly payments of principal
and interest.
Future lease commitments are as follows:
1998 $ 56,119
1999 35,746
2000 15,662
2001 2,484
--------
$110,011
========
35
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
10. COMMITMENTS
The Company has entered into cancelable operating agreements with a
telecommunications service provider. The Company has agreed to a $12,555
monthly minimum charge. Although there are a limited number of service
providers for the call processing systems used by the Company, management
believes that other suppliers could provide similar services on comparable
terms.
Total rent expense under all operating leases for the years ended August
31, 1997 and 1996 approximated $107,000 and $95,500, respectively.
The Company has entered into a lease agreement for office space.
Future lease commitments are as follows:
1998 $ 99,453
1999 105,056
2000 110,659
2001 116,262
2002 29,416
--------
Total $460,846
========
11. STOCKHOLDERS' EQUITY
COMMON STOCK
During the year ended August 31, 1997, the Company issued 62,342 shares of
common stock for consulting services pursuant to various agreements valued
at $37,303.
During the year ended August 31, 1997, the Company issued 361,269 deferred
shares of common stock under the 1997 Stock Incentive Plan to meet payroll
expenses in the amount of $137,877.
During the year ended August 31, 1997, the Company issued 100,000 shares in
satisfaction of a note payable of $53,639.
During the year ended August 31, 1997, the Company issued 300,000 shares of
stock in satisfaction for services performed in the previous year.
Pursuant to various consulting agreements, the Company has committed to
issue 64,578 shares of common stock as payment for services valued at
$29,000.
36
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
11. STOCKHOLDERS' EQUITY, CONTINUED
WARRANTS
During 1995 and 1994, Interpretel issued warrants for the purchase of its
common stock in connection with a note offering. On March 8, 1995, the
warrants were converted to warrants to purchase common stock of the
Company. The warrants are exercisable at a price of $1.00 per share at any
time prior to May 31, 1998. As of August 31, 1997, there were 820,885
warrants outstanding.
During 1995 and 1994, Interpretel issued warrants for the purchase of its
common stock in connection with a private placement offering of units of
common stock. At the date of the acquisition, the warrants were converted
to warrants to purchase common stock of the Company. The warrants are
exercisable at a price of $3.50 per share. The warrants expire June 30,
1998. As of August 31, 1997, there were 23,745 warrants outstanding.
Pursuant to an agreement with Switch (Note 5) the Company issued warrants
to purchase up to 2,000,000 shares of common stock at a price of $1.50 per
share.
In consideration of various consulting and loan agreements, the Company
issued warrants to purchase up to 235,000 shares of common stock at an
exercise price of between $.44 and $1.75 per share.
The total number of warrants outstanding at August 31, 1997, is 3,079,630.
STOCK OPTIONS
During the year ended August 31, 1997, the Company adopted the Wavetech,
Inc. 1997 Stock Incentive Plan. Under this plan, the Company is authorized
to issue up to 4,600,000 shares of common stock. Shares may be issued as
incentive stock options, deferred shares or restricted shares.
37
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
11. STOCKHOLDERS' EQUITY, CONTINUED
The Company issued the following options during the current year:
Option Price Options Granted
------------ ---------------
Employee Incentive stock options $ .66 - .81 1,800,000
Non-Statutory stock options .66 400,000
Non employee Director Automatic options .375 - .79 50,000
Restricted and deferred stock .35 - .94 78,935
---------
Total options issued 2,328,935
=========
Exercise Price
Number of Per Share
Shares Range
---------- --------------
Outstanding, August 31, 1995 136,250 .10 - 6.25
Issued 1,550,000 1.31 - 1.94
Canceled (450,000) 1.94
---------- ------------
Outstanding, August 31, 1996 1,236,250 .10 - 6.25
Issued 2,328,935 .35 - .94
Canceled (1,236,250) 1.387 - .175
---------- ------------
Outstanding, August 31, 1997 2,328,935 $ .35 - .94
========== ============
12. INCOME TAXES
At August 31, 1997, the Company has net operating loss carryforwards
totaling approximately $7,764,000 that may offset future income from 1997
to 2011 with varying expiration dates. No tax benefit has been recorded in
the financial statements since realization of net operating loss
carryforwards does not appear likely. The potential benefit of the net
operating loss carryforwards and the deferred tax benefit of future timing
differences under SFAS No. 109 is approximately $2,988,000. The March 8,
1995 acquisition (Note 4) resulted in a "change in control" as defined by
Internal Revenue Service Regulations. Accordingly, the utilization of the
Company's net operating loss carryforwards are deemed more likely than not
to expire unutilized. The total amount of the net operating loss
carryforwards, $7,764,000, consists of pre-acquisition losses of
approximately $3,186,000. These losses cannot be applied against income
generated in a trade or business significantly different from that which
gave rise to the carryforward.
