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. 1)
[X] Filed by the Registrant
[ ] File 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 Additional Materials
[ ] Definitive Proxy Statement
[ ] 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 JULY , 1998
To the stockholders of Wavetech International, Inc.:
A special meeting in lieu of the 1998 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, , July ,1998 at 10:30 a.m.,
Mountain Standard Time, for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of up
to 7,922,861 shares (the "Merger Shares") of the Company's authorized but
unissued Common Stock, (after giving effect to a one-for-six reverse split).
Such issuance shall result in a change in control of the Company pursuant to
that certain Reorganization Agreement, dated January 5, 1998, as amended (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;
2. To elect five directors to the Board of Directors if Proposal No. 1
is NOT adopted; and 3. To transact such other business as may properly come
before the Annual Meeting and any adjournment thereof.
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 issuance
of the Merger Shares 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, L.P. that, in its opinion, the ratio at which
Imagitel shares shall be exchanged for shares of Wavetech Common Stock is 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 issuance of the Merger Shares.
Only stockholders of record ("Stockholders") at the close of business
on June 24, 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 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 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,
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
1998 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 a special meeting to be held in lieu of the 1998 Annual Meeting (the
"Annual Meeting") of Stockholders (defined below) to be held on July
, 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.
Only holders (the "Stockholders") of the Company's outstanding Common
Stock, $.001 par value (the "Wavetech Common Stock"), at the close of business
on June 24, 1998 (the "Record Date"), are entitled to notice of, and to vote at,
the Annual Meeting. On the Record Date, there were 16,994,976 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.
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.
This Proxy Statement relates, among other things, to the issuance by
the Company of up to an aggregate of 7,922,861 (after giving effect to the
one-for-six Reverse Split) shares (the "Merger Shares") of its authorized but
unissued Common Stock, pursuant to a Reorganization Agreement, dated January 5,
1998, as amended (the "Reorganization Agreement"), by and among Wavetech,
Wavetech Interim, Inc., a wholly owned subsidiary of the Company ("Interim") and
Imagitel Inc., a closely held Nevada corporation ("Imagitel"). The issuance of
the Merger Shares shall result in a change of control of the Company with the
former stockholders of Imagitel holding, in the aggregate, approximately 70%
(72% on a fully diluted basis) of the Company's Common Stock to be outstanding
immediately following the consummation of the transactions contemplated by the
Reorganization Agreement (the "Reorganization"). Holders of the Wavetech Common
Stock outstanding immediately prior to the Reorganization shall hold the
remaining shares of Wavetech Common Stock to be outstanding immediately
following the Reorganization, representing, in the aggregate, approximately 30%
of such shares. As a result of the Merger, Wavetech shall issue 197.95 shares of
Wavetech Common Stock (32.99 after giving effect to the one-for-six reverse
split) in exchange for each share of Imagitel Common Stock then outstanding and
rights to purchase Imagitel Common Stock, and the actual number of shares of
Wavetech Common Stock to be issued as a result of the Reorganization will depend
upon the aggregate number of outstanding shares of Imagitel Common Stock. 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.
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.
ALL INFORMATION SET FORTH HEREIN RELATING TO THE NUMBER OF SHARES OF
WAVETECH COMMON STOCK TO BE ISSUED AS A RESULT OF THE MERGER OR TO BE
OUTSTANDING IMMEDIATELY THEREAFTER GIVES EFFECT TO A ONE-FOR-SIX REVERSE SPLIT
OF WAVETECH COMMON STOCK WHICH WAS APPROVED BY WAVETECH SHAREHOLDERS AT A
SPECIAL MEETING HELD ON MAY 26, 1998. AS OF THE DATE OF THIS PROXY STATEMENT,
THE REVERSE SPLIT HAS NOT BEEN IMPLEMENTED, HOWEVER, IT IS A CONDITION TO
IMAGITEL'S OBLIGATIONS UNDER THE REORGANIZATION AGREEMENT THAT IT BE EFFECTIVE
PRIOR TO THE MERGER. UNLESS OTHERWISE STATED, ALL HISTORICAL INFORMATION
CONCERNING WAVETECH COMMON STOCK IS ACTUAL AND DOES NOT GIVE EFFECT TO THE
REVERSE SPLIT.
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TABLE OF CONTENTS
SUMMARY.................................................................... 5
General................................................................ 5
The Annual Meeting..................................................... 5
Required Vote.......................................................... 6
Recommendations of the Boards of Directors............................. 6
Fairness Opinion With Respect to the Merger............................ 6
The Parties to the Merger.............................................. 7
The Merger............................................................. 7
Termination of the Reorganization Agreement............................ 8
Fees and Expenses...................................................... 8
Amendment of the Reorganization Agreement; Waiver of Conditions........ 8
Federal Income Tax Consequences........................................ 8
Exchange of Shares..................................................... 8
Accounting Treatment of the Merger..................................... 9
Business and Management After the Merger............................... 9
Resale of Wavetech Common Stock to be Issued in the Merger............. 9
Risk Factors........................................................... 10
Dissenters Rights of Appraisal......................................... 10
Comparative Rights of Wavetech Stockholders and Stockholders
of the Reorganized Parent............................................. 10
Interest of Certain Persons in the Merger.............................. 10
Market Price and Dividend of Wavetech Common Stock..................... 10
Defined Terms.......................................................... 11
Summary Historical Consolidated Financial Data......................... 12
Summary Unaudited Pro Forma Condensed Combined Financial Data.......... 14
Forward Looking Statements............................................. 14
RISK FACTORS............................................................... 15
I Overview.......................................................... 15
II Risks Associated With Wavetech.................................... 15
III Risks Associates With Imagitel.................................... 23
IV Risks Associated With the Reorganization and the
Reorganized Parent............................................... 33
PROPOSAL ONE: APPROVAL OF ISSUANCE OF WAVETECH COMMON STOCK
PURSUANT TO REORGANIZATION AGREEMENT....................................... 36
RECOMMENDATION OF THE WAVETECH BOARD OF DIRECTORS AND REASONS
FOR THE MERGER............................................................. 36
General................................................................ 36
Background............................................................. 36
Recommendation of Wavetech Board of Directors.......................... 36
Risks Associated with the Merger....................................... 38
Opinion of Kaufman Bros., Inc.......................................... 38
Description of Imagitel, Inc........................................... 42
BUSINESS OF REORGANIZED PARENT............................................. 45
Overview............................................................... 45
Growth Strategies...................................................... 45
Marketing Strategy..................................................... 46
Strategic Partnerships................................................. 46
Planned Distribution Methods........................................... 47
Technical Developments................................................. 47
Acquisition Strategies................................................. 48
Planned Consolidation.................................................. 48
THE MERGER................................................................. 49
General................................................................ 49
Effective Time and Effect of the Merger................................ 49
Conditions to Consummation of the Merger............................... 50
Representations, Warranties and Covenants.............................. 51
Employee Benefit Plans and Stock Options............................... 52
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Warrants............................................................... 52
Termination of the Reorganization Agreement............................ 52
Fees and Expenses...................................................... 52
Amendment of the Reorganization Agreement; Waiver of Conditions........ 53
Federal Income Tax Consequences........................................ 53
Accounting Treatment of the Merger..................................... 53
Resale of Wavetech Common Stock to be Issued in the Merger............. 53
Comparative Rights of Wavetech Stockholders and Stockholders of
the Reorganized Parent................................................ 54
Dissenters Rights of Appraisal......................................... 54
Certain Material Contracts or Transactions............................. 54
Interest of Certain Persons in the Merger.............................. 54
Regulatory Matters..................................................... 54
Voting Requirements.................................................... 55
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION......................... 56
WAVETECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................. 61
Operations Overview.................................................... 61
Results of Operations.................................................. 61
Liquidity and Capital Resources........................................ 62
Inflation.............................................................. 62
Stock Option Plan...................................................... 62
Income Taxes........................................................... 63
Year 2000 Issues....................................................... 63
IMAGITEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................. 64
Overview............................................................... 64
Results of Operations.................................................. 65
Liquidity and Capital Resources........................................ 66
Seasonality............................................................ 68
Year 2000 Issues....................................................... 68
Inflation.............................................................. 68
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS OF THE COMPANY......... 69
Directors, Director Nominees and Officers.............................. 69
Committees of the Board of Directors................................... 71
Meetings of the Board of Directors..................................... 72
PROPOSAL TWO: ELECTION OF DIRECTORS........................................ 72
EXECUTIVE COMPENSATION..................................................... 72
Summary Compensation Table............................................. 72
Aggregated Option Exercises in Last Fiscal Year and Options
Value as of August 31, 1997........................................... 73
Option Grants in Last Fiscal Year...................................... 73
Compensation of Directors.............................................. 73
Employment Contracts................................................... 74
1997 Stock Incentive Plan.............................................. 74
Compensation Committee Report on Repricing............................. 76
Change in Control Arrangements......................................... 76
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 76
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................... 77
SECURITY OWNERSHIP OF CERTAIN PRINCIPAL STOCKHOLDERS AND MANAGEMENT........ 78
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................. 79
MARKET PRICE AND DIVIDENDS OF WAVETECH COMMON STOCK........................ 79
OTHER BUSINESS............................................................. 79
STOCKHOLDER PROPOSALS...................................................... 79
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 80
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1997 ANNUAL REPORT TO SHAREHOLDERS......................................... 80
GLOSSARY OF DEFINED TERMS.................................................. 81
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
Independent Auditor's Report........................................... F-2
Wavetech International, Inc. and Subsidiaries Consolidated
Balance Sheet......................................................... 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 International, Inc. and Subsidiaries Condensed
Consolidated Balance Sheets for February 28, 1998 (unaudited)
and August 31, 1997 (audited)........................................F-18
Wavetech International, Inc. and Subsidiaries Condensed
Consolidated Statements of Operations for the three month
periods ended February 28, 1998 and February 28, 1997 (unaudited)....F-19
Wavetech International, Inc. and Subsidiaries Condensed
Consolidated Statements of Operations for the six month periods
ended February 28, 1998 and February 28, 1997 (unaudited)............F-20
Wavetech International, Inc. and Subsidiaries Condensed
Consolidated Statements of Cash Flows for the six month periods
ended February 28, 1998 and February 28, 1997 (unaudited)............F-21
Wavetech International, Inc. and Subsidiaries Notes to
Condensed Consolidated Financial Statements (unaudited)..............F-22
Report of Independent Accountants......................................F-23
Imagitel, Inc. Consolidated Balance Sheets - December 31, 1997
and 1996.............................................................F-24
Imagitel, Inc. Consolidated Statements of Operations and
Retained Earnings -- December 31, 1997 and from January 9, 1996
to December 31, 1996.................................................F-25
Imagitel, Inc. Consolidated Statements of Cash Flows -
December 31, 1997 and from January 9, 1996 to December 31, 1996......F-26
Imagitel, Inc. Notes to the Consolidated Financial Statements..........F-27
Imagitel, Inc. Consolidated Balance Sheets -March 31, 1998 (unaudited)
and December 31, 1997 (audited)......................................F-32
Imagitel, Inc. Consolidated Statements of Operations--
March 31, 1998 and 1997 (unaudited)..................................F-33
Imagitel, Inc. Consolidated Statements of Cash Flows--
March 31, 1998 and 1997 (unaudited)..................................F-34
Imagitel, Inc. Notes to the Unaudited Interim Consolidated
Financial Statements.................................................F-35
EXHIBIT I -- REORGANIZATION AGREEMENT, AS AMENDED..........................E-1
EXHIBIT II -- OPINION OF KAUFMAN BROS, L.P.................................E-31
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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 AND/OR IN THE GLOSSARY OF DEFINED
TERMS. 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 I 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 STOCKHOLDER SHOULD READ CAREFULLY THIS PROXY STATEMENT AND THE
EXHIBITS HERETO IN THEIR ENTIRETY.
