SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e) (2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11
(c) or sec.240.14a-12
WAVETECH INTERNATIONAL, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid: $
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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WAVETECH INTERNATIONAL, INC.
5210 E. WILLIAMS CIRCLE, SUITE 200
TUCSON, ARIZONA 85711
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 18, 1998
To the Stockholders of Wavetech International, Inc.:
The Annual Meeting of Stockholders (the "Annual Meeting") of Wavetech
International, Inc., a Nevada corporation (the "Company"), will be held at the
Marriott Courtyard, Williams Center, 201 South Williams Boulevard, Tucson,
Arizona 85711, Monday, May 18, 1998 at 10:30 a.m., Mountain Standard Time, for
the following purposes:
1. To consider and act upon a proposal to amend the Company's Articles
of Incorporation to effect a one-for-six reverse stock split of the Company's
presently issued and outstanding shares of Common Stock (the "Reverse Split");
2. To consider and vote upon a proposal to approve the issuance of up
to 85,000,000 shares (the "Merger Shares") of the Company's authorized but
unissued Common Stock. Such issuance shall result in a change in control of the
Company pursuant to that certain Reorganization Agreement and Plan of Merger,
dated January 5, 1998 (the "Reorganization Agreement"), by and among the
Company, Wavetech Interim, Inc., a wholly-owned subsidiary of the Company
("Interim"), and Imagitel, Inc., a closely held Nevada corporation ("Imagitel"),
pursuant to which, among other things, Interim will merge with and into Imagitel
(the "Merger") which shall be the surviving corporation and which shall become a
wholly-owned subsidiary of the Company. As a result of the Merger, each Imagitel
shareholder shall be entitled to receive, without any action on his part, 365
shares of the Common Stock of Wavetech ("Wavetech Common Stock") for each share
of the Common Stock of Imagitel ("Imagitel Common Stock") issued and outstanding
immediately prior to the effective time of the Merger, as adjusted to reflect
changes to the assumed working capital ratio between Imagitel and the Company
(the "Conversion Ratio"), and the actual number of shares of common stock of
Wavetech outstanding at the consummation of the Merger, all as more fully set
forth in the accompanying Proxy Statement and in the Reorganization Agreement, a
copy of which is attached thereto as Exhibit II;
3. To elect five directors to the Board of Directors if Proposal No. 2
is NOT adopted; and
4. To transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
APPROVAL BY THE STOCKHOLDERS OF THE ISSUANCE BY THE COMPANY OF THE
MERGER SHARES IS CONTINGENT UPON APPROVAL OF THE REVERSE SPLIT. HOWEVER,
APPROVAL OF THE REVERSE SPLIT IS NOT CONTINGENT UPON APPROVAL OF THE ISSUANCE OF
THE MERGER SHARES. IN ADDITION, APPROVAL OF THE ISSUANCE OF THE MERGER SHARES
SHALL ALSO CONSTITUTE APPROVAL OF THE ELECTION TO THE BOARD OF DIRECTORS OF FOUR
PERSONS DESIGNATED BY IMAGITEL.
The Board of Directors of the Company unanimously approved the Merger
proposal and has determined that the Merger is fair to, and in the best
interests of, the Company and its stockholders. The Board of Directors has been
advised by Kaufman Brothers, Inc. that, in its opinion, the terms of the
Reorganization Agreement and the transactions contemplated thereby, including
the issuance of the Merger Shares, are fair, from a financial point of view, to
the Wavetech stockholders, as of the date of such opinion. Accordingly, the
Board unanimously recommends that you vote FOR approval of the Reorganization
Agreement and the Merger.
The Board also unanimously recommends that you vote FOR approval of the
Reverse Split.
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Only Stockholders (as defined) of record at the close of business on
March 20, 1998 (the "Record Date") are entitled to notice of and to vote at the
Annual Meeting. Holders of the Company's $.001 par value Common Stock
("Stockholders") as of the Record Date are entitled to vote on all of the above
proposals. Shares can be voted at the meeting only if the holder is present or
represented by proxy. A list of Stockholders entitled to vote at the Annual
Meeting will be available for inspection at the Annual Meeting and will be
available for inspection at the offices of Wavetech International, Inc., 5210 E.
Williams Circle, Suite 200, Tucson, Arizona 85711 during ordinary business hours
for ten days prior to the meeting.
Details of the Reverse Split, the Merger and other important
information concerning the Company and Imagitel are more fully described in the
accompanying Proxy Statement. Please give this information your careful
consideration.
By Order of the Board of Directors,
/s/ Richard Freeman
------------------------------
Richard Freeman
Secretary
Tucson, Arizona
, 1998
- ---------------
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO ATTEND THE MEETING, IT IS IMPORTANT THAT YOUR SHARES BE
REPRESENTED AT THIS MEETING. TO ASSURE YOUR REPRESENTATION AT THE MEETING,
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
A PERSON GIVING HIS OR HER PROXY HAS THE POWER TO REVOKE IT IN THE MANNER
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN
VOTED AT THE MEETING.
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PROXY STATEMENT
OF
WAVETECH INTERNATIONAL, INC.
5210 E. WILLIAMS CIRCLE, SUITE 200
TUCSON, ARIZONA 85711
WAVETECH ANNUAL MEETING OF STOCKHOLDERS
-------------------------
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Wavetech International, Inc., a Nevada corporation,
formerly known as Wavetech, Inc., a New Jersey corporation (referred to herein
together with such predecessor, as "Wavetech" or the "Company"), of proxies for
use at the Annual Meeting (the "Annual Meeting") of Stockholders (defined below)
to be held on May 18, 1998 at 10:30 a.m., Mountain Standard Time. The Annual
Meeting will be held at the Marriott Courtyard, Williams Center, 201 South
Williams Boulevard, Tucson, Arizona 85711.
This Proxy Statement and the accompanying form of proxy are being first
mailed to Stockholders on or about __________, 1998. The Stockholder giving the
proxy may revoke it at any time before it is exercised at the meeting by: (i)
delivering to the Secretary of the Company a written instrument of revocation
bearing a date later than the date of the proxy; (ii) duly executing and
delivering to the Secretary a subsequent proxy relating to the same shares; or
(iii) attending the meeting and voting in person (attendance at the meeting will
not in and of itself constitute revocation of a proxy). Any proxy which is not
revoked will be voted at the Annual Meeting in accordance with the Stockholder's
instructions. If a Stockholder returns a properly signed and dated proxy card
but does not mark any choices on one or more items, his or her shares will be
voted in accordance with the recommendations of the Board of Directors as to
such items. The proxy card gives authority to the proxy holders to vote shares
in their discretion on any other matter properly presented at the Annual
Meeting.
Proxies will be solicited from the Company's Stockholders by mail. The
Company will pay all expenses in connection with the solicitation, including
postage, printing and handling, and the expenses incurred by brokers,
custodians, nominees and fiduciaries in forwarding proxy material to beneficial
owners. It is possible that directors, officers and regular employees of the
Company may make further solicitations personally or by telephone, telegraph or
mail. Directors, officers and regular employees of the Company will receive no
additional compensation for any such further solicitation.
Only holders (the "Stockholders") of the Company's Common Stock, $.001
par value (the "Common Stock"), at the close of business on March 20, 1998 (the
"Record Date"), are entitled to notice of, and to vote at, the Annual Meeting.
On the Record Date, there were 16,203,095 shares of Common Stock outstanding.
Each share of Common Stock is entitled to one vote on each matter to be
considered at the Annual Meeting. A majority of the shares of Common Stock
issued and outstanding constitutes a quorum for the transaction of business at
the Annual Meeting.
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The affirmative vote of holders of a majority of the outstanding shares
of Common Stock entitled to vote and present in person or by proxy at the Annual
Meeting is required for approval of each of the matters proposed to be acted
upon at the Annual Meeting (the "Proposals"), provided that the number of shares
present in person or by proxy constitutes a quorum. It is expected that shares
held by officers and directors of the Company, which in the aggregate represent
approximately 15.6% of the shares of Common Stock outstanding as of the Record
Date, will be voted in favor of each of the Proposals. Votes that are withheld
will have the effect of a negative vote. Abstentions may be specified on all
Proposals. Abstentions are included in the determination of the number of shares
represented for a quorum. Abstentions will have the effect of a negative vote on
a Proposal. Broker non-votes are not counted for purposes of determining whether
a quorum is present or whether a Proposal has been approved. Proxies will be
tabulated by the Company with the assistance of the Company's transfer agent.
The Company will, in advance of the Annual Meeting, appoint one or more
Inspectors to count all votes and ballots at the Annual Meeting and make a
written report thereof.
This Proxy Statement relates, among other things, to the issuance by
the Company of up to an aggregate of approximately 85,000,000 shares (the
"Merger Shares") of its authorized but unissued Common Stock which will result
in a change of control of the Company. All of the Merger Shares will be issued
in connection with the proposed merger (the "Merger") of Wavetech Interim, Inc.,
a Nevada corporation and wholly owned subsidiary of the Company formed solely
for such purpose ("Interim"), with and into Imagitel, Inc., a closely held
Nevada corporation (together with its operating subsidiaries, "Imagitel"),
pursuant to a Reorganization Agreement, dated January 5, 1998 (the
"Reorganization Agreement"), among Wavetech, Interim and Imagitel. As a result
of the Merger, Imagitel shall become a wholly owned subsidiary (the "Surviving
Sub") of Wavetech and Wavetech shall change its corporate name to "Imagitel,
Inc." (the "Reorganized Parent"). In the Merger, each shareholder of Imagitel
shall receive approximately 365 shares of authorized but previously unissued
Wavetech Common Stock, as adjusted to reflect changes to the assumed working
capital ratio between Imagitel and the Company (the "Conversion Ratio").
Stockholders of the Company shall not be entitled to receive any cash or
securities in connection with the transactions contemplated by the
Reorganization Agreement. As a result of the Merger, shareholders of Imagitel
Common Stock shall hold, in the aggregate, approximately 72% of Wavetech Common
Stock to be outstanding thereafter (84% on a fully diluted basis assuming the
exercise of outstanding options held by Imagitel shareholders). In addition, the
management and consolidated business of the Reorganized Parent will be
significantly changed from that of the Company's present management and
consolidated business operations.
Consummation of the Merger is conditioned upon, among other things,
approval by the Stockholders and effectuations of the Reverse Split (defined
herein) also to be voted upon at the Annual Meeting. However, the Board of
Directors' recommendation to the Stockholders as to the approval of the Reverse
Split Proposal is not conditioned upon the approval of the Merger Proposal.
All information contained in this Proxy Statement with respect to the
Company and Interim has been provided by the Company, and all information
provided with respect to Imagitel has been provided by Imagitel.
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TABLE OF CONTENTS
SUMMARY.......................................................................8
General....................................................................8
The Annual Meeting.........................................................9
Required Vote.............................................................10
Recommendations of the Boards of Directors................................10
Fairness Opinions With Respect to the Merger..............................10
The Parties to the Merger.................................................10
The Merger................................................................11
Termination of the Merger Agreement.......................................12
Fees and Expenses.........................................................12
Amendment of the Reorganization Agreement; Waiver of Conditions...........12
Federal Income Tax Consequences...........................................12
Exchange of Shares........................................................13
Accounting Treatment of the Merger........................................13
Business and Management After the Merger..................................13
Resale of Wavetech Common Stock to be Issued in the Merger................14
Risk Factors..............................................................14
Dissenters Rights of Appraisal............................................14
Comparative Rights of Wavetech Stockholder and Stockholders of the
Reorganized Parent.......................................................14
Interest of Certain Persons in the Merger.................................15
Market Price and Dividend of Wavetech Common Stock........................15
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Summary Historical Consolidated Financial Data............................16
Summary Unaudited Pro Forma Condensed Combined Financial Data.............17
Reverse Stock Split.......................................................18
Exchange of Shares; No Fractional Shares..................................18
RISK FACTORS.................................................................20
I. Overview............................................................20
II. Risks Associated With Wavetech......................................20
III. Risks Associates With Imagitel......................................32
IV. Risks Associated With the Merger and the Reorganized Parent.........43
PROPOSAL NO. ONE: AMENDMENT OF ARTICLES OF INCORPORATION
TO EFFECT REVERSE STOCK SPLIT................................................45
Number Of Shares Of Capital Stock.........................................46
Loss and Book Value of Capital Stock Per Common Share.....................46
Exchange of Shares; No Fractional Shares..................................47
Purposes of the Reverse Split and Effective Increase in
Authorized Shares........................................................47
Certain Federal Income Tax Consequences...................................50
Voting Requirements.......................................................50
PROPOSAL NO. TWO: APPROVAL OF ISSUANCE OF WAVETECH COMMON STOCK
PURSUANT TO REORGANIZATION AGREEMENT AND PLAN OF MERGER....................51
RECOMMENDATION OF THE WAVETECH BOARD OF DIRECTORS AND REASONS
FOR THE MERGER...............................................................51
General...................................................................51
Description of Imagitel, Inc..............................................51
Effective Time and Effect of the Merger...................................51
Recommendation of Wavetech Board of Directors.............................54
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BUSINESS OF REORGANIZED PARENT...............................................55
THE MERGER...................................................................61
General....................................................................61
Effective Time and Effect of the Merger....................................61
Opinion of Kaufman Bros., Inc..............................................62
Conditions to Consummation of the Merger...................................63
Representations, Warranties and Covenants..................................64
Employee Benefit Plans and Stock Options...................................65
Warrants...................................................................66
Termination of the Merger Agreement........................................66
Fees and Expenses..........................................................66
Amendment of the Reorganization Agreement; Waiver of Conditions............66
Federal Income Tax Consequences............................................67
Accounting Treatment of the Merger.........................................68
Resale of Wavetech Common Stock to be Issued in the Merger.................68
Comparative Rights of Wavetech Stockholders and Stockholders of the
Reorganized Parent........................................................68
Dissenters Rights of Appraisal.............................................69
Certain Material Contracts or Transactions.................................69
Interest of Certain Persons in the Merger..................................69
Regulatory Matters.........................................................69
Voting Requirements........................................................70
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION...........................71
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DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS OF
THE COMPANY..................................................................76
Directors, Director Nominees and Officers..................................76
Committees of the Board of Directors.......................................79
Meetings of the Board of Directors.........................................80
EXECUTIVE COMPENSATION.......................................................80
Summary Compensation Table..................................................80
Aggregated Option Exercises in Last Fiscal Year and
Options Value as of August 31, 1997........................................81
Option Grants in Last Fiscal Year...........................................81
Compensation of Directors...................................................82
Employment Contracts........................................................82
Compensation Committee Report on Repricing..................................83
Change in Control Arrangements..............................................83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................84
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE......................85
SECURITY OWNERSHIP OF CERTAIN PRINCIPAL STOCKHOLDERS
AND MANAGEMENT.............................................................85
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS................................86
MARKET PRICE AND DIVIDEND OF WAVETECH COMMON STOCK...........................87
OTHER BUSINESS...............................................................87
STOCKHOLDER PROPOSALS........................................................87
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................88
INDEX TO FINANCIAL STATEMENTS...............................................F-1
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CERTAIN FINANCIAL DATA......................................................F-2
Independent Auditor's Report..............................................F-2
Wavetech International, Inc. and Subsidiaries Consolidated
Balance Sheets...........................................................F-3
Wavetech International, Inc. and Subsidiaries Consolidated
Statements of Operations.................................................F-4
Wavetech International, Inc. and Subsidiaries Consolidated
Statements of Changes in Stockholders' Equity............................F-5
Wavetech International, Inc. and Subsidiaries Consolidated
Statements of Cash Flows.................................................F-6
Wavetech International, Inc. and Subsidiaries Notes to
Financial Statements.....................................................F-7
Wavetech, Inc. Condensed Consolidated Balance Sheets for
November 30, 1997 (Unaudited) and August 31, 1997 (Audited)..............F-19
Wavetech, Inc. Condensed Consolidated Statements of Operations
for the three month periods ended November 30, 1997
and 1996 (Unaudited).....................................................F-20
Wavetech, Inc. Condensed Consolidated Statements of Cash Flows
for the three month periods ended November 30, 1997
and 1996 (Unaudited).....................................................F-21
Wavetech, Inc. Notes to Condensed Consolidated Financial
Statements (Unaudited)...................................................F-22
Report of Independent Accountants.........................................F-23
Imagitel Consolidated Balance Sheet - December 31, 1997...................F-24
Imagitel Consolidated Statements of Operations and Retained Earnings -
December 31, 1997 and from January 9, 1996 to December 31, 1996..........F-25
Imagitel Consolidated Statements of Cash Flows - December 31, 1997 and
from January 9, 1996 to December 31, 1996................................F-26
Imagitel Notes to the Consolidated Financial Statements...................F-27
EXHIBIT I -- FORM OF CERTIFICATE OF AMENDMENT TO ARTICLES
OF INCORPORATION OF WAVETECH INTERNATIONAL, INC.............................E-1
EXHIBIT II--REORGANIZATION AGREEMENT........................................E-3
EXHIBIT III--OPINION OF KAUFMAN BROS., INC..................................E-
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED
ELSEWHERE IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT, THE EXHIBITS HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. A COPY OF THE REORGANIZATION AGREEMENT IS ATTACHED AS
EXHIBIT II TO THIS PROXY STATEMENT AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER. ALL INFORMATION CONCERNING WAVETECH AND
INTERIM INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT HAS BEEN
FURNISHED BY WAVETECH AND ALL INFORMATION CONCERNING IMAGITEL INCLUDED HEREIN BY
REFERENCE HAS BEEN FURNISHED BY IMAGITEL. EACH SHAREHOLDER SHOULD READ CAREFULLY
THIS PROXY STATEMENT AND THE EXHIBITS HERETO IN THEIR ENTIRETY.
This Proxy Statement contains certain statements, including statements regarding
the combined operations of Wavetech and Imagitel, which are forward-looking
statements within the meaning of the safe harbor provisions of Section 27A of
the Securities Act and Section 21E of the Exchange Act under the headings "Risks
Associated with the Merger and the Reorganized Parent", "Description of
Imagitel, Inc.", "Business of Wavetech" (incorporated by reference to Wavetech's
Annual Report on Form 10-KSB for the fiscal year ended August 31, 1997),
"Recommendation of the Wavetech Board of Directors and Reasons for the Merger";
Business of Reorganized Parent", "Business and Management After the Merger",
"Opinion of Kaufman Bros., Inc." and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (incorporated by reference to
Wavetech's Annual Report on Form 10-KSB for the fiscal year ended August 31,
1997 and Quarterly Report on Form 10-QSB for the quarterly period ended November
30, 1997). These forward-looking statements involve risks and uncertainties and
the actual results of Wavetech, Imagitel and the Reorganized Parent could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors, including those set forth under "Risk Factors" and elsewhere
in this Proxy Statement. Accordingly, the information contained in "Risk
Factors" in addition to the other information included and incorporated by
reference in this Proxy Statement should be carefully considered by holders of
Wavetech Common Stock in evaluating whether to approve the Reverse Stock Split
and whether to approve the issuance of additional shares of Wavetech Common
Stock pursuant to the Reorganization Agreement.
GENERAL
This Proxy Statement relates to the proposed one-for-six reverse stock
split of the Company's presently issued and outstanding shares of Common Stock
(the "Reverse Split"), and to the proposed issuance by Wavetech of the Merger
Shares in connection with the Merger of Imagitel with and into Interim, a wholly
owned subsidiary of Wavetech, pursuant to the Reorganization Agreement and Plan
of Merger (the "Reorganization Agreement"). See "The Merger" and "The Reverse
Split."
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THE ANNUAL MEETING
TIME, DATE AND PLACE. The Annual Meeting will be held on May 18, 1998
at 10:30 a.m. at the Marriott Courtyard, Williams Center, 201 South Williams
Boulevard, Tucson, Arizona 85711.
RECORD DATE, QUORUM AND SHARES ENTITLED TO VOTE. Only holders of record
of shares of Wavetech Common Stock ("Common Stock") at the close of business on
March 20, 1998 (the "Record Date") are entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. At the close of business on the
Record Date, there were outstanding 16,203,095 shares of Common Stock that are
entitled to vote at the Annual Meeting.
The presence either in person or by properly executed proxy of the
holders of a majority of the outstanding shares of Common Stock entitled to vote
at the Annual Meeting is necessary to constitute a quorum at the Annual Meeting.
If a quorum is not present at the Annual Meeting, the shareholders
present, by vote of a majority of the votes cast by shareholders entitled to
vote thereon, may adjourn the meeting, and at any such adjourned meeting at
which a quorum is present any business may be transacted which might have been
transacted at the meeting as originally held and proxies will be voted thereat
as directed.
PROXIES AND REVOCATION OF PROXIES. The enclosed proxy card permits each
shareholder to specify that shares be voted "FOR" or "AGAINST" (or "ABSTAIN
FROM") approval of the issuance of the Merger Shares, "FOR" or "AGAINST" (or
"ABSTAIN FROM") approval of the Reverse Split and "FOR" or "AGAINST" (or
"ABSTAIN FROM") approval of the election of each of the persons nominated to the
Board of Directors. If properly executed and returned, such proxies will be
voted in accordance with the choice specified. Where a signed proxy card is
returned, but no choice is specified, the shares will be voted FOR approval of
the Reorganization Agreement and the Merger and FOR approval of the Reverse
Split.
A proxy related to the Annual Meeting may be revoked by the shareholder
at any time before it is exercised; however, mere attendance at the meeting will
not itself have the effect of revoking the proxy. Shareholders may revoke a
proxy before being voted by : (i) delivering to the Secretary of the Company a
written instrument of revocation bearing a date later than the date of the
proxy; (ii) duly executing and delivering to the Secretary a subsequent proxy
relating to the same shares; or (iii) attending the meeting and voting in
person.
PURPOSE OF ANNUAL MEETING. At the Annual Meeting, shareholders will be
asked to consider and vote on a proposal to approve (i) the issuance of the
Merger Shares, which is contingent upon approval of (ii) a proposal to effect
the Reverse Split and (iii) election of five directors if the issuance of the
Merger Shares is not approved and such other matters as may be properly brought
before the Annual Meeting.
CERTAIN VOTING INFORMATION. As of the Record Date, directors and
executive officers of the Company, as a group, beneficially owned 2,529,151
outstanding shares (or approximately 15.6%) of the outstanding Common Stock
entitled to vote at the Annual Meeting. All directors and executive officers
have indicated that they will vote all outstanding shares of Common Stock
beneficially owned by them for approval of the Reorganization Agreement and the
Merger and for approval of the Reverse Split.
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REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock present in person or by proxy at the Annual Meeting is
required to approve the Merger and the Reverse Split presented to the
shareholders, provided that the number of shares present in person or by proxy
constitutes a quorum. Each share of Common Stock is entitled to one vote at the
Annual Meeting. See "General Information -- Vote Required at Annual Meeting."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors has approved the Reorganization Agreement and
the issuance of the Common Stock pursuant thereto and unanimously recommends
that the shareholders vote "FOR" the issuance of the Merger Shares . The Board
has also approved the Reverse Split and unanimously recommends that the
shareholders vote "FOR" the Reverse Split. In the event that the issuance of the
Merger Shares is not approved, the Board of Directors has approved the election
of each of the five persons nominated for election to the Board of Directors and
unanimously recommends that its shareholders vote "FOR" the election of all such
nominees.
FAIRNESS OPINION WITH RESPECT TO THE MERGER
The Board of Directors has received the opinion of Kaufman Brothers
Inc. ("Kaufman Brothers"), Wavetech's financial advisor in connection with the
Merger, that, as of the date of the Merger Agreement and as of the date of this
Proxy Statement, the terms of the Reorganization Agreement and the transactions
contemplated thereby, including the Merger, are fair to the stockholders from a
financial point of view. A copy of such opinion dated as of the date of this
Proxy Statement is attached hereto as Exhibit III and should be read in its
entirety for information with respect to the assumptions made, and matters
considered, by Kaufman Brothers in rendering such opinions.
THE PARTIES TO THE MERGER
WAVETECH. Wavetech is a provider of long distance telecommunications
services, primarily customized enhanced calling card services. As of February
28, 1998, there were approximately 166 holders of record of Wavetech Common
Stock entitled to notice of and to vote at the Annual Meeting. The principal
executive offices of Wavetech are located at 5210 East Williams Circle, Suite
200, Tucson, Arizona 85711, and its telephone number is (520) 750-9093.
IMAGITEL. Imagitel is a carrier and reseller of long distance and
enhanced telecommunications services. The principal executive offices of
Imagitel are located at 5120 Woodway Drive, Suite 7009, Houston, Texas 77056 and
its telephone number is (713) 626-1661.
INTERIM. Interim was formed on December 31, 1997, as a wholly owned
subsidiary of Wavetech to serve as a vehicle to effect the Merger. Interim's
address and telephone number are the same as Wavetech's.
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THE MERGER
GENERAL. At the Effective Time, Imagitel will be merged with and into
Interim. Imagitel will be the surviving corporation in the Merger (the
"Surviving Corporation') and shall become a wholly owned subsidiary of Wavetech
which shall change its corporate name to Imagitel, Inc. The Articles of
Incorporation and the Bylaws of the Company as in effect at the Effective Time
will be the Articles of Incorporation and the Bylaws of the Reorganized Parent,
except that the Articles of Incorporation may be amended in connection with
approval of the Reverse Split.
CONVERSION OF SHARES. At the Effective Time of the Merger, each
outstanding share of Imagitel Common Stock (other than shares as to which
appraisal rights shall have been properly exercised and perfected under Nevada
law) will be converted, without any action on the part of the holder thereof,
into the right to receive approximately 365 shares of Wavetech Common Stock,
subject to adjustment pursuant to the Conversion Ratio, based upon the actual
number of shares of Wavetech Common Stock outstanding, and as follows: (i)
additional shares of Wavetech Common Stock shall be issued in the event that the
Company's funded debt and working capital deficit as of the calendar month
immediately preceding the Effective Time exceeds $300,000 or in the event that
Imagitel has, as of such date, positive working capital and (ii) a decreased
number of shares of Wavetech Common Stock shall be issued in the event that the
Company's funded debt and working capital deficit as of the calendar month and
immediately preceding the Effective Time is less than $300,000 or in the event
that Imagitel has a working capital deficit as of such date.
Subject to the Conversion Ratio, Imagitel stockholders will own
approximately 72% to 84% of the total Wavetech Common Stock outstanding
subsequent to the Merger. Following the Merger, the shareholders of Wavetech
will continue to hold their shares of capital stock of Wavetech without any
change in number, designation, terms or rights.
EFFECTIVE TIME OF THE MERGER. Subject to the terms and conditions of
the Reorganization Agreement, the Merger is expected to become effective as soon
as practicable after the Annual Meeting upon the filing of the Articles of
Merger with the Secretary of State of the State of Nevada. See "The Merger --
Effective Time and Effect of the Merger."
CONDITIONS TO THE MERGER. The obligations of Wavetech and Imagitel to
effect the Merger are subject to certain conditions, including, among other
things, that the Reorganization Agreement and the Merger shall have been
approved by the Wavetech shareholders.
STOCK OPTIONS. Pursuant to the Merger Agreement, each outstanding
option to acquire shares of Imagitel Common Stock will be converted into fully
vested options to purchase the Reorganized Parent's Common Stock, determined in
accordance with the Conversion Ratio, and the exercise price will be
correspondingly adjusted.
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TERMINATION OF THE MERGER AGREEMENT
The Reorganization Agreement may be terminated at any time prior to the
closing of the transactions contemplated thereby (the "Closing"), (i) by the
mutual consent of Imagitel, Interim and the Company, (ii) by either party if an
injunction or order shall have been issued which prevents the consummation of
such transactions, (iii) by either party upon the other party's failure to
comply with the agreements or fulfill the conditions contained in the
Reorganization Agreement which failure is material to the consolidated business
of either party, after notice of such breach and a reasonable period to cure
have been provided by the terminating party, (iv) if the Closing has not
occurred by June 30, 1998, or (v) by either Imagitel or the Company,
respectively, if any updated disclosure schedules required to be provided by the
other party are unsatisfactory. Upon any termination of the Reorganization
Agreement, any agreements relating to the Confidential Information (as defined
in the Reorganization Agreement) will survive such termination.
FEES AND EXPENSES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Reorganization Agreement and the transactions
contemplated thereby will be paid by the party incurring such costs or expenses;
provided, however, that Imagitel and Wavetech have each paid a portion of the
fee payable to the SEC in connection with this Proxy Statement. Each party is
obligated to accrue reasonable estimates of all such expenses as of the end of
the month preceding the Closing. In addition to all ordinary expenses incurred
in connection with the Reorganization Agreement, Imagitel is required to pay
certain brokers' fees in connection with the Merger. The Company is not
obligated to make any payments of brokers' fees, or similar commissions in
connection with the Reorganization Agreement.
AMENDMENT OF THE REORGANIZATION AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Imagitel, Interim and the Company
may, by written agreement, at any time before or after the approval of the
Merger and the Reorganization Agreement by the Wavetech Stockholders and the
approval of the issuance of shares of Wavetech Common Stock pursuant to the
Reorganization Agreement by the Wavetech Stockholders, amend the Reorganization
Agreement, provided that after such approval by the Wavetech Stockholders, no
amendment or modification may be made that would materially adversely affect the
rights of the Wavetech Stockholders without the further approval of such
Stockholders. Each party to the Reorganization Agreement may, to the extent
legally permitted, extend the time for the performance of any of the obligations
of any other party to the Reorganization Agreement, waive any inaccuracies in
the representations or warranties of any other party contained in the
Reorganization Agreement or waive compliance by any other party with any of the
agreements or conditions contained in the Reorganization Agreement.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization for federal
income tax purposes, so that none of Wavetech, Imagitel or Interim will
recognize gain or loss solely as a result of the Merger and no gain or loss will
be recognized by Imagitel stockholders on the exchange of Imagitel Common Stock
for Wavetech Common Stock, except to the extent that Imagitel stockholders
receive cash upon exercise of dissenters' rights or pursuant to the terms of the
Reorganization Agreement, including cash received in lieu of fractional share
interests in Wavetech Common Stock.
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<PAGE>
EXCHANGE OF SHARES
After the Effective Time, each holder of shares of Imagitel Common
Stock issued and outstanding at the Effective Time shall surrender the
certificate representing such shares to Reorganized Parent and shall receive in
exchange therefor a number of shares of Wavetech Common Stock calculated
according to the Conversion Ratio for each share of Imagitel Common Stock and
cash in lieu of any fractional share of Wavetech Common Stock to which such
holder might be entitled. If such holder has lost his or her certificate, he or
she shall present an affidavit of loss and indemnity agreement and/or a bond as
may be reasonably required by either Reorganized Parent or Surviving Sub.
Following the Effective Time, Reorganized Parent's transfer agent and
registrar, American Stock Transfer & Trust Company, shall mail to each
shareholder of Reorganized Parent, a notice of the effectiveness of the Merger
and instructions on how to exchange certificates representing shares of Wavetech
Common Stock for certificates representing a number of shares of the $.001 par
value common stock of Reorganized Parent, which gives effect to the Reverse
Split and corporate name change.
ACCOUNTING TREATMENT OF THE MERGER
The Reorganized Parent will account for the business combination of
Interim and Imagitel in its consolidated financial statements under the purchase
method of accounting.
BUSINESS AND MANAGEMENT AFTER THE MERGER
Following the Merger, the business and operations of Reorganized Parent
will be significantly changed as a result of the combination of the differing,
yet complementary, businesses of the Company and Imagitel. The executive
officers of Reorganized Parent and Surviving Corporation following the Effective
Time will be as follows: James B. Gambrell IV, President and Chief Executive
Officer; Phillip Barber, Acting Chief Information Officer; Dee Darby, Vice
President of Operations; Scott Moster, President - Carrier Group; David
Crawford, Vice President of Business Development; Andrew Cauthen, President,
Zapcom. The Chief Financial Officer of the Reorganized Parent will be Lydia
Montoya, who currently serves as Chief Financial Officer of Wavetech, until such
time as a suitable replacement can be found. The directors of Reorganized Parent
and Surviving Corporation will be James B. Gambrell, Richard Hartman, Robert C.
Hawk, Steve Jaffe and one more independent director to be appointed at a later
date. See "Directors, Director Nominees and Executive Officers of the Company."
A vote FOR approval of the issuance of the Merger Shares shall be
deemed to constitute a vote FOR election to serve as director in favor of each
of the persons designated by Imagitel to serve as directors of the Reorganized
Parent.
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<PAGE>
RESALE OF WAVETECH COMMON STOCK TO BE ISSUED IN THE MERGER
The shares of Wavetech Common Stock to be received in the Merger will
be "restricted" securities (as defined in Rule 144 promulgated under the
Securities Act) and may only be transferred in accordance with the provisions of
Rule 144 under the Securities Act or pursuant to an effective registration
statement filed thereunder, or in transactions exempt from registration
thereunder. In addition, shares of Wavetech Common Stock received in the Merger
by persons who are affiliates of Imagitel immediately prior to the Effective
Time but do not become affiliates of Wavetech may be sold by them only in
accordance with the provisions of Rule 145 under the Securities Act (which
imposes certain limitations on the volume and manner of sales by such
affiliates).
Pursuant to the Reorganization Agreement, the Company has agreed to
execute a registration rights agreement relating to the shares of Wavetech
Common Stock to be issued in connection with the Reorganization Agreement. The
Reorganized Parent intends to file a registration statement covering such shares
as promptly as practicable following the Effective Time, all of the costs of
which (except for underwriting discounts and commissions, if any) will be borne
by the Reorganized Parent.
RISK FACTORS
Ownership of Wavetech Common Stock and the business to be conducted by
the Reorganized Parent after the Merger involve certain risks, including, but
not limited to, risks associated with combining the two companies. See "Risk
Factors."
DISSENTERS RIGHTS OF APPRAISAL
Wavetech stockholders have no right under Nevada law to dissent from
either the Reorganization Agreement or the Merger, or to dissent from the
Reverse Split. While Imagitel stockholders have dissenters rights of appraisal
under Nevada law, it is a condition to the obligations of Wavetech and Interim
to consummate the Merger that none of the shareholders of Imagitel shall have
exercised such rights.
COMPARATIVE RIGHTS OF WAVETECH STOCKHOLDER AND STOCKHOLDERS OF THE
REORGANIZED PARENT
At the Effective Time, Interim will be merged into Imagitel which will,
as a result thereof, become a wholly owned subsidiary of Reorganized Parent.
With the exception of a corporate name change from "Wavetech International,
Inc." to "Imagitel, Inc.", the Articles of Incorporation and Bylaws of the
Reorganized Parent will be the same as those currently in effect with respect to
Wavetech.
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<PAGE>
As such, the rights of Wavetech stockholders as provided by applicable state
laws and the Reorganized Parent's Articles of Incorporation and Bylaws will be
virtually unchanged as a result of the Merger.
INTEREST OF CERTAIN PERSONS IN THE MERGER
All of the then outstanding options held by directors and employees of
Wavetech shall be fully exercisable as of the Effective Time for a period of 10
years thereafter, even if such options were not exercisable immediately prior to
the Effective Time. Assuming solely for purposes of demonstration that the
Effective Time is on or about May 15, 1998, it is anticipated that options to
purchase an aggregate of 1,920,000 shares of Wavetech Common Stock will be fully
exercisable, of which approximately 470,000 would not otherwise be exercisable
at such time.
Except for Lydia Montoya, Chief Financial Officer of Wavetech, at the
Effective Time, the employment of all of Wavetech's employees shall immediately
terminate, although the management of the Reorganized Parent may thereafter seek
to employ some or all of such persons on terms to be negotiated at such time, in
its sole discretion. Ms. Montoya's employment shall continue after the Effective
Time pursuant to the terms and conditions of her current employment agreement,
which is terminable upon 3 months prior written notice.
MARKET PRICE AND DIVIDEND OF WAVETECH COMMON STOCK
The Wavetech Common Stock is quoted on the Nasdaq SmallCap Market. The
high and low bid prices of the Wavetech Common Stock, as reported by the Nasdaq
Stock Market, from September 1, 1995 through August 31, 1997 by fiscal quarters
(i.e., 1st Quarter = September 1 through November 30) and for the fiscal quarter
ended November 30, 1997, are as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
1998
Common Stock $ 19/32 $ 3/8 N/A N/A N/A N/A N/A N/A
</TABLE>
The bid and the asked price of the Wavetech Common Stock on February
29, 1998 were 3/8 and 13/32, respectively.