38
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
12. INCOME TAXES, CONTINUED
The income tax benefit for the years ended August 31 is comprised of the
following amounts:
1997 1996
---- ----
Current $ -0- $ -0-
Deferred
Federal (429,000) (628,000)
State (28,000) (67,000)
-------- --------
(457,000) (695,000)
Valuation allowance 457,000 695,000
-------- --------
Total tax benefit $ -0- $ -0-
======== ========
The Company's tax benefit differs from the benefit calculated using the
federal statutory income tax rate for the following reasons:
1997 1996
---- ----
Statutory tax rate (35.0%) (35.0%)
State income taxes (9.0%) (9.0%)
Amortization of organization costs 7.0% 7.0%
Release of valuation allowance 37.0% 37.0%
----- -----
Effective tax rate .0% .0%
===== =====
The components of the net deferred tax asset are as follows:
1997
----
Deferred tax asset:
Amortization of organization costs $ (120,000)
Net operating loss carryforward (2,868,000)
-----------
(2,988,000)
Valuation allowance 2,988,000
-----------
$ -0-
===========
39
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
13. RELATED PARTY TRANSACTIONS
The Company has cancelable operating agreements with a telecommunications
service provider who is a shareholder of common stock of the Company. The
Company has agreed to a $12,555 monthly minimum charge with the service
provider. The current and future contracts with the service provider have
been and are anticipated to be at market rates. The Company also purchased
computer equipment and software from this provider valued at $378,009.
During the year ended August 31, 1997, an officer and shareholder advanced
$109,071 to the Company which is reflected in notes payable. The Company
pledged as collateral the five shares of Switch common stock and one share
of Interpretel (Canada) common stock (Note 8). As of November 30, 1997, the
collateral has been released and the note payable is converted to shares of
An officer and shareholder advanced $13,000 to the Company which is
reflected in notes payable (Note 8).
A shareholder of the Company advanced $50,000 to the Company which is
reflected in notes payable (Note 8). The Company pledged as collateral a
security interest in accounts receivable, inventory, general intangibles,
equipment, instruments and personal guarantees of corporate officers. As of
November 30, 1997 the collateral has been released and the shares converted
to shares of common stock of the Company.
14. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the year ended August 31, 1997, the Company entered into capital
leases in the amount of $53,783 to purchase office equipment.
During the year ended August 31, 1997, the Company issued 100,000 shares of
common stock in satisfaction of a note payable of $53,639.
During the year ended August 31, 1996, the Company entered into capital
leases in the amount of $108,213 to purchase office equipment.
During the year ended August 31, 1996, the Company entered into an
agreement with Switch to exchange an equity interest in the Company for an
equity interest in Switch (Note 4). The Company issued 1,544,110 shares of
its common stock in exchange for 5 shares of the common stock of Switch.
Supplemental disclosure of cash flow information:
1997 1996
---- ----
Cash paid during the period for:
Income taxes $ 50 $ 50
======= =======
Interest $20,454 $39,327
======= =======
40
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------
15. SUBSEQUENT EVENTS
Subsequent to August 31, 1997, the Company engaged in merger negotiations
with a privately owned company. As of the date of this report, the Company
has not entered into a binding agreement.
16. GOING CONCERN
For the year ended August 31, 1997, the Company sustained a loss of
$1,629,285. The Company currently lacks adequate funds to finance its
ongoing working capital needs.
The Company is currently seeking to secure adequate sources of funds to
finance its immediate and long-term working capital needs. Such sources may
include a private placement of equity by the Company, commercial financing,
or a strategic alliance or other business combination. The Company does
not currently have any agreements, binding or non-binding, with respect to
any such above stated arrangements. Further, there can be no assurance that
the Company will be able to secure adequate sources of funds and its
inability to do so would result in a material adverse affect upon the
Company's business and results or operations. In addition, if the Company
succeeds in acquiring additional financing, such efforts may result in
additional dilution to the Company's stockholders; impose restrictions upon
the Company's ability to incur additional debt, pay future dividends, enter
into future business combinations or other restrictions upon the Company to
act in a manner which its Board of Directors may deem advisable; or result
in a change in control of the Company.