ALL INFORMATION SET FORTH HEREIN RELATING TO THE NUMBER OF SHARES OF
WAVETECH COMMON STOCK TO BE ISSUED AS A RESULT OF THE MERGER OR TO BE
OUTSTANDING IMMEDIATELY THEREAFTER GIVES EFFECT TO A ONE-FOR-SIX REVERSE SPLIT
OF WAVETECH COMMON STOCK WHICH WAS APPROVED BY WAVETECH SHAREHOLDERS AT A
SPECIAL MEETING HELD ON MAY 26, 1998. AS OF THE DATE OF THIS PROXY STATEMENT,
THE REVERSE SPLIT HAS NOT BEEN IMPLEMENTED, HOWEVER, IT IS A CONDITION TO
IMAGITEL'S OBLIGATIONS UNDER THE REORGANIZATION AGREEMENT THAT IT BE EFFECTIVE
PRIOR TO THE MERGER. UNLESS OTHERWISE STATED, ALL HISTORICAL INFORMATION
CONCERNING WAVETECH COMMON STOCK IS ACTUAL AND DOES NOT GIVE EFFECT TO THE
REVERSE SPLIT. GENERAL
This Proxy Statement relates to the proposed issuance by Wavetech of
the Merger Shares in connection with the Merger of Interim, a wholly owned
subsidiary of Wavetech, with and into Imagitel, pursuant to the Reorganization
Agreement. As a result of issuing the Merger Shares, the former stockholders of
Imagitel will own 70% of the total shares of Wavetech Common Stock to be
outstanding immediately thereafter, thereby resulting in a change of control of
the Company. See "The Merger."
Approval of the issuance of the Merger Shares shall also constitute
approval of the election of four persons designated by Imagitel to serve as
directors of the Company. If the issuance of the Merger Shares is not approved,
the Company's management has nominated five persons to serve as members of the
Wavetech Board of Directors until the next annual meeting of Stockholders.
WAVETECH'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVING THE ISSUANCE OF THE MERGER SHARES AND, ONLY IF SUCH ISSUANCE IS NOT
APPROVED, FOR THE ELECTION OF EACH PERSON NOMINATED BY THE COMPANY TO SERVE AS A
DIRECTOR.
THE ANNUAL MEETING
TIME, DATE AND PLACE. The Annual Meeting will be held on July , 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 at the close of business on June 24, 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 held by approximately 146
holders of record, all of which are entitled to notice of and 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 Wavetech 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 Stockholders
present, by vote of a majority of the votes cast by Stockholders 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.
SOLICITATION OF PROXIES; TREATMENT OF ABSTENTIONS AND BROKER NON-VOTES;
REVOCATION OF PROXIES. 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
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additional compensation for any such further solicitation. The enclosed proxy
card permits each Stockholder to specify that shares be voted "FOR" or "AGAINST"
(or "ABSTAIN FROM") approval of the issuance of the Merger Shares 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 issuance of the Merger Shares and, only if such issuance is not
approved, FOR the election to the Board of Directors of the five persons
nominated by the Wavetech Board of Directors.
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.
A proxy related to the Annual Meeting may be revoked by the Stockholder
at any time before it is exercised; however, mere attendance at the meeting will
not by itself have the effect of revoking the proxy. Stockholders 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, Stockholders will be
asked to consider and vote on Proposals to approve (i) the issuance of the
Merger Shares (which shall also constitute approval of the election to the Board
of Directors of the four persons designated by Imagitel), (ii) election of five
directors if the issuance of the Merger Shares is not approved, and (iii) 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 2,520,299
outstanding shares (or approximately 14.8%) of the outstanding Wavetech Common
Stock entitled to vote at the Annual Meeting. All directors and executive
officers have indicated that they will vote all outstanding shares of Wavetech
Common Stock beneficially owned by them for approval of the issuance of the
Merger Shares and, only if such issuance is not approved, for the election to
the Board of Directors of the five persons nominated by the Wavetech Board of
Directors.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding
shares of Wavetech Common Stock present in person or by proxy at the Annual
Meeting is required to approve the issuance of the Merger Shares, or election of
the five directors nominated by the Wavetech Board of Directors provided that
the number of shares present in person or by proxy constitutes a quorum. Each
share of Wavetech Common Stock is entitled to one vote at the Annual Meeting.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors has approved the Reorganization Agreement and
the issuance of the Merger Shares pursuant thereto and unanimously recommends
that the Stockholders vote "FOR" the issuance of the Merger Shares . 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 as set forth in Proposal No. 2 and
unanimously recommends that its Stockholders 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 Bros., L.P.
("Kaufman"), Wavetech's financial advisor in connection with the Merger, that,
as of the date of the Reorganization Agreement and as of the date of this Proxy
Statement, the terms of the Reorganization Agreement and the transactions
contemplated thereby, including the issuance of the Merger Shares, are fair to
the Stockholders from a financial point of view. A copy of such opinion dated as
of June 15, 1998 is attached hereto as Exhibit II and should be read in its
entirety for information with respect to the assumptions made, and matters
considered, by Kaufman in rendering such opinions. See "Recommendation of the
Wavetech Board of Directors and Reasons for the Merger -- Opinion of Kaufman
Bros., L.P."
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THE PARTIES TO THE MERGER
WAVETECH. Wavetech is a provider of long distance telecommunications
services, primarily consisting of customized enhanced calling card services.
Prior to February 1998, Wavetech was incorporated in the State of New Jersey
under the name "Wavetech, Inc." Wavetech's Common Stock is quoted on the Nasdaq
SmallCap Market under the symbol "ITEL". 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)977-0202.
INTERIM. Interim was formed on December 31, 1997, as a wholly owned
subsidiary of Wavetech solely for the purpose of effecting the Merger. Interim's
address and telephone number are the same as Wavetech's.
THE MERGER
GENERAL. At the Effective Time, Interim will be merged with and into
Imagitel. Imagitel will be the surviving corporation in the Merger (the
"Surviving Sub") and shall become a wholly owned subsidiary of Wavetech, which
shall then change its corporate name to "Imagitel Group Holdings, Inc." (the
"Reorganized Parent"). 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. See "The Merger".
CONVERSION OF SHARES OF IMAGITEL COMMON STOCK. At the Effective Time of
the Merger, each outstanding share of Imagitel Common Stock will be converted,
without any action on the part of the holder thereof, into the right to receive
32.99 shares of Wavetech Common Stock (the "Conversion Ratio"). The Conversion
Ratio and the aggregate number of shares of Wavetech Common Stock issuable in
connection with the Merger, each give effect to the one-for-six Reverse Split of
outstanding Wavetech Common Stock which was approved by Wavetech shareholders at
a Special Meeting held on May 26, 1998 and which will be implemented prior to
the Effective Time.
The actual aggregate number of shares of Wavetech Common Stock to be
issued as a result of the Merger will depend upon the number of shares of
Imagitel Common Stock outstanding immediately prior to the Effective Time. Based
upon the number of shares of Imagitel Common Stock outstanding as of June 15,
1998, Wavetech would be required to issue approximately 6.6 million shares of
Wavetech Common Stock plus reserve approximately 700,000 additional shares of
Wavetech Common Stock for issuance upon the exercise of options to purchase
Imagitel Common Stock outstanding as of June 15, 1998 which would be converted
into options to purchase a number of shares of Wavetech Common Stock determined
in accordance with the Conversion Ratio. To the extent Imagitel issues
additional shares of its Common Stock or grants options, warrants or rights to
purchase shares of its Common Stock prior to the Effective Time, the aggregate
number of shares of Wavetech Common Stock issuable in connection with the Merger
would be increased. However, in no event shall former shareholders of Imagitel
be issued more than 7,922,861 shares of Wavetech Common Stock in the aggregate
(including shares issuable upon the exercise of options, warrants or other
rights to purchase Imagitel Common Stock, which shall be converted into similar
rights to purchase a number of shares of Wavetech Common Stock determined by the
Conversion Ratio). As a result of the Merger, Imagitel stockholders will own
approximately 70% (72% on a fully diluted basis) of the total Wavetech Common
Stock to be outstanding immediately subsequent to the Merger. Following the
Merger, the Stockholders of Wavetech will continue to hold their shares of
capital stock of Wavetech without any change in number, designation, terms or
rights, except for the Reverse Split.
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, (the "Effective
Time"). 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, (i) that the issuance of the Merger Shares shall have been approved by
the Wavetech Stockholders and (ii) the effectiveness of the Reverse Split. See
"The Merger -- Conditions to Consummation of the Merger".
STOCK OPTIONS. Pursuant to the Reorganization Agreement, each
outstanding option to acquire shares of Imagitel Common Stock will be converted
into fully vested options to purchase shares of the Reorganized Parent's Common
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Stock, determined in accordance with the Conversion Ratio, and the exercise
price will be correspondingly adjusted. As of May 31, 1998, there were
outstanding options to purchase approximately 21,000 shares of Imagitel Common
Stock at an average exercise price of $16.78 and per share. Imagitel intends to
issue up to an aggregate of 3,000 additional shares of Imagitel Common Stock
prior to the Effective Time.See "The Merger -- Employee Benefit Plans and Stock
Options".
TERMINATION OF THE REORGANIZATION 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 any party thereto
if an injunction or order shall have been issued which prevents the consummation
of such transactions, (iii) by any party upon another 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
August 31, 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 Reorganization is consummated, all costs and
expenses incurred in connection with the Reorganization will be paid by the
party incurring such costs or expenses. In addition to all ordinary expenses
incurred in connection with the Reorganization, Imagitel is required to pay
approximately $725,000 of fees in connection with the Reorganization. The
Company is not obligated to make any payments of brokers' fees, or similar
commissions in connection with the Reorganization. See "The Merger -- Fees and
Expenses."
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
issuance of the Merger Shares 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
Neither Wavetech nor the shareholders of Wavetech will be subject to
any adverse federal income tax consequences as a result of the Reorganization.
Wavetech's conclusion that the Reorganization will not be a taxable event, for
federal income tax purposes, to Wavetech or to holders of Wavetech Common Stock,
Preferred Stock, options or warrants is based upon the advice of its legal
counsel, Squire, Sanders & Dempsey L.L.P. See "The Merger --Federal Income Tax
Consequences".
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, certificates representing shares of
Wavetech Common Stock shall represent, without any further action, an equal
number of shares of the common stock of the Reorganized Parent. Upon transfer or
exchange of their existing certificates, Stockholders will receive certificates
which reflect the changed name of the Reorganized Parent as well as the Reverse
Split.
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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
Wavetech is a provider of long distance telecommunications services,
consisting primarily of customized enhanced calling card services. The marketing
focus of the Company has historically been on direct sales to corporate,
affinity groups and non-profit organizations that distribute the calling cards
to their respective client or member bases using various promotional techniques.
Although the Company has successfully executed a number of agreements to
distribute branded calling card products to various affinity groups, the Company
has not been able to generate any significant sales as a result of those
agreements.
Imagitel is a holding company for its operating subsidiaries which are
primarily engaged as carriers and resellers of long distance and enhanced
telecommunications services. The principal focus of Imagitel has historically
been the promotional marketing of calling cards directly to the consumer using
mass marketing.
Following the Merger, the business and operations of the Reorganized
Parent will be significantly varied as compared to those of Wavetech presently
as a result of the combination of the differing, yet complementary, businesses
of the Company and Imagitel. The Reorganized Parent and its subsidiaries intend
to target their products to a variety of market segments, such as mass
distribution to consumers, and direct 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.
Specifically, the Reorganized Parent intends to utilize Imagitel's existing
marketing resources to increase, subject to customer demand, the variety and
volume of services provided pursuant to existing agreements between Wavetech and
its customers. However, the Reorganized Parent's ability to implement its
operating and growth strategies is subject to a number of factors, many of which
will be beyond its control, and there can be no assurance that the Reorganized
Parent will be able to successfully implement such strategies. See "Risk Factors
- - - - -- Risks Associated with the Merger and the Reorganized Parent" and "Business of
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, Chief Information Officer; Dee
Darby, Vice President of Operations; Scott Moster, President - Carrier Group;
David Crawford, Vice President of Business Development; and Andrew Cauthen,
President, Zapcom International. 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 IV, Richard
Hartman, Robert C. Hawk, Steve Jaffe and one more non-employee 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 a director of the Reorganized
Parent.