As of February 28, 1998, the Company had 166 shareholders of record of
its Common Stock.
The Company has never declared a dividend and does not plan to declare
a dividend of cash on Wavetech Common Stock in the future.
On __________, the last trading day prior to the public announcement of
the Merger, the closing per share sale price of Wavetech Common Stock as
reported on the Nasdaq SmallCap Market was $________.On ________, the last
trading day for which closing sale prices were available at the time of the
printing of this Proxy Statement, the closing sale price of Wavetech Common
Stock as reported on the Nasdaq SmallCap Market was $_____________.
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<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth summary historical consolidated
financial data of Wavetech for the years ended August 31, 1997 and 1996 and of
Imagitel for the year ended December 31, 1997 and for the period from inception
on January 9, 1996 to December 31, 1996.
This historical data is not necessarily indicative of results to be
expected after the Merger is consummated and should be read in conjunction with
the consolidated financial statements and notes thereto included herein or
incorporated herein by reference.
WAVETECH SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
For the years ended August 31, 1997 and 1996
Statement of Operations Data:
1997 1996
---- ----
Revenues $ 865,571 $ 19,895
Net loss from operations $ (1,610,892) $ (1,881,396)
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
As of August 31, 1997
Balance Sheet Data:
1997
----
Total Assets $3,140,796
Shareholders' Equity $2,158,244
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<PAGE>
IMAGITEL SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
Year ended December 31, 1997 and for the period from
inception on January 9, 1996 to December 31, 1996
Statement of Operations Data:
1997 1996
---- ----
Revenue $ 42,494,761 $ 6,204,726
Net Income (loss) $ 3,035,200 $ (806,997)
Net income (loss) per share $ 15.18 $ 4.03
As of December 31, 1997
Balance Sheet Data:
Total Assets $3,355,859
Stockholders' Equity $ 489,759
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following selected unaudited pro forma condensed combined financial
data reflects the Merger of Imagitel into a wholly owned subsidiary of Wavetech
under the purchase method of accounting. This data is for informational purposes
only and is not necessarily indicative of the operating results or the financial
position that would have been achieved had the Merger occurred on the indicated
dates, nor is it indicative of future operating results or financial position.
This data is derived from the Unaudited Pro Forma Combined Financial Statements
appearing elsewhere herein and should be read in conjunction with those
statements and the notes thereto.
Pro Forma Statement of Operations Data
For the Year ended August 31, 1997
Revenues $32,139,444
Net earnings (losses) $ (585,612)
Earnings (loss) per common share $ (0.04)
Weighted average number of shares outstanding 14,867,168
Pro Forma Balance Sheet Data:
For November 30, 1997
Total Assets $ 9,762,787
Shareholders' Equity $ 6,235,076
17
<PAGE>
REVERSE STOCK SPLIT
GENERAL. The Company is seeking approval to amend its Articles of
Incorporation to effect a one-for-six reverse stock split of its issued and
outstanding shares of common stock.
EFFECTIVE TIME OF AMENDMENT. Following stockholder approval of the
Reverse Stock Split, the amendment to the Company's Articles of Incorporations
shall become effective upon the filing of the Certificate of Amendment to the
Articles of Incorporation with the Nevada Secretary of State (the "Split
Effective Date").
EXCHANGE OF SHARES; NO FRACTIONAL SHARES
Pursuant to the proposed Amendment, every six shares of issued and
outstanding Wavetech Common Stock would be converted and reclassified into one
share of post-split Common Stock, and any fractional interests resulting from
such reclassification would be rounded upward to the nearest whole share. For
example, a holder of 120 shares prior to the Split Effective Date would be the
holder of 20 shares at the Split Effective Date, and the holder of 122 shares
prior to the Split Effective Date would be the holder of 21 shares at the Split
Effective Date. The proposed Reverse Split would become effective upon the Split
Effective Date. Stockholders will be notified after the Split Effective Date
that the Reverse Split has been effected. The Company's transfer agent, American
Stock Transfer & Trust Company, will act as the Company's exchange agent (the
"Exchange Agent") for Stockholders in implementing the exchange of their
certificates.
As soon as practicable after the Split Effective Date, Stockholders
will be notified and provided instructions concerning the surrender of their
certificates to the Exchange Agent in exchange for certificates representing
post-split Common Stock. Stockholders will not receive certificates for shares
of post-split Common Stock unless and until the certificates representing their
shares of pre-split Common Stock are surrendered and they provide such evidence
of ownership of such shares as the Company or the Exchange Agent may require.
Stockholders should not forward their certificates to the Exchange Agent until
they have received notice from the Company that the Reverse Split has become
effective. Beginning on the Split Effective Date, each certificate representing
shares of the Company's pre-split Common Stock will be deemed for all corporate
purposes to evidence ownership of the appropriate number of shares of post-split
Common Stock.
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<PAGE>
The following tables illustrate the principal effects on the Company's
capital stock of the Reverse Split, without giving effect to the Merger.
NUMBER OF SHARES OF CAPITAL STOCK
Prior to After Reverse
Reverse Split(1) Split(1)
---------------- --------
COMMON
Authorized 50,000,000 50,000,000
Issued and outstanding(1) 16,203,095 2,700,516
Available for future issuance 33,796,905 47,299,484
PREFERRED
Authorized 10,000,000 10,000,000
Issued and outstanding -0- -0-
Available for future issuance 10,000,000 10,000,000
(1) Excludes (i) 2,362,914 shares issuable upon exercise of outstanding options
(393,819 shares after the Reverse Split) and (ii) 3,149,403 shares issuable
upon exercise of outstanding warrants (524,901 shares after the Reverse
Split), each as of March 15, 1998.
LOSS AND BOOK VALUE OF CAPITAL STOCK PER COMMON SHARE
After Conversion
Prior to Conversion (Pro Forma)
------------------- -----------
(Loss) per common share for the year
ended August 31, 1997 $(0.11) $(0.68)
(Loss) per common share for the quarter
ended November 30, 1997 (0.02) (0.10)
Book value per common share as of
August 31, 1997 0.14 0.86
Book value per common share as of
November 30, 1997 0.15 0.92
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<PAGE>
RISK FACTORS
THIS PROXY STATEMENT CONTAINS "FORWARD-LOOKING STATEMENTS," INCLUDING
STATEMENTS REGARDING, AMONG OTHER ITEMS, THE COMPANY'S GROWTH STRATEGY, FUTURE
PRODUCTS, SALES, ABILITY TO LICENSE AND MARKET FUTURE 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 THE COMPANY'S 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. ACCORDINGLY, THE INFORMATION
CONTAINED IN "RISK FACTORS," IN ADDITION TO THE OTHER INFORMATION INCLUDED AND
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT, SHOULD BE CAREFULLY
CONSIDERED BY HOLDERS OF WAVETECH COMMON STOCK IN EVALUATING WHETHER TO APPROVE
THE ISSUANCE OF SHARES OF WAVETECH COMMON STOCK PURSUANT TO THE REORGANIZATION
AGREEMENT.
I. OVERVIEW
The current business and operations of Wavetech are subject to certain
risks and uncertainties, which are described under "Risk Factors -- Risks
Associated With Wavetech" and elsewhere herein as well as in the Company's
publicly available documents filed with the Securities and Exchange Commission
from time to time. The current business and operations of Imagitel are subject
to certain risks and uncertainties, which are described under "Risk Factors -
Risks Associated with Imagitel" and elsewhere herein. If the Reorganization
Agreement is approved, the Reorganized Parent will be subject to risks and
uncertainties related to the Merger and to the combination of the business of
Imagitel in addition to those currently associated with Wavetech. These factors
are described under "Risk Factors -- Risks Associated with the Merger" and
elsewhere herein. In addition, Reorganized Parent's business and operations will
be subject to the combined risks and uncertainties currently associated with
each of Wavetech and Imagitel's present operations. Stockholders are strongly
urged to review the description of such considerations in connection with the
other information set forth in this Proxy Statement.
II. RISKS ASSOCIATED WITH WAVETECH
LIMITED OPERATING HISTORY; PREVIOUS LOSSES. Interpretel, Inc., the
Company's operating subsidiary, 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, 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
fiscal years ended August 31, 1997, 1996 and 1995, respectively. Although the
Company recorded revenues for the quarter ended February 28, 1997, there can be
no assurance that the Company will record a profit in any future periods.
20
<PAGE>
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 and
announcements, market acceptance of new and enhanced versions of the Company's
services, potential acquisitions, 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
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 of
the Company's future fiscal quarters, 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
21
<PAGE>
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, news services
and electronic mail services are expected to compete with the services of other
computer telephony companies such as Premier Technologies (WorldLink) and
VoiceNet, among others. The Company is 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
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.
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."
Telecommunications 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 are able to
realize a profit while offering low rates to individual consumers because they
are able to attract a significant number of total customers. As a result, the
Company may be required to reduce the prices at which it offers services in
order to remain competitive. However, if the Company is unable to generate
sufficient revenues to offset its expenses, it will be unable to remain
profitable. 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
22
<PAGE>
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, 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 to develop
and introduce new products and services, and enhancements to existing products
and services which will complement the services currently offered or planned by
the Company. For example, the Merger will result in a suite of new products and
services being offered by the Reorganized Parent. 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.
The Company intends to upgrade its call processing network in tandem
with the introduction of new products and services during 1998. However, the
Company will be unable to complete such upgrades without additional capital
resources. Additionally, the suite of new products brought to the Reorganized
Parent as a result of the Merger will necessitate additional software
development, as well as expanding current call processing systems. The call
processing systems currently employed by the Company consist of digital computer
telephony technology which will require upgrades and expansion in order to
respond to increases in customer use. Although Wavetech believes the Reorganized
Parent will be able to upgrade its systems as necessary, there can be no
assurances in this regard. The inability of the Reorganized Parent to make
necessary upgrades or the failure to make them in a timely, cost-effective
manner could result in a loss of customers, increased expenses and other
unanticipated events, one or more of which could have a material adverse effect
upon the Reorganized Parent's business and results of operations.
Network development will include the deployment of call processing
platforms in Canada, as well as expansion of call processing to other
international locations. The Company is currently in negotiation with an
international telecommunications company to form a strategic partnership for
utilization of switches and network access in over 60 countries, although there
is no binding agreement with respect to such relationship. This relationship, if
consummated, will require additional software development as well as the
installation of additional call processing platforms.
The Company plans to introduce new products based on its custom
post-pay calling card program, including a "virtual office" service.
Implementation of this service does not require any hardware purchases or
installation of additional phone lines; however, the Company's management will
be required to devote its energy and resources to the development,
implementation and marketing of this product. There can be no assurance that
such product will generate revenues sufficient to offset the costs associated
with such development and marketing.
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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.,
Omni Mart, Inc. and Access Unlimited, Inc. These relationships were formed
recently, and have not produced significant revenues to date. In addition, the
Company's relationship with Switch may be in jeopardy. See "--Dependence on
Licensing Relationships." 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. 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
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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, in Australia. Pursuant to this
relationship, Switch is required to pay certain annual license fees in addition
to making ongoing royalty payments. Switch has paid the one annual licensee fee
accrued to date, but has not made any royalty payments since then. Although
Switch has not communicated any intent to terminate its relationship with
Wavetech, there can be no assurance when Switch will pay any unpaid royalty
payments, if ever, or if it will make the second license fee payment when it
becomes due in May 1998. Except for the Switch relationship, Wavetech currently
has no other licenses with other entities. There can be no assurance that such
licensing arrangements will continue to exist or, if they do, will prove to be
profitable to the Company. The Company intends to seek additional licensing
arrangements and increase the volume of its existing licensee transactions.
However, the telecommunications industry is intensely competitive and rapidly
consolidating and the majority of companies that have historically outsourced
communications card services to the Company have been 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. In order to maintain its viability, the
Company will need 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 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 survival has
historically been 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 future ability to become successful will depend to a
significant extent upon the efforts and abilities of its executive officers and
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other key personnel. The loss of services of any of these individuals could have
a material adverse effect upon the Company. 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.
The Company, in an effort to dramatically reduce its overhead, has
drastically cut back on a number of key management, technical and operations
positions that are essential to successfully growing the Company. However, the
Company will need to hire additional personnel in order to carry out its current
business plan. There are no assurances that the Company can either attract and
retain the qualified personnel required to create and manage growth, nor can it
assure that it can afford to increase its overhead to pay for these requisite
personnel.
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 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.
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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 or
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.
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 the Company's network or the cancellation by
subscribers of their service with the Company, any of which could have a
material adverse effect on the Company.
DEPENDENCE UPON TELECOMMUNICATIONS 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 virtually all 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
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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 telecommunications 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 virtually all of its long distance
telecommunications services pursuant to supply agreements with Interact, Inc. of
Lincoln, Nebraska, and, to a lesser extent, with 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 effect 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.
However, the Company may in the future 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.
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 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 ("LECs") 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 believes it has made all required 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. To date, such deregulation has resulted in
significant amounts of industry litigation, uncertainty and confusion. Such
legislation may result in increased competition for the Company from others,
including RBOCs and increased transmission costs in the future. See
"--Competition" above.
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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
effect 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 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 world 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 effect 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., 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
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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. Recently, a significant customer of the Company has become
seriously in arrears in its payment for international long distance services.
The Company believes that it will be able to recover these monies owed; however,
there can be no assurances that the Company will be successful nor that this
will be the only customer that defaults on monies owed to the Company.
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, 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, the entry into 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
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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.
The Company has received a Going Concern notice from its independent
auditors questioning the Company's ability to maintain its solvency without a
dramatic change in its current fiscal outlook, such as a substantial cash
infusion, the recording of profits or a merger with a more financially stable
organization, which may be required in order to ensure the Company's survival.
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS; RISK OF DELISTING. The
Company's Common Stock is currently listed on the Nasdaq SmallCap Market
("Nasdaq"). Under the rules for continued listing in the Nasdaq system, the
Company is 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 a period
of between 10 to 90 days (depending upon the criteria) to comply with the
maintenance standards. The Company has been notified by Nasdaq that it is
currently not in compliance with the minimum bid price requirement. Failure of
the Company to meet such requirement for at least 10 consecutive trading days on
or before May 28, 1998 or the failure to satisfy one or more of the other
maintenance requirements of Nasdaq could result in the Company's securities
being delisted from Nasdaq, with 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" above), 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 the
Company's stockholders to make resales of the Common Stock.
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 such
transaction, of a disclosure schedule prepared by the SEC 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.
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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, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the SEC 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 SEC 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.
III. RISKS ASSOCIATED WITH IMAGITEL
In addition to certain of the above-described factors associated with
Wavetech's business, Imagitel is also subject to the following risks and
uncertainties:
LIMITED OPERATING HISTORY. Imagitel's primary operating subsidiaries
were incorporated in 1996. Imagitel has only a limited operating history upon
which an evaluation of Imagitel and its prospects can be based. Imagitel'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 Imagitel's.
To address these risks, Imagitel 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 Imagitel will be successful in addressing such
risks.
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN
QUARTERLY RESULTS Imagitel's operating results have grown significantly in the
past; however there are no assurances that Imagitel's revenues will continue to
grow significantly in the future. Factors that may cause Imagitel's future
operating results to vary include, among others, the unique nature of strategic
relationships into which Imagitel may enter in the future, changes in operating
expenses resulting from such strategic relationships, the continued acceptance
of Imagitel's products, the financial and technological performance of
Imagitel's products, services and licenses, the timing of new services and
announcements, market acceptance of new and enhanced versions of Imagitel's
services, potential acquisitions and changes in legislation and regulation that
may affect the competitive environment for Imagitel's communications services
and general economic and seasonal factors, among others.
Quarterly revenues are difficult to forecast because the market for
Imagitel's information and telecommunications services is rapidly evolving.
Imagitel's expense levels are based, in part, on its expectations as to future
revenues. If actual revenue levels are below expectations, Imagitel may be
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unable or unwilling to reduce expenses proportionately and operating results
would likely be adversely affected. As a result, Imagitel 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 of
Imagitel's future fiscal quarters, its operating results may be below the
expectations of public market analysts and investors.
INTENSE COMPETITION. The information and telecommunications services
industries are intensely competitive, rapidly evolving and subject to rapid
technological change. Imagitel expects competition to increase in the future.
Many of Imagitel'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 Imagitel. There can be no assurance that Imagitel will be able to
successfully compete with such entities. As a result, such competition could
materially adversely affect Imagitel's business, operating results and financial
condition.
The Telecommunications Act of 1996 allows local exchange carriers to
provide inter-LATA long distance telephone service, which will likely
significantly increase competition for long distance services. The new
legislation also grants the 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 Imagitel. Such increased competition could have a material
adverse effect on Imagitel`s business, operating results and financial position.
See "--Regulation."
Telecommunications companies often compete for consumers based on
price, with major long distance carriers conducting extensive advertising
campaigns to capture market share. Many of Imagitel's competitors can offer
lower rates to consumers as a result of higher gross revenues. As a result,
Imagitel 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 Imagitel's business, operating results and financial
condition.
Imagitel 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 Imagitel's technology. Imagitel does not have the contractual
right to prevent its subscribers from changing to a competing network, and
Imagitel's subscribers may generally terminate their services with Imagitel at
will. If Imagitel is unable to compete with emerging technologies or services,
it may lose a substantial amount of its 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. Imagitel 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
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telecommunications products may be adversely affected by the increasing number
of competitive products from which to choose, making it difficult to predict
Imagitel`s future success in producing telecommunications products for the
retail market.
UNCERTAINTY OF STRATEGIC RELATIONSHIPS. A principal element of
Imagitel's growth strategy is the creation and maintenance of strategic
relationships that will enable Imagitel to offer its services to a larger
customer base than Imagitel could otherwise reach through its direct marketing
efforts. Imagitel is unable to predict the future success or failure of its
products and services or of its business overall, due to its limited operating
experience with any such strategic relationships to date. Although Imagitel
intends to continue to expand its direct marketing channels, Imagitel believes
that strategic partner relationships may offer an effective and efficient
marketing channel. Consequently, Imagitel's success depends in part on the
ultimate success of these relationships and on the ability of these strategic
partners to effectively market Imagitel's services.
ABILITY TO MANAGE GROWTH. In order to maintain its growth in revenues,
Imagitel will need to experience substantial growth in 1998 and thereafter as it
begins to implement its business strategy and introduce its new products and
services. This growth, if any, can be expected to place significant demands on
all aspects of Imagitel's business, including its administrative, technical and
financial personnel and systems. In addition, expansion by Imagitel may strain
Imagitel's management, financial and other resources. There can be no assurance
that Imagitel's systems, procedures, controls and existing resources will be
adequate to support expansion of Imagitel's operations. Imagitel'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 Imagitel is unable to respond to and manage changing business conditions,
then the quality of Imagitel's products and services, its ability to retain key
personnel and its results of operations could be materially adversely affected.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL. Imagitel's success has
historically been largely dependent upon its executive officers, the loss of one
or more of whom could have a material adverse effect on Imagitel. Imagitel
believes that its continued success will depend to a significant extent upon the
efforts and abilities of its executive officers and other key personnel. The
loss of services of any of these individuals could have a material adverse
effect upon Imagitel. Imagitel does not currently maintain key person life
insurance on the lives of any of such employees.
Imagitel 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
Imagitel to identify, attract and retain such personnel may have a material
adverse effect on Imagitel. No assurance can be given that Imagitel will be able
to retain its key employees or that it will be able to attract qualified
personnel in the future.
DEPENDENCE UPON SOFTWARE. The software developed and utilized by
Imagitel in providing its services and billing its customers may contain
undetected errors. Although Imagitel engages in extensive testing of its
software prior to utilizing the software in connection with its products and
services, 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
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or total failure of Imagitel's systems or 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
Imagitel to bill and/or collect from its customers or the cancellation by
customers of their service with Imagitel, any of which could have a material
adverse effect on the Company. Because all of Imagitel's systems were recently
purchased or developed in-house, Imagitel believes its systems are all year 2000
compliant; however, Imagitel has not undertaken an extensive study to determine
this absolutely. Should Imagitel's systems not be year 2000 compliant, there can
be no assurance that there will not be discovered or undiscovered errors in
Imagitel's software. Any such errors could lead to substantial operating and
financial problems for Imagitel.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. A future component of
Imagitel's strategy may be expansion into international markets. If
international revenues are not adjusted to offset the expense of establishing
and maintaining these international operations, Imagitel's business, operating
results or financial condition could be materially adversely affected. To date,
Imagitel has no experience in marketing and distributing its services
internationally. There can be no assurance that Imagitel will be able to
successfully establish, market, sell and deliver its services in these markets.
In addition to the uncertainty as to Imagitel'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 world and potentially adverse
tax consequences, among other factors, any one of which could have a material
adverse effect on the performance of Imagitel's international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on Imagitel's future international operations, if any, and,
consequently, on Imagitel's consolidated business, operating results and
financial condition.
RISK OF LOSS FROM RETURNED TRANSACTIONS, FRAUD, BAD DEBT, THEFT OF
SERVICES. Imagitel generally bears the credit risks normally 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 Imagitel's network
and obtain services without rendering payment to Imagitel by unlawfully
utilizing the access numbers and personal identification numbers of authorized
users. Although to date Imagitel 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. Imagitel currently
seeks to manage these risks through its internal controls and proprietary
billing system. For example, Imagitel establishes preset spending limits for
each subscriber. Imagitel also maintains a reserve for such risks. Past
experience in estimating and establishing reserves and Imagitel's historical
losses are not necessarily accurate indications of Imagitel's future losses or
the adequacy of the reserves established by Imagitel in the future. Although
Imagitel believes that its risk management and bad debt reserve practices are
adequate, there can be no assurance that Imagitel's risk management practices or
reserves will be sufficient to protect Imagitel from unauthorized or returned
transactions or thefts of services which could have a material adverse effect on
Imagitel's business, operating results and financial condition.
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POTENTIAL ACQUISITIONS. Imagitel may in the future pursue acquisitions
of complementary services, products, technologies or businesses. Future
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt, the write-off of software development and
other costs, and the amortization of expenses related to goodwill and other
intangible assets, all of which could have a material adverse effect on
Imagitel'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, the entry into markets in which Imagitel has little or no direct prior
experience and the potential loss of key employees of the acquired company.
Imagitel has retained an investment banking firm to seek out potential
acquisitions; however, there can be no assurance as to whether Imagitel will be
able to successfully consummate any potential acquisitions which may be
presented for its consideration.
NEED FOR ADDITIONAL FINANCING. Imagitel has significant cash
requirements in connection with its business. To date, Imagitel has been able to
generate sufficient funds from its principals and internal resources to cover
the cost of its growth. In addition to its working capital requirements,
Imagitel must fund the production and marketing of its products prior to the
time the products are made available for sale and generate revenues. Imagitel'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, Imagitel may not receive
payment from its customers until a period after products are sold to end-users.
Imagitel 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 Imagitel does not realize
anticipated revenues. In addition, Imagitel 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 Imagitel or its stockholders. Imagitel currently has no commitment
for any such financing and in the event such necessary financing is not
obtained, Imagitel's operations may be materially adversely affected and
Imagitel will have to curb its or substantially reduce its growth. Any
additional equity financings may be dilutive to stockholders, and debt
financings, if available, may involve restrictive covenants, including limiting
Imagitel's ability to incur additional debt.
RISKS ASSOCIATED WITH PLANNED EXPANSION. Imagitel's current growth
strategy includes an aggressive expansion plan that requires it to
simultaneously launch several new product and service offerings, develop, design
and implement a complex information technology system and commence a multi-prong
distribution and marketing program, each of which is vital to Imagitel's growth
plans. This is the first time that Imagitel has undertaken such a complex,
expensive and aggressive growth program in its history. There are a number of
inherent risks associated with this plan. Imagitel must attract, screen and
retain a substantial number of key employees in a short period of time. There
can be no assurances that Imagitel will be successful, nor that, even if
successful, Imagitel will be able to rapidly and successfully integrate these
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new personnel into its existing operations. The multiple marketing programs are
unproven by Imagitel and there can be no assurances that even if they are
operationally successful they will be economically viable and profitable to
Imagitel. The products that Imagitel is working to introduce may not be
successful and could potentially lead to negative consequences for Imagitel if
they are marketing failures. Imagitel is currently finalizing the testing on its
new product and service offerings and there can be no assurances that the tests
will yield positive results, or that positive results will be indicative of the
market success of the products and services.
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES. The future
profitability of Imagitel will be dependent in part on its ability to utilize
transmission facilities leased from others on a cost-effective basis. Due to the
possibility of unforeseen changes in industry conditions, the continued
availability of leased transmission facilities at historical rates cannot be
assured. Imagitel does not own a transmission network and, accordingly, depends
entirely on IXC Communications ("IXC") and Frontier Communications ("Frontier")
for transmission of its subscribers' long distance calls. For the year ended
December 31, 1997, IXC was responsible for carrying nearly all the long distance
transmissions billed by Imagitel. Further, Imagitel is dependent upon LECs for
call origination, termination and billing. Imagitel has not experienced
significant losses in the past because of interruptions of service by its
carriers, but no assurance can be made in this regard with respect to the future
integrity of such carriers. Imagitel's ability to maintain and expand its
business depends, in part, on its ability to continue to obtain
telecommunications 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 Imagitel's ability to receive or terminate calls would result
in a loss of revenues by Imagitel and could lead to a loss of subscribers,
either of which could have a material adverse effect on Imagitel's business,
financial condition and results of operations.
Imagitel obtains virtually all of its long distance telecommunications
services pursuant to supply agreements with IXC and to a lesser extent, with
Frontier. No assurance can be given that Imagitel 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 Imagitel, or a material increase in
the price at which Imagitel is able to obtain long distance service, would have
a material adverse effect on Imagitel's business, financial condition and
results of operations. Imagitel is not currently a party to a long distance
telecommunications services agreement that requires Imagitel to purchase a
minimum amount of service each month. However, Imagitel may in the future
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 Imagitel's transmission suppliers will exceed any such minimum
purchase requirement in the future.
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT. The
telecommunications industry is subject to rapid and significant changes in
technology. While Imagitel does not believe that, for the foreseeable future,
these changes will materially adversely affect the continued use of various
services currently in use or contemplated for use by Imagitel or materially
hinder Imagitel's ability to acquire necessary technologies, the effect of
technological changes, including changes relating to emerging wireline and
wireless transmission and switching technologies, on the businesses of Imagitel
cannot be predicted.
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LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT.
Imagitel 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
Imagitel's proprietary rights. Imagitel currently holds an exclusive North
American and non-exclusive worldwide licensing agreement for its Travel Warrior
and Bill Zapper products (see "Description of Imagitel, Inc. - New Products")
that are currently the subject of a pending patent application and trademark
applications in the United States. Despite Imagitel's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy or assert rights
with respect to aspects of Imagitel's licensed products or services or to obtain
and use information that Imagitel regards as proprietary. Although Imagitel is
not aware of any current or previous infringement upon its proprietary rights,
there can be no assurance that Imagitel's means of protecting its proprietary
rights will be adequate or that Imagitel's competitors will not independently
develop similar technology. There are no assurances that the U.S. Patent and
Trademark Office will grant the applied for patents and trademarks, nor that the
validity of any such granted patents or trademarks will be upheld if challenged
by third parties. In addition, the laws of some foreign countries do not protect
Imagitel's proprietary rights to as great an extent as the laws of the United
States. An inability of Imagitel 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 Imagitel 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 Imagitel with respect to current or
future products or services, or that, if such actions are brought, Imagitel will
ultimately prevail. Any such claiming parties may have significantly greater
resources than Imagitel 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
Imagitel to enter into royalty or licensing agreements or cause Imagitel to
discontinue use of the challenged tradename, service mark or technology at
potentially significant expense to Imagitel in connection 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 Imagitel.
DEPENDENCE ON KEY VENDORS AND INDEPENDENT AGENTS; INFLUENCE OF
PRINCIPALS OF IMAGITEL. Imagitel's success has historically been largely
dependent upon the efforts of its independent agent network. Imagitel currently
markets its products and services through an independent agent network (see
"Description of Imagitel, Inc. - Existing Products"), which is managed by four
master agents. These relationships were established by certain principals of
Imagitel and these principals receive substantial commissions for having
developed the current marketing program. Additionally, these same principals own
all of the rights and title to the Bill Zapper and Travel Warrior technology and
will receive various royalties based upon the future sales and success of these
units by Imagitel. Imagitel currently has a contract which governs the future
provision of services by these master agents for the benefit of Imagitel.
However, such contract may be terminated at will by either party. Although
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Imagitel believes that alternative providers of independent marketing services
exist, there can be no assurance that Imagitel would be able to negotiate with
such providers to obtain services comparable in quality to that currently
provided by the master agents or that such services may be obtained on terms
favorable to Imagitel. In addition, there can be no assurance that any transfer
of its marketing services to an alternative agent network will not result in
less than projected sales volume, a decreased level of service, service delays
or interruptions. As a result of these and other factors, each of which are out
of the control of Imagitel, the loss of one or more of these master agents or
principals could have a material adverse effect on Imagitel. Imagitel believes
that its continued success will depend to a significant extent upon the efforts
and abilities of these agents and principals and other key personnel. The loss
of services of any of these individuals could have a material adverse effect
upon Imagitel. Additionally, these principals will in the aggregate own a
controlling interest in the Reorganized Parent and may be able to exert
substantial influence over the affairs of the Reorganized Parent; however,
Imagitel believes there is not any present intention by these principals to seek
board seats nor executive positions within the Reorganized Parent.
RISKS ASSOCIATED WITH LITIGATION AND CERTAIN REGULATORY ACTIONS. In
September 1997, Imagitel received communications from several state attorneys
general notifying it that it was the subject of a multi-state investigation
regarding its Consumer Access(TM) calling card program. This investigation
involves the States of Tennessee, Michigan, Arkansas, New Jersey, Pennsylvania,
North Carolina, and Texas. These communications were followed up with the
service of formal subpoenas and civil investigative demands by certain states,
and have also included questions relating to the business practices of Imagitel.
Imagitel made a Unified Response to the states' demands on October 31, 1997 and
is cooperating with the states in their investigation. However, Imagitel
objected to producing certain information which it might ultimately have to
disclose if ordered to do so by a court. Imagitel's sale of telecommunications
services in these states comprise a significant portion of its revenue. In the
event these states obtain a restriction on Imagitel's ability to conduct
business in the future or seek redress for past business practices, Imagitel's
business, financial condition, and results of operations would be materially
adversely affected.
In early 1997, Imagitel entered into an agreement with the Illinois
Attorney General's Office that it would not market its telecommunications
services through the use of a sweepstakes box program without seeking the prior
approval of its office. This Agreement was entered into to satisfy that state's
objections to Imagitel's applications for certification in the State of
Illinois. Imagitel was certified shortly thereafter in 1997.
In early March 1998, Imagitel was notified by the Missouri Attorney
General's Office that it was to be the subject of a temporary restraining order
regarding its marketing practices. The order was granted requiring Imagitel to
temporarily cease marketing in Missouri. This Order is set for a hearing in late
April 1998. Imagitel believes it has conducted its business in a lawful manner
and in compliance with all applicable regulations and intends to vigorously
defend itself in this matter so that it will be able to continue marketing its
products and services in Missouri. However, there can be no assurances that
Imagitel will be allowed to continue marketing in Missouri. Customers in
Missouri do not currently constitute a substantial component of Imagitel's
customer base.
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In 1997, the State of Florida conducted an investigation into the
business practices of D.D.D. Calling, Inc., a subsidiary of Imagitel, relating
to its Consumer Access program. Imagitel has advised the Attorney General's
Office that it would modify its existing marketing materials pursuant to an
agreement in principle reached between the parties. There has been no formal
resolution of the matter and the Attorney General is also seeking a restrictive
cease and desist order and the payment of penalties.
Imagitel's business is subject to risks of litigation, customer
complaints and regulatory investigations in the ordinary course of its business.
Although Imagitel believes it has conducted its business in a lawful manner and
in compliance with all applicable regulations, a suit or regulatory action
successfully pursued against it could have a material adverse effect upon its
financial condition and business operations.
REGULATORY MATTERS. Federal laws and regulations promulgated by the FCC
apply to interstate calls, while state regulatory authorities have jurisdiction
over telecommunications involving intrastate calls. A provider of
telecommunications services must be certified by such agencies prior to
providing such services in their respective jurisdictions. There may be
instances in which Imagitel provided intra-state telecommunications services in
a particular state prior to its certification there.
The FCC and various state public service and utilities commissions
typically impose obligations on certified carriers to file tariffs and to
otherwise comply with existing laws and regulations. As a business operating in
such a heavily regulated environment, Imagitel frequently receives
communications from such regulatory bodies relating to consumers who are
dissatisfied with the companies' services and/or their marketing campaigns.
Imagitel has a policy of promptly responding to such inquiries and to resolve
each complaint to the customer's satisfaction. Imagitel does not require
consumers to select it as its primary interexchange carrier ("PIC") for its long
distance service in order to utilize Imagitel's services. This avoids the
potential for "slamming" allegations by consumers (i.e., changing a person's
long distance carrier without his or her knowledge). Imagitel is not aware of
any formal proceedings initiated by either the FCC or any state public service
and utility commission. However, there can be no assurance that such agencies
will not raise material issues with regard to Imagitel's compliance with laws or
regulations or that future regulations will not have a material adverse effect
on Imagitel's business, financial condition, and results of operations.
Moreover, while there are no existing FCC regulations specifically regarding the
marketing of calling card or casual calling services, such regulations may be
promulgated in the future and may accordingly have an impact on Imagitel's
business practices.
In addition to laws relating to telecommunications services, federal
and state laws prohibiting false and deceptive advertising practices govern the
marketing of all products and services. Such laws and regulations are enforced
either by a particular agency, such as the Federal Trade Commission in the case
of federal law, or by individual state attorneys general. Imagitel has had
several ongoing regulatory investigations involving various regulatory agencies
relating to their compliance with such laws, including those discussed above.
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As with other heavily regulated carriers, Imagitel has on occasion
received additional inquiries from various state regulators regarding its
respective business practices. Imagitel responds to each inquiry promptly and
seeks to accommodate the regulator's concern. However, there is no assurance
that a regulator will not disagree with a company's business practices and seek
to obtain a modification or redress.
SWEEPSTAKES MARKETING OPERATIONS. Imagitel has been marketing the
Consumer Access(TM) calling card program, which incorporates a sweepstakes prize
award program, since May 1996. Federal and state laws prohibiting false and
deceptive advertising practices govern marketing promotions that incorporate a
sweepstakes program, as well as the marketing of all products and services, in
addition to federal and states laws regulating lotteries and gambling. A
company, such as Imagitel, conducting a sweepstakes program in which the total
value of prizes awarded exceeds $5,000 is required to be registered with the
States of Florida and New York and to post a bond for the total prize amount.
The appropriate registrations with respect to certain sweepstakes ended June 30,
1997, in the States of New York and Florida were filed on behalf of Imagitel and
the bonds have been released by the States. In connection with the current
sweepstakes promoted in connection with the marketing of the Consumer Access(TM)
card, Imagitel has made the appropriate filings with the States of New York and
Florida and the sweepstakes is currently registered in those states by Imagitel.
LEC BILLING ISSUES. Imagitel bills its revenue generated from the
Consumer Access card through the individual local exchange carriers ("LEC")
pursuant to certain billing agreements with multiple third party billing
agencies. The telecommunications services offered by Imagitel may directly
compete with the services offered by the various LECs, including calling card
services, intra-Lata service, and inter-Lata service. Imagitel must rely on the
LECs and the billing services to handle customer service inquiries directed at
LECs and the billing services relating to Imagitel's operations and to handle
Imagitel's billings properly.
To date, Imagitel has experienced billing problems with at least one
LEC, Bell Atlantic. Imagitel was first advised in July 1997 that Bell Atlantic
had experienced an internal billing problem relating to the Consumer Access(TM)
records from January through May 1997. Imagitel first became aware of the
problem when Imagitel customers contacted its Customer Service department
complaining of multiple billings on one month's bill. After Imagitel contacted
its billing agent to investigate, Bell Atlantic advised the billing agent by
letter dated July 11, 1997 that it had erroneously failed to process Consumer
Access(TM) billing records for the period of January 1997 through May 1997. Bell
Atlantic further advised that it had, independently and without consulting
Imagitel nor Imagitel's third party billing agent, submitted the prior unbilled
multiple monthly bills on one month's bill to consumers beginning on June 26,
1997. These actions were taken all without notifying Imagitel, Imagitel's third
party billing agent, or even Bell Atlantic's own customers. This action by Bell
Atlantic has resulted in a loss of revenue and has generated numerous consumer
complaints and requests for cancellation and refunds.