The ability of the Company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
41
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
All directors hold office until the next annual meeting of stockholders of
the Company and thereafter until their successors are chosen and qualified. All
officers hold office at the selection and choice of the Board of Directors of
the Company.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company are as follows:
Name Age Position Held with Company
---- --- --------------------------
Terence E. Belsham 61 Chairman of the Company's Board of Directors
Gerald I. Quinn 53 President, Chief Executive Officer, and a
member of the Company's Board of Directors
Lydia M. Montoya 44 Chief Financial Officer
Richard P. Freeman 40 Vice President, Investor Relations and Product
Development, and a member of the Company's Board
of Directors
Terrence H. Pocock 65 Director
TERENCE E. BELSHAM was a co-founder of Interpretel. Since it was founded in
1992 until May 1996, Mr. Belsham was the President and CEO of Interpretel. Mr.
Belsham has also served as the Company's Chairman of the Board since March 1995.
From 1989 until 1992, Mr. Belsham was President of Intran Systems, Inc., an
electronics manufacturing Company. From 1983 to 1989, Mr. Belsham owned Sinclair
Associates, a real estate marketing and management firm. From 1965 to 1983, Mr.
Belsham was President and owner of Lackie Manufacturing Company, Ltd., a jewelry
manufacturing company in Canada. Mr. Belsham graduated from the business school
of the University of Western Ontario. Mr. Belsham has been active in Rotary
International, the Canadian Jeweler's Association and the 24 Karat Club.
42
<PAGE>
GERALD I. QUINN has been the President of Interpretel (Canada) Inc., a
subsidiary of the Company, since 1995. In May 1996, Mr. Quinn became the
President, Chief Executive Officer and a Director of the Company. From 1986 to
1994, Mr. Quinn was Vice President of University Affairs and Development at the
University of Guelph, which is one of Canada's leading teaching and research
universities. While at the University of Guelph, Mr. Quinn's responsibilities
included marketing, image development, constituent relations and media
relations, including systems development, telemarketing and the development of
affinity programs. From 1975 until 1986, Mr. Quinn held many senior
administrative positions with Canada's largest college of applied arts and
technology, including positions relating to the development and
commercialization of technology and multimedia based interactive learning
programs. Since 1984, Mr. Quinn has served as a consultant to Cableshare
Interactive Technology, Inc., a Canadian TSE listed public company that operates
in the interactive television industry. Mr. Quinn has been a director of
Cableshare since 1993 and chairs its board committee on mergers and
acquisitions. Mr. Quinn is active in numerous civic and professional
organizations and has been recognized for his work in marketing, sales,
promotion and public relations by various trade organizations. Mr. Quinn has two
arts degrees with majors in English, Economics and Political Science. Mr.
Quinn's sister is married to Terrence H. Pocock.
LYDIA M. MONTOYA joined the Company in September 1996 as its Chief
Financial Officer. From May 1994 until September 1996, Ms. Montoya was
self-employed as a Certified Public Accountant. Ms. Montoya was Controller of
Ugly Duckling Corporation, a publicly traded company ("Ugly Duckling") from
November 1992 to May 1994. Ugly Duckling is an operator of nine used car
dealerships which also finance and service retail installment contracts
generated from the sale of used cars by its dealerships. From July 1987 to
October 1992, Ms. Montoya was Director of Partnership Accounting for Verde
Investments, Inc., a real estate development company that constructed, operated
and sold over 5,000 apartment units. Ms. Montoya began her career with Coopers &
Lybrand, L.L.P. Ms. Montoya has a B.S. in Accounting from the University of
Arizona and a B.S. in Sociology from Arizona State University.
RICHARD P. FREEMAN was a co-founder of Interpretel and has served as
Interpretel's Vice President since 1993 and as a Director of the Company since
March 1995. Prior to joining Interpretel, Mr. Freeman was a principal in several
entrepreneurial companies located in Arizona, which were primarily involved in
the tourism and travel industries. Those companies included Desert Divers, a
scuba retail and boat charter company, and Vacation, Etc., a tour and travel
company which focused on corporate, leisure and adventure travel, wholesale tour
operations and escorted senior travel. Mr. Freeman has also served as a
consultant to several travel-related organizations, including the Business Radio
Network, a national network. Mr. Freeman holds a Bachelor of Arts degree from
the University of Arizona and is active in various civic and community
organizations.