RESALE OF WAVETECH COMMON STOCK TO BE ISSUED IN THE MERGER
The Merger Shares will be "restricted" securities and may only be
transferred in accordance with the provisions of Rule 144 under the Securities
Act, pursuant to an effective registration statement filed thereunder, or in
transactions exempt from registration thereunder. In addition, the Merger Shares
received by persons who are affiliates of Imagitel immediately prior to the
Effective Time but who 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.
Pursuant to such 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. See "The
Merger -- Resale of Wavetech Common Stock to be Issued in the Merger".
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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. The Company is seeking
approval by the Stockholders solely of the issuance of the Merger Shares in
order to comply with the applicable rules of the Nasdaq SmallCap Market, on
which its Common Stock is quoted. 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 stockholders of
Imagitel shall have exercised such rights.
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 Group Holdings, Inc.", the Articles of Incorporation and
Bylaws of the Reorganized Parent will be the same as those currently in effect
with respect to Wavetech. 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.
Notwithstanding the foregoing, the Reorganization will result in a change of
control of the Company and, as such, holders of Wavetech Common Stock will, in
the aggregate, hold approximately 30% of the Wavetech Common Stock to be
outstanding immediately following the Reorganization.
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 August 1, 1998, it is anticipated that options to
purchase an aggregate of 320,000 shares of Wavetech Common Stock will be fully
exercisable, of which approximately 78,333 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 three months prior written notice. See "Directors,
Director Nominees and Executive Officers of the Company -- Employment
Contracts".
MARKET PRICE AND DIVIDENDS 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 each of the fiscal
quarters ended November 30, 1997, February 28, 1998 and May 31, 1998, are as
follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
1996 (1) $ 2 1/16 $ 3/4 $1 3/8 $ 3/4 $2 1/8 $ 3/4 $ 2 $ 3/4
1997 (1) $ 1 1/16 $17/32 $1 1/32 $1/4 $15/16 $11/32 $3/4 $5/16
1998 (1) $ 19/32 $ 3/8 $15/32 $13/32 $11/16 $9/16 N/A N/A
(1) THESE PRICES ARE ACTUAL AND HAVE NOT BEEN ADJUSTED TO GIVE RETROACTIVE
EFFECT TO THE REVERSE SPLIT.
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The bid and the asked price of the Wavetech Common Stock as of the
close of the market on June 15, 1998 were $.594 and $.656, respectively.
The Company has never declared a dividend and does not plan to declare
dividends of cash on Wavetech Common Stock in the future.
On January 5, 1998, 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 $.406. 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 $ .
DEFINED TERMS
Certain capitalized terms used in this Proxy Statement are defined in
the "Glossary of Defined Terms" contained herein.
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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 for
the six months ended February 28, 1998 and 1997 and of Imagitel for the year
ended December 31, 1997, for the period from inception on January 9, 1996 to
December 31, 1996, and for the three months ended March 31, 1998 and 1997.
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
Stockholders' Equity $2,158,244
WAVETECH SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
FOR THE SIX-MONTH PERIODS ENDED FEBRUARY 28, 1998
AND FEBRUARY 28, 1997 (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
1998 1997
----------- -----------
Revenues: $ 78,675 $ 522,639
Net loss from operations $ (515,764) $ (898,008)
Net loss $ (627,537) $ (895,741)
Net loss per common share $ (0.04) $ (0.06)
Weighted average number of shares outstanding 15,276,641 14,228,728
AS OF FEBRUARY 28, 1998
BALANCE SHEET DATA:
1998
----------
Total Assets $3,160,534
Stockholders' Equity $2,032,930
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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)
Net income (loss) per share, assuming dilution $ 14.50
AS OF DECEMBER 31, 1997 AND 1996
BALANCE SHEET DATA:
1997 1996
---------- ----------
Total Assets $8,350,526 $3,115,439
Stockholders' Equity $ 398,618 $ (804,997)
IMAGITEL SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
1998 1997
----------- ----------
Revenue $12,700,873 $6,975,106
Net Income $ 724,459 $ 348,341
Net income per share $ 3.62 $ 1.74
Net income per share, assuming dilution $ 3.45 $ 1.70
AS OF MARCH 31, 1998
BALANCE SHEET DATA:
1998
-----------
Total Assets $10,538,251
Stockholders' Equity $ 993,077
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following summary 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 DECEMBER 31, 1997
1997
-----------
Revenues $43,412,934
Net earnings $ 592,468
Earnings per common share $ 0.04
Weighted average number of shares outstanding 14,575,862
PRO FORMA BALANCE SHEET DATA
AT MARCH 31, 1998
1998
-----------
Total Assets $17,226,321
Stockholders' Equity $ 6,780,408
FORWARD-LOOKING STATEMENTS
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., L.P.", "Wavetech Management's Discussion
and Analysis of Financial Condition and Results of Operations", "Imagitel
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere. 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
issuance of additional shares of Wavetech Common Stock pursuant to the
Reorganization Agreement.
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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 with that of 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
PREVIOUS LOSSES; POTENTIAL INABILITY TO CONTINUE AS GOING CONCERN. 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. If the Company is unable to operate at a profit,
its financial position and results of operations, as well as the price at which
its Common Stock trades, may be materially adversely affected. The Company's
auditors have issued a report which states that, in their opinion, there exists
substantial uncertainty as to the Company's ability to continue as a "going
concern," as a result of its lack of sufficient capital resources. Since the
date of such report, the Company has secured a line of credit of $450,000,
against which $330,000 has been drawn. The $330,000, plus accrued interest, is
due to Imagitel, Inc. by June 30, 1998. The Company has also issued shares of
its Series A Preferred Stock for a gross price of $600,000. In addition, certain
warrant holders of the Company have exercised their warrants, resulting in
additional proceeds to the Company of approximately $222,500. These funds are
expected to be sufficient to sustain the operations of the Company for at least
four months, until such time as the Reorganization Agreement with Imagitel is
concluded. However, if the Reorganization is aborted (or even if completed), the
Company may be unable to generate sufficient revenues or otherwise obtain
adequate capital resources, it may be unable to continue its business operations
as currently planned, or at all. See "-- Need for Additional Financing".
LIMITED OPERATING HISTORY. 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 operations. Such risks include, but are not limited to, the
possibility that the Company may be unable to develop products and services
which are responsive to consumer demands, unable to achieve sales of such
products and services sufficient to enable the Company to become profitable, and
unable to develop the operational infrastructure necessary to support its
intended operations. To the extent the Company is unable in the future to
adequately address these and other risks and uncertainties associated with its
early stage of operations, its business, financial condition and results of
operations may be materially adversely affected.
FACTORS AFFECTING OPERATING RESULTS. The Company's operating results
have varied significantly from period to period in the past and may vary
significantly in the future. Special factors that may cause the Company's future
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<PAGE>
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 existing 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 monopolistic
market or its equipment becomes redundant or obsolete.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. 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. For example, the Company's worldwide long distance
services and features, such as conference calling, compete with services
provided by companies such as AT&T, MCI and Sprint Corporation ("Sprint"), as
well as smaller interexchange long distance providers. The Company's voice mail
services compete with voice mail services provided by certain regional Bell
operating companies ("RBOCs") as well as by independent voice mail vendors such
as Octel Communications Corporation. Many of the Company's planned future
products and services are likely to compete with products and services offered
by the Company's existing competitors, as well as additional companies with
which the Company does not presently compete. There can be no assurance that the
Company will be able to successfully compete with such entities. Such current or
future competition could materially adversely affect the Company's business,
operating results and financial condition.
In addition, the Telecommunications Act of 1996 allows local exchange
carriers ("LECs"), 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. Such deregulation 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 " -- Potential Adverse Effects of Regulation."
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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 greater number of total customers than the Company. As a result, the
Company may be required to reduce the prices at which it offers services in
order to make its services attractive to customers. However, if the Company is
unable to generate sufficient revenues to offset its expenses, it will be unable
to become 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 LECs
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 competitor's
network, and the Company's subscribers may generally terminate their services
with the Company at will. If the Company is unable to compete with emerging
technologies or services, it may lose customers and, as a result, its business
and operating results may be materially adversely affected.
The personal telecommunications products industry is intensely
competitive and subject to rapid change. The Company believes that the principal
competitive factors affecting the markets for its products include customer
service, content, quality, price, marketing, distribution, uninterrupted service
and proprietary technology. In addition, consumer demand for particular
telecommunications products may be adversely affected by the increasing number
of competitive products from which to choose, making it difficult to predict the
Company's future success in producing personal telecommunications products for
the retail market.
RAPID TECHNOLOGICAL CHANGE. The information and telecommunications
services markets in which the Company competes 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, enhance its software and call processing platform
and achieve market acceptance of products and services based on evolving or new
technology. The Company intends 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. However,
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 in order to compete successfully in the future.
DEPENDENCE ON NEW SERVICES. The Company's operating and growth
strategies are largely dependent upon its ability to develop new services in a
timely and effective manner. Development and implementation of such services is
expected to require the Company to upgrade its existing systems, acquire new
technological and other resources and develop additional strategic
relationships. There can be no assurances that the Company will be able to meet
these needs. The Company intends to upgrade its call processing network during
calendar year 1998. However, the Company does not presently have the capital
resources necessary to complete such upgrades, nor does it have any commitments
to provide additional capital.
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. Currently,
there is no binding agreement with respect to such relationship and there can be
no assurance that such relationship will be consummated. This relationship, if
consummated, will require additional software development as well as the
installation of additional call processing platforms. There can be no assurance
when, if ever, such relationship will generate revenues for the Company.
The Company's future planned products include 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 and other future planned products. There
can be no assurance that such product will ultimately generate revenues
sufficient to offset the costs associated with the development and marketing of
any future planned product or service.
There can be no assurance that the Company will be successful in
developing and marketing service enhancements or new services in response to
technological changes, evolving industry standards or customer demands and
preferences. The Company may experience difficulties that could delay or prevent
the successful development, introduction and marketing of its services.
Additionally, to the extent the Company is able to develop new services, if at
all, there can be no assurances that such services or any 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.
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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. There can be no
assurances as to when, if ever, any of such relationships will generate revenues
or net profits for the Company. 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. The Company believes that its
strategic partner relationships may be an effective and efficient means of
marketing its products and services. Consequently, the Company's future success
is largely dependent upon 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 reduce or even eliminate their commitment to the Company in the
future. The Company's arrangements with its strategic partners do not establish
minimum performance requirements for the Company's strategic partners, but
instead rely on the voluntary efforts of these partners in pursuing joint goals.
Certain of these arrangements prevent the Company from entering into strategic
relationships with other companies in the same industry as the Company's
strategic partners, either for specified periods of time or while the
arrangements remain in force. In addition, even when the Company is without
contractual restriction, it may be restrained by business considerations from
pursuing alternative arrangements. The ability of the Company's strategic
partners to incorporate the Company's services into successful commercial
ventures will require the Company, among other things, to continue to
successfully enhance its existing services and develop new services. The
Company's inability to meet the requirements of its strategic partners or to
comply with the terms of its strategic partner arrangements could result in its
strategic partners failing to market the Company's services, seeking alternative
providers of communication and information services or canceling their contracts
with the Company, any of which could have a material adverse impact on the
Company.
DEPENDENCE ON LICENSING RELATIONSHIPS. The Company has an active
licensing relationship with one company, Switch, located in Australia. Pursuant
to this relationship, Switch is required to pay certain annual license fees in
addition to making ongoing royalty payments to the Company. Switch has paid the
one annual license 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 which became 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
license transactions. However, 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 and rapid change currently experienced in the
telecommunications industry. The inability of the Company to attract larger or
more license 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,
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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 to continually 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 ability to become successful in the future 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 the Company. The Company does not currently
maintain key person 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 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,
drastically reduced its numbers of key management, technical and operations
employees in 1997. Many of the positions that the Company eliminated are crucial
to the Company's future success and the Company will need to hire additional
personnel in order to carry out its current business plan. Competition for
persons with the skills and experience which the Company seeks is intensely
competitive, and there are no assurances that the Company can either attract or
retain the qualified personnel required to create and manage growth, nor can it
assure that it will generate revenues sufficient to offset the costs of
attracting and retaining such personnel.