Several other LECs have carried on internal investigations into
Imagitel's marketing practices. In each case, Imagitel has taken significant
steps to educate the LECs on its marketing process, order fulfillment, customer
service philosophy and regulatory compliance procedures. To date, these LECs
have continued to accept Imagitel's billing records with respect to both new and
existing customers. However, there is no guarantee that these LECs will continue
this practice in the future.
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Imagitel believes that it conducts its business in an ethical fashion
that demonstrates a strong commitment to customer service. Imagitel's practice
is to only process written orders signed by its customers. It then submits such
orders to a rigorous screening process that removes any incomplete, erroneous or
suspicious orders before the order is sent for final processing. As an
additional precaution, Imagitel then sends out a first-class letter welcoming
the customer at least ten days in advance of the first billing that restates the
charges and fees associated with the product that the customer has already
agreed to and offers a "1-800" telephone number should the consumer wish to
cancel the service. Nonetheless, Imagitel does receive complaints from customers
that they were unaware of the charges. Even when presented with a written copy
of their order form, some customers have still denied having signed the order
form or admit they signed the order form but were unaware what they signed
because they didn't read the order form. The nature of Imagitel's operations may
make it susceptible in the future to unfounded allegations of a practice of
billing a consumer on their LEC bill without their permission. This practice
usually occurs in individual amounts of less than $5.00 and, as a result, often
goes unnoticed by a consumer. While Imagitel believes it conducts its billing
practices in a manner intended to avoid any consumer complaints regarding this
type of LEC billing practice, the public attention devoted to the practices of
other companies may unfairly taint the customer's perception of Imagitel. There
is no assurance that a regulator, LEC billing company or other official will not
disagree with Imagitel's business practices and seek to obtain a modification or
redress.
Currently, Imagitel is totally dependent upon LECs for billing its
customers. Imagitel is undertaking new marketing initiatives that have a lesser
reliance on LEC billing. However, should Imagitel be unable to bill and collect
from its customers through some or all LECs, it could create catastrophic
consequences for the financial health of Imagitel. LEC billing is an extremely
expensive method of billing customers. Imagitel believes that lessening its
reliance upon LEC billing will increase its profits and reduce Imagitel specific
and industry wide risks associated with this form of billing and collections
arrangement.
CHARITABLE REGISTRATION ISSUES. Imagitel has entered into a commercial
co-venture agreement with ChildHelp USA. The agreement permits Imagitel to
include the name, likeness, and image of ChildHelp USA and its celebrity
spokespersons in exchange for a royalty fee. It is the opinion of Imagitel's
legal counsel that Imagitel is not required to register as a charitable
solicitor or professional fund-raiser because of the nature of the agreement.
However, the State of Utah has taken the position that its charitable
registration law governs such conduct. Imagitel has entered into an Agreement
with the State of Utah that it will not engage in any marketing campaign, which
involves the use of the name, likeness, or image of a charitable organization
without complying with the State's charitable registration law. There is no
assurance that other states may not take a similar position in the future. There
can be no assurances as to the impact future registrations or penalties for
failure to register may have on Imagitel's business and results of operations.
POTENTIAL ADVERSE EFFECTS OF IMAGITEL'S RELATIONSHIP WITH CERTAIN
AFFILIATES. Imagitel is aware that its relationships with certain affiliates may
prevent or delay certification by the State of California. Certain affiliates of
Imagitel have previously served as principals in other entities that marketed
telecommunications services, none of which entities is affiliated with Imagitel.
Some of these other entities have been and are currently the subject of
regulatory investigations with various regulatory agencies and have entered into
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consent agreements that restrict the method in which these other entities
conduct business. Imagitel believes that its affiliation with such entities may
in itself delay or even prevent its ability to receive certification to provide
its services in certain states. An inability of Imagitel to conduct its business
in certain states where it plans to operate in the future or the cessation of
services in any state where it currently provides services or products may have
a material adverse effect on Imagitel's business, financial condition and
results of operations. The affiliates of Imagitel currently under investigation
will not be officers or directors of the Reorganized Parent; however, they will
own, directly or indirectly, a controlling interest in the capital stock of the
Reorganized Parent and in addition, will continue to provide certain marketing
services and license products to Imagitel and the Reorganized Parent.
IV. RISKS ASSOCIATED WITH THE MERGER AND THE REORGANIZED PARENT
Notwithstanding the belief of the respective Board of Directors of
Wavetech and Imagitel as to the potential benefits to stockholders of the
Merger, stockholders should realize that there may be certain negative
consequences of the Merger. Stockholders should consider carefully certain
effects of the Merger, including the fact that the management of the Reorganized
Parent will be entirely changed from that of Wavetech or Imagitel and the
combination of the businesses of Imagitel and Wavetech will require substantial
dedication of management resources, which will temporarily distract attention
from the day-to-day businesses of the Reorganized Parent. There can be no
assurance that the combination will be completed without disrupting Wavetech's
and Imagitel's respective businesses. Should Wavetech and Imagitel not be able
to combine their businesses in a timely and coordinated fashion, it could have a
material adverse impact on operating results. Moreover, the ability of the
Reorganized Parent to retain key management, technical, sales and marketing
personnel will be critical to the Reorganized Parent's future operations. In
addition, the anticipated combination of the two companies may cause
uncertainties, hesitation and possible dissatisfaction among customers and
potential customers of Wavetech or Imagitel.
Wavetech and Imagitel estimate that they will, in the aggregate, incur
direct transaction costs associated with the Merger in an amount as great as
$1,000,000. These non-recurring transaction costs will be charged to operations
as incurred. See "Unaudited Pro Forma Combined Financial Information."
RISKS MULTIPLIED In addition to the risks detailed elsewhere in this
section, the risk identified as attendant to the Merger shall incorporate by
reference those risks already identified above as risks associated with both the
Company and Imagitel. By its very nature, those previously discussed risks will
be magnified after the Effective Time as the Reorganized Parent seeks to address
not only the previous risks it has inherited from both the Company and Imagitel,
but also those additional risks identified in this section.
POTENTIAL DIFFICULTY IN IMPLEMENTING MARKETING STRATEGY. Growth of
Wavetech's sales of its services will depend to a large degree on Wavetech's
ability to realize the benefits of the relationship with Imagitel contemplated
by the Merger and the integration of Imagitel's operations with those of
Wavetech. Substantial attention and a high level of coordination from management
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of both Wavetech and Imagitel will be required to realize the anticipated
benefits of the relationship. The diversion of the attention of Wavetech's
management from other aspects of Wavetech's business, and any difficulties
encountered in the implementation process, could have an adverse impact on the
revenues and operating results of Wavetech. There can be no assurance that the
anticipated benefits of the Merger will be realized or that the results of
operations and financial condition of Wavetech following the Merger will be
superior to what would have been achieved by Wavetech and Imagitel separately if
the Merger had not been consummated.
DEPENDENCE ON KEY MANAGEMENT. If the issuance of the Merger Shares is
approved by the Stockholders, the Company's executive officers and members of
its Board of Directors, as well as many of its key employees will be replaced
with persons designated by Imagitel. Although these persons have experience in
the telecommunications industry and the Company's management believes they are
well qualified to manage the future business and operations of the Company
post-Merger, there can be no assurance in this regard. In addition, none of such
persons designated to manage and direct the Reorganized Parent are currently
subject to any contractual obligation to perform such functions. There can be no
assurance that the Reorganized Parent's management post-Merger will be able to
successfully integrate and manage the combined operations of Wavetech and
Imagitel, or that it will be able to retain any of its key employees. The
inability to integrate such operations or the loss of any of such key employees
could significantly divert the attention of management and have a material
adverse effect on the Reorganized Parent's business and results of operations.
DILUTION. While the issuance of the Merger Shares to stockholders of
Imagitel will not have the effect of increasing the loss per share of Wavetech
Common Stock, it may reduce any future earnings per share, unless and until
Reorganized Parent achieves revenue growth and other business synergies
sufficient to offset the effect of such issuance. There can be no assurance that
any such revenue growth or other business synergies will be achieved. An
increase in Wavetech's loss per share could result in a decline in the market
price of Wavetech Common Stock.
UNCERTAINTY OF MARKET VALUE OF WAVETECH COMMON STOCK. Upon consummation
of the Merger, each outstanding share of Imagitel Common Stock will be converted
into a number of shares of Wavetech Common Stock as determined pursuant to the
Conversion Ratio. There can be no assurance that the value of the Wavetech
Common Stock received in the Merger by holders of Imagitel Common Stock will be
equal to or greater than the market value of the shares of Imagitel Common Stock
that are converted into Wavetech Common Stock at the Effective Date or at any
time thereafter.
EXPANSION POLICY. The Company is committed to an expansion policy of
acquiring other long distance and telecommunications companies for cash and the
Reorganized Parent's common stock. The Reorganized Parent may be required to
raise additional capital and continue to issue common stock to facilitate its
expansion policy. There can be no assurance that funding will be available and
as the Reorganized Parent issues its common stock for cash or in connection with
an acquisition, existing shareholders will face dilution of their existing
investment in the Company.
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PROPOSAL NO. ONE:
AMENDMENT OF ARTICLES OF INCORPORATION TO
EFFECT REVERSE STOCK SPLIT
The Board of Directors believes that the best interests of the Company
and its Stockholders will be served by amending the Company's Articles of
Incorporation (the "Articles of Incorporation") to effect a one-for-six reverse
stock split (the "Reverse Split") of the Company's issued and outstanding shares
of Common Stock. The Board of Directors has unanimously approved and recommends
a vote FOR the Proposal.
If the Stockholders approve the Proposal, the Company's Articles of
Incorporation will be amended to replace the existing provision relating to the
Company's authorized capital with the following provision relating thereto.
Accordingly, Section 4 of the Articles of Incorporation shall be amended to read
as follows:
The total authorized capital stock of the Corporation is fifty million
(50,000,000) shares of common stock, $.001 par value, and ten million
(10,000,000) shares of preferred stock, $.001 par value. Each six (6)
shares of the Corporation's Common Stock issued and outstanding as of
[INSERT DATE ON WHICH CERTIFICATE OF AMENDMENT IS FILED], (the "Split
Effective Date") shall be automatically changed and reclassified, as
of the Split Effective Date and without further action, into one (1)
fully paid and nonassessable share of the Corporation's outstanding
Common Stock; provided, however, that any fractional interest
resulting from such change and classification shall be rounded upward
to the nearest whole share.
If the Stockholders approve the Proposal, the above amendment to the
Company's Articles of Incorporation shall become effective upon the filing of
the Certificate of Amendment to the Articles of Incorporation with the Nevada
Secretary of State. The Certificate of Amendment will amend the Company's
Articles of Incorporation to give effect to the amendment made pursuant to the
Proposal. The Company's Certificate of Amendment to the Articles of
Incorporation (the "Amendment"), as it will appear if the Proposal is approved
by the Stockholders, is attached as Exhibit I.
The proposed Reverse Split will not affect any Stockholder's
proportionate equity interest in the Company or the rights, preferences,
privileges or priorities of any Stockholder, other than an adjustment which may
occur due to the rounding up of fractional shares. Likewise, the proposed
Reverse Split will not affect the total stockholders' equity of the Company or
any components of stockholders' equity as reflected on the financial statements
of the Company except (i) to change the numbers of the issued and outstanding
shares of capital stock and (ii) for an adjustment which will occur due to the
costs incurred by the Company in connection with this Proxy Statement, the
Annual Meeting and the implementation of the Proposal if approved by the
Stockholders. However, because the number of shares of capital stock that the
Company is authorized to issue will not be decreased in proportion to the
one-for-six decrease in the number of issued shares, the number of shares which
are authorized but unissued, and the percentage of ownership of the Company
represented by such shares if they are issued in the future in the discretion of
the Board of Directors, effectively will be increased.
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The following tables illustrate the principal effects on the Company's
capital stock of the Reverse Split, without giving effect to the Merger, which
is the subject of Proposal No. Two of this Proxy Statement:
NUMBER OF SHARES OF CAPITAL STOCK
Prior to Reverse After Reverse
Split (1) Split (1)
---------------- -------------
COMMON
Authorized 50,000,000 50,000,000
Issued and outstanding (1) 16,203,095 2,700,516
Available for future issuance 33,796,905 47,299,484
PREFERRED
Authorized 10,000,000 10,000,000
Issued and outstanding -0- -0-
Available for future issuance 10,000,000 10,000,000
- ----------
(1) Excludes (i) 2,362,914 shares issuable upon exercise of outstanding options
(393,819 shares after the Reverse Split) and (ii) 3,149,403 shares issuable
upon exercise of outstanding warrants (524,901 shares after the Reverse
Split), each as of March 15, 1998.
LOSS AND BOOK VALUE OF CAPITAL STOCK PER COMMON SHARE
After
Prior to Conversion
Conversion (Pro Forma)
---------- -----------
(Loss) per common share for the year ended
August 31, 1997 $(0.11) ($0.68)
(Loss) per common share for the quarter
ended November 30, 1997 (0.02) (0.10)
Book value per common share as of
August 31, 1997 0.14 0.86
Book value per common share as of
November 30, 1997 0.15 0.92
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EXCHANGE OF SHARES; NO FRACTIONAL SHARES
Pursuant to the proposed Amendment, every six shares of issued and
outstanding Wavetech Common Stock would be converted and reclassified into one
share of post-split Common Stock, and any fractional interests resulting from
such reclassification would be rounded upward to the nearest whole share. For
example, a holder of 120 shares prior to the Split Effective Date would be the
holder of 20 shares at the Split Effective Date, and the holder of 122 shares
prior to the Split Effective Date would be the holder of 21 shares at the Split
Effective Date. The proposed Reverse Split would become effective upon the Split
Effective Date. Stockholders will be notified after the Split Effective Date
that the Reverse Split has been effected. The Company's transfer agent, American
Stock Transfer & Trust Company, will act as the Company's exchange agent (the
"Exchange Agent") for Stockholders in implementing the exchange of their
certificates.
As soon as practicable after the Split Effective Date, Stockholders
will be notified and provided instructions concerning the surrender of their
certificates to the Exchange Agent in exchange for certificates representing
post-split Common Stock. Stockholders will not receive certificates for shares
of post-split Common Stock unless and until the certificates representing their
shares of pre-split Common Stock are surrendered and they provide such evidence
of ownership of such shares as the Company or the Exchange Agent may require.
Stockholders should not forward their certificates to the Exchange Agent until
they have received notice from the Company that the Reverse Split has become
effective. Beginning on the Split Effective Date, each certificate representing
shares of the Company's pre-split Common Stock will be deemed for all corporate
purposes to evidence ownership of the appropriate number of shares of post-split
Common Stock.
No service charge will be payable by Stockholders in connection with
the exchange of certificates, all costs of which will be borne and paid by the
Company.
Stockholders have no right under Nevada law to dissent from the Reverse
Split or to dissent from the rounding up of fractional interests resulting from
the Reverse Split.
PURPOSES OF THE REVERSE SPLIT AND EFFECTIVE INCREASE IN AUTHORIZED SHARES
The primary objective of the Reverse Split is to increase the market
value per share of the Company's Common Stock.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market System under the symbol "ITEL." The Nasdaq SmallCap Market has recently
approved revised qualitative and quantitative requirements for listing thereon,
which became applicable to the Company on February 23, 1998. The Nasdaq SmallCap
Market has advised the Company that it is currently out of compliance with the
$1 per share minimum bid requirement of its listing under the revised
maintenance criteria, and will be subject to removal from that system unless it
sustains a bid price at or above the $1 threshold for at least 10 consecutive
trading days prior to May 28, 1998. The Board of Directors believes that the
Proposal, if approved by the Stockholders, should have the effect of curing the
deficiency in order for the Company to retain its listing under the revised
listing standards. The Company anticipates that the Reverse Split will have the
effect of increasing the minimum bid price of its Common Stock sufficient to
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permit it to satisfy the applicable minimum bid price criteria. However, there
can be no assurance that the Company will be successful in retaining its Nasdaq
SmallCap Market listing. Further, the Board of Directors has been advised that
certain securities firms limit the extension of margin credit for, and otherwise
discourage their registered representatives from recommending, the purchase of
corporate securities that have a market value of less than $5.00 per share.
Under the margin regulations of the Federal Reserve Board, brokers, financial
institutions and certain other lenders may extend credit for the purchase of
margin stock in an amount not to exceed 50% of the market value of such shares.
For purposes of these regulations, the market value of the Common Stock is the
closing price as reported by Nasdaq on the day preceding the extension of
credit. To increase the market value, satisfy the Nasdaq SmallCap Market System
and increase the likelihood of marginability of the Common Stock, the Board of
Directors has determined that the Reverse Split would be in the best interests
of the Company and its Stockholders.
Additionally, the Board of Directors believes that the current price
per share of the Company's Common Stock may reduce the effective marketability
of the Common Stock because of the reluctance of certain brokerage firms to
recommend the purchase of lower-priced stocks to their clients. Certain
institutional investors have internal policies preventing the purchase of
lower-priced stocks and many brokerage houses do not permit lower-priced stocks
to be used as collateral for margin accounts. Further, a number of brokerage
houses have policies and practices that tend to discourage individual brokers
within those firms from dealing in lower-priced stocks. Some of those policies
and practices pertain to the payment of brokers' commissions and to
time-consuming procedures that function to make the handling of lower-priced
stocks unattractive to brokers from an economic standpoint. In addition, the
structure of trading commissions tends to have an adverse impact upon holders of
lower-priced stocks because the brokerage commission on a sale of lower-priced
stocks generally represents a higher percentage of the sales price than the
commission on a relatively higher-priced stock.
The Board of Directors believes that the historically low per share
market price of the Common Stock impairs the marketability of the Common Stock
to institutional investors and members of the investing public and creates a
negative impression with respect to the Company. Many investors and market
makers look upon lower priced stocks as unduly speculative in nature and, as a
matter of policy, avoid investment and trading in such stocks. The foregoing
factors adversely affect both the pricing and the liquidity of the Common Stock.
Thus, the potential increase in trading price is expected to be attractive to
the financial community and the investing public and in the best interests of
the Stockholders.
The Board of Directors is hopeful that the decrease in the number of
shares of Common Stock outstanding as a consequence of the proposed Reverse
Split, and the resulting anticipated increased price level, will stimulate
additional interest in the Company's Common Stock and possibly promote greater
liquidity for the Company's Stockholders. There can be no assurance, however,
that there will be any greater liquidity, and it is possible that the liquidity
could even be adversely affected by the reduced number of shares of Common Stock
which would be outstanding after the proposed Reverse Split is effected.
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If the Reverse Split becomes effective, management expects the quoted
market price of the Company's Common Stock should increase as a result of
decreasing the number of shares outstanding without altering the aggregate
economic interest in the Company represented by such shares. The Board believes
that the increased price would be a more appropriate trading price for a company
that is traded on the Nasdaq SmallCap Market System and is concerned with
long-term development of its business opportunities. In addition, the increase
in the market price may serve to mitigate the present reluctance, policies and
practices on the part of brokerage firms referred to above and diminish the
adverse impact of trading commissions on the potential market for the Company's
shares of Common Stock. There can be no assurance, however, that the Reverse
Split will achieve these desired results, that any such increase would be in
proportion to the one-for-six Reverse Split ratio or that the per share price
level of the Common Stock immediately after the proposed Reverse Split can be
maintained for any period of time.
The Reverse Split may result in some Stockholders owning "odd lots" of
less than 100 shares. The costs, including brokerage commissions, of
transactions in odd lots are generally higher than the costs in transactions in
"round lots" of even multiples of 100.
The primary objective of the effective increase in the number of shares
of Common Stock which are authorized but unissued, and in the percentage of
ownership of the Company represented by such shares if they are issued in the
future in the discretion of the Board of Directors of the Company, is for the
Company to have additional shares of Common Stock authorized and available for
issuance as the need arises for possible future financing transactions, stock
acquisitions, asset purchases, stock dividends or splits, issuances under any
stock option plan that may be adopted in the future, and other general corporate
purposes. The Board of Directors of the Company believes that the effective
increase in the number and percentage of authorized but unissued shares will
provide the Company additional flexibility to issue additional shares of Common
Stock to meet the Company's future financing needs. In order to avoid the delay
and expense involved in obtaining Stockholder approval, the Board of Directors
of the Company believes it to be in the best interests of the Company and its
Stockholders to have shares of Common Stock authorized and available for
issuance without further action by the Stockholders. If the Proposal is
approved, Stockholders will have no preemptive rights with respect to the
additional authorized shares of Common Stock. Such shares of Common Stock may be
issued on such terms, at such times and on such conditions as the Board may
determine in its discretion.
Although the Reverse Split and the effective increase in the number and
percentage of authorized but unissued shares of Common Stock are not intended to
be anti-takeover devices, the effective increase in the authorized capital
together with a subsequent issuance of equity securities could impede a
potential takeover for various reasons including, but not limited to, diluting
the stock ownership of persons attempting to gain control of the Company and
issuing securities to individuals or entities favorable to management. Moreover,
the availability of such additional shares of Common Stock in and of itself
might have the effect of discouraging an attempt to acquire control of the
Company other than through negotiations with the Board of Directors. In addition
to the foregoing discussion in this paragraph, certain provisions in the
Company's Articles of Incorporation or Bylaws could act to discourage a change
in control of the Company. These include the authorization of "blankcheck"
Preferred Stock and certain supermajority voting requirements. The Company has
no plans to adopt any additional measures, other than the Reverse Split, which
may be deemed to be anti-takeover devices.
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In January 1998, the Company entered into a Reorganization Agreement
which contemplates certain actions resulting in effective control of the Company
being held by the former shareholders of Imagitel, the other party to such
agreement. The transaction contemplated by the Reorganization Agreement is
subject to approval by the Company's Stockholders at the Annual Meeting, as well
as other conditions described elsewhere in this Proxy Statement. The Board has
not formulated any program, nor entered into any agreement or understanding, and
has no current intention, to issue any unissued and unreserved shares of Common
Stock for the purpose of impeding or preventing any proposed takeover, including
the Merger discussed herein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A summary of the federal income tax consequences of the Reverse Split
as contemplated in the Proposal is set forth below. The discussion is based on
the present federal income tax law. The discussion is not intended to be, nor
should it be relied on as, a comprehensive analysis of the tax issues arising
from or relating to the proposed Reverse Split. Income tax consequences to
Stockholders may vary from the federal tax consequences described generally
below. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE EFFECT OF
THE CONTEMPLATED REVERSE SPLIT UNDER APPLICABLE FEDERAL, STATE AND LOCAL INCOME
TAX LAWS.
The proposed Reverse Split constitutes a "recapitalization" to the
Company and its Stockholders to the extent that issued shares of Common Stock
are exchanged for a reduced number of shares of Common Stock. Therefore, neither
the Company nor its Stockholders will recognize any gain or loss for federal
income tax purposes as a result thereof.
The shares of Common Stock to be issued to each Stockholder will have
an aggregate basis, for computing gain or loss, equal to the aggregate basis of
the shares of such stock held by such Stockholder immediately prior to the Split
Effective Date. A stockholder's holding period for the shares of Common Stock to
be issued will include the holding period for the shares of Common Stock held
thereby immediately prior to the Split Effective Date provided that such shares
of Common Stock were held by the Stockholder as capital assets on the Split
Effective Date.
VOTING REQUIREMENTS
Each holder of Wavetech Common Stock is entitled to one vote per share
held. The holders of a majority of the shares of the Common Stock issued and
outstanding constitutes a quorum. The affirmative vote of holders of a majority
of the outstanding shares of Wavetech Common Stock of the Company entitled to
vote and present in person or by proxy at the Annual Meeting is required for
approval of the Proposal, provided that the number of shares present in person
or by proxy constitutes a quorum. In the event that a quorum is not present or
represented at the Annual Meeting, the Stockholders entitled to vote at the
meeting present in person or by proxy shall have power to adjourn the Annual
Meeting until a quorum shall be present or represented. Proxies solicited by the
Board of Directors will be voted for approval of the Proposal. Stockholders are
not entitled to cumulate votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL.
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PROPOSAL NO. TWO:
APPROVAL OF ISSUANCE OF
WAVETECH COMMON STOCK PURSUANT TO
REORGANIZATION AGREEMENT AND PLAN OF MERGER
RECOMMENDATION OF THE WAVETECH BOARD OF DIRECTORS AND
REASONS FOR THE MERGER
GENERAL
Both Imagitel and Wavetech currently provide long distance
telecommunications services. Wavetech, through its wholly-owned subsidiary
Interpretel, Inc., is a switch-based carrier of long distance services. To date,
Wavetech has provided such services primarily through post-pay calling cards.
Imagitel is a switchless reseller of long distance services and
telecommunications enhancement
DESCRIPTION OF IMAGITEL, INC.
HISTORY AND OVERVIEW. Imagitel is a holding company formed in December
1997 to consolidate the ownership of two operating companies with the same
ownership, management and directorship. These two operating companies are now
wholly-owned subsidiaries of Imagitel. RRV Enterprises, Inc.. a Texas
corporation doing business as Consumer Access ("RRVE"), is the primary operating
company. RRVE was formed in January 1996 and has generated all of the revenues
of Imagitel to date. RRVE is a switchless reseller of long distance and enhanced
telecommunications services certified to conduct business in more than 40
states. DDD Calling, Inc. ("DDD") is a development stage corporation organized
under Texas laws in January 1996. DDD is also a switchless reseller of long
distance and enhanced telecommunications services, and is certified to conduct
business in more than 40 states. However, it has no revenues at this time.
Zapcom International, Inc., a Nevada corporation, is a newly formed subsidiary
of Imagitel. It is a development stage company that is engaged in marketing
services for the various Imagitel Companies. Comac Interim, Inc., a Delaware
corporation, is a newly formed subsidiary of Imagitel that is going to be used
to acquire another small telecommunications marketing company. See
"--Acquisition Plans" below. In states where Imagitel is not yet certified,
Imagitel has licensed its program to other carriers and will receive royalties
and management fees in an amount equal to a portion of their sales. In an effort
to build market share, Imagitel has determined that strategic alliances with
existing organizations that have complementary assets and skills also offer the
potential for distribution partnering relationships.
EXISTING PRODUCTS. Imagitel, through its principal operating subsidiary
RRVE, currently markets the Consumer Access(TM) benefits calling card. Although
there are numerous calling cards currently on the market, Imagitel believes that
its Consumer Access card offers customers a unique combination of value and
convenience. Consumer Access service is not canceled when the customer changes
long distance carriers. The only way that Consumer Access loses a customer is if
that customer calls or writes to express a desire to cancel. The calling card
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offers long distance calling services at only $0.25 per minute to any location
in the United States. Imagitel believes this is one of the lowest calling rates
currently offered in the United States, although Imagitel's strategy is based on
the best value, not lowest price. In combination with this rate, an active
member of the Consumer Access program also receives access to a host of
benefits. These benefits include a discount dining program (which gives users a
20% rebate at thousands of restaurants), discounts at golf courses and hotels, a
travel saving program, prepaid legal expenses and many others.
Many of Imagitel's customers also enjoy a marketing alliance with
Childhelp USA(R). Childhelp USA(R) is a nonprofit entity that raises money to
fund a national child abuse hotline, residential treatment centers and outreach
programs on a nationwide basis to help end child abuse. Childhelp is backed by
many celebrity spokespersons and earns a royalty on every long distance dollar
billed to a Consumer Access user.
The Consumer Access program was commenced in May 1996 and currently,
Consumer Access has over 750,000 active customers in over 40 states. The calling
card program is marketed through a nationwide independent agent network.
Imagitel through its primary operating subsidiary, RRVE, has grown from its
first month's billings of $160,000 in June 1996 to $4.2 million in January 1998.
NEW PRODUCT LINES. Imagitel's second product planned for introduction
to the non-PIC long distance market is the Bill Zapper(TM) product. The Bill
Zapper is intended to capitalize upon the recent growth in the
telecommunications industry in "dial-around" services, which offer low cost long
distance services by dialing an access code as opposed to subscribing to a
single provider of "1+" long distance service. The Bill Zapper is an intelligent
autodialer unit which utilizes a user's customized use history and information
profile to access the most economical service provider each time the customer
makes a telephone call. The Bill Zapper (TM) unit is also capable of delivering
calls through a calling card platform or a local access number system. Imagitel
believes this flexibility will allow it to incorporate Internet telephony as it
becomes available. Imagitel currently has a patent pending for the Bill Zapper.
The Bill Zapper will be provided by and licensed to Imagitel's
subsidiary DDD and distributed throughout the United States by another Imagitel
subsidiary, Zapcom. One thousand units of the Bill Zapper(TM) were manufactured
for use in a nationwide test in March, 1997. Based upon the results of that
test, Imagitel made a number of improvements to the product, and is currently
undergoing final testing of the revised version. The first shipments are
expected to be available in the third quarter of 1998.
The third major product innovation currently being developed by
Imagitel is the Travel Warrior product. This is a product intended to be
marketed to the business traveler. The Travel Warrior(TM) unit is intended to
plug directly into a hotel room phone unit. A customer merely dials the phone in
the normal manner and the Travel Warrior(TM) unit reads the dialed number,
identifies it as a long distance number, captures the number and dials out to
Imagitel's toll-free number. It then dials the user's personal identification
number (PIN) code automatically and redials the desired long distance number
automatically, thereby accessing the calling rates offered by Imagitel. An added
feature of the Travel Warrior(TM) unit is the speed dial feature that will allow
the user to completely autodial the entire series of numbers for their home,
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office, voice mail or other favorite location. Imagitel intends to begin test
marketing the Travel Warrior initially through targeted direct mail and
in-flight magazines and eventually through its direct sales force. The Travel
Warrior(TM) unit prototype is currently being tested and the units should be
available during the third quarter of 1998.
DDD also intends to offer the ZapCard(TM) Calling Card to Imagitel
customers. Modeled after the Consumer Access(TM) calling card, the ZapCard(TM)
calling card product will pay commissions to a direct sales force.
ACQUISITION OF ACCOMMODATIONS SERVICES, INC. Imagitel currently has an
option to acquire ACCOMModations Services, Inc., a closely held Delaware
corporation ("ASI"), for approximately 4,000 shares of Imagitel Common Stock.
ASI is a telecommunications marketing company that serves the hospitality
industry and is currently not profitable. At the present time, there is no
definitive acquisition agreement between ASI and Imagitel; however, Imagitel
anticipates consummating this acquisition prior to Effective Time. This
transaction is not expected to have a material impact on the consolidated
operations or cash flow of Imagitel or Reorganized Parent.
The primary purpose of the Merger is to enable Reorganized Parent to
become a leader in marketing telephony-based products and services for
specifically targeted demographic markets, both domestically and
internationally. The perceived synergies and anticipated efficiencies to be
realized by combining the technology and expertise of Wavetech in creating
customized enhanced calling card services with the demonstrated promotional
skills of Imagitel is a primary benefit expected to be realized as a result of
the Merger. Reorganized Parent will continue Wavetech's existing line of
business and supplement it with the marketing expertise and products of
Imagitel. The Company believes that Wavetech's underlying technology and
business model is sound and, with some adjustment, should serve its shareholders
well. The anticipated benefits of the Merger to shareholders include a broader
customer base with opportunities to cross-sell Wavetech products, a stronger
asset value and financial position, better access to capital and greater growth
potential. Existing products, new product development, services, technology,
distribution channels, facilities, industry contacts and personnel of Wavetech
and Imagitel will be integrated to maximize the strengths of each organization.
Although the Company believes that the Merger is in the best interests of the
Company and its shareholders, there can be no assurance that all or any of the
anticipated benefits of the Merger will be realized when and as contemplated, if
at all.
Imagitel's business strategy consists of an eight point philosophy:
1) IMAGITEL USES MASS MARKETING TECHNIQUES TO MARKET AND PROMOTE ITS PRODUCTS
AND SERVICES. This allows Imagitel to rapidly deploy its products and
services and obtain larger numbers of customers in a relatively short
period of time.
2) IMAGITEL SEEKS TO INCREASE ITS BASE OF CUSTOMERS AT A RELATIVELY LOW COST
BY UTILIZING INNOVATIVE MARKETING PRACTICES THAT ALLOW FOR INEXPENSIVE
CUSTOMER ACQUISITION. The telecommunications industry generally experiences
a high degree of customer turnovers as subscribers frequently change
providers in response to promotions or other incentives. Imagitel believes
that a company which spends an inordinate amount of resources in order to
acquire an at-will customer may ultimately offset any potential profits to
be realized as a result of such customer's business.
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3) IMAGITEL SEEKS TO LIMIT THE COST OF "COMPETITIVE WINBACK" PROGRAMS BY
COMPETITORS BY SHARING THE CUSTOMER WITH THE COMPETITION. Most long
distance providers have developed marketing programs that revolve around
the notification they receive when an existing customer leaves their
existing service provider. This is referred to as a competitive winback.
Because Imagitel does not provide "1+" services, there is no notification
that a new customer to Imagitel has left their previous service provider
because they still have that service provider and have simply overlaid
their new Imagitel service on top of their existing service.
4) IMAGITEL SEEKS TO REDUCE CUSTOMER TURNOVER BY OFFERING ITS SERVICES IN
CONJUNCTION WITH, AND NOT AS AN ALTERNATIVE TO, A CUSTOMER'S EXISTING
PRIMARY LONG-DISTANCE SERVICE PROVIDER.
5) IMAGITEL SEEKS TO OFFER A DIFFERENTIATED SUITE OF PRODUCTS TO DISTINGUISH
ITSELF FROM ITS COMPETITORS. Imagitel cannot afford to use cost as a
differentiator in the telecommunications marketplace. By differentiating
its products, Imagitel believes it can increase the perceived value of its
product or service offering and charge a competitive premium to the
consumer.
6) IMAGITEL SEEKS TO PROMOTE ENTANGLEMENT. Imagitel believes that consumers
today need to have a reason to keep using a product or service provider
(i.e., "entanglement"). Loyalty programs, mileage, rebates and affinity
programs are all examples of entanglement. Imagitel consistently seeks new
and innovative ways to encourage its customers to remain loyal.
7) IMAGITEL WORKS HARD TO DECREASE THE PERCENTAGE OF ITS CUSTOMERS WHO PRESENT
A CREDIT RISK. Imagitel uses prepaid, LEC billing, credit card and bank
draft billing and relationship marketing as a means of keeping the
customer's account current.
8) IMAGITEL SEEKS TO MAXIMIZE ITS PROFIT PER CUSTOMER, NOT JUST MARGIN PER
CUSTOMER. Rather than focus solely on making a certain percentage per
customer's monthly billing, Imagitel focuses on realizing a minimum
predetermined amount of profit per customer. Imagitel seeks to create
programs to sell its products and services that attract customers and that
prove to be profitable to Imagitel based upon the amount of resources
Imagitel must devote in order to attract, maintain and service that
customer.
RECOMMENDATION OF WAVETECH BOARD OF DIRECTORS
THE WAVETECH BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED
MERGER AND BELIEVES THE MERGER IS IN THE BEST INTEREST OF WAVETECH AND ITS
STOCKHOLDERS. ACCORDINGLY, THE WAVETECH BOARD UNANIMOUSLY RECOMMENDS THAT
WAVETECH STOCKHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE OF UP TO 85,000,000
SHARES OF WAVETECH COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT. In
reaching their decision, the directors considered, with the assistance of
management and its financial advisors the following factors:
(i) the strategic fit between Wavetech and Imagitel and the
complementary nature of their respective businesses;
(ii) anticipated operating synergies and cost saving;
(iii) the skills and experiences of Imagitel personnel and their
ability to further strengthen Wavetech's management and
telecommunications operations;
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(iv) the financial, marketing and operational resources of the
combined companies and the opportunity for expanded service
offerings in existing markets and growth in new markets; and
(v) the opinion of Kaufman Bros., Inc. that as of the date thereof
the consideration to be gained as a result of the Merger is fair,
from a financial point of view, to Wavetech and its stockholders.
In evaluating the proposed number of shares of Wavetech Common Stock to
be issued in connection with the Merger, the Wavetech Board considered: (i) the
proposed terms, timing and structure of the Reorganization Agreement, (ii) the
capital structure of Imagitel and its subsidiaries, (iii) information received
concerning the financial performance, condition, business operations and
Imagitel; and (iv) the opinion of Kaufman Bros., Inc. described under "Opinion
of Kaufman Bros., Inc.", including the various matters considered by Kaufman
Bros., Inc. in reaching its conclusion.