43
<PAGE>
TERRENCE H. POCOCK has been a Director the Company since March 1997. Mr.
Pocock is the Vice Chairman of Cableshare Interactive Technology, Inc., a
Canadian public company he founded in 1973 that operates in the interactive
television industry. Currently, Mr. Pocock is involved in technology oversight
for the board of directors at Cableshare. From its inception in 1973 until 1992,
Mr. Pocock was the CEO of Cableshare. While at Cableshare, Mr. Pocock was
involved in product development and was responsible for obtaining several
patents on interactive television technology. Mr. Pocock holds B.A., B Comm. and
MBA degrees from various Canadian universities and is a graduate of the Canadian
Royal Military College. Mr. Pocock is married to the sister of Gerald I. Quinn.
ITEM 10. EXECUTIVE COMPENSATION
(A) CASH COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer (the "Named Executive Officer"), for services rendered in all
capacities to the Company during each of the fiscal years ended August 31, 1997,
1996 and 1995. None of the Company's other employees received in excess of
$100,000 in compensation during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
----------------------------------- -----------------------
Restricted Securities
Name and Fiscal Bonus Other Annual Stock Underlying
Principal Position Year Salary($) Awards($) Compensation Awards($) Options(#)
- ------------------ ---- --------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gerald I. Quinn 1997 $85,000(1) $ -0- $-0- -0- 800,000(2)
President/CEO
1996 $85,000 -0- -0- $203,637 500,000
1995 $58,000 -0- -0- -0- 300,000
</TABLE>
(1) Includes the fair market value of 8,853 shares of Common Stock, for which
Mr. Quinn elected to receive deferred shares pursuant to the Company's 1997
Stock Option Plan in lieu of a portion of his annual base salary for
services rendered. The aggregate fair market value of these shares at the
expiration of the applicable deferral periods equalled $34,163.
(2) Effective January 31, 1997, the exercise price with respect to an aggregate
of 800,000 options to purchase Common Stock previously granted to Mr. Quinn
was amended in connection with the cancellation of such previously
outstanding options in exchange for a new grant of an equal number of
options under the Company's 1997 Stock Incentive Plan. The exercise price
of the new options is equal to the fair market value of the Company's
common stock on the date of grant.
44
<PAGE>
The following table sets forth certain information concerning each exercise
of stock options during the year ended August 31, 1997 by the named Executive
Officer and the aggregated fiscal year-end value of the unexercised options of
such Named Executive Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTIONS VALUE AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End(#) at Fiscal Year End($)
Shares Acquired Value -------------------------- --------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald I. Quinn -0- $0 800,000 -0- $0 $0
</TABLE>
The following table sets forth information concerning individual grants of
stock options made to the Named Executive Officer during the last completed
fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
Percent Of Total
Options Granted
Options To Employees In Exercise Expiration
Name Granted(#) Fiscal Year Price ($/Sh) Date
---- ---------- --------------- ------------ -----------
Gerald I. Quinn 800,000 45% $0.66 May 2006
(1) In January of 1997, the Company's stock price had decreased significantly
from the date these options were granted. In addition, the Company's Board
of Directors approved the Company's 1997 Stock Incentive Plan. The
Company's Board of Directors determined that these options were no longer
providing appropriate incentives to the officers of the Company due to the
significant decrease in market price of the Company's Common Stock.
Accordingly, in January of 1997, the Company agreed to cancel these options
and issue an equal number of options under the 1997 Stock Incentive Plan to
these officers at an exercise price per share equal to the closing bid
price of the Company's Common Stock on the date of grant.
(B) COMPENSATION PURSUANT TO PLANS
None.
(C) COMPENSATION OF DIRECTORS
All Directors are reimbursed for their reasonable out-of-pocket expenses
incurred in connection with attendance at Board meetings. Directors who are
employees of the Company do not receive compensation for service on the Board,
other than their compensation as employees. In March 1997, the Company adopted
the 1997 Stock Incentive Plan. Under the Plan, members of the Board of Directors
45
<PAGE>
of the Company, who are not employees of the Company or its subsidiaries, will
receive an option to purchase 10,000 shares of the Company's Common Stock upon
their initial election to the Board and thereafter receive an annual grant of an
additional 10,000 options. The options vest one year from the respective date of
grant and terminate upon the earlier of 10 years from the date of grant or 24
months after the Director ceases to be a member of the Board.