DEPENDENCE ON CALL PROCESSING PLATFORM, DAMAGE, FAILURE AND DOWNTIME.
Delivery of the Company's services is dependent upon the uninterrupted service
of its call processing platform and other systems. The Company currently
maintains a single UNIX-based multi-tasking call-processing system integrated
with a Tandem database server located in Lincoln, Nebraska. See "-- Dependence
Upon Telecommunications Providers, Specifically MCI and Interact, Inc." below.
The Company has taken certain precautions to protect its systems from events
that could interrupt delivery of the Company's services including, damage that
may be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. 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.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. 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
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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.
RISKS OF INFRINGEMENT BY THE COMPANY. 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 potentially 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, SPECIFICALLY MCI AND
INTERACT, INC. 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 LECs for call origination
and termination. If there is an outage affecting the Company's terminating
carriers, the Company's call processing platform may not complete a call. The
Company has not experienced significant losses in the past because of
interruptions of service at terminating carriers, but no assurance can be made
in this regard with respect to the future integrity of such carriers. The
Company's ability to maintain and expand its business depends, in part, on its
ability to continue to obtain telecommunications services on favorable terms
from a long distance carrier and the cooperation of both interexchange and LECs
in originating and terminating service for its subscribers in a timely and
effective 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.
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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. To the extent the Company is unable to generate revenues sufficient to
offset minimum purchase requirements or other expenses, its financial condition
would be materially adversely affected.
POTENTIAL ADVERSE EFFECTS OF 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 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's access to these services could
be severely limited or available only on commercially unfavorable terms,
resulting in a material adverse impact to its business and results of
operations. 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 LECs, 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. 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 in 1998 and
potentially other countries thereafter. 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, any of 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
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without rendering payment to the Company by unlawfully utilizing the access
numbers and personal identification numbers ("PINs") of authorized users.
Although to date the Company has not experienced material losses due to such
unauthorized use of access numbers and PINs, no assurance can be given that
future losses due to unauthorized use will not be material. The Company
currently seeks to manage these risks through its internal controls and
proprietary billing system. The Company's call processing platform prohibits a
single access number and PIN from establishing multiple simultaneous connections
to the network system, and the Company establishes preset spending limits for
each subscriber. The Company also maintains a reserve for such risks. Past
experience in estimating and establishing reserves and the Company's historical
losses are not necessarily accurate indications of the Company's future losses
or the adequacy of the reserves established by the Company in the future.
Although the Company believes that its risk management practices and bad debt
reserves 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" and " -- 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 does not currently have any commitments to
provide financing and there can be no assurance that it will be able to obtain
such financing on favorable terms when needed. See "Wavetech Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
The Company may be required to seek additional financing in the event
of delays, cost overruns or unanticipated expenses associated with a company in
an early stage of development, or in the event the Company does not realize
anticipated revenues. In addition, the Company may require additional financing
in the future to further expand its product offerings or to make strategic
acquisitions. There can be no assurance that such additional financing will be
available, or that, if available, such financing will be obtainable on terms
favorable to the Company or its Stockholders. The Company currently has no
commitment for any such financing and in the event such necessary financing is
not obtained, the Company's operations will be materially adversely affected and
the Company will have to cease or substantially reduce operations. Any
additional equity financings may be dilutive to Stockholders, and debt
financings, if available, may involve restrictive covenants, including limiting
the Company's ability to incur additional debt.
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.
There can be no assurance that the Company will be successful in improving its
financial condition, and to the extent it is unsuccessful it may become
insolvent, forcing it to suspend or even cease its operations.
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NASDAQ LISTING AND MAINTENANCE REQUIREMENTS. The Company's Common Stock
is currently listed on the Nasdaq SmallCap Market ("Nasdaq"). Under the rules
for continued inclusion 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. The Company's failure to meet one or more of the financial
or corporate governance criteria to which it is subject could result in its
Common Stock being delisted from Nasdaq. See " -- Risk of Delisting" below.
RISK OF DELISTING. Upon notice of a deficiency in one or more of the
Nasdaq listing and 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 $1.00 minimum bid price requirement. The
Company has requested a hearing to appeal Nasdaq's decision to delist its Common
Stock for failure to meet this requirement. However, an unfavorable outcome of
such hearing 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. If the Company's securities were delisted
from Nasdaq (See "-- 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.
PENNY STOCK REGULATIONS. 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.
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 --
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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.
Specifically, Imagitel's future revenues are dependent upon its ability to
successfully develop, implement and market new products and services and develop
multiple methods of billing its customers. There can be no assurance that
Imagitel will be successful in addressing any of such risks and, to the extent
it is unsuccessful, its business, financial condition and results of operations
will be materially adversely affected.
FACTORS AFFECTING OPERATING RESULTS. Imagitel's revenues have grown
significantly since its inception; however there are no assurances that
Imagitel's revenues will grow significantly or not decrease in the future. For
example, during the month of May 1998, Imagitel's revenues decreased 54% to $1.7
million from $3.7 in April 1998 as a result of a temporary suspension of billing
services provided by certain third parties. Although such services have since
resumed, there can be no assurance that other similar events will not happen in
the future. See "-- Risks Associated with LEC Billing." 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 availability and
efficiency of various billing methods, 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. These and other factors
could result in a material decline in Imagitel's revenues and results of
operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. 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 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 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 LECs 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 LECs
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,
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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
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 MAJORITY STOCKHOLDERS. Imagitel's
success has historically been largely dependent upon its executive officers and
its majority stockholders, James Rautio and Bruce Robin (the "Majority
Stockholders"), 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's future success is also highly dependent upon the Majority
Stockholders. Imagitel intends to enter into certain agreements with the
Majority Stockholders pursuant to which they will be responsible for a
substantial portion of Imagitel's marketing activities. However, no such
agreements currently exist and there can be no assurances that any agreements
will ultimately be reached, or that they will be on terms favorable to Imagitel.
To the extent that the Majority Stockholders are unsuccessful in their marketing
activities, Imagitel's future revenues may be materially adversely affected. In
addition, Imagitel's future success is largely dependent upon its ability to
complete development, commence manufacture and distribution of the Bill
Zapper(TM) and TravEl Warrior(TM) products. All proprietary rights to these
products are owned by the Majority Stockholders. ImagitEl believes it will be
able to acquire ownership of these products or a license from the Majority
Stockholders to market and distribute these products. However, if Imagitel is
unable to acquire rights to ownership or a license to these products its
business and results of operation could be materially adversely affected. There
can be no assurances that Imagitel will be able to acquire these products or be
able to acquire them on favorable terms. See "-- Dependence on Key Vendors and
Independent Agents; Influence of Majority Stockholders of Imagitel" below.
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
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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
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, 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.
YEAR 2000 RISKS. Some of Imagitel's programs may have been originally
designed to recognize calendar years by their last two digits. Functions
performed using these truncated fields will not function properly using dates
from January 1, 2000 and thereafter. Imagitel has undertaken a cursory internal
investigation and believes its systems are all year 2000 compliant; however,
Imagitel has not undertaken an extensive study to determine this with greater
certainty. 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. Whenever possible, Imagitel requires its vendors to make
year 2000 compliance assurances. However, many of Imagitel's vendors and much of
the telecommunications industry and infrastructure upon which Imagitel depends
both directly and indirectly continue to operate older generation systems that
may not be year 2000 compliant. To the extent that any third parties' systems
upon which Imagitel depends are not able to properly recognize dates beyond
December 31, 1999, Imagitel's business could experience errors, disruptions or
complete cessation of operations. As a result, Imagitel's business and results
of operations could be materially adversely affected. See "Imagitel Management's
Discussion and Analysis of Financial Condition and Results of Operations".
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. Imagitel's future growth
strategy may require 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, unbillable accounts, incorrect 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 PINs 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 practices and bad debt
reserves are adequate, there can be no assurance that Imagitel's risk management
practices or reserves will be sufficient to protect Imagitel from unauthorized
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or returned transactions or thefts of services which could have a material
adverse effect on Imagitel's business, operating results and financial
condition.
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 or, if consummated that it will be able to
successfully integrate and profitably operate any such acquired business.
NEED FOR ADDITIONAL FINANCING. Imagitel has significant cash
requirements in connection with its business. To date, Imagitel has been able to
generate sufficient funds to cover the cost of its growth through capital
investments by the Majority Stockholders and internal resources. 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. Historically, Imagitel has financed
its immediate working capital needs by borrowing against certain eligible
receivables. All of such financing has been provided to date by Receivables
Financing Corporation ("RFC"). However, there can be no assurances that RFC will
continue to provide such financing in the future. Although Imagitel believes
there exist alternative sources of receivables or other financing, there can be
no assurances that any such financing will be available when needed on
commercially reasonable terms.
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 may have to 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. Imagitel has no prior experience implementing such a plan and there are a
number of inherent risks associated with this plan. For example, Imagitel must
attract, screen and retain a substantial number of 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 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. To the extent
Imagitel is unable to successfully implement its growth strategy, it may be
unable to recoup its expenses associated with such implementation efforts and
its business and financial condition may be materially adversely affected.
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
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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. During May 1998, Imagitel experienced
a temporary suspension of billing services by Bell Atlantic, which resulted in a
54% decrease in revenues for such period as compared to the month immediately
prior to such suspension. Although Imagitel believes it has adequately addressed
the circumstances that resulted in such suspension, there can be no assurance
that Imagitel will not experience similar suspensions or complete termination of
service in the future. See " -- Risks Associated with LEC Billing". 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 carriers and LECs 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 business of Imagitel
cannot be predicted.
RISKS ASSOCIATED WITH LEC BILLING. Historically, Imagitel has been
entirely dependent upon LECs for billing customers of its Consumer Access(TM)
program, which has generated all of Imagitel's revenues to date. In May 1998,
Imagitel entered into certain arrangements with such LECs which limit their
continued billing services solely to those Consumer Access(TM) customers which
existed as of April 1998, subject to an absence of significant customer
complaints. In addition, billing services by the LECs of customers of any future
service offered by Imagitel will be subject to the prior approval of such LECs
of Imagitel's marketing practices in connection therewith. Imagitel is
undertaking new marketing initiatives that are intended to lessen its reliance
on LEC billing. See "Risks of New Marketing Efforts." However, Imagitel
anticipates that it will continue to be significantly dependent upon LEC's to
provide billing services for the foreseeable future and should Imagitel be
unable to bill and collect from its customers through some or all LECs, it could
have catastrophic consequences on the financial condition of Imagitel.
Imagitel bills its revenue generated from the Consumer Access(TM) card
through the individual LECs 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 multiple LECs,
including 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 1997 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
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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'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 all taken without notifying Imagitel, Imagitel's third
party billing agent, or even Bell Atlantic's own customers. This cumulative
billing by Bell Atlantic has resulted in a loss of revenue as numerous consumers
requested cancellation of their accounts and refunds. Imagitel believes that the
substantial majority of potential refunds have been already granted and that the
the most significant remaining issue is the potentially large number of
complaints that may be made in the future to Bell Atlantic, various state and
federal regulators and to Imagitel's own customer service department as a result
of this error in timely billing.
In late April, 1998, Imagitel was notified that Bell Atlantic (which
includes Nynex) had ceased to bill Imagitel's Consumer Access(TM) customers.
Although Imagitel was able to negotiate the resumption of such billing services
by Bell Atlantic, Imagitel's revenues during the period in which such services
were suspended were approximately $2.0 million less than anticipated for such
period. As a result of the suspension by Bell Atlantic of its billing services
to Imagitel's customers, Imagitel suffered a loss of approximately $2 million in
revenues during the period that such service was suspended. Imagitel believes it
has adequately addressed the issues which resulted in suspension of Bell
Atlantic's services and Bell Atlantic has agreed to resume its billing services
related to those customers of Imagitel prior to April 1, 1998. However, there
can be no assurance that Bell Atlantic or any other LEC billing company may not
suspend services to the Company in the future. Customer billings generated by
Bell Atlantic have historically represented approximately 30% of Imagitel's
overall revenues (or approximately $1.4 million per month). A future suspension
of services by Bell Atlantic, even temporary, could have a material adverse
effect upon Imagitel's financial condition and results of operations.