The Board also considered a number of risks associated with the Merger,
including (i) increased risks of regulatory investigations and other actions
associated with the business of Imagitel, (ii) the possibility that Imagitel
would not be successfully integrated into Wavetech, thus prohibiting the
Reorganized Parent from taking advantage of the synergies expected to result
from the Merger, (iii) increased risks of litigation and (iv) the possibility
that the Reorganized Parent would be unable to successfully implement its
marketing and operating strategies. On balance, however, the Wavetech Board
determined that the benefits of the Merger outweighed the potential risks and
unanimously approved the Reorganization Agreement, including the issuance of
Wavetech Common Stock required thereby.
The foregoing discussion of information and factors considered by the
Wavetech Board is not intended to be exclusive but is intended to include the
material factors considered. In view of the wide variety of factors considered,
the Wavetech Board did not find it practical to, and did not quantify or
otherwise assign relative weight to the specific factors considered and
individual directors may have given different weights to various factors.
BUSINESS OF REORGANIZED PARENT
THE FOLLOWING DISCUSSION OF THE PRINCIPAL BENEFITS AND RISKS
ANTICIPATED TO RESULT FROM THE MERGER INCLUDES CERTAIN FORWARD-LOOKING
STATEMENTS. WHEN USED IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN THIS PROXY
STATEMENT, THE WORDS "ESTIMATE," "ANTICIPATE," "INTEND," "EXPECT" AND SIMILAR
TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO THE
FUTURE PERFORMANCE OF WAVETECH, IMAGITEL AND THE REORGANIZED PARENT AND ITS
SUBSIDIARIES. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL UNCERTAINTY. READERS
ARE STRONGLY CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE
ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROXY STATEMENT.
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The ability of Reorganized Parent and its subsidiaries to incorporate
technological innovations will be enhanced by the technology expertise that
Wavetech will contribute to the Reorganized Parent, as well as its key contacts
in the technology side of the telecommunications field. The management of
Wavetech and Imagitel believes that technology will be a significant factor to
keeping Reorganized Parent's operating costs low, such as the use of direct
billing through the Internet, credit card authorization programs, e-mail
delivery of customer invoices, bills and on-line technical support and customer
service. Automated systems, such as Interactive Voice Response ("IVR") systems,
should also help keep costs down and service levels high.
The Reorganized Parent must develop additional marketing and
distribution channels in addition to creating new product and service offerings
in order to continue its success. The telecommunications industry is extremely
competitive and is subject to change its focus virtually overnight. A single
event can dramatically shift the competitive landscape and, as a result, the
Reorganized Parent would be required to redirect its focus immediately in order
to remain competitive. Although Wavetech already maintains telecommunications
switches and infrastructure, established vendor and customer relationships and a
distributor network, to date it has not been able to launch successful and
profitable marketing campaigns and has failed to reach a critical mass of
customers sufficient to make an impact in the telecommunications arena. The
Company believes that Imagitel's marketing resources will help to ameliorate
Wavetech's historical marketing difficulties since Imagitel has already achieved
significant customer penetration in the telecommunications field.
GROWTH STRATEGIES. The Reorganized Parent will seek to maximize its
future growth, profitability and equity valuation through a five part plan which
consists of the following:
+ Enhancing existing service offerings while systematically
developing innovative products which uniquely improve the
personal communications needs of its targeted customers;
+ Differentiate and position value-added products through
intelligent, avant-garde packaging and promotional/incentive
strategies;
+ Increase sales by establishing multiple channels of distribution,
thereby facilitating mass marketing opportunities;
+ Acquire additional telecommunications companies with
complementary business or product offerings in order to enhance
the Reorganized Parent's core products and service offerings,
distribution, operations, scalability, and/or critical mass; and
+ Optimize technological improvement opportunities in order to
increase productivity, efficiencies and operating margins.
MARKETING OBJECTIVES OF REORGANIZED PARENT. Distribution and
differentiation have traditionally been vital keys to success in the
telecommunications industry. Telecommunications is a commodity and must be
packaged and marketed in unique and uncommon ways. Reorganized Parent will seek
to differentiate its products and services through new product development and
innovative marketing. The Reorganized Parent must be flexible to the needs of
the telecommunications marketplace. It must be able to identify the needs of its
customers in a timely manner, develop products responsive to those needs and
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continuously monitor the appropriateness of market acceptance to ensure
financial viability. Internal development of innovative products and
distribution techniques combined with strategic acquisitions and alliances with
other organizations and industries will be essential to the future success of
Reorganized Parent.
The principal focus of Imagitel has been the promotional marketing of
calling cards directly to the consumer using mass marketing, while the focus of
Wavetech has been direct sales to corporate, affinity groups and non-profit
organizations that distribute the calling cards to their respective client bases
using various promotional techniques. Reorganized Parent and its subsidiaries
intend to target their products to a variety of market segments, such as mass
distribution to consumers, and directed marketing to affinity groups and
commercial and non-profit corporate entities using the respective experience of
Imagitel and Wavetech to support and enhance these separate initiatives.
Existing Wavetech contracts require strong promotional components in order to
achieve maximum market penetration. The Company believes that Imagitel has this
expertise and will greatly enhance the ability of Wavetech to design successful
promotional programs for its corporate clients.
Strategic relationships form another important component of the Merger.
Wavetech currently has both client and service provider relationships with a
number of major corporations. The enhanced services integrated into Wavetech's
calling cards are provided by such organizations as Dun & Bradstreet, LawLine
Canada Inc., Diners Club/enroute, AT&T's Language Line Service and MCI. These
relationships will become increasingly important as the new entity creates new
applications for new clients. The 750,000 existing customers of Imagitel are
expected to become an important component in strengthening these relationships,
resulting in higher volumes of activity and permitting more cost-effective
delivery based on increased volume. None of Imagitel's customers are
contractually obligated to continue to purchase services from Imagitel for any
specified period or in any specified amounts, and there can be no assurances
that such customers will continue to purchase the services of the Reorganized
Parent following the consummation of the Merger.
The Company believes that, as a result of increased long distance
volume, Reorganized Parent will be able to secure more favorable rates from
carriers. Through existing international relationships, such as Wavetech's
partnership with Switch in Australia, Reorganized Parent will be able to extend
its product offerings into new and evolving markets. But, see "Risk Factors -
Dependence On Licensing Relationships."
PLANNED DISTRIBUTION METHODS. The approval of the Reorganization
Agreement by the Board of Directors of Wavetech was influenced in large part by
the marketing and distribution strategies of Imagitel. The Reorganized Parent
intends to use a variety of marketing and distribution strategies in order to
maximize sales volumes while seeking to maintain the integrity of its products'
reputations. Initially, these strategies will consist of those currently being
developed by Imagitel, which are described herein.
GROUP, CORPORATE AND AFFINITY SALES. A Corporate Services
Division is currently being developed which, upon completion, is
intended to perform as a centralized sales and marketing group to
offer private label and Imagitel branded products and services to
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corporations, affinity groups and others. During the second quarter of
1998, Consumer Access(TM) will begin test marketing of its affinity
marketing program. Initially, Consumer Access(TM) will target
nonprofit groups, political affiliation groups, and social affinity
groups, as well as alliances with credit card issuers. As with the
Consumer Access(TM) calling card product, the Bill Zapper(TM) and
Travel Warrior devices will be made available to affinity groups.
Imagitel believes that marketing its products to affinity groups is an
effective method of distribution and may lend itself to additional
retail sales.
The Reorganized Parent intends to seek out partnership
opportunities with electric utilities, internet service providers
("ISP") and to a lesser degree, cable companies. Imagitel believes
that such industries provide attractive partnership opportunities
because both have an existing customer base with whom they have a
substantial relationship, both have direct billing systems in place,
both have installation personnel technically proficient enough to
handle a more sophisticated installation of the Bill Zapper(TM) unit
at the network interface and each has a desire to enter into other
lines of business to diversify in anticipation of increased
competition from new entrants to their respective industries. However,
Imagitel does not currently have agreements with any such strategic
partners. There can be no assurance that such relationships, if ever
developed, will be successful.
DIRECT SALES THROUGH MULTILEVEL MARKETING. Multilevel Marketing
("MLM") has historically been demonstrated to be a cost effective
method of products distribution. Imagitel formed its subsidiary,
Zapcom International, Inc. to distribute its Bill Zapper and Travel
Warrior products through MLM and other methods. Because MLM has
previously received negative publicity for certain aggressive
marketing techniques and other reasons, Zapcom has extensively
screened its management team, and legal and marketing counsel in
conjunction with its efforts to establish high standards of
performance for its MLM operations.
DIRECT RESPONSE. In addition to affinity marketing strategies,
Consumer Access(TM) is also currently developing a direct mail
campaign to supplement the other distribution models. These marketing
efforts will be conducted either in-house, as a strategic alliance
with an unrelated direct mail company or some combination of the two
methods. Imagitel believes that direct mail affords it an opportunity
to distribute its products through a channel that traditionally
returns relatively predictable rates of market acceptance. A direct
campaign aimed at frequent fliers using various media such as
in-flight magazines, catalog sales, infomercials, Internet sales and
other targeted methods is also currently being tested and analyzed
prior to implementation. Imagitel is currently formulating its
strategy to offer its products and services on infomercials.
Imagitel also intends to develop an Internet site as a means of
mass marketing. This phase has not yet begun development, but is
planned for introduction by the third quarter of 1998. Imagitel
believes the Internet could provide broad exposure for Imagitel and
its products. In determining how to develop this particular
distribution strategy, Imagitel will look for ways to differentiate
its product offerings from those of other long distance companies
which advertise on-line. In addition, Imagitel intends to develop an
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Internet site as a means of target marketing the products marketed by
Zapcom. Initially, there will be on-line support for direct mail and
target print advertising. This will be expanded to include Internet
advertising. These activities are intended to form a part of the MLM
approach of distribution as a means of communicating with Imagitel's
agent network, distributing bills and receiving payments.
Imagitel has also entered into contracts for several trade show
booths and intends to have several teams of its employees to work at
informational booths at various industry-specific trade shows. The
booths are intended to increase the visibility of Imagitel's products
and services, and also act as a conduit for determining the price
points of its products and marketing materials of Imagitel's various
product offerings.
TECHNOLOGICAL DEVELOPMENTS. The information and telecommunications
services markets are characterized by rapid technological change, frequent new
product introductions and evolving industry standards. The Reorganized Parent'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 platforms, and successfully compete with
products and services based on evolving or new technology.
As a facilities-based telecommunications company, the Reorganized
Parent expects to deploy call processing platforms to switch long distance calls
and delivery of enhanced services. The connection of these platforms to the
public communications network are an example of current state-of-the-art
computer telephony integration (CTI). Utilizing a UNIX-based operating system
and other proprietary software, the system is integrated with a high-speed
server and is fully scaleable to support unlimited growth. The open architecture
will allow the addition of unlimited enhancements, features and new
applications. Unlike conventional telecommunications switches, the platforms are
highly intelligent and will allow multiple applications to run simultaneously
while dynamically sharing system resources.
Whereas these platforms form the backbone for switching calling card
traffic, the Reorganized Parent intends to aggressively develop new technology
to augment its conventional products, including new services that will rely on
integration of voice and data with the Internet and other communication
networks. Platforms are currently operational in the United States and
Australia, with another location in Canada planned for 1998.
Wavetech's existing systems are not capable of accommodating the
products and services currently planned to be distributed by Reorganized Parent.
The Reorganized Parent will be required to make substantial investments of
financial and other resources in order to upgrade such systems so as to
accommodate the substantially increased demand anticipated to be placed upon
them as a result of the increased customer base of the Reorganized Parent as
compared to that of Wavetech. In order to meet such demand and effectively
upgrade, test and implement the improvements to Wavetech's existing systems
necessary to meet the demands of the Reorganized Parent, Reorganized Parent will
be required to expend a significant amount of financial, technical and other
resources and devote a substantial amount of the attention of its management.
There can be no assurance that the Reorganized Parent will successfully
implement such upgrades and, if so, will be able to do so in a timely and
cost-effective manner.
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ACQUISITION STRATEGIES. The telecommunications industry is highly
fragmented among the smaller niche players and consolidation is already taking
place. While there are no current negotiations being undertaken nor any
agreements in place to acquire specific companies, Reorganized Parent expects to
pursue potential acquisition/merger targets, and will evaluate such
opportunities as they become available. Reorganized Parent plans to form an
acquisition and capital markets group to take advantage of the favorable debt
and equity markets currently existing and to exploit the rapid industry
consolidation that is evolving. These opportunities present the potential to not
only become accretive to earnings, but to also add synergistic value to
Reorganized Parent's business and results of operations.
Future acquisitions by Reorganized Parent may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt, the
write-off of development costs, and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a material adverse
effect on Reorganized Parent'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 new entity
has little or no direct prior experience and the potential loss of key employees
of the acquired company. Reorganized Parent currently has no agreements or
understandings with regard to any potential acquisitions.
PLANNED CONSOLIDATION AND CENTRALIZED SERVICES BY IMAGITEL. Following
the Merger, Imagitel intends to restructure some of its operations and
consolidate them with those of Wavetech in order to develop the consolidated
operations of Reorganized Parent. Imagitel and Wavetech believe that
centralizing such services will allow Reorganized Parent to take advantage of
economies of scale, allow for greater development of expertise in the
consolidated areas and provide better career opportunities and incentives to its
employees while streamlining operational decision-making processes and reducing
the time associated with bringing its products to market.
The services currently intended for centralization include accounting,
management information systems, regulatory compliance, customer services,
product development, vendor and contract management, carrier relations, human
resources and some marketing and distribution assets.
Currently, many of these services are provided to Imagitel by a company
affiliated with Imagitel's principals. These services, which are governed by a
cost-sharing contract, include accounting, marketing and administration. The
employees providing these services will continue to provide these services to
the Reorganized Parent until it internalizes these functions after the Merger.
The cost of acquiring such services is currently not expected to have a material
impact on the financial condition of the Reorganized Parent, although there can
be no assurance in this regard.
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THE MERGER
GENERAL
The respective Boards of Directors of the Company and Imagitel have
each separately approved the execution of the Reorganization Agreement and
performance of the actions contemplated thereby, including, among other things,
the issuance of up to 85,000,000 shares of Wavetech Common Stock pursuant to the
Merger. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR APPROVAL OF
THE REORGANIZATION AGREEMENT AND EXECUTION OF THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING, AMONG OTHER THINGS, THE MERGER.
THE FOLLOWING SUMMARY OF THE MATERIAL TERMS OF THE REORGANIZATION
AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SPECIFIC PROVISIONS
OF THE REORGANIZATION AGREEMENT, WHICH IS ATTACHED AS EXHIBIT II TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
EFFECTIVE TIME AND EFFECT OF THE MERGER
Pursuant to the Reorganization Agreement by and among the Company,
Interim and Imagitel, Interim will merge with and into Imagitel, which shall be
the Surviving Sub and which shall become a wholly-owned subsidiary of the
Company. The former shareholders of Imagitel shall be issued a number of shares
of Wavetech Common Stock equal to approximately 72% of the total issued and
outstanding Wavetech Common Stock (84% after giving effect to certain options
held by Imagitel shareholders which shall be converted into options to purchase
Wavetech Common stock) after giving effect to the Merger.
Interim is a Nevada corporation and a wholly-owned subsidiary of
Wavetech, created for the purpose of effecting the Merger. Imagitel is a Nevada
corporation whose principal executive office is located at 5120 Woodway Drive,
Suite 7009, Houston, Texas 77056. As a result of the Merger, the corporate name
of the Company will be changed from "Wavetech International, Inc." to "Imagitel,
Inc." With the exception of such corporate name change and except as may be
effected in connection with the Reverse Split, if approved by the Stockholders,
all other provisions of the Company's Articles of Incorporation and By-laws as
currently in effect shall remain unaffected as a result of the Merger. For
purposes of describing the Company and its business following the Merger, the
Company is referred to herein as the "Reorganized Parent."
The Merger will become effective upon the filing of the Articles of
Merger with the Secretary of State of the State of Nevada or at such later time
as may be provided in the Articles of Merger (the "Effective Time"). The
Effective Time is expected to occur as promptly as practicable following the
approval of the Reorganization Proposal by the Company's Stockholders, subject
to the further conditions described under "The Merger - Conditions to
Consummation of the Merger."
As a result of the Merger, each Imagitel shareholder shall, without any
action on his part, be entitled to receive approximately 365 shares of Wavetech
Common Stock, subject to adjustment pursuant to the Conversion Ratio, for each
share of Imagitel Common Stock issued and outstanding immediately prior to the
Effective Time. (The Conversion Ratio is calculated without giving effect to the
Reverse Split.) The actual number of shares of Wavetech Common Stock to be
issued in exchange for each share of Imagitel Common Stock shall be adjusted in
accordance with the Conversion Ratio, based upon the actual number of shares of
Wavetech Common Stock outstanding, and as follows: (i) additional shares of
Wavetech Common Stock shall be issued in the event that the Company's funded
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debt and working capital deficit as of the calendar month immediately preceding
the Effective Time exceeds $300,000 or in the event that Imagitel has, as of
such date, positive working capital and (ii) a decreased number of shares of
Wavetech Common Stock shall be issued in the event that the Company's funded
debt and working capital deficit as of the calendar month and immediately
preceding the Effective Time is less than $300,000 or in the event that Imagitel
has a working capital deficit as of such date. It is currently anticipated that
Imagitel will not have a working capital deficit at the Effective Time. The
Company has reserved an aggregate of up to 85,000,000 shares of Wavetech Common
Stock for issuance in connection with the Merger. The shares of Interim will be
canceled as a result of the Merger. All of the outstanding shares of Imagitel
will be held by Reorganized Parent and the capitalization of the Surviving Sub
will remain unchanged from that of Imagitel's immediately prior to the Effective
Time. Any and all shares of Imagitel Common Stock held as treasury shares by
Imagitel will be canceled and retired at the Effective Time and no consideration
shall be issued or given in exchange therefor.
After the Effective Time, each holder of shares of Imagitel Common
Stock issued and outstanding at the Effective Time shall surrender the
certificate representing such shares to Reorganized Parent and shall receive in
exchange therefor a number of shares of Wavetech Common Stock calculated
according to the Conversion Ratio for each share of Imagitel Common Stock and
cash in lieu of any fractional share of Wavetech Common Stock to which such
holder might be entitled. If such holder has lost his or her certificate, he or
she shall present an affidavit of loss and indemnity agreement and/or a bond as
may be reasonably required by either Reorganized Parent or Surviving Sub.
Following the Effective Time, Reorganized Parent's transfer agent and
registrar, American Stock Transfer & Trust Company, shall mail to each
shareholder of Reorganized Parent, a notice of the effectiveness of the Merger
and instructions on how to exchange certificates representing shares of Wavetech
Common Stock for certificates representing a number of shares of the $.001 par
value common stock of Reorganized Parent, which gives effect to the Reverse
Split and corporate name change.
Following the Merger, the business and operations of Reorganized Parent
will be significantly changed as a result of the combination of the differing,
yet complementary, businesses of the Company and Imagitel. Stockholders are
strongly urged to review the description of Imagitel and the contemplated
business of Reorganized Parent set forth herein, as well as the description of
certain investment considerations associated with the business of Reorganized
Parent and its subsidiaries described under "Risk Factors" and elsewhere herein.
OPINION OF KAUFMAN BROS., INC.
Wavetech has engaged Kaufman Bros., Inc. to render its opinions with
respect to the fairness, from a financial point of view, to the stockholders of
Wavetech of the Merger and such other actions contemplated to be taken by the
Reorganization Agreement.
Such opinion shall be delivered prior to the mailing of the definitive
Proxy Statement to the Wavetech Stockholders.
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THE FULL TEXT OF THE OPINION OF KAUFMAN BROS., INC., WHEN ISSUED, SHALL
BE ATTACHED HERETO AS EXHIBIT III. WAVETECH STOCKHOLDERS ARE URGED TO READ THE
KAUFMAN BROS., INC. OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF
THE ASSUMPTIONS MADE, MATTERS CONSIDERED, PROCEDURES FOLLOWED AND THE LIMITS OF
KAUFMAN BROS., INC.'S REVIEW. THE SUMMARY OF THE KAUFMAN BROS., INC. OPINION TO
BE SET FORTH IN THIS PROXY STATEMENT SHALL BE QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION TO BE INCORPORATED HEREIN BY
REFERENCE.
MANAGEMENT OF THE REORGANIZED PARENT. The executive officers of
Reorganized Parent and Surviving Sub following the Effective Time will be as
follows: James B. Gambrell IV, President and Chief Executive Officer; Phillip
Barber, Acting Chief Information Officer; Dee Darby, Vice President of
Operations; Scott Moster, President - Carrier Group; David Crawford, Vice
President of Business Development; Andrew Cauthen, President, Zapcom; and other
non-executive officers are Suzanne Efhan, Controller; Pat Wills, Director of
Customer Service Operations; and Terry Harmon, Public Relations. The Chief
Financial officer of the Reorganized Parent will be Lydia Montoya, who currently
serves as Chief Financial Officer of Wavetech, until such time as a suitable
replacement can be found. The directors of Reorganized Parent and Surviving Sub
will be James B. Gambrell, Richard Hartman, Robert C. Hawk, Steve Jaffe and one
more independent director to be appointed at a later date. See "Directors,
Director Nominees and Executive Officers of the Company.
CONDITIONS TO CONSUMMATION OF THE MERGER
In addition to customary conditions, the obligations of the Company,
Imagitel and Interim to consummate the Merger are subject to the satisfaction of
certain conditions, including (i) the approval of the Reorganization Agreement
and the transactions contemplated thereby, including, among other things, the
Merger, by the respective stockholders of the Company and Imagitel, (ii) the
absence of any material adverse change in the respective businesses or financial
conditions of Wavetech and Imagitel, (iii) the receipt of all permits, consents
and approvals of any governmental bodies or agencies reasonably deemed
necessary, and (iv) the accuracy in all material respects, as of the closing of
the transactions contemplated by the Reorganization Agreement, of the respective
representations and warranties of Imagitel, Interim and the Company.
Additional conditions to the obligation of Imagitel to consummate the
Merger include (i) the compliance with and performance of, in all material
respects, the agreements and obligations required to be complied with and
performed by the Company and Interim, including, among other things, the
preparation, to the satisfaction of Imagitel, of this Proxy Statement and
mailing thereof to Wavetech's Stockholders and the performance of all reasonable
action required to be taken under applicable federal and state securities laws
in connection with the issuance of Wavetech Common Stock pursuant to the Merger,
(ii) the operation of Wavetech's business in the ordinary course and in a manner
substantially similar to that in which it was conducted prior to entering into
the Reorganization Agreement, (iii) election by the Company's Stockholders of
persons designated by Imagitel to serve as all of the directors of Reorganized
Parent following the Effective Time, (iv) the receipt by Imagitel of
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<PAGE>
certificates executed by officers of the Company certifying as to such matters
reasonably requested by Imagitel, (v) the closing by Wavetech of a line of
credit, reasonably acceptable to Imagitel, in the minimum principal amount of
$3.5 million, (vi) the execution of a registration rights agreement relating to
the shares of Wavetech Common Stock to be issued to the shareholders of
Imagitel, and (vii) the effectiveness of the Reverse Split.
Additional conditions to the Company's and Interim's respective
obligations to consummate the Merger include (i) the compliance with and
performance of, in all material respects, the agreements and obligations
required to be complied with and performed by Imagitel, (ii) the operation of
Imagitel's business in the ordinary course of business and in a manner
substantially similar to that in which it was conducted prior to entering into
the Reorganization Agreement, (iii) the receipt by Wavetech of a written
agreement, in form reasonably satisfactory to Wavetech, executed by each
"affiliate" (as defined in Rule 145 promulgated under the Securities Act of
1933, as amended (the "Securities Act")) of Imagitel to not sell or otherwise
transfer any shares of Wavetech Common Stock held or to be held by such persons,
except in compliance with the applicable provisions of the Securities Act, (iv)
the receipt by the Company of certificates executed by officers of Imagitel
certifying as to such matters reasonably requested by the Company, (v) the
receipt by Wavetech of an opinion from Kaufman Brothers, Inc. that the terms of
the Reorganization Agreement and the transactions contemplated thereby are fair
to the Company's shareholders, from a financial point of view, (vi) none of the
shareholders of Imagitel shall have exercised dissenter's rights with respect to
shares of Imagitel Common Stock to be surrendered in connection with the Merger,
and (vii) the receipt by the Company of certificates from the shareholders of
Imagitel certifying as to such information reasonably sufficient to permit
Imagitel's counsel to conclude that the issuance of Wavetech Common Stock in
connection with the transactions contemplated by the Reorganization Agreement
will be exempt from registration under applicable federal and state securities
laws.
Reference is hereby made to Articles 7 and 8 of the Reorganization
Agreement for a complete statement of the conditions precedent to the
obligations of the respective parties to consummate the Merger.
REPRESENTATIONS, WARRANTIES AND COVENANTS
In the Reorganization Agreement, Imagitel, Interim and the Company have
made various representations, warranties, covenants and agreements relating to,
among other things, their respective organization, capital structure, business
and financial condition, the satisfaction of certain legal and regulatory
requirements or approvals in connection with the Merger, and the accuracy and
completeness of information provided respectively by each party for use in this
Proxy Statement. In addition, Imagitel has represented that it shall use its
best efforts to cause its shareholders to provide certain agreements and
information in order to permit the issuance of the Wavetech Common Stock in
connection with the Merger to comply with applicable provisions of federal and
state securities laws. The Company has also agreed to execute a registration
rights agreement relating to the shares of Wavetech Common Stock to be issued in
connection with the Merger. Except for such representations, warranties and
covenants required to be set forth in a separate agreement or document delivered
on or before closing of the transactions contemplated by the Reorganization
64
<PAGE>
Agreement and the obligation to keep confidential certain information provided
by the parties, the representations, warranties and covenants of the respective
parties thereto will expire upon consummation of the Merger.
The Reorganization Agreement provides that, pending the Effective Time,
Imagitel (i) will not amend its Articles of Incorporation or Bylaws, (ii) will
not make any change in its equity capital structure or enter into any contract
or agreement with respect to the issuance of any shares of its capital stock or
securities convertible into such shares, except for the issuance of securities
pursuant to certain outstanding options, warrants or obligations which are
disclosed in Schedule 3.4 to the Reorganization Agreement or the issuance of up
to 5,000 shares of Imagitel Common Stock in connection with the contemplated
acquisition by Imagitel of ASI, (iii) will promptly notify the Company of any
change in Imagitel's business reasonably expected to be materially adverse
thereto, (iv) will not permit any action which would be contrary to the terms of
the Reorganization Agreement, (v) will not incur any indebtedness, issue or sell
any debt securities or otherwise become liable for any other party, except in
the ordinary course of its business, (vi) except in the ordinary course of its
business or in connection with the Merger, will not incur any expense in excess
of $75,000, (vii) will not grant any increase in the compensation of, or enter
into any employment agreement with, any of its executive officers, and (viii)
will not acquire or agree to acquire substantially all of the assets or business
of another entity.
The Reorganization Agreement provides similar restrictions upon the
business and activities of the Company in favor of Imagitel pending the
Effective Time as set forth in the preceding paragraph, with the following
material differences: (i) the Company may only issue shares of its capital stock
as contemplated by certain obligations disclosed on Schedule 4.4 to the
Reorganization Agreement, in connection with capital raising transactions which
are acceptable to Imagitel up to 500,000 shares of Wavetech Common Stock at not
less than $0.53 per share or, up to 1,428,572 shares of Wavetech Common Stock at
not less than $0.35 per share to Elgin Investments, and (ii) the Company may not
incur any expense in excess of $25,000, except in connection with the Merger or
pursuant to contractual commitments existing as of the execution of the
Reorganization Agreement.
EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
Currently Imagitel has only one employment agreement outstanding that
will survive the Merger. All other currently existing employment agreements of
Imagitel will terminate at the Effective Time. The continuing employment
agreement contains a termination provision which requires Imagitel to pay
severance fees in an aggregate amount of $18,000 for a period of 90 days should
Imagitel terminate its relationship with the employee.
As of February 28, 1998, a total of 21,048 shares of Imagitel Common
Stock were subject to outstanding options (the "Imagitel Options"). It is
anticipated that up to an additional 3,200 options for Imagitel Common Stock may
be granted to various outside members of the Board of Directors of the
Reorganized Parent prior to the Effective Time. At the Effective Time, all of
the Imagitel Options will be converted into fully vested options to purchase a
number of shares of the Reorganized Parent's Common Stock, determined in
accordance with the Conversion Ratio, and the respective exercise price will be
correspondingly changed.
65
<PAGE>
WARRANTS
As of February 28, 1998, no warrants to purchase shares of Imagitel
Common Stock (the "Imagitel Warrants") were outstanding. Imagitel does not have
a present intention or obligation to issue any warrants prior to the Effective
Time. However, at the Effective Time, all of the Imagitel Warrants, if any, will
be converted into warrants to purchase a number of shares of the Reorganized
Parent's Common Stock, determined in accordance with the Conversion Ratio, and
the respective exercise price will be correspondingly changed.
TERMINATION OF THE MERGER AGREEMENT
The Reorganization Agreement may be terminated at any time prior to the
closing of the transactions contemplated thereby (the "Closing"), (i) by the
mutual consent of Imagitel, Interim and the Company, (ii) by either party if an
injunction or order shall have been issued which prevents the consummation of
such transactions, (iii) by either party upon the other party's failure to
comply with the agreements or fulfill the conditions contained in the
Reorganization Agreement which failure is material to the consolidated business
of either party, after notice of such breach and a reasonable period to cure
have been provided by the terminating party, (iv) if the Closing has not
occurred by June 30, 1998, or (v) by either Imagitel or the Company,
respectively, if any updated disclosure schedules required to be provided by the
other party are unsatisfactory. Upon any termination of the Reorganization
Agreement, any agreements relating to the Confidential Information (as defined
in the Reorganization Agreement) will survive such termination.
FEES AND EXPENSES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Reorganization Agreement and the transactions
contemplated thereby will be paid by the party incurring such costs or expenses;
provided, however, that Imagitel and Wavetech have each paid a portion of the
fee payable to the SEC in connection with this Proxy Statement. Each party is
obligated to accrue reasonable estimates of all such expenses as of the end of
the month preceding the Closing. In addition to all ordinary expenses incurred
in connection with the Reorganization Agreement, Imagitel is required to pay
certain brokers' fees in connection with the Merger. The Company is not
obligated to make any payments of brokers' fees, or similar commissions in
connection with the Reorganization Agreement.
AMENDMENT OF THE REORGANIZATION AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Imagitel, Interim and the Company
may, by written agreement, at any time before or after the approval of the
Merger and the Reorganization Agreement by the Wavetech Stockholders and the
approval of the issuance of shares of Wavetech Common Stock pursuant to the
Reorganization Agreement by the Wavetech Stockholders, amend the Reorganization
Agreement, provided that after such approval by the Wavetech Stockholders, no
amendment or modification may be made that would materially adversely affect the
rights of the Wavetech Stockholders without the further approval of such
66
<PAGE>
Stockholders. Each party to the Reorganization Agreement may, to the extent
legally permitted, extend the time for the performance of any of the obligations
of any other party to the Reorganization Agreement, waive any inaccuracies in
the representations or warranties of any other party contained in the
Reorganization Agreement or waive compliance by any other party with any of the
agreements or conditions contained in the Reorganization Agreement.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Wavetech stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations
promulgated thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to Imagitel, Interim, Wavetech or
their respective stockholders as described herein.
If the Merger qualifies as a Reorganization, none of Wavetech, Imagitel
or Interim will recognize gain or loss solely as a result of the Merger, and the
stockholders of Imagitel will not recognize gain or loss upon surrender of
shares of Common Stock of Imagitel in exchange for Common Stock of Wavetech,
except to the extent that consideration other than Common Stock is received,
including any cash compensation for fractional shares.
Certain of the requirements for qualification as a Reorganization are
dependent on the facts and circumstances regarding the Merger, such as, for
example, the requirements that there be a "continuity of business enterprise"
and "continuity of shareholder interest". Although Wavetech's management knows
of no reason why these requirements would not be met in connection with the
Merger, no assurances can be given that the Merger will qualify as a
Reorganization.
The foregoing discussion is based on the existing provisions of the
Code, and existing judicial and administrative interpretations thereof, any of
which may be altered retroactively.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND IS BASED UPON PRESENT LAW. EACH STOCKHOLDER AND OPTIONHOLDER SHOULD
CONSULT A TAX ADVISOR AS TO THE SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAW OR OTHER TAX LAWS.
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<PAGE>
ACCOUNTING TREATMENT OF THE MERGER
The Reorganized Parent will account for the business combination of
Interim and Imagitel in its consolidated financial statements under the purchase
method of accounting.
RESALE OF WAVETECH COMMON STOCK TO BE ISSUED IN THE MERGER
The Merger Shares to be issued pursuant to the Merger will be
"restricted" securities (as defined in Rule 144 promulgated under the Securities
Act) and may only be transferred in accordance with the provisions of rule 144
under the Securities Act or pursuant to an effective registration statement
filed thereunder, or in transactions exempt from registration thereunder. In
addition, shares of Wavetech Common Stock received in the Merger by persons who
are affiliates of Imagitel immediately prior to the Effective Time but do not
become affiliates of Wavetech may be sold by them only in accordance with the
provisions of Rule 145 under the Securities Act (which imposes certain
limitations on the volume and manner of sales by such affiliates).
Pursuant to the Reorganization Agreement, the Company has agreed to
execute a registration rights agreement relating to the shares of Wavetech
Common Stock to be issued in connection with the Reorganization Agreement. The
Reorganized Parent intends to file a registration statement covering such shares
as promptly as practicable following the Effective Time, all of the costs of
which (except for underwriting discounts and commissions, if any) will be borne
by the Reorganized Parent.
Certain principals of Imagitel have made arrangements to privately
place between five and six million dollars worth of the Common Stock of the
Reorganized Parent to be issued to them in connection with the Merger. The
purpose of this sale will be to replace income lost due to the principals' loss
of employment compensation after the Effective Date. This private placement will
not have any effect on the principal's ability to retain majority control of the
Reorganized Parent once the Merger closes. The Company believes that the
"continuity of interest" requirement described under "Federal Income Tax
Consequences" above will not be violated by this private placement of common
stock.
COMPARATIVE RIGHTS OF WAVETECH STOCKHOLDERS AND STOCKHOLDERS OF THE REORGANIZED
PARENT
At the Effective Time, Interim will be merged into Imagitel which will,
as a result thereof, become a wholly owned subsidiary of Reorganized Parent.
With the exception of a corporate name change from "Wavetech International,
Inc." to "Imagitel, Inc.", the Articles of Incorporation and Bylaws of the
Reorganized Parent will be the same as those currently in effect with respect to
68
<PAGE>
Wavetech. As such, the rights of Wavetech stockholders as provided by applicable
state laws and the Reorganized Parent's Articles of Incorporation and By-laws
will be virtually unchanged as a result of the Merger.
DISSENTERS RIGHTS OF APPRAISAL
Wavetech stockholders have no right under Nevada law to dissent from
either the Reorganization Agreement and the Merger, or to dissent from the
issuance of the Merger Shares in connection therewith. Wavetech stockholders are
being asked to approve the issuance of shares pursuant to the Merger. While
Imagitel stockholders have dissenters rights of appraisal under Nevada law, it
is a condition to the obligations of Wavetech and Interim to consummate the
Merger that none of the shareholders of Imagitel shall have exercised such
rights.
CERTAIN MATERIAL CONTRACTS OR TRANSACTIONS
On February 9, 1998, Wavetech executed a loan agreement with Imagitel,
pursuant to which Wavetech may borrow up to $450,000 for working capital
purposes. Outstanding balances under such loan accrue interest at a rate of 12%
per annum and all unpaid principal plus interest accrued thereon is payable on
or before June 30, 1998. The loan is secured by all of the assets of Wavetech
and its wholly-owned subsidiary, Interpretel, Inc.
INTEREST OF CERTAIN PERSONS IN THE MERGER
All of the then outstanding options held by directors and employees of
Wavetech shall be fully exercisable as of the Effective Time for a period of 10
years thereafter, even if such options were not exercisable immediately prior to
the Effective Time. Assuming solely for purposes of demonstration that the
Effective Time is on or about May 15, 1998, it is anticipated that options to
purchase an aggregate of 1,920,000 shares of Wavetech Common Stock will be fully
exercisable, of which approximately 470,000 would not otherwise be exercisable
at such time.