The Company lacked sufficient funds to compensate its executives and
employees and, therefore, entered into agreements with such executives and
employees to compensate them with a number of shares of the Company's Common
Stock with a fair market value on the last day of a regular pay period equal to
each respective employee's salary plus a ten percent premium as consideration
for entering into such agreements. The shares were issued as Deferred Shares
pursuant to the Company's 1997 Stock Incentive Plan.
(D) EMPLOYMENT CONTRACTS
In May 1996, the Board of Directors approved a two-year employment
agreement with Gerald I. Quinn for services as President and Chief Executive
Officer. The agreement requires Mr. Quinn to devote his full time to the Company
and provides for a salary of $85,000 annually. Mr. Quinn is also entitled to
receive any fringe benefits generally extended to the employees of the Company,
including medical, disability and life insurance. Mr. Quinn also has the right
to receive certain sales commissions from the Company under his agreement.
In May 1996, the Board of Directors approved a one-year employment
agreement with Terence E. Belsham for services as Chairman. In September 1996,
the agreement was amended to eliminate Mr. Belsham's responsibilities as Chief
Financial Officer because the Company retained Lydia Montoya to serve as its
Chief Financial Officer. The agreement requires Mr. Belsham to devote his full
time to the Company and provides for a salary of $85,000 annually. Mr. Belsham
is also entitled to receive any fringe benefits extended to the employees of the
Company, including medical, disability and life insurance. In August 1997, Mr.
Belsham's contract was terminated, as per conditions of the agreement, due to
illness.
In June 1996, the Board of Directors approved a one-year employment
agreement with Richard P. Freeman for services as Vice President. The agreement
provides for a base salary of $72,000 per year. The agreement requires Richard
P. Freeman to devote his full time to the Company. In June 1997, Mr. Freeman's
contract was renewed under the same terms.
After their initial terms, each of the above-described agreements continue
at will, terminable with/on ninety days written notice by either party to the
other. The agreements terminate upon the occurrence of any of the following
events: (i) if the employee voluntarily terminates; (ii) if the employee dies;
(iii) if the employee is unable to properly discharge his obligations under his
employment agreement due to illness, disability or accident for three
consecutive months or for a period aggregating six months in any continuous
twelve months; (iv) if the employee is convicted of a crime of moral turpitude
by a court of competent jurisdiction; (v) if the employee is convicted of a
felony, except to the extent that the charge arises from an act taken at the
46
<PAGE>
board's direction; or (vi) if the employee is grossly negligent or guilty of
willful misconduct in connection with the performance of his duties, which
negligence or misconduct, if curable, is not cured within fifteen days of a
notice of cure by the Board or the Chairman of the Board. Each of the
above-described agreements provides that the employee shall not compete with the
Company during the term of the agreement and for a period of one year
thereafter.
In the event of any Corporate Transaction or Change of Control of the
Company (each as defined in the Plan), the Common Stock at the time subject to
each outstanding option, but not otherwise vested, shall automatically vest in
full, so that each such option shall, immediately prior to the effective date of
such corporate transaction or change of control, become fully exercisable for
all of the Common Shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested Common Stock.
(E) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
Directors, and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, Directors and greater than 10% stockholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
In 1997, Messrs. Belsham, Freeman and Quinn each failed to make timely one
report on Form 4 of a change in the exercise price of certain stock options
granted in 1996 and Ms. Montoya failed to timely make one report on Form 4 of
the grant of certain stock options. In addition Mr. Pocock failed to timely file
an initial statement of beneficial ownership on Form 3 and one report on Form 4
of the grant of certain stock options.