Other LECs are also taking various actions relating to LEC billing that
could have an adverse impact on Imagitel's ability to operate. Both Southwestern
Bell and Billing Concepts ("USBI") ceased in May, 1998 to provide billing
services on behalf of Imagitel for "miscellaneous records", which currently
comprise the majority of Imagitel's revenues. USBI, which has historically
represented approximately 70% of monthly revenues to Imagitel, has since resumed
its billing activities in behalf of Imagitel. However, Imagitel has been unable
to successfully negotiate the resumption of billing activities by Southwestern
Bell. Southwestern Bell's billing activities had historically represented less
than $200,000 in monthly revenues to Imagitel. There can be no assurance that
Imagitel will be successful in its negotiations with Southwestern Bell or that
USBI will not in the future cease to provide billing services on behalf of
Imagitel. Although there do currently exist alternative LEC billing companies,
it is unlikely that Imagitel would be able to use their services for billing of
its existing customers. As a result, to the extent that USBI were in the future
to suspend, even temporarily, its billing services to Imagitel, Imagitel's
financial condition and results of operations would be materially adversely
effected.
Several other LECs have carried on internal investigations into
Imagitel's marketing practices. Imagitel believes that the investigated
activities are proper and, 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.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. 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. The Majority Stockholders of Imagitel have indicated that they intend to
grant Imagitel an exclusive North American and non-exclusive worldwide license
for its Travel Warrior(TM) and Bill Zapper(TM) 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. 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. 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
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competitors will not independently develop similar technology. 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.
RISKS OF INFRINGEMENT. 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 MAJORITY
STOCKHOLDERS OF IMAGITEL. Imagitel's success in marketing its products and
services has historically been largely dependent upon the efforts of its
independent agent network which is managed by four master agents (see
"Description of Imagitel, Inc. -- Existing Products"). These relationships were
established by the Majority Stockholders who receive substantial commissions for
having developed the current marketing program. Additionally, these same
Majority Stockholders own all of the rights and title to the Bill Zapper(TM) and
Travel Warrior(TM) technology and will receive various royalties based upon the
future sales of these units by Imagitel. Imagitel currently has an oral contract
which governs the future provision of services by the master agents for the
benefit of Imagitel. The contract calls for a one-time payment for each accepted
order, with a small ongoing monthly commission after the customer has been
active for more than 90 days. The contract may be terminated at will by either
party. Although 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
those 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
yield projected sales volume, and could result in a decreased level of service,
service delays or interruptions. As a result of these and other factors, each of
which are beyond the control of Imagitel, the loss of services by one or more of
the master agents or the Majority Stockholders could have a material adverse
effect on Imagitel's business and results of operations. Imagitel believes that
its continued success will depend to a significant extent upon the efforts and
abilities of these agents and Majority Stockholders and other key personnel.
Imagitel does not have a contract that governs the continued services of the
Majority Stockholders. Additionally, the Majority Stockholders 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 does not believe the Majority Stockholders intend to seek
board seats nor executive positions within the Reorganized Parent. See "-- Risks
Associated with the Reorganization and the Reorganized Parent -- Influence of
the Majority Stockholders of Imagitel".
RISKS ASSOCIATED WITH LITIGATION AND CERTAIN REGULATORY ACTIONS. In
September 1997, RRV Enterprises, Inc., a Texas corporation and a subsidiary of
Imagitel ("RRVE"), 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 Arkansas, Florida, Idaho, Kansas, Michigan, New Jersey, North
Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, 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 RRVE . RRVE made a Unified Response to the
states' demands on October 31, 1997 and is cooperating with the states in their
investigation. However, RRVE objected to producing certain information which it
might ultimately have to disclose if ordered to do so by a court. RRVE's sale of
telecommunications services in these states comprises a significant portion of
its revenue. In the event these states obtain a restriction on RRVE'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, RRVE 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 that office. This agreement was entered into to satisfy that state's
objections to RRVE's applications for certification in the State of Illinois.
RRVE was certified shortly thereafter in 1997.
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In early March 1998, RRVE 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 RRVE to
temporarily cease the use of sweepstakes marketing in Missouri. RRVE 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 RRVE will be allowed to
continue marketing or servicing its existing customers in Missouri. Customers in
Missouri do not currently constitute a substantial component of RRVE's customer
base. RRVE has agreed to no longer market its products in Missouri with the use
of a sweepstakes promotion, until such time as RRVE and the State of Missouri
reach a settlement on this matter. In the meantime, RRVE is continuing to
service and bill its existing customer base in Missouri. The State of Missouri
is seeking recision of all contracts in that state in addition to substantial
monetary damages. Imagitel does not believe there exists a substantial
likelihood that Missouri will prevail in this action; however there can be no
assurances in this regard. If Imagitel is unsuccessful in defending itself
against such allegations, the damages assessed against it are likely to exceed
its resources and, as a result, Imagitel will likely become insolvent, and be
forced to cease its operations.
In April 1998, the West Virginia Attorney General's Office filed suit
against RRVE alleging, among other things, deceptive trade practices and sought
injunctive relief barring it from marketing, providing services or billing any
consumers within the State of West Virginia. RRVE entered into a voluntary
agreement with the State of West Virginia that allows RRVE to continue servicing
and billing its existing customer base, but requires RRVE to cease marketing its
products with its existing sweepstakes program. RRVE 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 West Virginia.
However, there can be no assurance that RRVE will be allowed to continue
marketing or servicing its existing customers in West Virginia. Customers in
West Virginia do not currently constitute a substantial component of RRVE's
customer base. The State of West Virginia is seeking recision of all contracts
and substantial monetary damages. Imagitel does not believe there exists a
substantial likelihood that West Virginia will prevail in this action, however
there can be no assurances in this regard. If Imagitel is unsuccessful in
defending itself against such allegations, the damages assessed against it are
likely to exceed its resources and, as a result, Imagitel will likely become
insolvent, and be forced to cease its operations.
In 1997, the State of Florida conducted an investigation into the
business practices of D.D.D. Calling, Inc., a subsidiary of Imagitel ("DDD"),
relating to its Consumer Access(TM) 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 seeking a
restrictive cease and desist order and the payment of penalties.
In addition to the matters described above, 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. Imagitel has not made reserves against any potential
damages which may be assessed against it as a result of a successful regulatory
action or litigation related thereto. To the extent such damages, if any, were
to exceed Imagitel's available cash, Imagitel's business and financial condition
would be materially adversely affected.
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 company's services and/or its 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
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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 its compliance with such laws, including those discussed above. See
also "-- Risks Associated with Sweepstakes Marketing Operations" below.
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.
RISKS ASSOCIATED WITH SWEEPSTAKES MARKETING OPERATIONS. Until May 1998,
Imagitel marketed its 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 which was until May 1998 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 program is currently registered in those states by Imagitel.
Effective May 1, 1998, Imagitel has suspended all of its sweepstakes marketing
activities, however, it intends to conduct a prize drawing in connection with a
previously initiated sweepstakes marketing program. There can be no assurances
that Imagitel will not in the future be subject to consumer complaints and
regulatory actions related to prior sweepstakes marketing activities.
RISKS OF CRAMMING ALLEGATIONS. Companies which operate businesses
similar to that of Imagitel are frequently subject to allegations of "cramming".
Cramming refers to the practice of subscribing a customer to a
telecommunications services without such customer's express authorization and
including charges for such services on the customer's local phone bill, which
often go unnoticed. Although Imagitel conducts its business in a manner intended
to avoid even unintentional "cramming" activities, there can be no assurance
that it will not, nonetheless, be subject to allegations of cramming practices.
Imagitel's practice is to only process written orders signed by its customers.
It then submits such orders to a 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 to which the customer has already
agreed 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 of what they signed because
they had not read the order form. The nature of Imagitel's operations may make
it susceptible in the future to unfounded allegations of the practice of billing
consumers on their LEC bills without their permission. 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. The costs associated with
defending itself against such allegations, even if unfounded, may be significant
and could result in a loss of customers, reduced revenues and other material
adverse effects upon Imagitel's business and results of operations.
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During the month of April 1998, several news shows, along with
newspapers, ran stories on the unscrupulous practices of "cramming." The media
pressure induced by this increased coverage has prompted many LECs to reevaluate
their third party billing practices. It is this reevaluation that Imagitel
believes prompted Bell Atlantic to temporarily suspend billing the Consumer
Access(TM) customers. There can be no assurances that Imagitel will not Be
subject to negative reactions of its customers, LEC's or others to unfavorable
publicity of Imagitel's industry and business, even if unrelated to Imagitel. To
the extent Imagitel is subject to any such negative reactions, its business
could be materially adversely affected.
RISKS OF NEW MARKETING EFFORTS. Effective May 1998, Imagitel undertook
certain actions to lessen its dependence on both LEC billing and sweepstakes
marketing. Imagitel ceased all sweepstakes marketing and began attempts to
replace it with non-sweepstakes marketing. It is Imagitel's belief that
non-sweepstakes marketing will be less subject to investigation by the various
state and federal regulators, state and federal attorney generals and the LECs.
However, that belief is based upon speculation and the change may have little or
no effect. As a result, Imagitel's future revenues and operations are dependent
upon the success of its planned future products, the Bill Zapper(TM) and Travel
Warrior(TM), and other previously planned marketing channels. In addition,
Imagitel is also working to introduce credit card and direct billing for its new
customers as a means to lessen its reliance on LEC billing. However, Imagitel
does not currently have these systems in place and may lack the resources to
implement such billing mechanisms. There can be no assurances that the new
products and services and alternate means of billing and collection from
customers will achieve market acceptance, and as a result, Imagitel's financial
condition may be materially adversely affected.
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 and 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 the Majority
Stockholders may prevent or delay certification in certain states, including the
State of California. The Majority Stockholders have previously served as
principals and/or controlling stockholders of other entities that were or are
the subject of various state investigations. One such entity, R & R Ventures
Ltd. ("R & R"), which is not directly affiliated with Imagitel, is owned by the
Majority Stockholders, and is currently under investigation for deceptive
marketing practices in California. Since the Majority Stockholders will own a
controlling portion of the outstanding capital stock of the Reorganized Parent,
Imagitel believes that its affiliation with the Majority Stockholders may 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. See "Dependence on Key Management and Majority Stockholders" and
"--Dependence on Key Vendors and Independent Agents; Influence of Majority
Stockholders" above and "-- Risks Associated with the Reorganization and the
Reorganized Parent -- Influence of Majority Stockholders of Imagitel" below. IV.
RISKS ASSOCIATED WITH THE REORGANIZATION AND THE REORGANIZED PARENT
Notwithstanding the belief of the respective Board of Directors of
Wavetech and Imagitel as to the potential benefits to their stockholders of the
Reorganization, stockholders should realize that there may be certain negative
consequences of the Merger. Stockholders should consider carefully certain
effects of the Reorganization, 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 conducting the day-to-day business 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
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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 existing
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 Reorganization 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 Reorganization 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
Reorganized Parent's sales of its services will depend to a large degree on
Reorganized Parent's ability to realize the benefits of the relationship
contemplated by the Merger and the integration of Imagitel's operations with
those of Wavetech. Substantial attention and a high level of coordination from
the management of both Wavetech and Imagitel will be required to realize the
anticipated benefits of the relationship. The diversion of the attention of
Reorganized Parent's management from other aspects of Reorganized Parent's
business, and any difficulties encountered in the implementation process, could
have an adverse impact on the revenues and operating results of Reorganized
Parent. 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
Reorganized Parent following the Merger will be superior to what would have been
achieved by Wavetech and Imagitel separately if the Merger had not been
consummated.
RISKS ASSOCIATED WITH INTEGRATING NEW TECHNOLOGY. The success of the
Reorganized Parent will be largely dependent upon its ability to incorporate the
differing products, services and technologies currently associated with the
Company and Imagitel. 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 anticipated increases in customer use following the Merger.