Except for Lydia Montoya, Chief Financial Officer of Wavetech, at the
Effective Time, the employment of all of Wavetech's employees shall immediately
terminate, although the management of the Reorganized Parent may thereafter seek
to employ some or all of such persons on terms to be negotiated at such time, in
its sole discretion. Ms. Montoya's employment shall continue after the Effective
Time pursuant to the terms and conditions of her current employment agreement,
which is terminable upon 3 months prior written notice.
REGULATORY MATTERS
Federal laws and regulations promulgated by the FCC apply to interstate
calls, while state regulatory authorities have jurisdiction over
telecommunications involving intrastate calls. A provider of telecommunications
services must be certified by such agencies prior to providing such services in
their respective jurisdictions.
The FCC and various state public service and utilities commissions
typically impose obligations on certified carriers to file tariffs and to
otherwise comply with existing laws and regulations. While there are no existing
FCC regulations specifically regarding the marketing of calling card or calling
services, such regulations may be promulgated in the future and may accordingly
have an impact on the new entity's business practices.
69
<PAGE>
Wavetech has made all filings with the FCC necessary to allow it to
provide interstate and international long distance service. In order to provide
intrastate long distance service, Wavetech 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. Wavetech 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, Wavetech has not been denied any
interstate or international licenses or tariffs for which it has applied.
In addition to laws relating to telecommunications services, federal
and state laws prohibiting false and deceptive advertising govern the marketing
of all products and services. Such laws and regulations are enforced either by a
particular agency, such as in the case of federal law, the Federal Trade
Commission, or by individual state attorneys general.
In conducting various aspects of its business, the new entity will be
subject to various laws and regulations relating to commercial transactions
generally, such as the Uniform Commercial Code, and will also be 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 new entity's business and industry and could have a
material adverse affect on the new entity's business, operating results and
financial condition.
The FCC and certain states may require regulatory notice or approval of
the Merger and certain actions to be taken in connection therewith. In
particular, Imagitel will be required to file with certain state regulatory
agencies a notice or application for approval of the Merger. There can be no
assurances that all the necessary regulatory approvals will be requested or
received prior to the closing of the Merger.
VOTING REQUIREMENTS
Each holder of Wavetech Common Stock is entitled to one vote per share
held. The holders of a majority of the shares of the Wavetech Common Stock
issued and outstanding constitutes a quorum. The affirmative vote of holders of
a majority of the outstanding shares of Wavetech Common Stock entitled to vote
which are present in person or by proxy at the Annual Meeting is required for
approval of the Proposal, provided that the number of shares present in person
or by proxy constitutes a quorum. In the event that a quorum is not present or
represented at the Annual Meeting, the shareholders entitled to vote at the
meeting present in person or by proxy shall have power to adjourn the Annual
Meeting until a quorum shall be present or represented. Proxies solicited by the
Board of Directors will be voted for approval of the Proposal. Stockholders are
not entitled to cumulate votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL.
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<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information is
based upon the historical consolidated financial statements of Wavetech
International, Inc. and Imagitel, Inc. The pro forma adjustments were applied to
the respective historical financial statements to reflect and account for the
Merger as a purchase. The purchase price was calculated based on the market
value of $0.43 per share of Wavetech Common Stock. The market value is based on
the average of the Wavetech Common Stock for three days beginning the day before
the Merger was announced and ending the day following the Merger announcement.
The purchase also requires Imagitel shareholders to receive 365 shares of
Wavetech Common Stock, based on the Conversion Ratio set forth in the
Reorganization Agreement, for each share of Imagitel Common Stock issued and
outstanding at the Effective Time. The Conversion Ratio shall be increased or
decreased based upon the positive working capital or a working capital deficit
of Wavetech or Imagitel as of the month end immediately prior to the Effective
Time.
The unaudited pro forma combined financial information also reflect the
proposed one-for-six reverse stock split of the issued and outstanding shares of
Common Stock.
UNAUDITED COMBINED PRO FORMA BALANCE SHEET FOR NOVEMBER 30, 1997
WAVETECH, INC. AND SUBSIDIARIES AND RRV ENTERPRISES INC. & D.D.D. CALLING, INC.
<TABLE>
<CAPTION>
RRV
Enterprises,
ASSETS Inc. & D.D.D.
Wavetech, Inc. Calling, Inc. Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 64,364 $1,205,503 $1,269,867
Restricted cash 100,000 100,000
Accounts receivable 29,672 1,328,529 1,358,201
Due from affiliate 91,141 91,141
License fee receivable 150,000 150,000
Prepaid expenses and other assets 8,917 73,925 82,842
---------- ---------- ----------
Total current assets 252,953 2,799,098 3,052,051
Property and equipment, net 371,983 271,480 102,000 (1) 745,463
Other assets:
Investment in Switch Telecomm
Pty Ltd 2,316,165 2,316,165
License fee receivable 150,000 150,000
Intangibles, net 28,472 28,472
Goodwill 2,631,103 (1) 2,631,103
Deferred tax benefit 755,000 (1) 755,000
Deposits and other assets 35,633 48,900 84,533
---------- ---------- ----------
Total other assets 2,530,270 48,900 5,965,273
---------- ---------- ----------
Total assets $3,155,206 $3,119,478 $9,762,787
========== ========== ==========
</TABLE>
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<PAGE>
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
FOR NOVEMBER 30, 1997 -- CONTINUED
WAVETECH, INC. AND SUBSIDIARIES AND RRV ENTERPRISES INC. & D.D.D. CALLING, INC.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 388,689 $2,387,233 $2,775,922
Accrued interest payable 2,529 2,529
Unearned revenue 150,000 150,000
Notes payable, current portion 63,000 63,000
Capital leases payable, current 56,119 56,119
portion
---------- ---------- ----------
Total current liabilities 660,337 2,387,233 3,047,570
Noncurrent liabilities:
Notes payable 284,500 284,500
Capital leases payable 45,641 45,641
Unearned revenue - license fee 150,000 150,000
---------- ---------- ----------
Total liabilities 855,978 2,671,733 3,527,711
Stockholders' equity:
Common stock, par value
$.001 per share; 50,000,000 shares
authorized, 15,141,364 shares
issued and outstanding. Imagitel
common stock, no par value;
1,000,000 shares authorized, 200,000
shares issued and outstanding 15,141 2,000 (2,000) (1)
12,167 (1)
1,062 (2)
(13,502) )1) 14,868
Additional paid in capital 7,428,089 369,934 (1)
(1,062) (2)
13,502 (1) 7,810,463
Accumulated deficit (5,144,002) 445,745 5,144,002 (1)
(2,036,000) (1) (1,590,255)
----------- ---------- ----------
Total stockholders' equity 2,299,228 447,745 6,235,076
----------- ---------- ----------
Total liabilities and stockholders' $ 3,155,206 $3,119,478 $9,762,787
=========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
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<PAGE>
WAVETECH, INC. AND SUBSIDIARIES AND RRV ENTERPRISES INC. & D.D.D. CALLING, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
RRV
Enterprises,
Inc. &
D.D.D.
Wavetech, Inc Calling, Inc. Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues: $ 865,571 $31,273,873 $32,139,444
Cost of sales:
Direct costs 679,930 14,687,961 15,367,891
----------- ----------- -----------
Gross profit 185,641 16,585,912 16,771,553
Other costs
Development and administrative expenses 1,796,533 14,789,902 526,000 (4) 17,112,435
----------- ----------- -----------
Operating profit (loss) before other
income (expenses) (1,610,892) 1,796,010 (340,882)
Other income (expense)
Interest income 8,500 8,500
Interest expense (26,893) (616,745) (643,638)
----------- ----------- -----------
Total other income (expense) (18,393) (616,745) (635,138)
----------- ----------- -----------
Earnings (loss) before taxes (1,629,285) 1,179,265 (976,020)
Benefit from income taxes (390,408)(4) (390,408)
----------- ----------- -----------
Net earnings (loss) $(1,629,285) $ 1,179,265 $ (585,612)
========== =========== ===========
Earnings (loss) per common share $ (0.68) $ 5.90 $ (0.04)
=========== =========== ===========
Weighted average number of
Shares outstanding 2,409,195 200,000 14,575,862
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
73
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES AND RRV ENTERPRISES INC. & D.D.D. CALLING, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
RRV
Enterprises,
Inc. &
D.D.D.
Wavetech, Inc Calling, Inc. Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C>
Revenues: $ 51,030 $11,891,149 $11,942,179
Cost of sales:
Direct costs 52,570 6,115,828 6,168,398
---------- ----------- -----------
Gross profit (loss) (1,540) 5,775,321 5,773,781
Other costs
Development and administrative expenses 247,995 4,662,249 132,000(4) 5,042,244
---------- ----------- -----------
Operating profit (loss) before other
income (expenses) (249,535) 1,113,072 731,537
Other income (expense)
Interest income 2 2
Interest expense (12,811) (247,989) (260,800)
---------- ----------- -----------
Total other income (expense) (12,809) (247,989) (260,798)
---------- ----------- -----------
Earnings (loss) before taxes (262,344) 865,083 470,739
Provision for income taxes 188,296(4) 188,296
---------- ----------- -----------
Net earnings (loss) $ (262,344) $ 865,083 $ 282,443
========== =========== ===========
Earnings (loss) per common share $ (0.10) $ 4.33 $ 0.02
========== =========== ===========
Weighted average number of
shares outstanding 2,518,778 200,000 14,685,445
========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
74
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following table sets forth the determination and preliminary allocation
of the estimated purchase price based on a market value of $0.43 per share
of Wavetech, Inc. common stock for three days beginning the day before the
Merger was announced and ending the day following the Merger announcement
Merger exchange of shares (16,203,095 pre-split,
2,700,516 post-split shares of Wavetech
common stock at $0.43 per pre-split share). $6,967,331
Estimated transaction costs 856,000
----------
Estimated purchase price 7,823,331
==========
The preliminary allocation of the estimated purchase price is as follows:
Current assets $ 252,953
Property, plant and equipment 473,983
Investment in Switch Telecomm. Pty Ltd 2,316,165
Other assets 969,105
Current liabilities (660,337)
Capital lease obligations (45,641)
Other noncurrent liabilities (150,000)
Goodwill 2,631,103
In process research and development costs 2,036,000
----------
$7,823,331
==========
(1) To record the Merger of Wavetech International, Inc. and Imagitel, Inc.
based on a purchase price of $0.43 per outstanding common share of Wavetech
and a conversion ratio of 365 shares of Wavetech for each outstanding share
of Imagitel (200,000 outstanding shares). The merger has been accounted for
using purchase accounting as a reverse acquisition (purchase of Wavetech
International, Inc. by Imagitel, Inc.)
(2) Adjustment related to stock issued subsequent to November 30, 1997.
(3) To record the one-for-six reverse stock split.
(4) To record goodwill amortization and to tax effect income (loss) at a
combined federal and state rate of 40%. The allocation of the purchase
price to in-process research and development has been excluded from the pro
forma statement of income as the expense, to be recognized on the first day
of the period following the Merger, is anticipated to be a non-recurring
item.
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<PAGE>
DIRECTORS, DIRECTOR NOMINEES AND
EXECUTIVE OFFICERS OF THE COMPANY
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, DIRECTOR NOMINEES AND OFFICERS
The directors, director-nominees 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 Director
Lydia M. Montoya 44 Chief Financial Officer
Richard P. Freeman 41 Vice President, Investor Relations and Product
Development, Secretary and Director
Terrence H. Pocock 65 Director
John P. Clements 48 Director
IMAGITEL DESIGNEES
James B. Gambrell IV 38 Director-Nominee
Richard Hartman 52 Director-Nominee
Robert C. Hawk 58 Director-Nominee
Steven B. Jaffe 42 Director-Nominee
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I. WAVETECH NOMINEES
The persons named below have been nominated to be elected as members of
the Board of Directors of Wavetech only if the issuance of the Merger Shares
pursuant to the Reorganization Agreement and Plan of Merger are NOT approved by
the Stockholders. In addition, certain persons who currently serve as executive
officers of Wavetech are identified below.
TERENCE E. BELSHAM was a co-founder of Interpretel, a wholly owned
subsidiary of Wavetech. 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. At the Effective Time, Mr.
Belsham shall cease to be a director of the Reorganized Parent.
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. At the Effective Time, Mr.
Quinn shall cease to be an officer or director of the Reorganized Parent.
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. Ms. Montoya has a B.S. in Accounting from the University of Arizona and
a B.S. in Sociology from Arizona State University. At the Effective Time, Ms.
Montoya shall continue to serve as Chief Financial Officer of the Reorganized
Parent.
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<PAGE>
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. At the Effective Time, Mr. Freeman shall cease to be an officer
or director of the Reorganized Parent.
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.
At the Effective Time, Mr. Pocock shall cease to be a director of the
Reorganized Parent.
JOHN P. CLEMENTS has been a Director of the Company since February
1998. Mr. Clements is currently Vice President of Lovitt & Touche, an insurance
brokerage firm in Tucson, Arizona. The firm sells and services a variety of
industries, with a specialty in real estate. Prior to joining Lovitt & Touche in
1989, Mr. Clements was Chief Operating Officer for Ashland Equities Company in
Tucson where he directed development of shopping centers and formed land
investment partnerships. Mr. Clements is also a Certified Public Accountant. For
the first 14 years of his career he was with Coopers & Lybrand accounting firm,
where he started in a staff position and moved up to become a General Practice
Partner in charge of Audit Practice for the Tucson office, specializing in real
estate and healthcare. At the Effective Time, Mr. Clements will cease to be a
director of the Company.
II. IMAGITEL DESIGNEES
The following persons have been designated by Imagitel to serve as all
of the directors of the Reorganized Parent at the Effective Time. A vote for the
approval of the issuance of the Merger Shares pursuant to the Reorganization
Agreement and Plan of Merger will also be deemed a vote for each of the
following persons to be elected as a director of the Reorganized Parent. In
addition, certain persons who will serve as executive officers of the
Reorganized Parent.
JAMES B. GAMBRELL IV has been designated to serve as a director of the
Reorganized Parent. In addition, if the Reorganization Agreement is approved by
the Stockholders, Mr. Gambrell shall commence service as President, Chief
Executive Officer and a director of the Reorganized Parent at the Effective
Time. Mr. Gambrell has served as President and Chief Executive Officer of
Imagitel since March 1997, and as its Chief Financial Officer from 1996 to 1997.
From 1986 to 1996, Mr. Gambrell served as President of Waterford Investments, an
investment and corporate advisory firm. Mr. Gambrell holds a B.S. in Business
from the State University of New York, an Executive MBA from Baylor University
and a Jonah Certificate from the Goldratt Institute of New Haven.
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<PAGE>
RICHARD HARTMAN has been designated to serve as a director of the
Reorganized Parent. If the Reorganization Agreement is approved by the
Stockholders, Mr. Hartman shall commence service as a director of the
Reorganized Parent at the Effective Time. Mr. Hartman has served as Senior Vice
President and President - North American Division of ITT Sheraton Corporation
("Sheraton"), a publicly traded international hotel operating company, from 1992
until March 1998. Prior thereto, Mr. Hartman, served in various other managerial
positions with Sheraton, including Senior Vice President, Director of Operations
- - North America Division and Vice President, Director of Operations - Asia
Pacific Division, among others, since joining Sheraton in 1968. Mr. Hartman was
educated in Seattle, Washington, Geneva, Switzerland and Hawaii and is a
graduate of the University of Hawaii School of Travel Industry Management.
ROBERT C. HAWK has been designated to serve as a director of the
Reorganized Parent. If the Reorganization Agreement is approved by the
Stockholders, Mr. Hawk shall commence service as a director of the Parent at the
Effective Time. Mr. Hawk is currently President of Hawk Communications, a
telecommunications consulting company. From May 1996 until his retirement in
April 1997, Mr. Hawk was President and Chief Executive Officer of US West
Multimedia Communications, Inc. ("US West"), during which time he was
responsible for its cable, data and telephony communications businesses. Prior
thereto, Mr. Hawk served as President of the Carrier and Information Provider
division of U.S. West from 1990 until May 1996. Prior to joining U.S. West, Mr.
Hawk served in various positions with other telecommunications and technology
companies, such as Mountain Bell, CXC and AT&T. Mr. Hawk is also a member of the
Boards of Directors of Regis University, the Urban League of Metropolitan
Denver, PairGain Technologies, Premisys Communications, Xylan Corp., Concord
Communications and Radcom. All are publicly traded. Mr. Hawk received a Bachelor
of Business Administration from the University of Iowa and an MBA from the
University of San Francisco.
STEVEN B. JAFFE has been designated to serve as a director of the
Reorganized Parent. If the Reorganization Agreement is approved by the
Stockholders, Mr. Jaffe shall commence service as a director of the Reorganized
Parent at the Effective Time. Mr. Jaffe currently serves as Chief Executive
Officer, President and Chairman of the Board of Directors of Receivables Funding
Corporation ("RFC"), a telecommunications specialty finance company. RFC
provides receivable financing to Imagitel. Prior to joining RFC in March 1996,
Mr. Jaffe served as vice president of Enron Capital & Trade Resources, a
marketer of natural gas, gas liquids and electric power, since November 1992.
Mr. Jaffe received a bachelor's degree in communications from McGill University
and an MBA from Northeastern University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Board of Directors has established an audit
Committee (the "Audit Committee"), which consists of Messrs. Pocock and
Clements. Upon approval of the Reorganization Proposal by the Stockholders and
consummation of the Merger, the Audit Committee will consist of members of the
Board of Directors to be appointed at the Effective Time. The Audit Committee is
responsible for recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, establishing
and monitoring the Company's financial policies and control procedures, and
reviewing and monitoring the provision of non-audit services by the Company's
auditors.
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<PAGE>
COMPENSATION COMMITTEE. The Board of Directors has established a
compensation committee (the "Compensation Committee"), which consists of Messrs.
Quinn and Freeman. Upon approval of the Reorganization Agreement by the
Stockholders and consummation of the Merger, the Compensation Committee will
consist of members of the Board of Directors to be appointed at the Effective
Time. The Compensation Committee will oversee the design and implementation of
all executive compensation, stock options, bonus plans, retirement plans and
other compensation related issues which the Board of Directors deems, from time
to time, appropriate for consideration.
There are no other committees of the Board of Directors.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended August 31, 1997, the Company's Board of
Directors held twelve (12) meetings and acted approximately seven (7) times by
unanimous written consent in lieu of a meeting. All of the Company's directors
attended at least 75% of all meetings of the Board of Directors and any
committees thereof on which he served.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
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 $100,000 in compensation during the last completed fiscal year.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
Annual Compensation ------------------------
------------------------------------ Restricted Securities
Name And Fiscal Bonus Other Annual Stock Underlying
Principal Position Year Salary ($) 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, which Mr.
Quinn elected to receive as deferred shares pursuant to the Company's 1997
Stock Incentive 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 equaled $34,163.
(2) Effective January 31, 1997, the exercise price with respect to an aggregate
of 800,000 options to purchase Common Stock previously granted to Mr. Quinn
was amended in connection with the cancellation of such previously
outstanding options in exchange for a new grant of an equal number of
options under the Company's 1997 Stock Incentive Plan. The exercise price
of the new options is equal to the fair market value of the Company's
Common Stock on the date of grant. All of such options were deemed fully
vested as of the date of grant. See "Compensation Committee Report on
Repricing."
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTIONS VALUE AS OF
AUGUST 31, 1997
The following table sets forth certain information concerning each
exercise of stock options during the year ended August 31, 1997 by the Named
Executive Officer and the aggregated fiscal year-end value of the unexercised
options of such Named Executive Officer.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options At In-The-Money Options
Fiscal Year End (#) At Fiscal Year End ($)
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>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants
of stock options made to the Named Executive Officer during the last completed
fiscal year.
Number of
Shares Percent of Total
Underlying Options Granted
Options To Employees In Exercise Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- ---- ----------- ----------- ------------ ----
Gerald I. Quinn 800,000(1) 45% $0.66 May 2006
- ----------
(1) In January of 1997, the public trading price of the Company's Common Stock
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. See "Compensation Committee Report on Repricing."
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<PAGE>
COMPENSATION OF DIRECTORS
All Directors are reimbursed for their reasonable out-of-pocket
expenses incurred in connection with attendance at meetings of the Board of
Directors and its committees. 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 (the
"Plan"). Under the Plan, members of the Board of Directors of the Company, who
are not employees of the Company or its subsidiaries, are automatically granted
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. Since adopting the Plan, the Board of Directors
determined that it was appropriate to provide additional compensation to its
non-employee directors. Based upon such determination, the Company's two
non-employee directors were granted the following options: an additional grant
of 20,000 options was made to John P. Clements and an additional grant of 40,000
options was made to Mr. Terrence H. Pocock.
In addition, the Board of Directors has adopted a policy to provide
additional compensation to those directors who agree to serve as members of the
Audit Committee. Pursuant to this policy, each of Messrs. Pocock and Clements
were granted options to purchase 20,000 shares of the Company's Common Stock
pursuant to the Plan. Such grants are in addition to any compensation which such
directors receive in consideration of their service to the Company.
All of the options granted pursuant to the Plan 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 parties to the Reorganization Agreement intend to grant to the
members of its Board of Directors options to purchase up to an aggregate of
3,000 shares of the Common Stock of Reorganized Parent at an exercise price of
$135.36 per share (after giving effect to the Reverse Split). Of such options,
885 will be granted to Robert Hawk. All of such options will be granted on or
after the Effective Time and are not considered in the Conversion Ratio.
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 base 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 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.
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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 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. Pursuant to
these provisions, all options held by Messrs. Quinn and Freeman which are
unvested immediately prior to the Effective Time shall become fully vested and
immediately exercisable at the Effective Time. See "Interest of Certain Persons
in the Merger."
COMPENSATION COMMITTEE REPORT ON REPRICING
In January 31, 1997, the Board, on the recommendation of the
Compensation Committee, canceled an aggregate of 800,000 options previously
granted to Gerald I. Quinn, President and CEO. Under a May 21, 1996 Services
Agreement, Quinn was granted options on 500,000 shares of Wavetech Common Stock
with an exercise price of $1.75 a share and, from a former agreement, options on
300,000 shares of Wavetech Common Stock at an exercise price of $1.3875 per
share. On the same date, January 31, 1997, Mr. Quinn was granted a new option
pursuant to the Plan of 800,000 shares of Wavetech Common Stock at an exercise
price of $0.66 per share. Mr. Quinn's prior options were not within the 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. The Board of
Directors determined, with Mr. Quinn abstaining, 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 Raftery:. Quinn was appropriate.
CHANGE IN CONTROL ARRANGEMENTS
Pursuant to the Company's 1997 Stock Incentive Plan, the Board of
Directors has the authority to provide, as to any options granted thereunder and
outstanding at the time of a Corporate Transaction or Change of Control which
have not otherwise vested, that such options shall automatically vest and become
exercisable in full. In addition, the Non-Employee Director Automatic Grant
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<PAGE>
Program of the Plan provides that all options granted pursuant to such program
automatically vest upon a Corporation Transaction of Change of Control. As a
result of such provisions, options to purchase an aggregate of approximately
1,900,000 (316,667 after giving effect to the Reverse Split) shares of Common
Stock will become fully vested and exercisable (including 120,000 (20,000 after
giving effect to the Reverse Split) options granted to the Company's
non-employee directors) at the Effective Time of the Merger.
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 $7,685; 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 interest rates and collateral, as those available to the
Company at the time in comparable transactions with unrelated third parties.
On October 24, 1997, the Company issued a 12% convertible promissory
note in the original principal amount of $115,335 to Gerald I. Quinn, President
and Chief Executive Officer. The note was issued in lieu of all then outstanding
indebtedness of the Company to Mr. Quinn, and in consideration of the waiver by
Mr. Quinn of certain defaults by the Company to repay such previously existing
indebtedness according to its terms. On November 30, 1997, all of the unpaid
principal plus accrued interest thereon then outstanding under the note was
converted into an aggregate of 333,593 shares of the Company's restricted Common
Stock.
On October 24, 1997, the Company issued two 12% convertible promissory
notes in the original principal amounts of $70,000 and $30,000, respectively, to
the spouse and son of Terrence H. Pocock, a director of the Company. On November
30, 1997, all of the unpaid principal plus accrued interest thereon then
outstanding under these notes was converted into an aggregate of 288,096 shares
of the Company's restricted Common Stock. As additional consideration for such
loans, the Company also issued warrants to purchase an aggregate of 20,000
shares of its Common Stock to the holders of the promissory notes. The warrants
are exercisable until October 24, 1999 at a price of $0.46 per share.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (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
Commission. 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 file 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. All of the aforementioned untimely
reports have since been filed with the Commission.
SECURITY OWNERSHIP OF
CERTAIN PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information, as of February 28,
1997, with respect to the number of shares of the Company's Common Stock
beneficially owned by (i) the Company's directors, (ii) the Named Executive
Officer, (iii) all directors and officers of the Company as a group and (iv)
persons known to the Company to own 5% or more of the Company's outstanding
Common Stock.
Number of Number of
Shares Owned Shares Owned
Name and Address of Before Reverse after Reverse
Beneficial Owner (+) Split Split Percentage
- -------------------- -------------- ------------- ----------
Terence E. Belsham 1,187,876(1) 197,980(1) 7.2%
Richard P. Freeman 1,195,192(2) 199,199(2) 7.3%
Gerald I. Quinn 1,346,083(3) 224,348(3) 7.8%
Terrence H. Pocock 298,096(4) 49,683(4) 1.8%
John P. Clements 200(5) 0 *
Switch Telecommunications Pty Ltd. 3,544,110(6) 590,685(5) 19.5%
55 Mentmove Ave.
Rosebery, New South Wales 2018
Australia
ALL OFFICERS AND DIRECTORS AS A
GROUP (5 IN NUMBER) 4,037,247(1)(2)(3)(4) 22.8%
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<PAGE>
- ----------
* Less than 1%
+ Unless otherwise indicated, each holder has an address at c/o Wavetech
International, Inc., 5210 E. Williams Circle, Suite 200, Tucson, Arizona
85711.
(1) Includes 200,000 (33,334 post-split) shares of Common Stock issuable in
connection with options to purchase Common Stock. The options are
exercisable at $0.81 ($4.86 post-split) per share and have fully vested.
(2) Includes 200,000 (33,334 post-split) shares of Common Stock issuable in
connection with options to purchase Common Stock. The options are
exercisable at $0.81 ($4.86 post-split) per share and have fully vested.
(3) Includes 800,000 (133,334 post-split) shares of Common Stock issuable in
connection with options to purchase Common Stock. The options are
exercisable at $0.66 ($3.96 post-split) per share and have fully vested.
(4) Includes 10,000 (1,667 post-split) shares of Common Stock issuable upon the
exercise of options granted to a non-employee Board Member. The options are
exercisable at $0.37 and have fully vested. At February 28, 1998, 10,000
(1,667 post-split) of the options are exercisable. Includes 288,096 (48,016
post-split) and warrants to purchase an aggregate of 20,000 (3,334
post-split) shares of Common Stock, all held by this holder's spouse and
son, of which he expressly disclaims beneficial ownership.
(5) All of these shares are held by Raftery:. Clements' sons.
(6) Includes a warrant to purchase 2,000,000 (333,334 post-split) shares of
Common Stock at $1.50 ($9.00) per share.
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed Addison, Roberts & Ludwig, P.C.,
independent public accountants, to audit the consolidated financial statements
of the Company for the fiscal year ending August 31, 1998 if the Reorganization
Agreement is not approved by the Stockholders or if the Merger is not
consummated. Addison, Roberts & Ludwig, P.C. also served as the independent
accountants for the Company's fiscal year ended August 31, 1997. Representatives
of Addison, Roberts & Ludwig, P.C. are expected to be present at the Annual
Meeting and will have the opportunity to make a statement if they desire to do
so and are expected to be available to respond to appropriate questions.
It is anticipated that if the Reorganization Agreement is approved, the
Board of Directors of the Reorganized Parent will seek to appoint independent
public accountants other than Addison, Roberts & Ludwig, to audit the
consolidated financial statements of the Reorganized Parent for the 1998 fiscal
year.
86
<PAGE>
MARKET PRICE AND DIVIDEND OF
WAVETECH COMMON STOCK
The Wavetech Common Stock is quoted on the Nasdaq SmallCap Market. The
high and low bid prices of the Wavetech Common Stock, as reported by the Nasdaq
Stock Market, from September 1, 1995 through August 31, 1997 by fiscal quarters
(i.e. 1st Quarter = September 1 through November 30) and for the fiscal quarter
ended November 30, 1997, are as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
1998
Common Stock $ 19/32 $ 3/8 N/A N/A N/A N/A N/A N/A
</TABLE>
The bid and the asked price of the Wavetech Common Stock on February
28, 1998 were 3/8 and 13/32, respectively.
As of February 28, 1998, the Company had 166 shareholders of record of
its Common Stock.
The Company has never declared a dividend and does not plan to declare
a dividend of cash on Wavetech Common Stock in the future.
OTHER BUSINESS
The Company's Board of Directors is not aware of any other business to
be considered or acted upon at the Annual Meeting of the Stockholders other than
those described above. If other business requiring a vote of Stockholders is
properly presented at the meeting, proxies will be voted in accordance with the
judgment on such matters of the person or persons acting as proxy. If any matter
not appropriate for action at the Annual Meeting should be presented, the
holders of the proxies will vote against consideration thereof or action
thereon.
STOCKHOLDER PROPOSALS
The Company welcomes comments or suggestions from its stockholders. If
a stockholder desires to have a Proposal formally considered at the 1999 Annual
Meeting of Stockholders, and evaluated by the Board for possible inclusion in
the Proxy Statement for that meeting, the Proposal (which must comply with the
requirements of Rule 14a-8 promulgated under the Exchange Act) must be received
in writing by the Secretary of the Company at the address set forth on the first
page hereof on or before December 31, 1998.
87
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Certain information set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to shareholders (the "Wavetech Annual Report") is incorporated
into this Proxy Statement by reference thereto. [A COPY OF THE WAVETECH 1997
ANNUAL REPORT IS BEING DELIVERED HEREWITH AND SHOULD BE CAREFULLY REVIEWED IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROXY STATEMENT PRIOR
TO MAKING A DECISION AS TO THE PROPOSALS PRESENTED HEREIN.]
The following documents have been filed with the SEC by the Company and
are hereby incorporated by reference into this Proxy Statement: (i) the
Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1997
and (ii) the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended November 30, 1997. All other documents and reports filed pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this
Proxy Statement and prior to the date of the 1998 Annual Meeting shall be deemed
to be incorporated herein by reference, and shall be deemed to be a part hereof
from the date of the filing of such reports and documents.
The Company will provide without charge to each person to whom this
Proxy Statement is delivered, upon the written or oral request of such person, a
copy of the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended November 30, 1997. Such requests should be directed to: Attention:
Secretary, Wavetech International, Inc., 5210 E. Williams Circle, Suite 200,
Tucson, Arizona 85711. In order to ensure timely delivery of the documents prior
to the Wavetech 1998 Annual Meeting, any request should be made by April 15,
1998.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
Wavetech International, Inc. and its Subsidiaries
for the Years Ended August 31, 1997 and 1996.
Independent Auditor's Report F-2
Consolidated Balance Sheet as of August 31, 1997 F-3
Consolidated Statements of Operations for the Years Ended
August 31, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders Equity
For the Years Ended August 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1997 and 1996 F-6
Note to the Financial Statements F-7
HISTORICAL CONSOLIDATED FINANCIAL
Statements of Wavetech International, Inc. and its
Subsidiaries for the Three Month Periods Ended
November 30, 1997 and 1996.
Condensed Consolidated Balance Sheets for November 30,
1997 (Unaudited) and August 31, 1997 (Audited) F-19
Condensed Consolidated Statements of Operations for the
three month periods ended November 30, 1997 and 1996
(unaudited) F-20
Condenses Consolidated Statements of Cash Flows for the
three month periods ended November 30, 1997 and 1996
(Unaudited) F-21
Notes to Condensed Consolidated Financial Statements
(Unaudited) F-22
COMBINED FINANCIAL STATEMENTS OF IMAGITEL, INC.
Report of Independent Accountants F-23
Consolidated Balance Sheet - December 31, 1997 F-24
Consolidated Statements of Operations and Retained
Earnings - December 31, 1997 and from January 9, 1996
to December 31, 1996 F-25
Consolidated Statements of Cash Flows - December 31, 1997
and from January 9, 1996 to December 31, 1996. F-26
Notes to the Consolidated Financial Statements F-27
F-1
<PAGE>
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
Except for Note 15 as to which the date is March 31, 1998
F-2
<PAGE>
CERTAIN FINANCIAL DATA
WAVETECH INTERNATIONAL, 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
===========
F-3
<PAGE>
WAVETECH INTERNATIONAL, 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
=========== ===========
F-4
<PAGE>
WAVETECH INTERNATIONAL, 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>
F-5
<PAGE>
WAVETECH INTERNATIONAL, 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
=========== ===========
F-6
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The consolidated financial statements include the accounts of Wavetech
International, 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 International,
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.
F-7
<PAGE>
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.
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.
F-8
<PAGE>
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.
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.
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.
F-9
<PAGE>
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.
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 Telstra 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).
F-10
<PAGE>
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.
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.
F-11
<PAGE>
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
=========
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
International, 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
========
F-12
<PAGE>
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
========
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.
F-13
<PAGE>
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.
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
International, 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.
F-14
<PAGE>
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.
F-15
<PAGE>
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-
===========
F-16
<PAGE>
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
Common Stock of the Company.
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.
F-17
<PAGE>
Supplemental disclosure of cash flow information:
1997 1996
---- ----
Cash paid during the period for:
Income taxes $ 50 $ 50
======= =======
Interest $20,454 $39,327
======= =======
15. SUBSEQUENT EVENTS
On January 5, 1998, the Company entered into a Reorganization Agreement
and Plan of Merger with Imagitel, Inc. (Imagitel), a privately owned company.
Subject to shareholder approval, the Company will issue common stock of its
newly formed subsidiary Wavetech Interim, Inc. (Interim), in exchange for all
the issued and outstanding common stock of Imagitel at the rate of 365 shares of
the Company's stock for each share of Imagitel common stock. The ratio may be
adjusted for certain conditions specified in the Plan of Merger. Imagitel shall
be the surviving corporation of the Merger at which time Interim shall cease to
exist and Imagitel will become the wholly-owned subsidiary of Wavetech.
On February 9, 1998, the Company executed a loan agreement with
Imagitel pursuant to which the Company may borrow up to $450,000 for working
capital purposes. Outstanding balances under such loan accrue interest at a rate
of 12% per annum and all unpaid principal plus interest accrued thereon is
payable on or before June 30, 1998. The loan is secured by all of the assets of
the Company.
In October of 1997, the Company entered into various convertible loan
agreements with several individuals including an officer and shareholder. The
Notes were converted to shares of common stock on February 10, 1998.
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.