(F) COMPENSATION COMMITTEE REPORT ON REPRICING
In January 31, 1997, the Board, on the recommendation of the Compensation
Committee, canceled the options granted to Gerald I. Quinn, President and CEO,
under his Services Agreement dated May 21, 1996. Under the May 21, 1996 Services
Agreement, Quinn was to receive options on 500,000 Common Shares with an
exercise price of $1.75 a share and, from a former Agreement, options on 300,000
Common Shares at an exercise price of $1.3875 per share. On the same date,
January 31, 1997, Mr. Quinn was granted a new option plan within the Company's
1997 Stock Incentive Plan of 800,000 Common Shares at an exercise price of $0.66
cents a share. Mr. Quinn's prior options were not within the Stock Incentive
Plan of the Company, and as such, did not enable him to take advantage of
certain favorable tax provisions, and in addition, had an exercise price which
the Board believed did not provide an appropriate incentive to Mr. Quinn. It was
felt that Mr. Quinn as President and CEO needed to have a reasonable incentive
to make Wavetech a financially viable operation for the benefit of the
shareholders. Mr. Quinn was not a significant shareholder and was not being paid
a large salary. Consequently, the Board felt the change in the option plan for
Quinn was appropriate.
47
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 28, 1997 certain information
with regard to the record and beneficial ownership of the Company's Common Stock
by (i) each shareholder beneficially owning 5% or more of the Company's
outstanding Common Stock, (ii) each Director individually, (iii) the Named
Executive Officer and (iv) all Officers and Directors of the Company as a group:
Name and Address of
Beneficial Owner Shares Owned Percent of Class
------------------- ------------ ----------------
Terence E. Belsham 1,187,876 (1) 7.7%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711
Richard P. Freeman 1,195,192 (2) 7.8%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711
Gerald I. Quinn 1,346,083 (3) 8.3%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711
Terrence H. Pocock 298,096 (4) 1.9%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711
Switch Telecommunications Pty Ltd 3,544,110 (5) 20.7%
55 Mentmove Ave.
Rosebery, New South Wales 2018
Australia
ALL OFFICERS AND DIRECTORS AS
A GROUP (4 IN NUMBER) 4,027,247 (1)(2)(3)(4) 23.7%
- ----------
(1) Includes 200,000 Common Shares issuable in connection with options to
purchase Common Stock. The options are exercisable at $0.81 per share and
have fully vested. At August 31, 1997, 200,000 of the options are
exercisable.
(2) Includes 200,000 Common Shares issuable in connection with options to
purchase Common Stock. The options are exercisable at $0.81 per share and
have fully vested. At August 31, 1997, 200,000 of the options are
exercisable.
(3) Includes 800,000 Common Shares issuable in connection with options to
purchase Common Stock. The options are exercisable at $0.66 per share and
have fully vested. At August 31, 1997, 800,000 share options are
exercisable. Includes 333,593 Common Shares, issuable upon conversion of
convertible note as of November 28, 1997.
(4) Includes 10,000 options granted to a non-employee Board member. The options
are exercisable at $0.37 and have fully vested. At August 31, 1997, 10,000
of the options are exercisable. Includes 288,096 Common Shares held by this
holder's spouse and son, issuable upon conversion of convertible notes as
of November 28, 1997, of which he expressly disclaims beneficial ownership.
(5) Includes a warrant to purchase 2,000,000 Common Shares at $1.50 per share.
48
<PAGE>
(C) CHANGE IN CONTROL
On March 8, 1995, the Company entered into an agreement with Interpretel,
Inc. pursuant to which the Company agreed to issue 6,000,000 shares of its
Common Stock in exchange for 100% of the outstanding 1,532,140 shares of Common
Stock of Interpretel. The transaction resulted in the former shareholders of
Interpretel, Inc. owning approximately 80% of the outstanding shares of the
Company. In accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," the Acquisition has been accounted for as a reverse
acquisition with Interpretel, Inc. deemed to be acquiring entity of the Company.
The Common Shares in connection with the Acquisition were valued at $2,000,000,
which is based on the fair market value of the Company's only major asset,
undeveloped land located in Ohio.
The Acquisition agreement also provides that during the three year period
following the March 8, 1995 closing, former shareholders of Interpretel can
receive an additional 7,500,000 Common Shares of the Company through an
"earn-out" based upon before tax net profit. During the two year period
following closing, former shareholders of Interpretel can earn up to 3,750,000
Common Shares of the Company for every $0.50 net profit before taxes, and an
additional 3,750,000 Common Shares of the Company for every $1.00 of cumulative
total net profit before taxes. During the third year following closing, any
shares not previously issued pursuant to this agreement can be earned at $1.50
net profit before taxes per share. These additional shares will not be
considered in recording the Acquisition transaction until such time as the
earnings targets have been met.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 21, 1997, the Company granted a warrant to Switch
Telecommunications Pty Ltd to purchase up to 2,000,000 shares of the Company's
Common Stock at a price of $1.50 per share, in exchange for consideration of
$2,000,000. The Company also licensed Switch to use certain Company technology
in Australia and various other Asian countries.