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.
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
qualified to manage the future business and operations of the Reorganized
Parent, 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 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 the
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. A
reduction in future earnings per share or an increase in Wavetech's loss per
share could result in a decline in the market price of Wavetech Common Stock.
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 stockholders will face dilution of their existing
investment in the Company.
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INFLUENCE OF MAJORITY STOCKHOLDERS OF IMAGITEL. The two Majority
Stockholders of Imagitel will receive approximately 90% of the Merger Shares
representing, in the aggregate, approximately 62% of the Company's Common Stock
to be outstanding immediately following the Effective Time. As a result, the
Majority Stockholders 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. In addition, Imagitel is currently seeking to
enter into certain agreements with the Majority Stockholders prior to the
Effective Time which will survive the Merger. Although the terms of such
agreements have not been determined and there can be no assurances that any
agreement will be reached, it is anticipated that they will include an
obligation to pay substantial commissions to the Majority Stockholders following
the Effective Time. However, Imagitel does not believe the Majority Stockholders
intend to seek board seats nor executive positions within the Reorganized
Parent.
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PROPOSAL ONE:
APPROVAL OF ISSUANCE OF WAVETECH COMMON STOCK
PURSUANT TO REORGANIZATION AGREEMENT
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 provider of long distance services. To
date, Wavetech has provided such services primarily through post-pay calling
cards. Imagitel is a switchless carrier and reseller of long distance and
enhanced telecommunications services.
BACKGROUND
On October 6, 1997, James Gambrell, President of Imagitel, contacted
Gerald Quinn, President of Wavetech, to suggest that Imagitel and Wavetech
consider the possibility of a business combination. Mr. Gambrell made the same
suggestion to the chairman of a third company by telephone the following week to
discuss the possibility of a three-way business combination. This third party
ultimately decided not to participate in any proposed combination. The
conversations were very general in nature and did not include any proposals with
respect to a specific price (or range of prices) or structure for any such
transaction. A number of months earlier, Mr. Gambrell had suggested to Mr. Quinn
the possibility of an unspecified strategic transaction involving the two
companies.
On October 23, 1997, representatives of Imagitel met in Dallas, Texas
to continue their discussions of a possible combination. Each management group
presented in general terms its respective business strategies. The discussion
also included the strategic advantages of the combination of the two companies.
In particular, the potential for the combination to enhance the access to
capital markets of the two companies to finance anticipated growth as well as
certain operational efficiencies resulting from the use of a common network call
processing platform and other efficiencies was discussed. As a result of these
discussions, certain members of the management of Wavetech and Imagitel agreed
to commit to a process by which the companies would complete reciprocal due
diligence and negotiate the terms of a definitive merger agreement. It was
further agreed that upon satisfactory negotiation of all necessary agreements,
Wavetech and Imagitel would establish the price/exchange ratio for such merger
which would provide a premium over the then current market price of Wavetech
Common Stock. Representatives of Imagitel and Wavetech met several times to
discuss the specific terms on which a transaction would take place.
Specifically, the Conversion Ratio was determined by reference to the price at
which Wavetech Common Stock had historically traded as well as the relative
contributions by Wavetech and Imagitel to the revenues of the Reorganized
Parent. On January 5, the Board of Directors of Wavetech approved the proposed
terms of the Reorganization Agreement and the execution of the Reorganization
Agreement. On January 5, 1998, Imagitel and Wavetech executed the Reorganization
Agreement.
In May 1998, Imagitel's revenues decreased dramatically as a result of
the unanticipated suspension of billing services by certain LECs as well as the
termination of its sweepstakes marketing activities. In light of this material
change, representatives of Wavetech and Imagitel met several times during the
first two weeks of June 1998 to negotiate certain amendments to the
Reorganization Agreement, including a changed Conversion Ratio. On June 15,
1998, Imagitel and Wavetech amended the Reorganization Agreement to provide for
a fixed Conversion Ratio of 32.99 shares of Wavetech Common Stock for each share
of Imagitel Common Stock.
RECOMMENDATION OF WAVETECH BOARD OF DIRECTORS
THE WAVETECH BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED
REORGANIZATION AND BELIEVES THE REORGANIZATION IS IN THE BEST INTERESTS OF
WAVETECH AND ITS STOCKHOLDERS. ACCORDINGLY, THE WAVETECH BOARD UNANIMOUSLY
RECOMMENDS THAT WAVETECH STOCKHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE OF UP TO
7,922,861 SHARES OF WAVETECH COMMON STOCK PURSUANT TO THE REORGANIZATION
AGREEMENT.
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In reaching their decision, the Board of Directors of Wavetech
considered, with the assistance of management and 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 savings;
(iii) the skills and experiences of Imagitel personnel and their
ability to further strengthen Wavetech's management and
telecommunications operations;
(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., L.P. that as of the date thereof
the Conversion Ratio was fair, from a financial point of view,
to Wavetech and its Stockholders.
Certain of these factors are discussed more in depth below.
HISTORICAL REVENUES AND EXISTING CUSTOMER BASE. Imagitel had revenues
of $6 million in 1996 and revenues of $42 million and approximately $3 million
in net profit in 1997. Imagitel's customer base consisted of approximately
500,000 individual cardholders as of June 15, 1998, each of whom pays an average
of $4.50 a month for the calling card services. Wavetech concluded that
Imagitel's cardholder retention, based on a thorough analysis of the cardholder
base, is higher than the 1+ long distance companies. This is due to a
well-developed consumer benefit program which offers each cardholder
considerable discounts on a multitude of non-telecommunications services and
products each month. The Board felt strongly that once combined with Wavetech,
Imagitel could bring considerable value to the Stockholders and the prospect of
continuing growth in both revenues and earnings. Additionally, Imagitel's
customer base would provide a significant potential market for Wavetech's
enhanced calling card services.
EXISTING INFRASTRUCTURE OF MARKETING RESOURCES. Wavetech through its
Interpretel, Inc. subsidiary has significant technical capability and owns its
own intelligent call processing platforms or switches along with proprietary
billing and customer record systems. It does not, however, possess any
significant marketing or promotional capability. Nor does Wavetech presently
have the financial and personnel resources to market and promote its services
appropriately in the marketplace. The Company has been unsuccessful in its
marketing efforts resulting in losses to date. Imagitel, on the other hand,
which has no platforms, switches or enhanced calling card services, has
significant experience in marketing and promoting telecommunications services.
Wavetech's Board of Directors was particularly attracted to Imagitel's developed
marketing infrastructure, which includes customer service facilities and its own
call center. Combining these marketing resources with the Wavetech switches,
customer billing and record keeping systems as well as Wavetech's credit card
billing capability, are expected to be quickly integrated, although there can be
no assurances in this regard.
COMPLEMENTARY BUSINESS. One of the most appealing factors to the
Wavetech Board in approving the Reorganization was the fact that Imagitel is in
the same business as Wavetech -- the post-paid calling card business. Although
the Wavetech products, which are developed and offered to consumers through its
Interpretel, Inc. subsidiary, are more sophisticated and technically more
advanced than those of Imagitel, the consumer benefit programs designed by
Imagitel to attract and retain customers have been successful in that regard to
date. As a benefit of having a Consumer Access(TM) calling card from Imagitel's
RRVE subsidiary, cardholders are offered a host of other consumer benefits
besides long distance telephone services. Cardholders are entitled to discounts
on a variety of non-telecommunications services and products.
COST SAVINGS. In addition to the synergies mentioned above, the
Reorganization has the potential to result in certain operational cost savings.
The operations will be located at the Imagitel facility in Houston, Texas, thus
allowing the Tucson operation of Wavetech to be shut down. By using the Wavetech
call processing platforms to carry the Imagitel long distance telephone traffic,
the immediate need for Imagitel to acquire its own equipment would be
eliminated. In addition, Imagitel will not be required to develop its own new
enhanced calling card products, but rather can simply incorporate those of
Wavetech which already exist. Wavetech will not be required to build an
independent marketing infrastructure since Imagitel currently possesses such
resources. Wavetech's Board believes that these anticipated cost savings will
permit the Reorganized Parent to devote additional capital to its growth
strategy, such as acquisitions and expansion of its operations into new
telecommunications markets.
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In evaluating the proposed number of shares of Wavetech Common Stock to
be issued in connection with the Merger, the Wavetech Board of Directors
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, and
business operations of 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. RISKS ASSOCIATED
WITH THE MERGER
The Board also considered a number of risks associated with the Merger,
including: (i) the potential decline in Imagitel's revenues, (ii) the negative
implications of sweepstakes marketing, (iii) the disruption or suspension of
established billing procedures, (iv) the uncertainty of new product development,
(v) the increased risks of litigation, (vi) dilution to existing shareholders,
and (vii) Imagitel's dependence on its distribution network.
UNCERTAINTY OF FUTURE IMAGITEL REVENUES. One of the primary benefits
Wavetech anticipated to result from the Reorganization is an increase in
revenues. However, Imagitel's ability to sustain its existing revenues is
subject to a substantial degree of uncertainty. This risk was demonstrated by
the substantial decline in revenues experienced as a result of the suspension by
certain LECs to provide billing services in May 1998, as well as Imagitel's
decision to suspend its sweepstakes marketing activities effective May 1, 1998
in part, due to significant adverse publicity associated with such activities in
general. Although most of the LEC billing activities have since resumed,
Imagitel will need to introduce alternative marketing practices in order to
replace revenues generated through its sweepstakes marketing activities.
Imagitel does not have experience with such marketing activities and, as a
result, there can be no assurances that Imagitel's future revenues will be
comparable to its historical performance. In addition, Imagitel's business is
substantially dependent upon LECs to bill its customers. There can be no
assurances that one or more LECs will not in the future cease to perform billing
services on behalf of Imagitel. See "Risk Factors--Risks Associated with LEC
Billing."
NEGATIVE IMPLICATIONS OF SWEEPSTAKES MARKETING. Sweepstakes marketing
involves the solicitation and enrollment of new cardholders in calling card
services through the use of prizes awarded as part of a regular draw.
Sweepstakes marketing has come under considerable criticism over the past few
years because of the fraudulent activities of a number of unscrupulous
operators, particularly in the publishing business. State authorities have begun
investigating organizations involved in sweepstakes marketing to identify
potentially fraudulent activities. Imagitel has not been immune from these state
investigations. Imagitel's prior sweepstakes marketing practices have been
questioned in many states. Imagitel believes that to date, it has not been found
to engage in deceptive practices and has practiced full disclosure with
potential cardholders. Imagitel has ceased its sweepstakes marketing program and
has commenced introduction of alternative marketing methods. However, the
Reorganized Parent could, in the future, be subject to consumer complaints or
regulatory actions related to Imagitel's prior marketing practices.
UNCERTAINTY OF NEW PRODUCT DEVELOPMENT. Much of the anticipated growth
in Imagitel revenues is expected to result from new products currently planned
for introduction, such as the products being launched by the Imagitel
subsidiary, ZAPCOM International, Inc. ("ZAPCOM"). ZAPCOM products include the
"Bill Zapper(TM)" which is a telecommunications routing device for use in the
home or office, and the "Travel Warrior(TM)" which is a telecommunications
routing device for use while traveling. The Majority Stockholders, who own these
products, have filed applications for patents protection of these products.
These products will offer consumers an opportunity to enjoy discounted long
distance telephone calls. Both products simply plug into the telephone jack on a
wall and then are connected to the telephone. Both units can be programmed to
allow access to different long distance services . The units are about the size
of a computer mouse, are completely line-driven (no separate electrical power is
required) and have been in testing for several months. Neither of these devices
require that subscribers change their existing carriers. It is anticipated that
these products will be available for distribution in the summer of 1998. While
the Board of Wavetech was concerned that these new products may not work, the
results of testing indicate that they are functionally viable products that can
be offered at a competitive price. Patent infringement was another concern of
the Board but Wavetech management does not believe that these products will
infringe the proprietary rights of any third party based upon its knowledge of
other similar products currently available.