F-18
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 (UNAUDITED) AND
AUGUST 31, 1997 (AUDITED)
ASSETS
November 30 August 31
1997 1997
----------- ---------
Current assets:
Cash and cash equivalents $ 64,364 $ 13,329
Accounts receivable, net of allowance of $527 29,672 26,273
License fee receivable 150,000 150,000
Prepaid expenses and other assets 8,917 9,725
----------- -----------
Total current assets 252,953 199,327
Property and equipment, net 371,983 410,182
Noncurrent asssets:
Investment in Switch Telecommunications
Pty Limited 2,316,165 2,316,165
License fee receivable 150,000 150,000
Intangibles, net 28,472 29,489
Deposits and other assets 35,633 35,633
----------- -----------
Total noncurrent assets 2,530,270 2,531,287
----------- -----------
Total assets 3,155,206 3,140,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 388,689 $ 395,222
Accrued interest payable 2,529 5,248
Unearned revenue 150,000 150,000
Notes payable, current portion 63,000 172,071
Capital leases payable, current portion 56,119 56,119
----------- -----------
Total current liabilities 660,337 778,660
Noncurrent liabilities:
Capital leases payable 45,641 53,892
Unearned revenue - license fee 150,000 150,000
----------- -----------
Total liabilities 855,978 982,552
Stockholders' equity:
Common stock, par value $.001 per share;
50,000,000 shares authorized, 15,141,364
and 15,076,807 shares issued and
outstanding 15,141 15,077
Additional paid in capital 7,428,089 7,024,823
Accumulated deficit (5,144,022) (4,881,656)
----------- -----------
Total stockholders' equity 2,299,228 2,158,244
----------- -----------
Total liabilities and stockholders' equity $ 3,155,206 $ 3,140,796
=========== ===========
F-19
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenues: $ 51,030 $ 8,399
Cost of sales:
Direct costs 52,570 51,230
----------- -----------
Gross profit (loss) (1,540) (42,831)
Other costs
Development and administrative expenses 247,995 452,115
----------- -----------
Loss before other income (expenses) $ (249,535) $ (494,946)
----------- -----------
Other income (expense)
Interest income 2 6,549
Interest expense (12,811) (2,300)
----------- -----------
Total other income (expense) 12,809 4,249
----------- -----------
Net loss $ (262,344) $ (490,697)
=========== ===========
Per share data
Net loss per share (0.02) (0.03)
Weighted average number of shares outstanding 15,112,666 14,114,441
=========== ===========
F-20
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net Loss $(262,344) $(490,697)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 39,216 48,740
Common stock issued for services and accrued
interest 44,191
Changes in assets and liabilities:
(Increase) decrease in accounts receivable
and other current assets (2,591) 14,029
(Increase) in inventory deposit (3,422)
(Decrease) in accounts payable and accrued
expenses (6,530) (69,987)
(Decrease) in accrued interest payable (2,720)
--------- ---------
Total Adjustments 71,566 (10,640)
Net cash used in operating activities (190,778) (501,337)
Cash flows from investing activities:
Purchase of property and equipment -- (8,266)
Decrease in notes receivable -- 2,797
--------- ---------
Net cash used in investing activities 0 (5,469)
Cash flows from financing activities:
Proceeds from notes payable 250,000
Payments on capital lease payable (8,251) (4,769)
Proceeds from common stock issued 64 5,002
--------- ---------
Net cash provided by financing activities 241,813 233
Net increase (decrease) in cash 51,035 (506,573)
Cash and cash equivalents, beginning of period 13,329 857,488
--------- ---------
Cash and cash equivalents, end of period $ 64,364 $ 350,915
========= =========
F-21
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operation results for the three month period
ended November 30, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ending August 31, 1998. For further information,
refer to the Company's financial statements for the year ended August 31, 1997
included in its Form 10-KSB.
The consolidated financial statements include the accounts of Wavetech,
Inc. (the Company), its wholly owned subsidiaries, Interpretel, Inc.
(Interpretel) and Telplex International Communications, Inc. (Telplex). All
material intercompany balances and transactions have been eliminated.
NOTE 2 - PER SHARE DATA
Per share data is based on the weighted average number of shares outstanding
throughout the periods. The assumed exercise of stock options outstanding would
not have a dilutive effect on the computation.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Imagitel, Inc.
We have audited the accompanying consolidated balance sheet of Imagitel, Inc. as
of December 31, 1997 and the related consolidated statements of operations and
retained earnings, and cash flows for the year ended December 31, 1997 and for
the period from inception on January 9, 1996 to December 31, 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Imagitel, Inc. as
of December 31, 1997, and the consolidated results of its operations and its
cash flows for the year ended December 31, 1997 and for the period from
inception on January 9, 1996 to December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
March 11, 1998
F-23
<PAGE>
IMAGITEL, INC.
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash $1,472,425
Restricted Cash 100,000
Accounts receivable 1,309,182
Prepaid Expenses 116,702
----------
Total current assets 2,998,309
Property and Equipment 263,509
Other Assets 2,900
----------
Total assets $3,264,718
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,545,161
Notes payable to stockholders 314,500
Commissions payable to affiliate 241,929
Other accrued liabilities 764,510
----------
Total current liabilities 2,866,100
Commitments and Contingencies
Stockholders' Equity:
Common stock-no par value; 1,000,000 shares
authorized; 200,000 shares issued and outstanding 2,000
Retained earnings 396,618
398,618
Total liabilities and stockholders' equity $3,264,718
==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-24
<PAGE>
IMAGITEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM INCEPTION ON JANUARY 9, 1996 TO DECEMBER 31, 1996
1997 1996
---- ----
Carrier revenue $42,494,761 $6,204,726
Costs and expenses:
Cost of phone services and consumer benefits 20,098,609 2,657,895
Commissions and other selling costs 9,704,619 2,864,682
General and administrative costs 8,765,465 1,489,146
Interest expense 890,868 --
----------- ----------
39,459,561 7,011,723
----------- ----------
Net Income (loss) 3,035,200 (806,997)
Accumulated deficit, beginning of period (806,997) --
Distributions, $9.16 per share (1,831,585) --
----------- ----------
Retained earnings, end of period $ 396,618 $ (806,997)
=========== ==========
Net income (loss) per share $ 15.18 $ (4.03)
=========== ==========
Net income per share, assuming dilution $ 14.50
===========
Pro Forma:
Historical income before income taxes $ 3,035,200
Pro forma provision for income taxes 1,214,080
-----------
Pro forma net income $ 1,821,120
===========
Pro forma net income per share $ 9.11
===========
Pro forma net income per share, assuming dilution $ 8.70
===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-25
<PAGE>
IMAGITEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM INCEPTION ON JANUARY 9, 1996 TO DECEMBER 31, 1996
1997 1996
---- ----
Operating Activities:
Receipts from customers $ 42,156,866 $ 5,233,439
Payments to suppliers and employees (37,704,728) (5,367,439)
Interest paid (890,868) --
------------ -----------
Net cash provided by (used in)
operating activities 3,561,270 (134,000)
------------ -----------
Investing Activities:
Restricted cash investment (100,000) --
Capital expenditures (140,474) (199,286)
------------ -----------
Net cash used in investing activities (240,474) (199,286)
------------ -----------
Financing Activities:
Proceeds from notes payable 894,500 220,000
Payments on notes payable (800,000) --
Bank overdraft (76,286) 76,286
Advance from affiliate (35,000) 35,000
Proceeds from issuance of common stock -- 2,000
Payment of distributions (1,831,585) --
------------ -----------
Net cash provided by (used in) financing
activities (1,848,371) 333,286
------------ -----------
Net change in cash 1,472,425 --
Cash, beginning of period -- --
------------ -----------
Cash, end of period $ 1,472,425 $ --
============ ===========
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 3,035,200 $ (806,997)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 62,042 14,208
Change in -
Accounts receivable (337,895) (971,287)
Prepaid expenses (85,394) (31,307)
Other assets -- (2,900)
Accounts payable 668,030 877,131
Commission payable (375,247) 617,176
Deposits (113,810) 113,810
Other accrued liabilities 708,344 56,166
------------ -----------
526,070 672,997
------------ -----------
Net cash provided by (used in) operating activities $ 3,561,270 $ (134,000)
============ ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-26
<PAGE>
IMAGITEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Imagitel, Inc. (the Company) was incorporated in the State of Nevada on December
12, 1997 to serve as the holding company for RRV Enterprises, Inc. (RRVE) and
DDD Calling, Inc. (DDD). RRVE and DDD were incorporated in the state of Texas on
January 10, 1996 and January 9, 1996, respectively. The stockholders of both
companies made an initial $1,000 capital contribution and the stockholders share
ownership in both companies was identical. Effective in December 1997, RRVE and
DDD were merged into newly formed subsidiaries of the Company. The share
ownership of the Company is represented by 200,000 shares owned in identical
proportion to the former ownership of RRVE and DDD. The merger of the companies,
all under common control and management, has been accounted for at historical
cost and as if it were effective from inception on January 9, 1996.
The Company maintains a small finance and administrative staff in Honolulu,
Hawaii and has an operations center in Houston, Texas. The Company's financial
and accounting operations are managed, in part, by Mutual Holdings, Inc., an
entity owned by certain of the Company's stockholders. The Company provides
services under the name Consumer Access and DDD Calling. The Company is a
switchless reseller of long-distance telephone services and conducts business in
forty-five states. In certain states, where the Company is not authorized as a
carrier, the Company utilizes the services of another reseller to process its
calls.
The Company obtains subscribers through independent sales agents. The sales
agents are paid a one-time commission. Additional costs of customer acquisition
include printing of phone cards and various sales material that accompany the
card. All of the Company's subscriber acquisition costs are expensed as
incurred. The agreement entered into with the customer provides for a minimum
monthly charge for a predetermined amount of minutes. The Company pays a fee per
subscriber for benefit services administered by an outside benefits
organization.
The Company utilizes an intermediary for detail call accounting and transaction
authorization. The intermediary is also responsible for aggregation of the
Company's utilization of long-distance phone carrier charges. Billings are
generated based on actual volume and minimum monthly charges.
The Company uses two aggregators to process and transmit billing information to
Local Exchange Carriers (LEC). The LECs (owned primarily by Regional Bell
Operating Companies) are responsible for customer billing and collection. Prior
to collection by the LEC, the Company factors receivables for advance cash
settlement.
F-27
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION -
The consolidated financial statements of the Company include the
accounts of all wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidation.
PROPERTY AND EQUIPMENT -
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives (generally three years) of the assets.
REVENUE RECOGNITION -
Revenue from phone usage is recognized as utilized by subscribers.
Billings to subscribers are based on established rates.
INCOME TAXES -
The Company and its subsidiaries adopted S Corporation tax status
effective with inception. Accordingly, the Company's taxable income
accrues to its stockholders and no provision for income taxes has been
reflected in the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The fair value of all financial instruments approximates the carrying
value as the majority of the financial instruments have short durations
until maturity or the market and risk factors associated with the
instruments have not changed.
EARNINGS PER SHARE -
Earnings per share were computed based on Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Earnings per share
were calculated assuming 200,000 shares were outstanding for all
periods presented. For the year ended December 31, 1997, earnings per
share, assuming dilution, included 9,334 additional shares, or 209,334
total shares, representing the dilutive impact of outstanding stock
options. In January 1998, the Company approved the issuance of
additional options which will increase the number of options
outstanding with a potentially dilutive impact on earnings per share.
F-28
<PAGE>
PRO FORMA INFORMATION -
The pro forma statement of operations data presents the effects on the
historical financial statements for income taxes based upon pro forma
pre-tax income as if the Company had been subject to additional federal
, state and local taxes, calculated using a pro forma effective rate of
40%. The Company and its subsidiaries have adopted S Corporation tax
status. However, after the impending merger with Wavetech, Inc. (see
Note 11), the Company will not retain its S Corporation status.
USE OF ESTIMATES IN 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 amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. RECEIVABLES
Accounts receivable at December 31, 1997 is comprised of the following:
Receivables assigned to factor $ 5,679,160
Less advances from factor 5,085,808
------------
Due from factor 593,352
Unfactored accounts receivable 1,591,419
Due from another reseller 374,411
Allowance for doubtful accounts (1,250,000)
------------
$ 1,309,182
============
Pursuant to an agreement, the Company assigns to a factor, with recourse against
future receivables and not other assets of the Company, all of the receivables
generated from long-distance services. Calls carried by another reseller are
also assigned to the same factor.
4. AFFILIATE PAYABLE
At December 31, 1997, included in accounts payable is a balance of $21,079 due
to Mutual Holdings, Inc. This balance includes amounts due for payroll charges
incurred by Mutual Holdings, Inc. and allocated to the Company. Such payroll
charges amounted to $588,159 for the year ended December 31, 1997.
F-29
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 is summarized as follows:
Equipment $276,820
Furniture and fixtures 62,938
--------
339,758
Less accumulated depreciation (76,249)
--------
$263,509
========
Depreciation expense for the periods ended December 31, 1997 and 1996 amounted
to $62,042 and $14,208,
respectively.
6. NOTES PAYABLE
At December 31, 1997, the Company had notes payable to two of its shareholders
in the amount of $314,500. The balance was repaid in 1998. The notes accrue
interest at 12% per annum.
At December 31, 1997, the Company had an undrawn bank line of credit in the
amount of $100,000 which expires on June 19, 1998. A certificate of deposit for
$100,000 serves as collateral for the line of credit and is classified as
restricted cash in the balance sheet.
7. OPERATING LEASES
The Company leases certain operating facilities in Houston, Texas under a
noncancelable agreement which expires on October 31, 2001.
Future minimum lease rentals at December 31, 1997 under this agreement are
summarized below:
Year
----
1998 $105,000
1999 105,000
2000 105,000
2001 87,000
--------
$402,000
========
Office space in Honolulu, Hawaii is leased by an affiliated entity. The Company
reimburses the related entity for its proportionate share of monthly lease rent.
The lease expires on February 28, 1998. Monthly rental under this lease amounts
to approximately $11,000.
Rent expense for the periods ended December 31, 1997 and 1996 amounted to
$209,183 and $20,488, respectively.
F-30
<PAGE>
8. COMMISSIONS PAYABLE
In addition to sales commissions paid to independent agents, the Company entered
into an agreement to pay a commission of 10% of carrier revenue to Mutual
Holdings, Inc. Commissions to Mutual Holdings, Inc. for the periods ended
December 31, 1997 and 1996 amounted to $2,236,934 and $617,176, respectively.
9. REGULATORY MATTERS
In September 1997, the Company received communications from several state
attorneys general notifying that it was the subject of a multi-state
investigation regarding the Consumer Access calling card program. This
investigation involves the States of Tennessee, Michigan, Arkansas, New Jersey,
Pennsylvania, North Carolina and Texas. These communications were followed up
with the service of formal subpoenas and civil investigative demands by certain
states and have also included questions related to the business practices of the
Company. The Company made a unified response to the states' demands on October
31, 1997 and is cooperating with the states in their investigation. The
Company's sale of telecommunications services in the affected states comprise a
significant portion of the Company's revenue. In the event these states obtain a
restriction on the Company's ability to conduct business in the future or seek
redress for past business practices, the Company's business could be
significantly affected. However, management currently does not anticipate a loss
related to this matter.
10. STOCK OPTIONS
In February 1997, the Company issued an option to an employee of the Company to
purchase 10,526 shares of the Company's stock for $20,000 ($1.90 per share). The
option provides for vesting only if there is a change in the Company's ownership
or the shares of the Company become publicly traded (trigger event) and the
option expires in 2007. The Company has not recognized any intrinsic value or
fair value for this option as the exercise is contingent on the happening of the
trigger event.
In January 1998, the Company approved options to other employees to acquire
10,480 shares of the Company's stock for $31,67 per share. These options vest
after three years or sooner if there is a trigger event.
11. SUBSEQUENT EVENTS
DEFINITIVE MERGER AGREEMENT -
In January 1998, the Company entered into a reorganization (merger)
agreement with Wavetech, Inc. (Wavetech), a public company, pursuant to
which Wavetech will issue 365 shares of common stock for each share of
Company common stock in a transaction that will be accounted for as a
purchase. As a result of the merger, the Company will become a wholly-owned
subsidiary of Wavetech. The transaction is subject to approval by
shareholders of both companies. The Company expects to complete the
transaction in the second quarter of 1998,
OTHER -
In February 1998, the Company made $210,000 available to Wavetech in a line
of credit arrangement.
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EXHIBIT I
FORM OF CERTIFICATE OF
AMENDMENT TO ARTICLES OF INCORPORATION
OF
WAVETECH INTERNATIONAL, INC.
We, the undersigned President and Secretary of WAVETECH INTERNATIONAL,
INC., a Nevada corporation (the "Corporation"), do hereby certify:
That the Board of Directors of the Corporation has at an Annual
Meeting, held on __________ ____, 1998, adopted a resolution to amend the
Articles of Incorporation, as amended (the "Articles of Incorporation"), as
amended (the "Articles of Incorporation"), as follows:
1. Article 4 is hereby amended by deleting it in its entirety and
replacing it with the following:
4. The authorized capital stock of this Corporation shall be
fifty million (50,000,000) shares of common stock $.001 par value, and
ten million (10,000,000) shares of preferred stock $.001 par value per
share. Each ____ (__) shares of the Corporation's Common Stock issued
and outstanding as of [INSERT DATE WHICH CERTIFICATE OF AMENDMENT IS
FILED] (the "Split Effective Date") shall be automatically changed and
reclassified, as of the Split Effective Date and without further
action, into one (1) fully paid and nonassessable share of the
Corporation's outstanding Common Stock; provided, however, that any
fractional interest resulting from such change and classification
shall be rounded upward to the nearest whole share. Such shares may be
issued from time to time for such consideration as may be fixed by the
Board of Directors;
As to the preferred stock of the Corporation, the power to issue
any shares of preferred stock of any class of any series of any class
and designations, voting power, preferences and relative
participating, optional or other rights, if any, or the
qualifications, limitations or restrictions thereof, shall be
determined by the Board of Directors.
The number of shares of each class outstanding and entitled to vote on
the amendment to the Articles of Incorporation is ______ shares of the
Corporation's Common Stock; that the foregoing amendment has been approved by a
majority of the outstanding shares of Common Stock, at an Annual Meeting held on
May 1, 1998, which was sufficient for approval by that voting group.
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Dated this ____ day of February, 1998.
WAVETECH INTERNATIONAL, INC.,
a Nevada corporation
By: /s/ Gerald I. Quinn
--------------------------------
Gerald I. Quinn, President
By: /s/ Richard Freeman
--------------------------------
Richard Freeman, Secretary
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EXHIBIT II
This REORGANIZATION AGREEMENT is entered into as of this ____ day of
January, 1998 among Wavetech, Inc. ("Wavetech"), a corporation
organized and existing under the laws of the State of New Jersey,
Wavetech Interim, Inc. ("Interim"), a corporation organized and
existing under the laws of the State of Nevada, and Imagitel, Inc.
("Imagitel"), a corporation organized and existing under the laws of
Nevada.
WHEREAS, Wavetech desires to acquire Imagitel through the merger of
Interim with and into Imagitel (the "Merger");
WHEREAS, the respective Boards of Directors of Wavetech, Interim and
Imagitel have approved such Merger pursuant to the terms and conditions of this
Reorganization Agreement and the Plan of Merger attached hereto as Appendix A
(the "Plan of Merger");
WHEREAS, for Federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended; and
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties and agreements herein contained, Wavetech, Interim
and Imagitel hereby agree as follows:
ARTICLE 1. DEFINITIONS
1.1. CERTAIN DEFINITIONS : AS USED IN THIS REORGANIZ4TION AGREEMENT The
following terms shall have the meanings set forth below:
AFFILIATED PERSON. This means, with respect to Imagitel or Wavetech,
any (i) officer or director of such company or any subsidiary of such company;
(ii) a shareholder of such company that owns, or has the right to acquire, more
than five percent (5%) of the company's Common Stock on a fully diluted basis;
(iii) an entity that, directly or indirectly, alone or together with others,
controls, is controlled by or is under common control with such company or such
company's subsidiary; or (iv) Person that, directly or indirectly, alone or
together with others, is controlled by or under common control with any officer
or director of such company or of any subsidiary or any company shareholder
described in clause (ii) above.
BENEFIT PLANS. All employee benefit plans within the meaning of Section
3(3) of ERISA and any related or separate contracts, plans, trusts, programs,
policies, arrangements, practices, customs and understandings that provide
benefits of economic value to any present or former employee of, or current or
former beneficiary, dependent or assignee of any such employee or former
employee.
CERTIFICATE OF MERGER. The Certificate of Merger to be executed by
Interim and Imagitel and in a form appropriate for filing with the Secretary of
State of Nevada, and relating to the effective consummation of the Merger as
contemplated by the Plan of Merger.
CLOSING DATE. The terms Closing and Closing Date shall have the
meanings ascribed to them in Section 2.2 hereof.
CODE. The Internal Revenue Code of 1986, as amended.
CONFIDENTIAL INFORMATION. The term "Confidential Information" shall
mean all information of any kind concerning a party hereto that is furnished by
such party or on its behalf pursuant to Section 6.1 hereof and designated in
writing as "Confidential Information", except information (i) ascertainable or
obtained from public or published information, (ii) received from a third party
not known to the recipient of Confidential Information to be under an obligation
to keep such information confidential, (iii) which is or becomes known to the
public (other than through a breach of this Reorganization Agreement), (iv) of
which the recipient was in possession prior to disclosure thereof in connection
with the Merger, or (v) which was independently developed by the recipient
without the benefit of Confidential Information.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
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EFFECTIVE TIME. The date and time which the Merger becomes effective as
set forth in the Certificate of Merger.
IMAGITEL. Imagitel, Inc. a Nevada corporations headquartered in
Houston, Texas. Where the context permits, Imagitel shall include all subsidiary
entities.
IMAGITEL COMMON STOCK. The common stock, no par value share, of
Imagitel.
IMAGITEL SHAREHOLDER APPROVAL. This term shall mean the approval by the
requisite vote of the shareholders of Imagitel at the Imagitel Shareholders'
Meeting of the Merger, all in accordance with this Reorganization Agreement and
the Plan of Merger.
IMAGITEL SHAREHOLDERS' MEETING. The meeting of the shareholders of
Imagitel at which the Merger shall be voted upon.
INTERIM. Wavetech Interim, Inc. a Nevada corporation and a wholly-owned
subsidiary of Wavetech.
MERGER. The merger of Interim with and into Imagitel as more
particularly set forth herein and in the Plan of Merger.
PERSON. An individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a business
trust, a joint venture, an unincorporated organization, a governmental entity
(or any department, agency, or political subdivision thereof) or other entity.
PLAN OF MERGER. The Plan of Merger attached to this Reorganization
Agreement as Appendix A.
PROXY STATEMENT. The proxy statement which shall be furnished to the
Wavetech shareholders in connection with the solicitation by the Wavetech Board
of Directors of proxies for the approval of this Reorganization Agreement and
the matters contemplated hereby.
REGULATIONS. The regulations issued by the Internal Revenue Service
under the Code.
REGULATORY APPROVALS. Any approvals or consents of Regulatory
Authorities, which approvals or consents are necessary or reasonably desirable
in connection with the consummation of the transactions contemplated herein.
REGULATORY AUTHORITY. Any federal or state governmental agency or
authority charged with the supervision or regulation of Wavetech or Imagitel,
and any and all other agencies or departments of federal, state or local
government, including without limitation the SEC.
REORGANIZATION AGREEMENT. This Reorganization Agreement, including all
schedules, appendices and exhibits attached hereto.
SEC. The Securities and Exchange Commission.
SECURITIES ACT. The Securities Act of 1933, as amended.
SHAREHOLDER APPROVALS. The Imagitel Shareholders' Approval and the
Wavetech Shareholders' Approval.
SURVIVING CORPORATION. The surviving corporation after consummation of
the Merger, which shall be Imagitel.
WAVETECH. Wavetech, Inc. a New Jersey corporation headquartered in
Tucson, Arizona. Where the context permits, references to Wavetech shall include
all subsidiary entities.
WAVETECH COMMON STOCK. The common stock, par value $0.001 per share, of
Wavetech.
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WAVETECH SHAREHOLDER APPROVALS. THIS term shall mean, as the context
may require, the duly authorized written consent of Wavetech to the Merger (as
sole shareholder of Interim) and the approval by the requisite vote of the
shareholders of Wavetech at the Wavetech Shareholders' Meeting of the Merger,
all in accordance with this Reorganization Agreement and the Plan of Merger.
WAVETECH SHAREHOLDERS' MEETING. The meeting of the shareholders of
Wavetech at which the Merger shall be voted upon.
ARTICLE 2. THE MERGER
2.1. GENERAL PROVISIONS. Subject to the terms and conditions of this
Reorganization Agreement, including the Plan of Merger, at the Effective Time,
Interim shall be merged with and into Imagitel, which shall be the Surviving
Corporation and become a wholly-owned subsidiary of Wavetech. At the Effective
Time, the separate corporate existence of Interim shall cease. Wavetech and
Imagitel hereby agree that the Merger will be effected pursuant to the terms set
forth in the Plan of Merger.
2.2 THE CLOSING. The Closing of the transaction contemplated herein
shall be held as soon as reasonably practicable after fulfillment of all
conditions set forth in Article 7 and Article 8 hereof (the "Closing Date"), at
the offices of Imagitel located at 5120 Woodway Drive, Suite 7007, Houston,
Texas 77056,or ' at such other place and time as the parties hereto may mutually
agree; provided, however, that in the event that Closing has not occurred by
June 30, 1998, either party hereto shall have the right to terminate this
Reorganization Agreement.
2.3. CONSIDERATION FOR THE MERGER. The manner of converting the shares
of Imagitel into shares of Wavetech shall be as set forth in the Plan of Merger.
2.4. SHAREHOLDER APPROVALS. Each of Wavetech and Imagitel shall call
their respective Shareholders Meetings in accordance with the applicable
provisions of Nevada law and federal securities laws (as applicable) for the
purpose of considering and voting on this Reorganization Agreement and the
transactions contemplated hereby. The Shareholders' Meetings shall be held as
soon as practicable. The board of directors of each of Wavetech and Imagitel
shall recommend (subject to compliance with their legal and fiduciary duties, as
advised by counsel) to their respective shareholders and use their best efforts
to obtain the approval of this Reorganization Agreement and the Merger. Wavetech
shall also take any reasonable action required to be taken under the federal
securities laws and blue sky laws in connection with the issuance of Wavetech
Common Stock in the Merger. Wavetech shall prepare the Proxy Statement, which
shall be acceptable to Imagitel, in its sole discretion. The Proxy Statement
shall be mailed to the Wavetech shareholders as soon as reasonably practicable
after it becomes permissible to do so under applicable federal securities laws,
with due consideration given to the anticipated length of time that will be
required to obtain the Regulatory Approvals.
2.5. COOPERATION; REGULATORY FILINGS. Subject to the terms and
conditions of this Reorganization Agreement, Wavetech and Imagitel shall
cooperate, and shall cause each of their subsidiaries to cooperate, in the
preparation and submission by Wavetech and Imagitel, as promptly as reasonably
practicable, of such applications, petitions, and other documents and materials
as any of them may reasonably deem necessary or desirable to the SEC, the
appropriate Regulatory Authorities, the shareholders of Imagitel and Wavetech,
and any other Persons for the purpose of obtaining any approvals or consents
necessary to consummate the transactions contemplated by this Reorganization
Agreement. Prior to the making of any such filings with any Regulatory Authority
or the making of any written disclosures with respect to the transactions
contemplated hereby to shareholders or to any third Person (such as mailings to
shareholders or press releases), the parties shall submit to each other the
material to be filed, mailed, or released. Any such materials shall be
reasonably acceptable to all parties prior to the filings with any Regulatory
Authorities or the disclosures to shareholders or to any third Person, except to
the extent that any Person is legally required to proceed prior to obtaining the
approvals of the other parties. Wavetech shall be responsible for all filings
fees associated with the Regulatory Approvals.
2.6 TAX TREATMENT. Wavetech and Imagitel intend that the Merger shall
qualify as a tax-free reorganization under Section 368(a) of the Code.
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2.7. OPTIONS. At the Effective Time, all outstanding obligations,
commitments, options, warrants or other securities set forth on Schedule 3.4 of
the hereto which are exercisable for or convertible into, or which require the
issuance of, shares of any class of capital stock of Imagitel ("Options"),
shall, after the Effective Date, represent only the right to receive shares of
Wavetech Common Stock based on the Conversion Ratio (as defined in the Plan of
Merger).
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF IMAGITEL
Imagitel hereby represents and warrants to Wavetech the following
matters on and as of the date of this Reorganization Agreement and at the
Effective Time; provided, however, that before any breach of or inaccuracy in
any of the representations or warranties given in this Section 3 shall be
actionable or shall constitute grounds for termination of or failure to perform
under the terms of this Reorganization Agreement by Wavetech, such breach or
inaccuracy must be materially adverse in the aggregate with respect to the
business of Imagitel.
3.1. ORGANIZATION, GOOD-STANDING AND CONDUCT OF BUSINESS. Imagitel is a
corporation, duly organized, validly existing and in good standing under the
laws of Nevada, and has full power and authority and all necessary governmental
and regulatory authorization to own all of its properties and assets and to
carry on its business as it is presently being conducted, and is properly
licensed, qualified and in good standing as a foreign corporation in all
jurisdictions wherein the character of the properties or the nature of the
business transacted by Imagitel makes such license or qualification necessary.
3.2. CORPORATE AUTHORITY. The execution, delivery and performance of
this Reorganization Agreement have been duly authorized by the Board of
Directors of Imagitel. Other than the Imagitel Shareholder Approval, no other
corporate acts or proceedings on the part of Imagitel are required or necessary
to authorize this Reorganization Agreement or the Merger.
3.3. BINDING EFFECT. Subject to receipt of the Shareholder Approvals
and any required Regulatory Approvals, when executed, this Reorganization
Agreement will constitute a valid and legally binding obligation of Imagitel,
enforceable against Imagitel in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect and general principles of equity. Each document and
instrument contemplated by this Reorganization Agreement, when executed and
delivered by Imagitel in accordance with the provisions hereof, shall be duly
authorized, executed and delivered by Imagitel and enforceable against Imagitel
in accordance with its terms, subject to the exceptions in the previous
sentence.
3.4. CAPITALIZATION OF IMAGITEL. The authorized capital stock of
Imagitel consists solely of (i) 1,000,000 authorized shares of common stock (no
par value), of which 210,526 shares are issued and outstanding. All of the
issued and outstanding shares of Imagitel are validly issued and fully paid and
nonassessable. Except for the items set forth on Schedule 3.4 attached hereto or
expressly referenced elsewhere herein, there are no outstanding obligations,
options, warrants or commitments of any kind or nature or any outstanding
securities or other instruments convertible into shares of any class of capital
stock of Imagitel, or pursuant to which Imagitel is or may become obligated to
issue any shares of its capital stock. None of the shares of the Imagitel Common
Stock is subject to any restrictions as to the transfer thereof, except as set
forth in Imagitel's Certificate of Incorporation or Bylaws and except for
restrictions on account of applicable federal or state securities laws. Imagitel
does not hold any equity securities of any other company or legal entity except
for shares in RRV Enterprises, Inc., a Texas corporation, and DDD Calling, Inc.,
a Texas corporation, Zapcom International, Inc., a Nevada corporation and
Contest Central, LLC, a Texas limited liability company. Imagitel, Inc. owns
100% of the outstanding shares of capital stock of such subsidiaries and there
are no outstanding obligations, options, warrants or commitments of any kind or
nature or any outstanding securities or other instruments convertible into
shares of any class of capital stock of such subsidiaries.
3.5. ABSENCE OF DEFAULTS. Imagitel is not in default under, or in
violation of, any provision of its Certificate of Incorporation or Bylaws.
Imagitel is not in default under, or in violation of, any agreement to which
Imagitel is a party, the effect of which default or violation would have a
material adverse effect on Imagitel or its business operations or prospects.
Except as disclosed in Schedule 3.5 hereto, Imagitel is not in violation of any
applicable law, rule or regulation, the effect of which violation would have a
material adverse effect on Imagitel or its business operations or prospects.
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3.6 NON-CONTRAVENTION AND DEFAULTS; NO LIENS. Neither the execution or
delivery of this Reorganization Agreement, nor the fulfillment of, or compliance
with, the terms and provisions hereof, will (i) result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in a
violation of, termination of or acceleration of the performance provided by the
terms of, any agreement to which Imagitel is a party or by which it may be
bound, (ii) violate any provision of any law, rule or regulation, (iii) result
in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any asset of Imagitel, or
(iv) violate any provisions of Imagitel's Certificate of Incorporation or
Bylaws. To the best of Imagitel's knowledge, no other party to any material
agreement to which Imagitel is a party is in default thereunder or in breach of
any provision thereof. To the best of Imagitel's knowledge, there exists no
condition or event which, after notice or lapse of time or both, would
constitute a default by any party to any such agreement.
3.7. NECESSARY APPROVALS. Imagitel has obtained all certificates of
authority, licenses, permits, franchises, registrations of foreign ownership or
other Regulatory Approvals in every jurisdiction necessary for the continuing
conduct of its business and ownership of its assets. Except for those which may
be renewed or extended in the ordinary course of business, no such certificate,
license, permit, franchise, registration or other Regulatory Approval is about
to expire, lapse, has been threatened to be revoked or has otherwise become
restricted by its terms which would, upon such expiration, lapse, revocation or
restriction, have a material adverse effect on the financial circumstances of
Imagitel. Further, there is no reasonable basis for any such expiration, lapse,
revocation, threat of revocation or restriction. Except for any necessary
Regulatory Approvals, no consent, approval, authorization, registration, or
filing with or by any governmental authority, foreign or domestic, is required
on the part of Imagitel in connection with the execution and delivery of this
Reorganization Agreement or the consummation by Imagitel of the transactions
contemplated hereby. Except for the items in the preceding sentence or as
disclosed in Schedule 3.7 hereto, Imagitel is not required to procure the
approval of any Person, in order to prevent the termination of any right,
privilege, license or contract of Imagitel as a result of this Reorganization
Agreement.
(b) Schedule 3.7 hereto sets forth all governmental licenses and each
other material approval, authorization, consent, license, certificate of public
convenience, order or other permit of all Regulatory Authority, necessary to
enable Imagitel or its subsidiaries to own, operate and lease their properties
and assets as and where such properties and assets are owned, leased or operated
and to provide service and carry on their business as presently provided and
conducted (collectively the "Permits") or required to permit the continued
conduct of such business following the Closing Date in the manner conducted on
the date of this Reorganization Agreement (indicating in each case whether or
not the consent of any Person is required for the consummation of the
transactions contemplated hereby).
3.8 FINANCIAL STATEMENTS. The financial statements of Imagitel's
subsidiaries (the "Imagitel Financial Statements") which have been provided to
Wavetech, are true, correct and complete in all material respects and present
fairly, in conformity with generally accepted accounting principles consistently
applied, the financial position of the respective entities at the dates
indicated and the results of its operations for each of the periods indicated,
except as otherwise set forth in the notes thereto and except, with respect to
the unaudited statements' normal year end adjustments. The books and records of
Imagitel have been kept, and will be kept to the Closing Date, in reasonable
detail, and will fairly and accurately reflect in all material respects to the
Closing Date, the transactions of Imagitel. Only RRV Enterprises, Inc. has
audited financial statements, all other subsidiaries of Imagitel have unaudited
financial statements that are only internal statements and all information
contained therein should be verified by Wavetech's auditors.
3.9. TAX RETURNS. Imagitel files its income tax returns and maintains
its tax books and records on the basis of a taxable year ending December 3 1.
Imagitel has duly filed all tax reports and returns required to be filed by any
federal, state or local taxing authorities (including, without limitation, those
due in respect of its properties, income, franchises, licenses, sales and
payrolls) through the date hereof, and Imagitel has duly paid all taxes with
respect to the periods covered thereby and has established adequate reserves in
accordance with generally accepted accounting principles consistently applied
for the payment of all income, franchises, property, sales, employment or other
taxes anticipated to be payable after the date hereof. Imagitel is not
delinquent in the payment of any taxes, assessments or governmental charges and
no deficiencies have been asserted or assessed, which have not been paid or for
which adequate reserves have not been established. Imagitel does not have in
effect any waiver relating to any statute of limitations for assessment of taxes
with respect to any federal, state or local income, property, franchise, sales,
license or payroll tax. Imagitel does not know, or have reason to know, of any
questions which have been raised or which may be raised by any taxing authority
relating to taxes or assessments of Imagitel which, if determined adversely,
would result in the assertion of any deficiency.
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3.10. UNDISCLOSED LIABILITIES. Except for the liabilities which are
disclosed in the Imagitel Financial Statements or as set forth on Schedule 3.10
hereto, Imagitel has no material liabilities or material obligations of any
nature, whether absolute, accrued, contingent or otherwise, and whether due or
to become due. Since December 31, 1996, there has been (i) no material adverse
change in the business or operations of Imagitel, (ii) no incurrence by or
subjection of Imagitel to any obligation or liability (whether fixed, accrued or
contingent) or commitment material to Imagitel not referred to in this
Reorganization Agreement, except such obligations or liabilities as were or may
be incurred in the ordinary course of business and which are reflected on the
Imagitel Financial Statements at and for the periods subsequent to December 31,
1996.
(b) Except as set forth in Schedule 3.10 hereto, Imagitel. has not
since December 31, 1996 provided any special promotions, discounts or other
incentives to its employees, agents, distributors or customers in connection
with the solicitation of new orders for service provided by Imagitel or any
subsidiary, nor has any customer pre-paid any material amount for services to be
provided by Imagitel or any subsidiary in the future.