During the year ended August 31, 1997, the Company became indebted to
Messrs. Quinn and Freeman, each of which is an officer and director of the
Company. The Company became indebted to Mr. Gerald I. Quinn, the Chief Executive
Officer, for $109,071 plus accrued interest of $3,809; and to Mr. Richard P.
Freeman, Vice President, for $13,000 plus accrued interest of $585. The loans
were made in the ordinary course of business and were made on substantially the
same terms, including rates and collateral, as those prevailing at the time for
comparable transactions with other persons.
49
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The Financial Statements Listed in the Index Set Forth In Item 7 of
This Form 10-Ksb Are Filed As Part Of This Report.
(a)(2) Exhibits
Sequential
Number Description Page Number
- ------ ----------- -----------
3.1 Certificate of Incorporation of the Company *
3.2 By-Laws of the Company *
10.30 Employment Contract dated May 21, 1996, between the Company **
and Terence E. Belsham, Chairman and Chief Financial Officer
10.31 Employment Contract dated June 17, 1996 between the Company **
and Richard P. Freeman, Vice President, Product Development &
Strategic Planning
10.32 Employment Contract dated May 21, 1996 between the Company **
and Gerald I. Quinn, President and Chief Executive Officer
22 Subsidiaries of the Registrant ***
24 Consent of Addison, Roberts & Ludwig ***
27 Financial Data Schedule ***
- ----------
* Incorporated by reference from the like numbered exhibit to the
Company's Form 10-QSB for the Quarter ended February 28, 1997.
** Incorporated by reference from the like numbered exhibit to the Company's
Form 10-KSB for the Fiscal year ended August 31, 1996.
*** Filed herewith.
(b) Reports on Form 8-K Filed During the Last Quarter of the Period
Covered By This Report are as Follows:
None.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Wavetech, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAVETECH, INC.
Dated: December 12, 1997 By: /s/ Gerald I. Quinn
-------------------- ------------------------------
GERALD I. QUINN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, DIRECTOR
(Principal Executive Officer)
Dated: December 12, 1997 By: /s/ Lydia M. Montoya
-------------------- ------------------------------
LYDIA M. MONTOYA, CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Dated: December 12, 1997 By: /s/ Terence E. Belsham
-------------------- ------------------------------
TERENCE E. BELSHAM, CHAIRMAN OF THE BOARD
Dated: December 12, 1997 By: /s/ Richard P. Freeman
-------------------- ------------------------------
RICHARD P. FREEMAN, DIRECTOR
Dated: December 12, 1997 By: /s/ Terrence H. Pocock
-------------------- ------------------------------
TERRENCE H. POCOCK, DIRECTOR
51
EXHIBIT 22
Subsidiaries of Registrant
State of Incorporation % of Ownership
Subsidiary or Jurisdiction by Wavetech, Inc.
- -------------------------- ---------------------- -----------------
International Environment
Services Corporation Delaware 100%
Interpretel (Canada) Inc. Province of Ontario 100%
Interpretel, Inc. Arizona 100%
Telplex International
Communications, Inc. Arizona 100%
EXHIBIT 24
[LETTERHEAD OF ADDISON, ROBERTS & LUDWIG, P.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated December 4, 1997, related to
the consolidated financial statements of Wavetech, Inc. and Subsidiaries
included in or made a part of this Form 10-KSB.
/s/ Addison, Roberts & Ludwig, P.C.
-----------------------------------
Addison, Roberts & Ludwig, P.C.
Tucson, Arizona
December 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS, FOR THE
YEAR ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 13,329
<SECURITIES> 0
<RECEIVABLES> 176,273
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 199,327
<PP&E> 788,110
<DEPRECIATION> (377,928)
<TOTAL-ASSETS> 3,140,796
<CURRENT-LIABILITIES> 718,660
<BONDS> 0
0
0
<COMMON> 15,077
<OTHER-SE> 2,143,167
<TOTAL-LIABILITY-AND-EQUITY> 3,140,796
<SALES> 865,571
<TOTAL-REVENUES> 865,571
<CGS> 679,930
<TOTAL-COSTS> 679,930
<OTHER-EXPENSES> 1,796,533
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,893
<INCOME-PRETAX> (1,629,285)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,629,285)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