INCREASED RISK OF LITIGATION. The Wavetech Board was concerned about
litigation pertaining to the sweepstakes marketing practices of the Imagitel
subsidiary, RRVE. Litigation challenges have focused on sweepstakes marketing
and practices indirectly related to sweepstakes marketing and related
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promotions. None of the litigation challenges have been successful and to date,
RRVE believes it meets all applicable customer service standards and practices
required by state and federal laws and licensing boards. See "Risk Factors --
Risks Associated with Sweepstakes Marketing Operations."
DILUTION OF THE SHARES OF WAVETECH STOCKHOLDERS. The Wavetech Board was
concerned about the potential dilution to its Stockholders' as a result of the
Merger. The present Wavetech Stockholders would own approximately 30% of the
Reorganized Parent, while the Imagitel stockholders would own approximately 70%.
Imagitel's Majority Stockholders would end up controlling approximately 60% of
the Reorganized Parent. It was important for the Board of Wavetech to ensure
that the present Wavetech Stockholders received a fair consideration as a result
of the Merger. The Wavetech Board determined that the dilution to its
shareholders was fair if there were sufficient revenues from Imagitel to support
a reasonable per share value thus justifying the respective share ownership
percentages of the two companies post-Merger. It was determined, with the help
of Kaufman through a fairness opinion, that the Stockholders of Wavetech would
receive a fair deal financially in the Merger of the two companies.
REDUCTION OF CONTROL BLOCK AND PUBLIC FLOAT. Subsequent to completion
of the one-for-six Reverse Split and the Merger, the Board of Wavetech felt it
would be in the best interests of their stockholders for the Majority
Stockholders in Imagitel to reduce their aggregate holdings by up to 30% in
order to broaden the stockholder base of the Reorganized Parent and increase the
public float. This was a concern to the Wavetech Board and consequently the
Majority Stockholders have agreed to sell some of the Merger Shares which they
will receive through a private placement of their common stock following the
Reorganized Parent, however, potential purchasers for such shares have not yet
been identified and none of the terms of such sale have been determined. See
"The Merger -- Resale of Wavetech Common Stock to be Issued in the Merger".
DEPENDENCE ON DISTRIBUTION NETWORK. An issue of concern to the Wavetech
Board was the potential for losing the product distribution networks of Imagitel
post-Merger if one of the Majority Stockholders of Imagitel decided not to be
involved in the marketing activities of the Reorganized Parent. Although such
Majority Stockholder is not currently subject to any contractual obligation to
continue providing such services, Imagitel has endeavored to use its best
efforts to secure his services after the Effective Time. However, there can be
no assurances in this regard. See "Risk Factors -- Risks Associated with
Imagitel -- Dependence on Key Vendors and Independent Agents; Influence of
Majority Stockholders of Imagitel".
The foregoing discussion of information and factors considered by the
Wavetech Board is not intended to be exclusive but is intended to highlight the
material factors considered. In view of the large number of factors considered,
the Wavetech Board did not find it practical to, and did not, quantify or
otherwise assign relative weights to the specific factors considered. Individual
directors may have nonetheless attributed different weights to various factors.
OPINION OF KAUFMAN BROS., L.P.
Wavetech has engaged Kaufman to render its opinions with respect to the
fairness, from a financial point of view, to the Stockholders of Wavetech of the
Conversion Rate.
On April 1, 1998, Kaufman delivered its opinion, dated as of April 1,
1998, to the Board of Directors of Wavetech, which opinion contained the
financial and comparative analyses described below. On June 15, 1998, Kaufman
reissued an amended opinion which considered certain changes to the terms and
conditions upon which the Reorganization would occur as agreed to by the parties
pursuant to Addendum No. 1 to the Reorganization Agreement.
THE FULL TEXT OF THE AMENDED KAUFMAN OPINION IS ATTACHED HERETO AS
EXHIBIT II. WAVETECH STOCKHOLDERS ARE URGED TO READ THE KAUFMAN OPINION
CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS
CONSIDERED, PROCEDURES FOLLOWED AND THE LIMITS OF KAUFMAN'S REVIEW. THE SUMMARY
OF THE KAUFMAN 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.
The Kaufman opinion was prepared for the use and benefit of the
Wavetech Board of Directors in connection with its consideration of the Merger.
The Kaufman opinion is directed solely to the fairness of the Conversion Ratio
from a financial point of view and does not constitute a recommendation to any
Stockholder of Wavetech as to how such Stockholder should vote at the Wavetech
Annual Meeting, nor does it constitute an opinion as to the price at which the
Common Stock of the Reorganized Parent will actually trade at any time. Kaufman
was not requested to opine as to, and its opinions do not address, Wavetech's
underlying business decision to proceed with or effect the Merger. Kaufman was
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not requested to and did not make any recommendation to the Wavetech Board of
Directors as to the form and amount of the consideration to be received by the
Wavetech Stockholders as a result of the Merger, which was determined through
arm's length negotiations between the parties. No limitations were imposed by
Wavetech on the scope of Kaufman's investigation or the procedures to be
followed by Kaufman in rendering its opinion.
In arriving at its opinion, Kaufman assumed and relied upon the
accuracy and completeness of the financial and other information used by Kaufman
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the managements of the
Company and Imagitel that they are not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the
financial projections of Imagitel, upon the advice of Imagitel, Kaufman assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgment of the management of Imagitel as to
the future financial performance of Imagitel and that Imagitel will perform
substantially in accordance with such projections. Under the advice of Wavetech
and its legal and accounting advisors, Kaufman assumed that the Merger will
qualify as a reorganization within the meaning of Section 368(a) of the Code and
therefore, as a tax-free transaction to the Stockholders of Wavetech. The
Kaufman opinion was necessarily based upon market, economic and other conditions
as they existed and to the extent they could be evaluated as of the date of the
Kaufman opinion. It should be understood that, although subsequent developments
may have affected its opinion, Kaufman is not obligated to update, review or
reaffirm its opinion.
In rendering its opinion, Kaufman reviewed and analyzed (i) the
Reorganization Agreement; (ii) the Form 10-KSB dated August 31, 1997, the Form
10-QSB dated February 28, 1998, the Form 10-QSB dated November 30, 1997 and the
Form 10-KSB dated August 31, 1996 and the Addendum thereto for the Company;
(iii) the draft Proxy Statement prepared in connection with the 1998 Annual
Meeting of the Company's Stockholders (the "Draft Proxy Statement") and the
audited 1997 and 1996 financial statements for Imagitel and the pro forma
combined financial data for the Company and Imagitel contained herein and such
other information concerning the Company and Imagitel as Kaufman believed to be
relevant to its analysis; (iv) financial and operating information with respect
to the business, operations and prospects of the Company and Imagitel, furnished
to Kaufman by the Company and Imagitel respectively; (v) trading histories of
the Company's Common Stock and a comparison of those trading histories with
those of other companies that Kaufman deemed relevant; and (vi) a comparison of
the historical financial results and present financial condition of the Company
and Imagitel with those of other companies that Kaufman deemed relevant. In
arriving at its opinions, Kaufman did not conduct a physical inspection of the
properties and facilities of the Company and only conducted a physical
inspection of the Houston facility of Imagitel. Kaufman did not make or obtain
any evaluations or appraisals of the assets or liabilities of the Company or
Imagitel. In addition, Kaufman had discussions with the managements of the
Company and Imagitel concerning their respective businesses, operations, assets,
financial conditions, prospects and potential strategic benefits from a
combination of the businesses of the Company and Imagitel, and undertook such
other studies, analyses and investigations as Kaufman deemed appropriate.
The following is a summary of the material analysis performed by
Kaufman in connection with providing its opinion:
DISCOUNTED CASH FLOW ANALYSIS. Kaufman performed a discounted cash flow
analysis based on certain limited financial information for Imagitel for 1998
provided by Imagitel's management. Kaufman extended this projection forward by
making certain assumptions to derive a projected stream of after-tax cash flows
through the year 2000.
Kaufman discounted to present value the projected stream of after-tax
cash flows and the terminal year value (the "Terminal Value") of the business.
The Terminal Value for the discounted cash flow analysis of the projections was
based upon a range of 1 to 1.5 times projected revenue for fiscal year 2000.
Kaufman used discount rates ranging from 40 to 60 percent, which were chosen
based on factors such as the current level of inflation and interest rates, the
inherent business risk of Imagitel and the telecommunications services industry
as a whole, and the cost of capital to Imagitel. These assumptions produced
present values ranging from approximately $22 million to $45 million.
COMPARABLE COMPANY ANALYSIS. The comparable publicly traded company
analysis involves the review of companies deemed comparable to Wavetech. For the
Company, Kaufman compared the historical financial and stock market performances
of certain publicly traded companies that it considered relevant with the
historical financial and stock market performance of the Company, based upon
information provided to Kaufman by the management of the Company and information
that was publicly available. The companies that Kaufman included as comparable
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telecommunications companies were Premiere Technologies, Inc., SmarTalk
TeleServices, Inc., DigiTEC 2000, Inc., Executive TeleCard, Ltd., Global
Telecommunications Solutions, Inc., and DCI Telecommunications, Inc. (the
"Comparable Companies"). Kaufman also compared the historical financial
performance of the Comparable Companies to the historical financial performance
of Imagitel.
Based upon publicly available information, Kaufman compared the price
performance of the Company's Common Stock from May 29, 1997 to June 15, 1998 to
that of an index comprising the Comparable Companies with meaningful trading
data. Using May 29, 1997 as the base of 100 percent, on March 30, 1998, the
price of the Company's Common Stock was 161.5 percent of the base value,
compared to 55.5 percent for the Comparable Companies. Because of the inherent
differences between the business, operations and prospects of the Company and
the businesses, operations, and prospects of the Comparable Companies, Kaufman
believes that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analyses, but rather also made qualitative judgments
concerning differences between the financial and operating characteristics and
prospects of the Company and the Comparable Companies that would affect the
public trading values of each.
QUALITATIVE FACTORS. In performing its analysis, Kaufman has taken into
account a number of significant qualitative factors relating to the Company.
Among these factors is the difficulty experienced by the Company with regard to
financing its current growth plans and business opportunities, a low average
volume of trading in the Company's stock, and the Company's small base of
historical revenues.
The summary of the Kaufman analysis set forth above does not purport to
be a complete description of the analysis performed by Kaufman, but describes in
summary form the principal elements of the opinion delivered to the Wavetech
Board of Directors. Kaufman has performed a variety of financial and comparative
analyses, as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the applications of those methods to the
particular circumstances and therefore such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Kaufman did not attribute particular weights to any analysis or factor but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Kaufman's analyses must be considered as a
whole and considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. In its analyses, Kaufman made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which were beyond the control of
the Company and Imagitel. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or reflect the prices at which businesses actually may
be sold.
CERTAIN ASSUMPTIONS REGARDING LEGAL AND REGULATORY MATTERS. In
conducting its analysis, Kaufman assumed no material adverse impact on the
business or finances of Imagitel from any current or prospective litigation,
prosecution or regulatory action brought by any party, including but not limited
to any state attorney general, any litigant in any state or federal court, any
state public service commission, the Federal Communications Commission, the
Federal Trade Commission, the Securities and Exchange Commission or any other
regulatory or governmental agency, whether state or federal. Any such material
adverse impact could potentially change the results of Kaufman's analysis and
the conclusions set forth in its opinion. In conducting its analysis, Kaufman
assumed no material adverse impact on the business or finances of Imagitel from
any liability in relation to any statutory, regulatory, licensing or other
similar requirement, which may attach to any officer, director, principal, or
stockholder of Imagitel as a result of past actions on the part of such officer,
director, principal, or stockholder. Any such material adverse impact could
potentially change the results of Kaufman's analysis and the conclusion set
forth herein.
Kaufman has not made any independent investigation into the backgrounds
of any officers, directors, principals or stockholders of Imagitel. Kaufman has
not searched the dockets of any state attorney general, any state or federal
court, any public service commission, the Federal Communications Commission, the
Federal Trade Commission, the Securities and Exchange Commission or any other
regulatory or governmental agency, whether state or federal, in connection with
any complaints, actions or claims that may have been or may in the future be
brought against Imagitel or any of its officers, directors, principals or
stockholders. Kaufman has made no independent determination or analysis with
regard to whether any of Imagitel's current or prospective business practices
(including but not limited to marketing and billing practices) comply with
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existing state and federal laws and regulations, nor has Kaufman made any
independent determination or analysis as to the likelihood that any such
practices may be challenged by any regulatory agency, governmental agency or any
private litigant.