(c) Since December 31, 1996, Imagitel's accounts payable have been
accrued and paid in a manner consistent with Imagitel's prior practice and at no
point in time since December 31, 1996 have Imagitel's aggregate past due
accounts payable been more than $125,000.
(d) Imagitel has paid or fully provided for all access charges properly
payable to local exchange carriers for access facilities and has properly
reported its percentage of interstate use ("PIU") to such carriers. As of
September 30, 1997, Imagitel does not have, and at the Closing Imagitel will not
have, any liability on account of PIU. Imagitel does not have material revenues
associated with international traffic. The subsidiaries of Imagitel will not
have any operating loss in excess of $500,000 for the period from inception
through the Closing Date, after taking into account any and all contingencies
associated with the provision or possible termination of such services,
including (i) any requirement to provide return traffic, (ii) any liability that
may arise in connection with the termination of contracts or other arrangements
with any agents or distributors, governmental entities or other Persons, and
(iii) and potential litigation costs related to any of the foregoing.
3.11. TITLE TO PROPERTIES, ENCUMBRANCES. Imagitel has good and
marketable title to all of the real property and depreciable tangible personal
property owned by it, free and clear of any liens, claims, charges, options or
other encumbrances, except for any lien for (i) current taxes not yet due and
payable, (ii) pledges to secure deposits and other liens incurred in the
ordinary course of the banking business, (iii) such imperfections of title,
easements and other encumbrances, if any, as are not material in character,
amount or extent, or (iv) such items as are set forth on Schedule 3. 11 hereto.
3.12. LITIGATION. Except as shown on Schedule 3.12 hereto, there are no
claims, actions, suits or proceedings pending or threatened against Imagitel, or
to its knowledge affecting Imagitel, at law or in equity, before or by any
Federal, state, municipal, administrative or other court, governmental
department, commission, board, or agency, an adverse determination of which
could have a material adverse effect on the business or operations of Imagitel,
and Imagitel knows of no basis for any of the foregoing. There is no order,
writ, injunction, or decree of any court, domestic or foreign, or any Federal or
state agency affecting Imagitel specifically or to which Imagitel is subject.
3.13. REPORTS. Imagitel has duly made all reports and filings required
to be made pursuant to applicable law, except for failures to file or reports
which would not have a material adverse effect on the business or financial
condition of Imagitel.
3.14. BROKERS. Except as provided in its contracts with Seruus Ventures
LLC and Maverick Management Group, Imagitel has not incurred any liability for
any commission or fee in the nature of a finder's, originator's or broker's fee
in connection with the transaction contemplated herein.
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3.15. EXPENDITURES. Schedule 3.15 hereto sets forth any single
expenditure of $75,000 or more proposed to be made by Imagitel after the date
hereof and a summary of the terms and conditions pertaining thereto. At least 20
business days prior to the Closing Date, Imagitel will advise Wavetech of any
changes to Schedule 3.15 hereto reflecting additions or deletions thereto since
the date hereof.
3.16 INSURANCE. Schedule 3.16 hereto is a true and complete summary of
the policies of fire, liability, life and other types of insurance held by
Imagitel, setting forth with respect to each such policy, the policy number,
name of the insured party, type of insurance, insurance company, annual premium,
expiration date, deductible amount, if any, and amount of coverage. Each such
policy is in an amount reasonably sufficient for the protection of the assets
and business covered thereby, and, in the aggregate, all such policies are
reasonably adequate for the protection of all the assets and business of
Imagitel taking into account the availability and cost of such coverage. To the
extent permissible pursuant to such policies, all such policies shall remain in
full force and effect for a period of at least 90 days following the Closing
Date. There is no reason known to Imagitel that any such policy will not be
renewable on terms and conditions as favorable as those set forth in such
policy.
3.17. CONTRACTS AND COMMITMENTS. Schedule 3.17 hereto sets forth each
contract or other commitment of Imagitel which requires an aggregate payment by
Imagitel after the date hereof of more than $75,000, and any other contract or
commitment that in the opinion of the Imagitel management materially affects the
business of Imagitel. Except for the contracts and commitments described in this
Reorganization Agreement or as set forth in Schedule 3.17 hereto, Imagitel is
not party to or subject to:
1. Any contracts or commitments which are material to its
business, operations or financial condition other than loans or agreements
with respect thereto entered into in the ordinary course of business;
2. Any employment contract or arrangement, whether oral or
written, with any officer, consultant, director or employee which is not
terminable on 30 days' notice without penalty or liability to make any
payment thereunder for more than 30 days after such termination;
3. Any plan or contract or other arrangement, oral or written,
providing for insurance for any officer or employee or members of their
families;
4. Any plan or contract or other arrangement, oral or written,
providing for bonuses, pensions, options, deferred compensation, retirement
payments, profit-sharing or other benefits for employees;
5. Any contract or agreement with any labor union;
6. Any contract or agreement with customers for the sale of
products or the furnishing of services, or any sales agency, broker,
distribution or similar contract, except contracts made in the ordinary
course of business;
7. Any contract restricting Imagitel from carrying on its
business anywhere in the United States;
8. Any instrument or arrangement evidencing or related to
indebtedness for money borrowed or to be borrowed, whether directly or
indirectly, by way of purchase money obligation, guaranty, conditional
sale, lease purchase, or otherwise;
9. Any joint venture contract or arrangement or any other
agreement involving a sharing of profits;
10. Any license agreement in which Imagitel is the licensor or
licensee;
11. Any material contract or agreement, not of the type covered
by any of the other items of this Section 3.17, which by its terms is
either (i) not to be performed prior to 30 days from the date hereof, or
(ii) does not terminate, or is not terminable without penalty to Imagitel,
or any successors or assigns prior to 30 days from the date hereof.
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3.18. EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.18 hereto contains a complete list of all Benefit Plans
sponsored or maintained by Imagitel or under which Imagitel may be obligated
("Imagitel Benefit Plans"). Imagitel has delivered to the Wavetech (i) accurate
and complete copies of all Imagitel Benefit Plan documents and all other
material documents relating thereto, including all summary plan descriptions,
summary annual reports and insurance contracts, (ii) accurate and complete
detailed summaries of all unwritten Imagitel Benefit Plans, (iii) accurate and
complete copies of the most recent financial statements and actuarial reports
with respect to all Imagitel Benefit Plans for which financial statements or
actuarial reports are required or have been prepared and (iv) accurate and
complete copies of all annual reports for all Imagitel Benefit Plans (for which
annual reports are required) prepared within the last two years. Any Imagitel
Benefit Plan providing benefits that are funded through a policy of insurance is
indicated by the word "insured" placed by the listing of the Imagitel Benefit
Plan on Schedule 3.18 hereto.
(b) All Imagitel Benefit Plans conform in all material respects to, and
are being administered and operated in material compliance with, the
requirements of ERISA, the Code and all other applicable Regulations. All
returns, reports and disclosure statements required to be filed or delivered
under ERISA and the Code with respect to all Imagitel Benefit Plans have been
filed or delivered. There have not been any "prohibited transactions," as such
term is defined in Section 4975 of the Code or Section 406 of ERISA involving
any of the Imagitel Benefit Plans, that could subject Imagitel to any material
penalty or tax imposed under the Code or ERISA.
(c) Except as set forth in Schedule 3.18 hereto, any Imagitel Benefit
Plan that is intended to be qualified under Section 401(a) of the Code and
exempt from tax under Section 501(a) of the Code has been determined by the
Internal Revenue Service to be so qualified, and such determination remains in
effect and has not been revoked. Nothing has occurred since the date of any such
determination that is reasonably likely to affect adversely such qualification
or exemption, or result in the imposition of excise taxes or income taxes on
unrelated business income under the Code or ERISA with respect to any Imagitel
Benefit Plan.
(d) Except as set forth in Schedule 3.18 hereto, Imagitel has no
current or contingent obligation to contribute to any multiemployer plan (as
defined in Section 3(37) of ERISA). Imagitel has no liability with respect to
any employee benefit plan (as defined in Section 3(3) of ERISA) other than with
respect to the Imagitel Benefit Plans.
(e) There are no pending or, threatened claims by or on behalf of any
Imagitel Benefit Plans, or by or on behalf of any individual participants or
beneficiaries of any Imagitel Benefit Plans, alleging any breach of fiduciary
duty on the part of Imagitel or any of such party's officers, directors or
employees under ERISA or any other applicable Regulations, or claiming benefit
payments other than those made in the ordinary operation of such plans. The
Imagitel Benefit Plans are not the subject of any investigation, audit or action
by the Internal Revenue Service, the Department of Labor or the Pension Benefit
Guaranty Corporation ("PBGC"). Imagitel has made all required contributions
under the Imagitel Benefit Plans including the payment of any premiums payable
to the PBGC and other insurance premiums.
(f) With respect to any Imagitel Benefit Plan that is an employee
welfare benefit plan (within the meaning of Section 3(l) of ERISA) (a "Welfare
Plan"), (i) each such Welfare Plan for which contributions are claimed as
deductions under any provision of the Code is in material compliance with all
applicable requirements pertaining to such deduction, (ii) with respect to any
welfare benefit fund (within the meaning of Section 419 of the Code) related to
such a Welfare Plan, there is no disqualified benefit (within the meaning of
Section 4976(b) of the Code) that would result in the imposition of a tax under
Section 4976(a) of the Code, (iii) any Imagitel Benefit Plan that is a group
health plan (within the meaning of Section 4980B(g)(2) of the Code) complies,
and in each and every case has complied, with all of the material requirements
of Section 4980B of the Code, ERISA, Title XXII of the Public Health Service Act
and the applicable provisions of the Social Security Act, and (iv) such Welfare
Plan may be amended or terminated at any time on or after the Closing Date.
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3.19. ENVIRONMENTAL MATTERS. Imagitel is in compliance with all local,
state and federal environmental statutes, laws, rules, regulations and permits,
including but not limited to the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. 9601 ET SEQ. ("CERCLA") and the Toxic
Substances Control Act, 15 U.S.C. 2601 et seq. Imagitel has not, nor to
Imagitel's knowledge have other parties, used, stored, disposed of or permitted
any "hazardous substance" (as defined in CERCLA), petroleum hydrocarbon,
polychlorinated biphenyl, asbestos or radioactive material (collectively,
"Hazardous Substances") to remain at, on, in or under any of the real property
owned or leased by Imagitel (including, without limitation, the buildings or
structures thereon) (the "Real Property"). Imagitel has not, nor to Imagitel's
knowledge have other parties, installed, used, or disposed of any asbestos or
asbestos-containing material on, in or under any of the Real Property. Imagitel
has not, nor to Imagitel's knowledge have other parties, installed or used
underground storage tanks in or under any of the Real Property. Imagitel has
provided Interim with copies of all complaints, citations, orders, reports,
written data, notices or other communications sent or received by it with
respect to any local, state or federal environmental law, ordinance, rule or
regulation as any of them relate to Imagitel.
3.20. AFFILIATE TRANSACTIONS. Except as set forth in Schedule 3.20
hereto, (i) no Affiliated Person has any interest in any property or assets
(whether real or personal, tangible or intangible) owned or leased by Imagitel
or any subsidiary or otherwise utilized by Imagitel or any subsidiary in the
conduct of its business; (ii) has any direct or indirect interest of any nature
whatever in any Person that competes with, conducts any business similar to, has
any present (or contemplated) arrangement or agreement (including, without
limitation, arrangements regarding the shared use of personnel or facilities)
with (wither as a customer or supplier or otherwise), or is involved in any way
with, Imagitel or any subsidiary; (iii) neither Imagitel nor any subsidiary owes
any amount to any Affiliated Person; and (iv) no Affiliated Person owes any
amount to Imagitel or any subsidiary.
3.21. IMAGITEL INFORMATION. The written information with respect to
Imagitel, and its officers, directors, and affiliates which shall have been
supplied by Imagitel (or any of its accountants, counsel or other authorized
representatives) specifically for use in soliciting approval of the Merger by
shareholders of Wavetech, or which shall be contained in the Proxy Statement,
will not, on the date the Proxy Statement is first mailed to shareholders of
Wavetech or on the date of the Wavetech Shareholders' Meeting, contain any
untrue statement of a material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or
necessary to correct any statement in any earlier communication to Wavetech
shareholders with respect to the Merger.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES BY WAVETECH AND INTERIM
Wavetech and Interim hereby represent and warrant to Imagitel the
following matters on and as of the date of this Reorganization Agreement and at
the Effective Time; provided, however, that before any breach of or inaccuracy
in any of the representations or warranties given in this Section 4 shall be
actionable or shall constitute grounds for termination of or failure to perform
under the terms of this Reorganization Agreement by Imagitel, such breach or
inaccuracy must be materially adverse in the aggregate with respect to the
business of Wavetech.
4.1. ORGANIZATION, GOOD-STANDING AND CONDUCT OF BUSINESS. Wavetech is a
corporation, duly organized, validly existing and in good standing under the
laws of New Jersey, and has full power and authority and all necessary
governmental and regulatory authorization to own all of its properties and
assets and to carry on its business as it is presently being conducted, and is
properly licensed, qualified and in good standing as a foreign corporation in
all jurisdictions wherein the character of the properties or the nature of the
business transacted by Wavetech makes such license or qualification necessary.
The only subsidiaries of Wavetech are set forth in Schedule 4.1 hereto. Each
subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the
corporate power to carry on its business as it now being conducted or currently
proposed to be conducted. Each subsidiary is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary. All the outstanding shares of
capital stock of each subsidiary are validly issued, fully paid and
nonassessable, owned by Wavetech, or by a subsidiary of Wavetech, free and clear
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of any liens, claims or encumbrances. There are no existing options, warrants,
calls or other rights, agreements or commitments of any character relating to
the issued or unissued capital stock or other securities of any of the
subsidiaries of Wavetech. Except as set forth in Wavetech's Annual Report on
From 10-KSB for the year ended August 31, 1997, Wavetech does not directly or
indirectly own any interest in any other corporation, partnership, joint venture
or other business association or entity.
4.2. CORPORATE AUTHORITY. The execution, delivery and performance of
this Reorganization Agreement have been duly authorized by the Boards of
Directors of Wavetech and Interim. Other than the Wavetech Shareholder Approval,
no other corporate acts or proceedings on the part of Wavetech or Interim are
required or necessary to authorize this Reorganization Agreement or the Merger.
4.3. BINDING EFFECT. Subject to receipt of the Shareholder Approvals
and any required Regulatory Approvals, when executed, this Reorganization
Agreement will constitute a valid and legally binding obligation of Wavetech and
Interim, enforceable against Wavetech and Interim in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect and general principles of equity.
Each document and instrument contemplated by this Reorganization Agreement, when
executed and delivered by Wavetech and Interim in accordance with the provisions
hereof, shall be duly authorized, executed and delivered by Wavetech and Interim
and enforceable against Wavetech and Interim in accordance with its terms,
subject to the exceptions in the previous sentence.
4.4. CAPITALIZATION OF WAVETECH. The authorized capital stock of
Wavetech consists solely of (1) 50,000,000 authorized shares of common stock
($0.001 par value), of which 16,282,252 are issued and outstanding, and (ii)
10,000,000 shares of preferred stock, none of which is outstanding. All of the
issued and outstanding shares of Wavetech are validly issued and fully paid and
nonassessable. Except for the items set forth on Schedule 4.4 hereto, there are
no outstanding obligations, options, warrants or commitments of any kind or
nature or any outstanding securities or other instruments convertible into
shares of any class of capital stock of Wavetech, or pursuant to which Wavetech
is or may become obligated to issue any shares of its capital stock. None of the
shares of the Wavetech Common Stock is subject to any restrictions as to the
transfer thereof, except as set forth in Wavetech's Certificate of Incorporation
or Bylaws and except for restrictions on account of applicable federal or state
securities laws. Except for Interim (which is wholly-owned by Wavetech),
Wavetech does not hold 10% of any class of equity securities of any other
company or legal entity, except for those wholly owned subsidiaries disclosed in
Wavetech's public SEC filings.. The authorized capital stock of Interim consists
solely of (i) 10,000 authorized shares of common stock ($ 1.00 par value), of
which 100 shares are issued and outstanding. All of the issued and outstanding
shares of Interim are validly issued and fully paid and nonassessable. Except
for the items set forth on Schedule 4.4 hereto, there are no outstanding
obligations, options, warrants or commitments of any kind or nature or any
outstanding securities or other instruments convertible into shares of any class
of capital stock of Interim, or pursuant to which Interim is or may become
obligated to issue any shares of its capital stock.
4.5. ABSENCE OF DEFAULTS. Neither Wavetech nor Interim is in default
under, or in violation of, any provision of its Certificate of Incorporation or
Bylaws. Neither Wavetech nor Interim is in default under, or in violation of,
any agreement to which Wavetech or Interim is a party, the effect of which
default or violation would have a material adverse effect on Wavetech or Interim
or their respective business operations or prospects. Except as disclosed in
Schedule 4.5 hereto, neither Wavetech nor Interim is in violation of any
applicable law, rule or regulation, the effect of which would have a material
adverse effect on Wavetech or its business operations or prospects.
4.6 NON-CONTRAVENTION AND DEFAULTS; NO LIENS. Neither the execution or
delivery of this Reorganization Agreement, nor the fulfillment of, or compliance
with, the terms and provisions hereof, will (i) result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in a
violation of, termination of or acceleration of the performance provided by the
terms of, any agreement to which Wavetech or, Interim is a party or by which it
may be bound, (ii) violate any provision of any law, rule or regulation, (iii)
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any asset of Wavetech or
Interim, or (iv) violate any provisions of Wavetech's or Interim's charter or
Bylaws. To the best of Wavetech's knowledge, no other party to any material
agreement to which Wavetech or Interim is a party is in default thereunder or in
breach of any provision thereof. To the best of Wavetech's knowledge, there
exists no condition or event which, after notice or lapse of time or both, would
constitute a default by any party to any such agreement.
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4.7. NECESSARY APPROVALS. (a) Wavetech has obtained all certificates of
authority, licenses, permits, franchises, registrations of foreign ownership or
other Regulatory Approvals in every jurisdiction necessary for the continuing
conduct of its business and ownership of its assets. Except for those which may
be renewed or extended in the ordinary course of business, no such certificate,
license, permit, franchise, registration or other Regulatory Approval is about
to expire, lapse, has been threatened to be revoked or has otherwise become
restricted by its terms which would, upon such expiration, lapse, revocation or
restriction, have a material adverse effect on the financial circumstances of
Wavetech. Further, there is no reasonable basis for any such expiration, lapse,
revocation, threat of revocation or restriction. Except for any necessary
Regulatory Approvals, no consent, approval, authorization, registration, or
filing with or by any governmental authority, foreign or domestic, is required
on the part of Wavetech in connection with the execution and delivery of this
Reorganization Agreement or the consummation by Wavetech of the transactions
contemplated hereby. Except for the items in the preceding sentence or as
disclosed in Schedule 4.7 attached hereto, Wavetech is not required to procure
the approval of any Person, in order to prevent the termination of any right,
privilege, license or contract of Wavetech as a result of this Reorganization
Agreement.
(b) Schedule 4.7 hereto sets forth all governmental licenses and each
other material approval, authorization, consent, license, certificate of public
convenience, order or other permit of all Regulatory Authority, necessary to
enable Wavetech or its subsidiaries to own, operate and lease their properties
and assets as and where such properties and assets are owned, leased or operated
and to provide service and carry on their business as presently provided and
conducted (collectively the "Permits") or required to permit the continued
conduct of such business following the Closing Date in the manner conducted on
the date of this Reorganization Agreement (indicating in each case whether or
not the consent of any Person is required for the consummation of the
transactions contemplated hereby).
4.8. FINANCIAL STATEMENTS. The audited financial statements of Wavetech
at and for each of the fiscal years ended August 31, 1995, 1996 and 1997, and
the unaudited monthly statements subsequent to August 31, 1997 (the "Wavetech
Financial Statements") all of which have been provided to Imagitel, are true,
correct and complete in all material respects and present fairly, in conformity
with generally accepted accounting principles consistently applied, the
financial position of Wavetech at the dates indicated and the results of its
operations for each of the periods indicated, except as otherwise set forth in
the notes thereto and except, with respect to the unaudited statements' normal
year end adjustments. The books and records of Wavetech have been kept, and will
be kept to the Closing Date, in reasonable detail, and will fairly and
accurately reflect in all material respects to the Closing Date, the
transactions of Wavetech.
4.9. TAX RETURNS. Wavetech files its income tax returns and maintains
its tax books and records on the basis of a taxable year ending August 3 1.
Wavetech has duly filed all tax reports and returns required to be filed by any
federal, state or local taxing authorities (including, without limitation, those
due in respect of its properties, income, franchises, licenses, sales and
payrolls) through the date hereof, and Wavetech has duly paid all taxes with
respect to the periods covered thereby and has established adequate reserves in
accordance with generally accepted accounting principles consistently applied
for the payment of all income, franchises, property, sales, employment or other
taxes anticipated to be payable after the date hereof. Wavetech is not
delinquent in the payment of any taxes, assessments or governmental charges and
no deficiencies have been asserted or assessed, which have not been paid or for
which adequate reserves have not been established. Wavetech does not have in
effect any waiver relating to any statute of limitations for assessment of taxes
with respect to any federal, state or local income, property, franchise, sales,
license or payroll tax. Wavetech does not know, or have reason to know, of any
questions which have been raised or which may be raised by any taxing authority
relating to taxes or assessments of Wavetech which, if determined adversely,
would result in the assertion of any deficiency.
4.10. UNDISCLOSED LIABILITIES. (a) Except for the liabilities which are
disclosed in the Wavetech Financial Statements or as set forth on Schedule 4.10
hereto, Wavetech has no material liabilities or material obligations of any
nature, whether absolute, accrued, contingent or otherwise, and whether due or
to become due. Since August 31, 1997, there has been (i) no material adverse
change in the business or operations of Wavetech, (ii) no incurrence by or
subjection of Wavetech to any obligation or liability (whether fixed, accrued or
contingent) or commitment material to Wavetech not referred to in this
Reorganization Agreement, except such obligations or liabilities as were or may
be incurred in the ordinary course of business and which are reflected on the
Wavetech Financial Statements at and for the periods subsequent to August 31,
1997.
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(b) Except as set forth an Schedule 4.10 hereto, Wavetech has not since
August 31, 1997 provided any special promotions, discounts or other incentives
to its employees, agents, distributors or customers in connection with the
solicitation of new orders for service provided by Wavetech or any subsidiary,
nor has any customer pre-paid any material amount for services to be provided by
Wavetech or any subsidiary in the future.
(c) Since August 31, 1997, Wavetech's accounts payable have been
accrued and paid in a manner consistent with Wavetech's prior practice and at no
point in time since August 31, 1997 have Wavetech's aggregate past due accounts
payable been more than $ 450,000.
(d) Wavetech has paid or fully provided for all access charges properly
payable to local exchange carriers for access facilities and has properly
reported its PlU to such carriers. As of September 30, 1997, Wavetech does not
have, and at the Closing Wavetech will not have, any liability on account of
PIU. Wavetech's revenue from international traffic is fully collectible at the
recorded amounts thereof, less a provision for bad debts not in excess of 25%
thereof, and the subsidiaries of Wavetech will not have any operating loss in
excess of $6,500,000 for the period from March 8, 1995 through the Closing Date,
after taking into account any and all contingencies associated with the
provision or possible termination of such services, including (i) any
requirement to provide return traffic, (ii) any liability that may arise in
connection with the termination of contracts or other arrangements with any
agents Or distributors, governmental entities or other Persons, and (iii) and
potential litigation costs related to any of the foregoing.
4.11. TITLE TO PROPERTIES, ENCUMBRANCES. Wavetech has good and
marketable title to all of the real property and depreciable tangible personal
property owned by it, free and clear of any liens, claims, charges, options or
other encumbrances, except for any lien for (i) current taxes not yet due and
payable, (ii) pledges to secure deposits and other liens incurred in the
ordinary course of the banking business, (iii) such imperfections of title,
easements and other encumbrances, if any, as are not material in character,
amount or extent, or (iv) such items as are set forth on Schedule 4.11 hereto.
4.12. LITIGATION. Except as shown on Schedule 4.12 hereto, there are no
claims, actions, suits or proceedings pending or threatened against Wavetech, or
to its knowledge affecting Wavetech, at law or in equity, before or by any
Federal, state, municipal, administrative or other court, governmental
department, commission, board, or agency, an adverse determination of which
could have a material adverse effect on the business or operations of Wavetech,
and Wavetech knows of no basis for any of the foregoing. There is no order,
writ, injunction, or decree of any court, domestic or foreign, or any Federal or
state agency affecting Wavetech specifically or to which Wavetech is subject.
4.13. REPORTS. Wavetech has duly made all reports and filings required
to be made pursuant to applicable law, except for failures to file or reports
which would not have a material adverse effect on the business or financial
condition of Wavetech.
4.14. BROKERS. Wavetech has not incurred any liability for any
commission or fee in the nature of a finder's, originator's or broker's fee in
connection with the transaction contemplated herein.
4.15. EXPENDITURES. Schedule 4.15 hereto sets FORTH ANY SINGLE
EXPENDITURE of $25,000 or more proposed to be made by Wavetech after the date
hereof and a summary of the terms and conditions pertaining thereto. At least 20
business days prior to the Closing Date, Wavetech will advise Imagitel of any
changes to Schedule 4.15 hereto reflecting additions or deletions thereto since
the date hereof.
4.16 INSURANCE. Schedule 4.16 hereto is a true and complete summary of
the policies of fire, liability, life and other types of insurance held by
Wavetech, setting forth with respect to each such policy, the policy number,
name of the insured party, type of insurance, insurance company, annual premium,
expiration date, deductible amount, if any, and amount of coverage. Each such
policy is in an amount reasonably sufficient for the protection of the assets
and business covered thereby, and, in the aggregate, all such policies are
reasonably adequate for the protection of all the assets and business of
Wavetech taking into account the availability and cost of such coverage. To the
extent permissible pursuant to such policies, all such policies shall remain in
full force and effect for a period of at least 90 days following the Closing
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Date. There is no reason known to Wavetech that any such policy will not be
renewable on terms and conditions as favorable as those set forth in such
policy.
4.17. CONTRACTS AND COMMITMENTS. Schedule 4.17 hereto sets forth each
contract or other commitment of Wavetech which requires an aggregate payment by
Wavetech after the date hereof of more than $25,000, and any other contract or
commitment that in the opinion of the Wavetech management materially affects the
business of Wavetech. Except for the contracts and commitments described in this
Reorganization Agreement or as set forth in Schedule 4.17 hereto, Wavetech is
not party to or subject to:
1. Any contracts or commitments which are material to its
business, operations or financial condition other than loans or agreements
with respect thereto entered into in the ordinary course of business;
2. Any employment contract or arrangement, whether oral or
written, with any officer, consultant, director or employee which is not
terminable on 30 days' notice without penalty or liability to make any
payment thereunder for more than 30 days after such termination;
3. Any plan or contract or other arrangement, oral or written,
providing for insurance for any officer or employee or members of their
families;
4. Any plan or contract or other arrangement, oral or written,
providing for bonuses, pensions, options, deferred compensation, retirement
payments, profit-sharing or other benefits for employees;
5. Any contract or agreement with any labor union;
6. Any contract or agreement with customers for the sale of
products or the furnishing of services, or any sales agency, broker,
distribution or similar contract, except contracts made in the ordinary
course of business;
7. Any contract restricting Wavetech from carrying on its
business anywhere in the United States;
8. Any instrument or arrangement evidencing or related to
indebtedness for money borrowed or to be borrowed, whether directly or
indirectly, by way of purchase money obligation, guaranty, conditional
sale, lease-purchase, or otherwise;
9. Any joint venture contract or arrangement or any other
agreement involving a sharing of profits;
10. Any license agreement in which Wavetech is the licensor or
licensee;
11. Any material contract or agreement, not of the type covered
by any of the other items of this Section 4.17, which by its terms is
either (i) not to be performed prior to 30 days from the date hereof, or
(ii) does not terminate, or is not terminable without penalty to Wavetech,
or any successors or assigns prior to 30 days from the date hereof.
4.18. EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.18 hereto contains a complete list of all
Benefit Plans sponsored or maintained' by Wavetech or under which
Wavetech may be obligated ("Wavetech Benefit Plans"). Wavetech has
delivered to Imagitel (i) accurate and complete copies of all Wavetech
Benefit Plan documents and all other material documents relating
thereto, including all summary plan descriptions, summary annual
reports and insurance contracts, (ii) accurate and complete detailed
summaries of all unwritten Wavetech Benefit Plans, (iii) accurate and
complete copies of the most recent financial statements and actuarial
reports with respect to all Wavetech Benefit Plans for which financial
statements or actuarial reports are required or have been prepared and
(iv) accurate and complete copies of all annual reports for all
Wavetech Benefit Plans (for which annual reports are required) prepared
within the last two years. Any Wavetech Benefit Plan providing benefits
that are funded through a policy of insurance is indicated by the word
"insured" placed by the listing of the Wavetech Benefit Plan on
Schedule 4.18 hereto.
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(b) All Wavetech Benefit Plans conform in all material
respects to, and are being administered and operated in material
compliance with, the requirements of ERISA, the Code and all other
applicable Regulations. All returns, reports and disclosure statements
required to be filed or delivered under ERISA and the Code with respect
to all Wavetech Benefit Plans have been filed or delivered. There have
not been any "prohibited transactions," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA involving any of the
Wavetech Benefit Plans, that could subject Wavetech to any material
penalty or tax imposed under the Code or ERISA.
(c) Except as set forth in Schedule 4.18 hereto, any Wavetech
Benefit Plan that is intended to be qualified under Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code has been
determined by the Internal Revenue Service to be so qualified, and such
determination remains in effect and has not been revoked. Nothing has
occurred since the date of any such determination that is reasonably
likely to affect adversely such qualification or exemption, or result
in the imposition of excise taxes or income taxes on unrelated business
income under the Code or ERISA with respect to any Wavetech Benefit
Plan.
(d) Except as set forth in Schedule 4.18 hereto, Wavetech has
no current or contingent obligation to contribute to any multiemployer
plan (as defined in Section 3(37) of ERISA). Wavetech has no liability
with respect to any employee benefit plan (as defined in Section 3(3)
of ERISA) other than with respect to the Wavetech Benefit Plans.
(e) There are no pending or, threatened claims by or on behalf
of any Wavetech Benefit Plans, or by or on behalf of any individual
participants or beneficiaries of any Wavetech Benefit Plans, alleging
any breach of fiduciary duty on the part of Wavetech or any of such
party's officers, directors or employees under ERISA or any other
applicable Regulations, or claiming benefit payments other than those
made in the ordinary operation of such plans. The Wavetech Benefit
Plans are not the subject of any investigation, audit or action by the
Internal Revenue Service, the Department of Labor or the Pension
Benefit Guaranty Corporation ("PBGC"). Wavetech has made all required
contributions under the Wavetech Benefit Plans including the payment of
any premiums payable to the PBGC and other insurance premiums.
(f) With respect to any Wavetech Benefit Plan that is an
employee welfare benefit plan (within the meaning of Section 3(l) of
ERISA) (a "Welfare Plan"), (i) each such Welfare Plan for which
contributions are claimed as deductions under any provision of the Code
is in material compliance with all applicable requirements pertaining
to such deduction, (ii) with respect to any welfare benefit fund
(within the meaning of Section 419 of the Code) related to such a
Welfare Plan, there is no disqualified benefit (within the meaning of
Section 4976(b) of the Code) that would result in the imposition of a
tax under Section 4976(a) of the Code, (iii) any Wavetech Benefit Plan
that is a group health plan (within the meaning of Section 498013(g)(2)
of the Code) complies, and in each and every case has complied, with
all of the material requirements of Section 4980B of the Code, ERISA,
Title XXII of the Public Health Service Act and the applicable
provisions of the Social Security Act, and (iv) such Welfare Plan may
be amended or terminated at any time on or after the Closing Date.
4.19. ENVIRONMENTAL MATTERS. Wavetech is in compliance with all local,
state and federal environmental statutes, laws, rules, regulations and permits,
including but not limited to the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. 9601 ET SEC. ("CERCLA") and the Toxic
Substances Control Act, 15 U.S.C. 2601 et seq. Wavetech has not, nor to
Wavetech's knowledge have other parties, used, stored, disposed of or permitted
any "hazardous substance" (as defined in CERCLA), petroleum hydrocarbon,
polychlorinated biphenyl, asbestos or radioactive material (collectively,
"Hazardous Substances") to remain at, on, in or under any of the real property
owned or leased by Wavetech (including, without limitation, the buildings or
structures thereon) (the "Real Property"). Wavetech has not, nor to Wavetech's
knowledge have other parties, installed, used, or disposed of any asbestos or
asbestos-containing material on, in or under any of the Real Property. Wavetech
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has not, nor to Wavetech's knowledge have other parties, installed or used
underground storage tanks in or under any of the Real Property. Wavetech has
provided Interim with copies of all complaints, citations, orders, reports,
written data, notices or other communications sent or received by it with
respect to any local, state or federal environmental law, ordinance, rule or
regulation as any of them relate to Wavetech.
4.20. AFFILIATE TRANSACTIONS. Except as set forth in Schedule 4.20
hereto, (i) no Affiliated Person has any interest in any property or assets
(whether real or personal, tangible or intangible) owned or leased by Wavetech
or any subsidiary or otherwise utilized by Wavetech or any subsidiary in the
conduct of its business; (ii) has any direct or indirect interest of any nature
whatever in any Person that competes with, conducts any business similar to, has
any present (or contemplated) arrangement or agreement (including, without
limitation, arrangements regarding the shared use of personnel or facilities)
with (wither as a customer or supplier or otherwise), or is involved in any way
with, Wavetech or any subsidiary; (iii) neither Wavetech nor any subsidiary owes
any amount to any Affiliated Person; and (iv) no Affiliated Person owes any
amount to Wavetech or any subsidiary.
4.21. WAVETECH INFORMATION. The written information with respect to
Wavetech, and its officers, directors, and affiliates which shall have been
supplied by Wavetech (or any of its accountants, counsel or other authorized
representatives) specifically for use in soliciting approval of the Merger by
shareholders of Imagitel, or which shall be contained in the Proxy Statement,
will not, on the date the Proxy Statement is first mailed to shareholders of
Imagitel or on the date of the Imagitel Shareholders' Meeting, contain any
untrue statement of a material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or
necessary to correct any statement in any earlier communication to Imagitel
shareholders with respect to the Merger.
4.22 REPORTS. Wavetech has duly made all reports and filings required
to be made pursuant to applicable law, except for failures to file or reports
which would not have a material adverse effect on the business or financial
condition of Wavetech. Without limiting the foregoing, Wavetech has filed all
reports required to be filed under the Securities Exchange Act of 1934 for the
past 36 calendar months and has filed on a timely basis all reports required to
have been filed by Wavetech under the Securities Exchange Act of 1934 during the
past 12 months. Since August 31, 1997 Wavetech has not defaulted on any
installment or indebtedness for borrowed money or on any rental for any
long-term lease.
4.23. NASDAQ. The Wavetech Common Stock is listed on the Nasdaq small
Market.
ARTICLE 5. CONDUCT OF BUSINESS PENDING CLOSING
5.1. CONDUCT OF IMAGITEL PENDING CLOSING. During the period commencing
on the date hereof and continuing until the Closing Date, Imagitel covenants and
agrees to the following (except to the extent that Wavetech shall otherwise
expressly consent in writing; provided, however, that any breach of any of the
covenants given in this Section 5.1 must be material in the aggregate with
respect to the business of Imagitel before such breach shall be actionable or
shall constitute grounds for termination or failure to perform under this
Reorganization Agreement.
(a) Imagitel will carry on its business only in the ordinary
course in substantially the same manner as heretofore conducted and, to the
extent consistent with such business, use all reasonable efforts to
preserve intact its business organization, maintain the services of its
present officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it so that
its goodwill and going business shall be unimpaired at the Closing Date.
(b) Imagitel will not amend its Certificate of Incorporation or
Bylaws as in effect on the date hereof.
(c) Except for:
(i) the issuance of capital stock in connection with items
set forth on Schedule 3.4 hereto, and
(ii) the issuance of up to 5,000 shares of its common stock
in connection with the contemplated acquisition of aCOMModation
Services, Inc., Imagitel will not issue, grant, pledge or sell,
or authorize the issuance of, reclassify or redeem, purchase or
otherwise acquire, any shares of its capital stock of any class
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or any securities convertible into shares of any class, or any
rights, warrants or options to acquire any such shares (except
for employee stock options in the ordinary course in accordance
with past practice and only upon prior notice to Wavetech); nor
will it enter into any arrangement or contract with respect to
the issuance of any such shares or other convertible securities;
nor will it make any other change in its equity capital
structure.
(d) Imagitel will promptly advise Wavetech orally and in writing
of any change in the businesses of Imagitel which is or may reasonably be
expected to be materially adverse to the business of Imagitel.
(e) Imagitel will not take, agree to take, or knowingly permit to
be taken any action or do or knowingly permit to be done anything in the
conduct of the business of Imagitel, or otherwise, which would be contrary
to or in breach of any of the terms or provisions of this Reorganization
Agreement, or which would cause any of the representations of Imagitel
contained herein to be or become untrue in any material respect.
(f) Imagitel will not incur any indebtedness for borrowed money,
issue or sell any debt securities, or assume or otherwise become liable,
whether directly, contingently or otherwise, for the obligation of any
other party, other than in the ordinary course of business.
(g) Except in the ordinary course of business and except for
expenses attendant to the Merger and current contractual obligations,
Imagitel will not incur any expense in an amount in excess of $75,000 after
the execution of this Reorganization Agreement without the prior written
consent of Wavetech,
(h) Imagitel will not grant any executive officers any increase
in compensation (except in the ordinary course in accordance with past
practice and only upon prior notice to Wavetech), or enter into any
employment agreement with any executive officer without the consent of
Wavetech except as may be required under employment or termination
agreements in effect on the date hereof which have been previously
disclosed to Wavetech in writing.
(i) Except as set forth expressly herein, Imagitel will not
acquire or agree to acquire by merging or consolidating with, purchasing
substantially all of the assets of or otherwise, any business of any
corporation, partnership, association or other business organization or
division thereof.
5.2. CONDUCT OF WAVETECH PENDING CLOSING. During the period commencing
on the date hereof and continuing until the Closing Date, Wavetech covenants and
agrees to the following (except to the extent that Wavetech shall otherwise
expressly consent in writing; provided, however, that any breach of any of the
covenants given in this Section 5.2 must be material in the aggregate with
respect to the business of Wavetech before such breach shall be actionable or
shall constitute grounds for termination or failure to perform under this
Reorganization Agreement.
(a) Wavetech will carry on its business only in the ordinary
course in substantially the same manner as heretofore conducted and, to the
extent consistent with such business, use all reasonable efforts to
preserve intact its business organization, maintain the services of its
present officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it so that
its goodwill and going business shall be unimpaired at the Closing Date.
(b) Wavetech will not amend its Certificate of Incorporation or
Bylaws as in effect on the date hereof.
(c) Except for:
(i) the issuance of capital stock in connection with items
set forth on Schedule 4.4 hereto, and
(ii) the issuance of up to 500,000 shares (pre-reverse
split) at not less than $0.53 per share in connection with
capital raising transactions which are otherwise acceptable to
Imagitel, and
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(iii) the issuance of 1,428,572 shares (pre-reverse split)
at not less than $0.35 per share to Elgin Investments.
Wavetech will not issue, grant, pledge or sell, or authorize the issuance of,
reclassify or redeem, purchase or otherwise acquire, any shares of its capital
stock of any class or any securities convertible into shares of any class, or
any rights, warrants or options to acquire any such shares (except for employee
stock options in the ordinary course in accordance with past practice and only
upon prior notice to Wavetech); nor will it enter into any arrangement or
contract with respect to the issuance of any such shares or other convertible
securities; nor will it declare, set aside or pay any dividends (of any type) or
make any other change in its equity capital structure.
(d) Wavetech will promptly advise Imagitel orally and in writing
of any change in the businesses of Wavetech which is or may reasonably be
expected to be materially adverse to the business of Wavetech.
(e) Wavetech will not take, agree to take, or knowingly permit to
be taken any action or do or knowingly permit to be done anything in the
conduct of the business of Wavetech, or otherwise, which would be contrary
to or in breach of any of the terms or provisions of this Reorganization
Agreement, or which would cause any of the representations of Wavetech
contained herein to be or become untrue in any material respect.
(f) Wavetech will not incur any indebtedness for borrowed money,
issue or sell any debt securities, or assume or otherwise become liable,
whether directly, contingently or otherwise, for the obligation of any
other party, other than in the ordinary course of business.
(g) Except for expenses attendant to the Merger and current
contractual obligations, Wavetech will not incur any expense in an amount
in excess of $25,000 after the execution of this Reorganization Agreement
without the prior written consent of Imagitel.
(h) Wavetech will not grant any executive officers any increase
in compensation (except in the ordinary course in accordance with past
practice and only upon prior notice to Imagitel), or enter into any
employment agreement with any executive officer without the consent of
Imagitel except as may be required under employment or termination
agreements in effect on the date hereof which have been previously
disclosed to Imagitel in writing.
Wavetech will not acquire or agree to acquire by merging or
consolidating with, purchasing substantially all of the assets of or otherwise,
any business or any corporation, partnership, association or other business
organization or division thereof.
ARTICLE 6. COVENANTS OF THE PARTIES
6.1. ACCESS TO PROPERTIES AND RECORDS. Between the date of this
Reorganization Agreement and the Closing Date, the parties will provide to each
other and to their respective accountants, counsel and other authorized
representatives reasonable access, during reasonable business hours and upon
reasonable notice, to their respective premises, properties, contracts,
commitments, books, records and other information and will cause their
respective officers to furnish to the other party and its authorized
representatives such financial, technical and operating data and other
information pertaining to their respective businesses, as the parties shall from
time to time reasonably request. Each party will and will cause its employees
and agents to hold in strict confidence, unless disclosure is compelled by
judicial or administrative process, or in the opinion of its counsel, by other
requirements of law, all Confidential Information and will not disclose the same
to any Person. Confidential Information shall be used only for the purpose of
and in connection with consummating the transaction contemplated herein. If this
Reorganization Agreement is terminated, each party hereto will promptly return
all documents received by it from each other party containing Confidential
Information. The covenants in this Section 6.1 shall survive the Closing Date
forever.
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6.2 REGULATORY FILINGS. The parties hereto will use their respective
best efforts and cooperate with each other to obtain promptly all such
Regulatory Approvals and to make such filings as, in the opinion of their
respective counsels, may be necessary or advisable in connection with this
transaction. Wavetech shall be responsible for all filings fees required in
connection with such approvals or filings.
6.3. COOPERATION. Each party shall use its respective, reasonable best
efforts to take any and all necessary or appropriate actions, and to use its
reasonable best efforts to cause its officers, directors, employees, agents, and
representatives to use their reasonable best efforts and to take all steps in
good faith within their power, to cause to be fulfilled those of the conditions
precedent to its obligations to consummate the Mergers which are dependent upon
its or their actions, including but not limited to (i) requesting the delivery
of appropriate opinions and letters from its counsel and (ii) obtaining any
consents, approvals, or waivers required to be obtained from other parties.
6.4. AFFILIATES' LETTERS. Imagitel shall deliver to Wavetech a letter
identifying all Persons who are, at the time the Corporate Merger is submitted
to a vote of the shareholders of Imagitel, "affiliates" of Imagitel for purposes
of Rule 145 of the General Rules and Regulations under the Securities Act.
Imagitel shall use its reasonable best efforts to cause each Person who is
identified as an "affiliate" in the letter referred to above to deliver to
Wavetech on or prior to the Effective Time a written agreement, in form
reasonably satisfactory to Wavetech that such Person shall not sell, pledge,
transfer or otherwise dispose of any capital stock of Imagitel or any Wavetech
Common Stock owned by such person or to be received by such person as part of
the consideration except in compliance with the applicable provisions of the
Securities Act.
6.5. LISTING OF WAVETECH COMMON STOCK. Wavetech shall use its best
efforts to cause the shares of Wavetech Common Stock to be issued in the
transactions contemplated by this Reorganization Agreement to be approved for
quotation on the Nasdaq Small Cap, subject to official notice of issuance, prior
to the Effective Time. Wavetech shall give such notice to Nasdaq as may be
required to permit the listing of the Wavetech Common Stock issued in connection
with the Merger.
6.6. TAX TREATMENT; ACCOUNTING TREATMENT. Imagitel and Wavetech shall
each take such acts within their power as may be reasonably necessary to cause
the Merger to qualify as a "reorganization" within the meaning of Section 368(a)
of the Code, and at Imagitel's option for "pooling treatment" under GAAP.
6.7. EXPENSES. The parties shall pay their own fees and expenses
(including legal and accounting fees) incurred in connection with this
transaction. Reasonable estimates of these expenses shall be accrued by the
month-end immediately prior to the Closing Date.
6.8 MATERIAL EVENTS. At all times prior to the Closing Date, each party
shall promptly notify the other in writing of the occurrence of any event which
will or may result in the failure to satisfy the conditions specified in Article
6 or Article 7 of this Reorganization Agreement.
6.9. PUBLIC ANNOUNCEMENTS. At all times until after the Closing Date,
neither Imagitel nor Wavetech shall issue or permit any of its respective
subsidiaries, affiliates, officers, directors or employees to issue any press
release or other information to the press with respect to this Reorganization
Agreement, without the express prior consent of the other party, except as may
be required by law or the policies of NASDAQ (and in such case, the parties
shall provide prior notice of such disclosure and a reasonable opportunity to
comment upon such disclosure).
6.10. UPDATING OF SCHEDULES. Imagitel and Wavetech shall, at the
Closing, prepare and deliver to each other such supplements to the schedules
attached hereto as may be necessary or appropriate to ensure the accuracy and
completeness of the information required to be disclosed in such schedules at
all times prior to the Closing, provided that the furnishing of any such
supplement to such schedules shall not modify, limit, or otherwise affect any
representations or warranties of Imagitel or Wavetech contained herein or any
right of Imagitel or Wavetech to terminate this Reorganization Agreement.
Imagitel and Wavetech shall provide to each other drafts of such supplemental
schedules at least three (3) business days prior to the Closing Date.
6.11 DIRECTORS. At the Wavetech Shareholders' Meeting, Wavetech shall
have its shareholders authorize that upon Closing:(l) its Board of Directors
shall consist of five persons and (2) shall nominate as management's slate five
designees of Imagitel.
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6.12. PROHIBITED ACTIONS. (a) Except as expressly provided in this
Reorganization Agreement, as agreed to by Wavetech or as required by applicable
law, rules or regulations (including the fiduciary duties of the Imagitel
directors under applicable law), during the period from the date of this
Reorganization Agreement to the Effective Time, Imagitel shall, and shall cause
its subsidiaries to, (i) take no action which would adversely affect or delay
the ability of the parties hereto to obtain any necessary Regulatory Approvals
or Authorizations required for the transactions contemplated hereby or to
perform its covenants and agreements on a timely basis under this Reorganization
Agreement and (ii) take no action that could reasonably be expected to have a
Material Adverse Effect on Imagitel.
(b) Except as expressly provided in this Reorganization Agreement, as
agreed to by Imagitel or as required by applicable law, rules or regulations,
during the period from the date of this Reorganization Agreement to the
Effective Time, Wavetech shall, and shall cause its subsidiaries to, (i) take no
action which would adversely affect or delay the ability of the parties hereto
to obtain any necessary Regulatory Approvals or Authorizations required for the
transactions contemplated hereby or to perform its covenants and agreements on a
timely basis under this Reorganization Agreement and (ii) take no action that
could reasonably be expected to have a Material Adverse Effect on Wavetech.
ARTICLE 7. CONDITIONS TO WAVETECH'S OBLIGATION TO CLOSE
The obligation of Wavetech and Interim to consummate the transactions
contemplated in this Reorganization Agreement is subject to the satisfaction of
the following conditions at or before the Closing Date:
7.1. PERFORMANCE OF ACTS AND REPRESENTATIONS BY IMAGITEL. Each of the
acts and undertakings of Imagitel to be performed on or before the Closing Date
pursuant to the terms of this Reorganization Agreement shall have been duly
authorized and duly performed, and each of the representations and warranties of
Imagitel set forth in this Reorganization Agreement shall be true in all
material respects on the Closing Date, except as to transactions contemplated by
this Reorganization Agreement.
7.2 CONDUCT OF BUSINESS. The business of Imagitel shall have been
conducted in the usual and customary manner, and there shall have been no
material adverse change in the business or financial condition of Imagitel from
the date hereof through the Closing Date.
7.3 CONSENTS. All permits, orders, consents, or other authorizations
necessary, in the reasonable opinion of counsel for Wavetech, to the
consummation of the transactions contemplated hereby shall have been obtained,
and no governmental agency or department or judicial authority shall have issued
any order, writ, injunction or decree prohibiting the consummation of the
transactions contemplated hereby. Approvals of all applicable Regulatory
Agencies shall have been obtained without the imposition of any condition or
requirements that, in the reasonable judgment of Wavetech, renders the
consummation of this transaction unduly burdensome.
7.4 CERTIFICATE. Wavetech shall have been furnished with such
certificates of officers of Imagitel and/or such certificates of Imagitel
shareholders, in form and substance reasonably satisfactory to Wavetech, dated
as of the Closing Date, certifying to such matters as Wavetech may reasonably
request, including but not limited to the fulfillment of the conditions
specified in this Section VII.
7.5 DUE DILIGENCE. Wavetech shall have completed a due diligence
investigation of Imagitel, the results of which shall be reasonably satisfactory
to Wavetech.
7.6 SHAREHOLDER APPROVALS. The Shareholder Approvals shall have been
obtained.
7.7 FAIRNESS OPINION. The Board of Directors of Wavetech shall have
received a fairness opinion from a reputable investment banking firm, which
opinion shall be reasonably acceptable to Wavetech.
7.8 DISSENTER'S RIGHTS. None of the Imagitel shareholders shall have
exercised dissenters' rights.
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7.9 SECURITIES MATTERS. Wavetech shall have receive certificates from
Imagitel's shareholders reasonably sufficient for Imagitel's counsel to conclude
that the issuance of Wavetech shares in connection with the transactions
contemplated herein will be exempt from registration under applicable federal
and state securities laws.
ARTICLE 8. CONDITIONS TO THE OBLIGATION OF IMAGITEL TO CLOSE
The obligation of Imagitel to consummate the transactions contemplated
in this Reorganization Agreement is subject to the satisfaction of the following
conditions at or before the Closing Date:
8.1. PERFORMANCE OF ACTS AND REPRESENTATIONS BY WAVETECH AND INTERIM.
Each of the acts and undertakings of Wavetech and Interim to be performed on or
before the Closing Date pursuant to the terms of this Reorganization Agreement
shall have been duly authorized and duly performed, and each of the
representations and warranties of Wavetech and Interim set forth in this
Reorganization Agreement shall be true in all material respects on the Closing
Date, except as to transactions contemplated by this Reorganization Agreement.
8.2. TAX OPINION. Imagitel shall have received an opinion from tax
counsel satisfactory in form and substance to Imagitel that the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code.
8.3. CONDUCT OF BUSINESS. There shall have been no material casualty
or material adverse change in the business or financial condition of Wavetech
from the date hereof through the Closing Date.
8.4. CONSENTS. All permits, orders, consents, or other authorizations
necessary, in the reasonable opinion of counsel for Imagitel, to the
consummation of the transactions contemplated hereby shall have been obtained,
and no governmental agency or department or judicial authority shall have issued
any order, writ, injunction or decree prohibiting the consummation of the
transactions contemplated hereby. Approvals of all applicable Regulatory
Agencies shall have been obtained without the imposition of any condition or
requirements that, in the reasonable judgment of Imagitel, renders the
consummation of this transaction unduly burdensome.
8.5. CERTIFICATE. Imagitel shall have been furnished with such
certificates of officers of Wavetech, in form and substance reasonably
satisfactory to Imagitel, dated as of the Closing Date, certifying to such
matters as Imagitel may reasonably request, including but not limited to the
fulfillment of the conditions specified in this Article 8.
8.6. SHAREHOLDER APPROVALS. The Shareholder Approvals shall have been
obtained.
8.7. DUE DILIGENCE. Imagitel shall have completed a due diligence
investigation of Wavetech, the results of which shall be reasonably satisfactory
to Imagitel.
8.8. DIRECTORS. The five designees of Imagitel shall have been elected
as the entire Board of Wavetech.
8.9. LINE OF CREDIT. Wavetech shall have put in place a line of credit
in the minimum amount of $3.5 million, which shall be acceptable in all respects
to Imagitel.
8.10. REGISTRATION RIGHTS AGREEMENT. Wavetech shall have entered into a
piggy-back and demand registration rights agreement acceptable to Imagitel with
respect to the registration of Wavetech shares to be issued to Imagitel
shareholders.
8.11. REVERSE STOCK SPLIT. Wavetech shall have effected a reverse stock
split of one share for every six shares outstanding. Such stock split may be
subject to change by the parties.
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ARTICLE 9. TERMINATION
9.1. TERMINATION. This Reorganization Agreement may be terminated at
any time prior to the Closing Date:
(a) by mutual consent of the parties;
(b) by either Wavetech or Imagitel, at that party's option, if a
permanent injunction or other order (including any order denying any
required regulatory consent or approval) shall have been issued by any
Federal or state court of competent jurisdiction in the United States or by
any United States Federal or state governmental or regulatory body, which
order prevents the consummation of the transactions contemplated herein;
(c) by either Wavetech or Imagitel if the other party has failed
to comply with the agreements or fulfill the conditions contained herein,
PROVIDED, however, that any such failure of compliance or fulfillment must
be material to the consolidated businesses of either Wavetech or Imagitel
and the breaching party must be given notice of the failure to comply and a
reasonable period of time to cure;
(d) by either Wavetech or Imagitel as set forth in Section 2.2
hereof.
(e) by either Wavetech or Imagitel, on or before January 31,
1998, if the results of the due diligence investigation of the other party
are not satisfactory to the terminating party in its sole discretion.
(f) By Imagitel if any updated schedule submitted pursuant to
Section 6.10 by Wavetech are not satisfactory to Imagitel or by Wavetech if
any updated schedules submitted by Imagitel pursuant to Section 6.10 are
not satisfactory to Wavetech.
9.2. EFFECT OF TERMINATION. In the event of termination of this
Reorganization Agreement by either Wavetech or Imagitel as provided above, this
Reorganization Agreement shall forthwith become void and there shall be no
liability hereunder on the part of Wavetech or Imagitel, or their respective
officers or directors, except for intentional breach. In the event this
Reorganization Agreement is terminated, any agreements between the two parties
as to Confidential Information shall survive such termination.
ARTICLE 10. INDEMNIFICATION
10.1. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Wavetech covenants
and agrees that it will cause each person who is an officer or director of
Imagitel and its subsidiaries (an "indemnitee") on the Closing Date to be
indemnified for any and all claims and liabilities arising out of such person's
service as an officer or director of Imagitel to the maximum extent that a
Nevada corporation is permitted by law to indemnify or insure its officers and
directors, including indemnification for the cost of defending such claims as
well as any liability resulting therefrom. Wavetech, upon request of such
indemnitees, shall advance expenses in connection with such indemnification,
provided that such advancement need be made if and only to the extent that such
advancement would have been proper under applicable Nevada law if such
indemnitees had been directors or officers of Wavetech. The provisions of this
Section 10.1 shall survive the Closing and shall be enforceable directly by each
officer and director of Imagitel benefited by this Section 10.1.
ARTICLE 11. MISCELLANEOUS
11.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations, warranties and covenants contained in this Reorganization
Agreement or in any other documents delivered pursuant hereto, shall not survive
the Closing of the transactions contemplated hereby.
11.2. ENTIRE AGREEMENT. This Reorganization Agreement, including any
schedules, exhibits, lists and other documents referred to herein which form a
part hereof, contains the entire agreement of the parties with respect to the
subject matter contained herein and there are no agreements, warranties,
covenants or undertakings other than those expressly set forth herein.
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11.3. Binding Agreement. This Reorganization Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that the Agreement shall
not be assigned by either of the parties hereto without the prior written
consent of the other party hereto.
11.4. Notices. Any notice given hereunder shall be in writing and
shall be deemed delivered and received upon reasonable proof of receipt. Unless
written designation of a different address is filed with each of the other
parties hereto, notice shall be transmitted to the following addresses:
For Wavetech: ATT: President
Wavetech, Inc.
5210 East Williams Circle, STE 200
Tucson, Arizona 85711
Copy to: ATT: Chris Johnson
Squire, Sanders et al
40 North Central Avenue, STE 2700
Phoenix, Arizona 85004
For Imagitel: ATT: President
Imagitel, Inc.
5120 Woodway Drive, STE 7007
Houston, Texas 77056
Copies to: ATT: Darryl Johnston
Cades Schutte et al
1000 Bishop Street
Honolulu, Hawaii 96813
11.5. COUNTERPARTS. This Reorganization Agreement may be executed in
one or more Counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument.
11.6 HEADINGS. The section and paragraph headings contained in this
Reorganization Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretations of this Reorganization Agreement.
11.7. LAW GOVERNING. This Reorganization Agreement shall be governed by
and construed in accordance with the laws of the State of Nevada.
11.8. AMENDMENT. This Reorganization Agreement may not be amended
except by an instrument in writing signed on behalf of all of the parties.
11.9. WAIVER. Any term, provision or condition of this Reorganization
Agreement (other than that required by law) may be waived in writing at any time
by the party which is entitled to the benefits thereof.
11. 10. NO THIRD PARTY BENEFICIARIES. Except for Section 10.1 hereof,
nothing in this Reorganization Agreement, express or implied, is intended to
confer upon any person, other than the parties hereto, any rights, obligations
or liabilities under or by reason of this Reorganization Agreement.
END OF PAGE
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<PAGE>
IN WITNESS WHEREOF, this Reorganization Agreement has been duly entered
as of the date first written above.
WITNESSES WAVETECH, INC.
- -------------------------------- By: /s/
--------------------------------
President
- --------------------------------
WITNESSES WAVETECH INTERIM, INC.
- -------------------------------- By: /s/
--------------------------------
President
- --------------------------------
WITNESSES IMAGITEL, INC.
- -------------------------------- By: /s/
--------------------------------
President
- --------------------------------
E-25
<PAGE>
APPENDIX A
PLAN OF MERGER
OF
WAVETECH INTERIM, INC.
WITH AND INTO
IMAGITEL, INC.
Pursuant to this Plan of Merger (the "Plan of Merger"), Wavetech
Interim, Inc. ("Interim"), a Nevada corporation and a wholly-owned subsidiary of
Wavetech, Inc., will be merged with and into Imagitel, Inc. ("Imagitel"), a
Nevada corporation.
ARTICLE 1. DEFINITIONS
The capitalized terms set forth below shall have the following
meanings:
"Certificate of Merger" shall mean the Certificate of Merger to be
executed by Interim and Imagitel in a form appropriate for filing with the
Secretary of State of Nevada, relating to the effective consummation of the
Merger as contemplated by the Plan of Merger.
"Conversion Ratio" shall mean the number of shares of Wavetech Common
Stock issuable in exchange for one share of Imagitel Common Stock, as calculated
pursuant to Section 3.1 hereof.
"Conversion Value of Imagitel" as set forth herein is to be used solely
for the purposes of calculating a Conversion Ratio and is not necessarily
indicative of its actual value.
"Conversion Value of Wavetech" as set forth herein is to be used solely
for the purposes of calculating a Conversion Ratio and is not necessarily
indicative of its actual value.
"Effective Time" shall mean the date and time which the Merger becomes
effective as more particularly set forth in Section 2.2 hereof
"Fair Market Value" shall mean, with respect to the Wavetech Common
Stock for a particular day in question, the average of the closing prices as
quoted on the automated quotation system for that particular day and the
immediately preceding 29 trading days.
"Interim Common Stock" shall mean the common stock, par value $1.00 per
share, of Interim.
"Merger" shall mean the merger of Interim with and into Imagitel as
more particularly set forth herein and in the Reorganization Agreement.
"Options" shall mean all outstanding obligations, commitments, options,
warrants or other securities set forth on Schedule 3.4 of the Reorganization
Agreement which are exercisable for or convertible into, or which require the
issuance of, shares of any class of capital stock of Imagitel.
"Reorganization Agreement" shall mean the Reorganization Agreement
among Wavetech, Interim and Imagitel dated the date hereof, to which this Plan
of Merger is attached as Appendix A.
"Surviving Corporation" shall mean Imagitel after consummation of the
Merger.
WAVETECH. Wavetech, Inc. a Nevada corporation headquartered in Tucson,
Arizona. Where the context permits, Wavetech shall include all subsidiary
entities.
"Wavetech Common Stock" shall mean the common stock, par value $0.001
per share, of Wavetech.
WAVETECH _______________ E-26 _______________ IMAGITEL
<PAGE>
ARTICLE 2. THE MERGER
2.1. MERGER. Subject to the terms and conditions set forth in the
Reorganization Agreement, unless effectively waived as provided therein, and in
accordance with all applicable laws, regulations and regulatory requirements, at
the Effective Time, Interim shall be merged with and into Imagitel. Imagitel
shall be the Surviving Corporation of the Merger and shall continue to be
governed by the laws of the State of Nevada.
2.2. EFFECTIVE TIME. The Merger shall become effective on the date and
at the time specified in the Certificate of Merger.
2.3. CAPITALIZATION. The number of authorized shares of capital stock
of the Surviving Corporation shall be the same as immediately prior to the
Merger.
2.4. CERTIFICATE OF INCORPORATION. The certificate of incorporation of
Imagitel as in effect at the Effective Time shall be and remain the certificate
of incorporation of the Surviving Corporation.
2.5. BYLAWS. The Bylaws of Imagitel, as in effect at the Effective
Time, shall continue in full force and effect as the bylaws of the Surviving
Corporation until otherwise amended as provided by law or by such bylaws.
2.6. PROPERTIES AND LIABILITIES OF IMAGITEL AND-INTERIM. At the
Effective Time, the separate existence and corporate organization of Interim
shall cease, and Imagitel shall thereupon and thereafter, to the extent
consistent with applicable law and with its certificate of incorporation and the
changes, if any, provided by the Merger, possess all the rights, privileges,
immunities, liabilities and franchises, of a public as well as a private nature
of Imagitel without. further act or deed.
ARTICLE 3. CONSIDERATION
3.1. MERGER CONSIDERATION. (a) Subject to adjustment as provided in
Section 3.1(b) below, in connection with the Merger, each Imagitel shareholder
shall, by virtue of the Merger and without any action on his part, be entitled
to receive 420 shares of Wavetech Common Stock for each share of Imagitel Common
Stock issued and outstanding immediately prior to the Effective Time (the
"Conversion Ratio"). The Conversion Ratio is calculated on a pre-reverse stock
split basis that does not yet include adjustments for a planned 6:1 reverse
stock split by Wavetech.
(b) (1) The Conversion Ratio shall be adjusted such that the number
of shares issuable under this Plan of Merger shall be either
increased or decreased in the following instances:
Actual Conversion Ratio shall be determined as of month end immediately prior to
closing using the following formula:
Actual number of Wavetech Shares Outstanding Conversion Value of Imagitel
Conversion Value of Wavetech
- --------------------------------------------------------------------------------
210.56
Based upon the following agreed upon conditions:
1) The Conversion Value of Wavetech is $7.9 million with a $300,000 working
capital deficit. The Conversion Value of Wavetech shall be adjusted, either
increased or decreased in the following instances:
(i) in the event that Wavetech's funded debt and working capital
deficit as of month end immediately prior to the Effective Time exceeds
$300,000, then the Conversion Value of Wavetech shall be decreased by an
amount equal to the working capital deficit that exceeds $300,000.
(ii) in the event that Wavetech's funded debt and working capital
deficit as of month end immediately prior to closing is less than $300,000,
then the Conversion Value of Wavetech shall be increased by an amount equal
to the difference between actual amount and the $300,000 deficit.
2) The Conversion Value of Imagitel is $37.4 million, with no working capital
deficit. The Conversion Value of Imagitel shall be adjusted, either
increased or decreased in the following instances:
(i) in the event that Imagitel. has positive working capital as
of month end immediately prior to the Effective Time, then the Conversion
Value of Imagitel shall be increased by an amount equal to the positive
working capital.
(ii) in the event that Imagitel has a working capital deficit as
of month end immediately prior to closing, then the Conversion Value of
Imagitel shall be decreased by an amount equal to the working capital
deficit.
(iii) the Conversion value of Imagitel shall not change if
Imagitel acquires acCOMModation Services, Inc. However, the number of
shares outstanding for Imagitel will increase, and the increase will not
change the Conversion Ratio - as it is already incorporated into the
formula calculations.
E-27
<PAGE>
3.2. INTERIM COMMON STOCK. The shares of Interim shall be canceled as a
result of the Merger.
3.3. IMAGITEL COMMON STOCK. After consummation of the Merger, all of
the outstanding shares of Imagitel shall be held by Wavetech and its
capitalization shall be unchanged.
3.4. TREASURY SHARES. Any and all shares of Imagitel common stock held
as treasury shares by Imagitel shall be canceled and retired at the Effective
Time, and no consideration shall be issued or given in exchange therefor.
3.5. FRACTIONAL SHARES. No fractional shares of Wavetech Common Stock
will be issued as a result of the Merger. In lieu of the issuance of fractional
shares pursuant to Section 3.1 hereof, cash will be paid to the holders of the
Imagitel Common Stock in respect of any fractional share that would otherwise be
issuable based on the Fair Market Value of the Wavetech Common Stock on the last
trading day immediately preceding the Effective Time.
3.6. EQUITABLE ADJUSTMENTS. In the event of any change in the
outstanding Wavetech Common Stock by reason of a stock dividend, stock split,
stock consolidation, recapitalization, reorganization, merger, split up or the
like, the Conversation Ratio, all stock prices set forth in this Article 3, and
the number and kind of shares under option in the Options and the option price
of such Options shall be appropriately adjusted so as to preserve, but not
increase, the benefits of this Plan of Merger to the Imagitel Shareholders and
the holders of the Options.
ARTICLE 4. EXCHANGE OF COMMON STOCK CERTIFICATES
4.1. ISSUANCE OF WAVETECH CERTIFICATES; CASH FOR FRACTIONAL SHARES.
After the Effective Time, each holder of shares of Imagitel Common Stock issued
and outstanding at the Effective Time shall surrender the certificate or
certificates representing such shares to Wavetech or its transfer agent, and
shall promptly upon surrender receive in exchange therefor the consideration
provided in Section 3.1 of this Plan of Merger (except for Dissenting
Shareholders, as provided below). To the extent required by Section 3.4 of this
Plan of Merger, each holder of shares of Imagitel Common Stock issued and
outstanding at the Effective Time also shall receive, upon surrender of the
certificate or certificates representing such shares, cash in lieu of any
fractional share of Wavetech Common Stock to which such holder might be
entitled.
4.2. AUTHORIZED WITHHOLDINGS. Wavetech shall not be obligated to
deliver the consideration to which any former holder of Imagitel Common Stock is
entitled as a result of the Merger until such holder surrenders his or her
certificate or certificates representing the shares of Imagitel Common Stock for
exchange as provided in this Article 4, or, in default thereof, an appropriate
affidavit of loss and indemnity agreement and/or a bond as may be reasonably
required in each case by Wavetech or Imagitel. In addition, no dividend or other
distribution payable to the holders of record of Wavetech Common Stock as of any
time subsequent to the Effective Time shall be paid to the holder of any
certificate representing shares of Imagitel Common Stock issued and outstanding
at the Effective Time until such holder surrenders such certificate for exchange
as provided in Section 4.1 above. However, upon surrender of the Imagitel Common
Stock certificate both the Wavetech Common Stock certificate, together with all
such withheld dividends or other distributions and any withheld cash payments in
respect of fractional share interest, but without any obligation for payment of
interest by such withholding, shall be delivered and paid with respect to each
share represented by such certificate.
4.3. LIMITED RIGHTS OF FORMER IMAGITEL SHAREHOLDERS. Except as provided
in Section 4.4 below, after the Effective Time, each outstanding certificate
representing shares of Imagitel Common Stock prior to the Effective Time shall
be deemed for all corporate purposes (other than voting and the payment of
dividends and other distributions to which the former shareholder of Imagitel
Common Stock may be entitled) to evidence only the right of the holder thereof
to surrender such certificate and receive the requisite number of shares of
Wavetech Common Stock in exchange therefor as provided in this Plan of Merger.
4.4. DISSENTING SHAREHOLDERS. Shares of Imagitel Common Stock owned by
a holder who (i) shall not have voted in favor of the Merger, and (ii) shall
have delivered to Imagitel a written notice of his intent to demand payment for
his shares if the Merger is effectuated in the manner provided in the corporate
law of Nevada (collectively, the "Dissenting Shareholders"), shall not be
converted as provided above, but shall be entitled to receive such consideration
as shall be provided in the corporate law of Nevada, except that shares of any
Dissenting Shareholder who shall thereafter not perfect his right to appraisal
as provided in the corporate law of Nevada shall thereupon be deemed to have
been converted as of the Effective Time of the Merger, into Wavetech Common
Stock, as provided above.
4.5. STOCK TRANSFER BOOKS. AT the close of business on the day prior to
the Effective Time of the Merger, the stock transfer books of Imagitel shall be
closed and no transfer of Imagitel Common Stock shall thereafter be made on such
stock transfer books.
ARTICLE 5. STOCK OPTIONS
5.1. Options. At the Effective Time, all of the Options shall, after
the Effective Date, represent only the right to receive shares of Wavetech
Common Stock based on the Conversion Ratio.
E-28
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
WAVETECH INTERNATIONAL, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of, WAVETECH INTERNATIONAL, INC. a Nevada
corporation (the "Company"), hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement of the Company, each dated April
____, 1998, and hereby appoints Gerald I. Quinn and Richard P. Freeman, and each
of them, proxies and attorneys-in-fact, with full power to each of substitution,
on behalf and in the name of the undersigned, to represent the undersigned at
the 1998 Annual Meeting of Stockholders of the Company, to be held on May 18,
1997, at 10:00 a.m., local time, at The Marriott Courtyard, Williams Center, 201
South Williams Center, Tucson, Arizona 85711, and at any adjournment or
adjournments thereof, and to vote all shares of Common Stock that the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below:
1. APPROVAL OF THE ONE-FOR-SIX REVERSE SPLIT OF THE COMPANY'S OUTSTANDING
COMMON STOCK
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. APPROVAL OF THE ISSUANCE OF UP TO 85,000,000 SHARES (THE "MERGER SHARES")
OF THE COMPANY'S COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT AND
PLAN OF MERGER, DATED JANUARY 5, 1998, AMONG WAVETECH INTERNATIONAL, INC.,
WAVETECH INTERIM, INC. AND IMAGITEL, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
A VOTE FOR ISSUANCE OF THE MERGER SHARES SHALL BE DEEMED A VOTE FOR THE ELECTION
OF DIRECTORS DESIGNATED BY IMAGITEL, INC.
3. ELECTION OF DIRECTORS:
[ ] FOR the five nominees listed below, except as indicated
[ ] WITHHOLD AUTHORITY to vote for the five nominees listed below
If you wish to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below:
TERENCE E. BELSHAM, GERALD I. QUINN, RICHARD P. FREEMAN, TERENCE H. POCOCK AND
JOHN P. CLEMENTS
IF PROPOSAL TWO IS APPROVED, YOUR VOTE WITH RESPECT TO THIS PROPOSAL NO. THREE
SHALL NOT BE CONSIDERED, AND THOSE PERSONS DESIGNATED BY IMAGITEL SHALL SERVE AS
DIRECTORS OF THE COMPANY
and upon such other matters that may properly come before the meeting or any
adjournment or adjournments thereof.
(continued, and to be signed, on other side)
<PAGE>
(continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
FOR THE REVERSE SPLIT, FOR ISSUANCE OF THE MERGER SHARES, THE ELECTION OF
DIRECTORS (ONLY IF ISSUANCE OF THE MERGER SHARES IS NOT APPROVED); AND AS SAID
PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
A majority of such attorneys or substitutes as shall be present and shall act at
said meeting or any adjournment or adjournments thereof (or if only one shall be
present and act, then that one) shall have and may exercise all of the powers of
said attorneys-in-fact hereunder.
Dated: , 1998
--------------
- -----------------------------------
Signature
- -----------------------------------
Signature
(This Proxy should be dated, signed by the stockholder(s) exactly as his or her
name appears hereon, and returned promptly in the enclosed envelope. Persons
signing in a fiduciary capacity should so indicate. If shares are held by joint
tenants or as community property, both stockholders should sign.)