Kaufman is a private investment banking and advisory firm. Kaufman, as
part of its financial advisory business, is regularly engaged in the valuation
of businesses and their securities in connection with mergers, acquisitions,
underwritings, sales and distributions of securities, private placements and
valuations for corporate and other purposes. The services of Kaufman were
secured solely for the purpose of preparing an independent fairness opinion for
the Board of Directors of Wavetech.
Pursuant to the terms of its engagement letters, Wavetech agreed to pay
Kaufman a fee of $90,000 as consideration for furnishing its opinions, of which
$80,000 has been already paid, and the remainder of which was payable upon
delivery by Kaufman of its opinion. In addition, Wavetech has agreed to
reimburse Kaufman for its reasonable out-of-pocket expenses in an amount not to
exceed $10,000 in the aggregate. Wavetech has further agreed to indemnify
Kaufman from and against certain liabilities that may arise out of its
engagement by Wavetech and the rendering of its opinion.
DESCRIPTION OF IMAGITEL, INC.
HISTORY AND OVERVIEW. Imagitel is a holding company formed in December
1997 to consolidate two operating companies which had the same ownership,
management and Board of Directors. These two operating companies are now wholly
owned subsidiaries of Imagitel. 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 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 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 subsidiary of Imagitel recently formed for the
purpose of acquiring another small telecommunications marketing company. See
"--Acquisition of AcCOModations Services, Inc." 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 offers the Consumer Access(TM) benefits calling card. Although
there are numerous calling cards currently on the market, Imagitel believes that
its Consumer Access(TM) card offers customers a unique combination of value and
convenience. Consumer Access(TM) service is not canceled when the customer
changes long distance carriers. The only way that Consumer Access(TM) loses a
customer is if that customer calls or writes to express a desire to cancel. The
calling card 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(TM) 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(TM) user.
The Consumer Access(TM) program commenced in May 1996 and as of June
15, 1998 had over 500,000 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. But see
"Risks Factors -- Risks Associated with LEC Billing."
NEW PRODUCT LINES. Imagitel's second product is the Bill Zapper(TM).
The Bill Zapper(TM) is planned for introduction to the non-PIC long
distance market and is intended to capitalize upon the recent growth in the
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telecommunications industry of "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(TM) is an
intelligent autodialer unit which utilizes a user's customized profile to access
the 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(TM).
Imagitel intends to offer the Bill Zapper(TM) through its subsidiary
DDD, which will license the product from the Majority Stockholders, and plans to
distribute the product throughout the United States through 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(TM) 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,
office, voice mail or other favorite location. Imagitel intends to begin test
marketing the Travel Warrior(TM) 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 however, Imagitel has not
yet made plans for the official launch of this product.
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 the Effective Time. This
transaction is not expected to have a material impact on the consolidated
operations or cash flow of Imagitel or Reorganized Parent.
BUSINESS STRATEGY. 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. Imagitel
believes that use of its mass marketing techniques has
facilitated its ability to acquire approximately 500,000
customers since its inception.
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 many
of its competitors often spend significant amount of resources
in order to acquire an at-will customer and may ultimately be
unable to offset such costs with any potential revenues to be
realized as a result of such customer's business due to high
rates of customer turnover and the uncertainty of initially
acquiring such customer. In order to offset these risks,
Imagitel seeks to utilize relatively cost-effective marketing
programs designed to attract customers in part due to their
uniqueness. For example, Imagitel believes that its use of point
of sale displays for marketing services have resulted in
inexpensive customer acquisitions.
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
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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, notification to the
customer's PIC is unnecessary since the Imagitel service
functions concurrently with a customer's existing service,
thereby reducing the risk that new customers will quickly
discontinue Imagitel's services solely as a result of such
winback programs.
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.
Similar to its philosophy of reducing the impact of competitive
winback programs, Imagitel believes that its ability to offer
services which complement rather than compete with services
offered by a customer's primary long distance service provider
has reduced the level of customer turnover which it has
experienced to date.
5) IMAGITEL SEEKS TO OFFER A DIFFERENTIATED SUITE OF PRODUCTS TO
DISTINGUISH ITSELF FROM ITS competitors. Because many of its
competitors are larger and have greater resources, 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. Imagitel
believes that the risk of uncollectible accounts is reduced by
using LEC billing as compared to other common forms of billing
and it has relied upon LEC billing for all of its billing
activities to date.
8) IMAGITEL SEEKS TO MAXIMIZE ITS PROFIT PER CUSTOMER, NOT JUST
MARGIN PER CUSTOMER. Rather than focus solely on making a
certain percentage of profit on each customer's monthly billing,
Imagitel focuses on realizing a predetermined minimum amount of
actual 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.
Typically, before undertaking a new marketing venture or product
offering, Imagitel will start its evaluation of the prospects for success using
its eight point business strategy. To date, Imagitel believes that
implementation of its eight point philosophy has achieved favorable results as
demonstrated by its ability to achieve profitable operations and establish a
customer base of approximately 500,000 customers as of June 15, 1998 since its
inception. However, there can be no assurances that reliance on this eight point
strategy will be sufficient to insure Imagitel's success in the future.
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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 AS THEY
REPRESENT THE BELIEFS OF THE COMPANY AND IMAGITEL, AND SHOULD NOT BE TAKEN AS
FACT. 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. OVERVIEW
The primary purpose of the Merger is to enable the 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 sought 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, products and services of
Imagitel. The Company believes that Wavetech's underlying technology and
business model is sound and, with some adjustment, should serve its Stockholders
well. The anticipated benefits of the Merger to Stockholders include a broader
customer base with opportunities to cross-sell Wavetech products, additional
assets, improved 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 in order to maximize the respective strengths of
each organization. Although the Company believes that the Merger is in the best
interests of the Company and its Stockholders, 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.
The Company and Imagitel believe that the ability of the Reorganized
Parent and its subsidiaries to produce and incorporate technological innovations
should be enhanced by the technology expertise that Wavetech may contribute to
the Reorganized Parent, as well as its key contacts in the technology side of
the telecommunications field. The Company and Imagitel believe that technology
will be a significant factor in 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 and bills, and
on-line technical support and customer service. Automated systems, such as
Interactive Voice Response ("IVR") systems, could 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 become successful. The telecommunications industry is extremely
competitive and is subject to rapid and often unanticipated change. A single
event can dramatically shift the competitive landscape and, as a result, the
Reorganized Parent could be required to redirect its focus on short notice 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 build a
significant base of customers. 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 plans to seek to maximize its future growth,
profitability and shareholder value through a five part plan which consists of
the following:
+ Enhance 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, innovative packaging and promotional/incentive
strategies;
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+ 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 STRATEGY
Distribution and differentiation have traditionally been vital keys to
success in the telecommunications industry. The 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
continuously monitor the extent 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.
In the past, 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 should greatly enhance the ability of Wavetech
to design successful promotional programs for its corporate clients. However,
the ability of the Reorganized Parent to successfully market its products and
services will be substantially dependent upon the efforts of the Majority
Stockholders, neither of which currently is contractually obligated to provide
such services. See "Risk Factors -- Risks Associated with Imagitel -- Dependence
on Key Vendors and Independent Agents; Influence of Majority Stockholders of
Imagitel".
STRATEGIC PARTNERSHIPS
The successful identification, negotiation and implementation of
strategic partnerships will be crucial to the success of the Reorganized Parent.
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, AT&T's Language Line Service and MCI. It is
anticipated that these relationships will become increasingly important as the
Reorganized Parent creates new applications for new clients. The 500,000
customers of Imagitel as of June 15, 1998 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 its
carriers. Through existing international relationships, such as Wavetech's
partnership with Switch in Australia, Reorganized Parent hopes to be able to
extend its product offerings into new and evolving markets. But see "Risk
Factors -- Dependence On Licensing Relationships."
The Reorganized Parent may also seek out partnership opportunities with
electric utilities, internet service providers ("ISP") and to a lesser degree,
cable companies. The Company and Imagitel believe such industries may provide
attractive partnership opportunities because they have an existing customer base
with which they have a substantial relationship, they have direct billing
systems in place, they have installation personnel technically proficient enough
to handle a more sophisticated installation of products such as the Bill
Zapper(TM) unit at the network interface and they have a desire to enter into
other lines of business to diversify in anticipation of increased competition
from new entrants to their respective industries. However, neither Imagitel nor
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Wavetech currently has agreements with any such strategic partners. There can be
no assurance that such relationships, if ever developed, will be successful.
PLANNED DISTRIBUTION METHODS
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. See "Risk Factors -- Risks Associated with Imagitel -- Risks of New
Marketing Initiatives."
GROUP, CORPORATE AND AFFINITY SALES. A Corporate Services Division is
currently planned 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 corporations, affinity groups and
others. During the third quarter of 1998, Imagitel will begin test marketing its
affinity group 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(TM) devices will be
made available to affinity groups. Imagitel and Wavetech believe that marketing
products to affinity groups is an effective method of distribution and may lend
itself to additional retail sales.
DIRECT SALES THROUGH MULTILEVEL MARKETING. Multilevel Marketing ("MLM")
has historically been demonstrated to be a cost effective method of product
distribution. Imagitel formed its subsidiary, Zapcom, to distribute its Bill
Zapper(TM) and Travel Warrior(TM) 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 group marketing strategies,
Imagitel is also currently developing a direct mail campaign to supplement the
other distribution models. This marketing effort will be conducted in-house
and/or as a strategic alliance with an unrelated direct mail company. 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 considered. Imagitel is also
currently formulating a strategy to potentially 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 seek to
differentiate its product offerings from those of other long distance companies
which advertise on-line. In addition, Imagitel intends to develop an Internet
site as a means of target marketing the products offered by Zapcom. Initially,
there will be on-line support for direct mail and target print advertising. This
may 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 employees working 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
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and other proprietary software, the system is integrated with a high-speed
server and is fully scalable to support unlimited growth. The open architecture
is expected to allow the addition of virtually unlimited enhancements, features
and new applications. Unlike conventional telecommunications switches, the
platforms are highly intelligent and are designed to allow multiple applications
to run simultaneously while dynamically sharing system resources.
In addition to building upon Wavetech's existing technology base and
platforms, 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 communications
networks. Wavetech's call switching platforms are currently operational in the
United States and Australia, with another location in Canada is planned for
initial operation in calendar year 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.
ACQUISITION STRATEGIES
The telecommunications industry is highly fragmented among the smaller
niche players and rapidly consolidating. While there are no current negotiations
underway 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 increase 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, the entry into markets in which the
Reorganized Parent 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
Following the Reorganization, 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 the services planned for consolidation are provided
to Imagitel by a company affiliated with the Majority Stockholders. 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. It is the intent of Reorganized Parent to directly hire the personnel
providing these services and put them on its payroll. This is not expected to
have a material effect on the expenses of Reorganized Parent.
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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 7,922,861 shares of Wavetech Common Stock (after giving
effect to the Reverse Split) pursuant to the Merger. THE BOARD OF DIRECTORS OF
THE COMPANY RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF THE MERGER SHARES.
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 I TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. EFFECTIVE TIME AND EFFECT OF
THE MERGER
Pursuant to the Reorganization Agreement, 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 stockholders of Imagitel shall be
issued a number of shares of Wavetech Common Stock equal to approximately 70% of
the total issued and outstanding Wavetech Common Stock (72% after giving effect
to certain options held by Imagitel stockholders 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
Group Holdings, Inc." With the exception of such corporate name change and
except as effected in connection with the Reverse Stock Split approved by the
Stockholders at a Special Meeting held on May 26, 1998, all other provisions of
the Company's Articles of Incorporation and Bylaws 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 Merger is expected to occur as
promptly as practicable following the approval of the issuance of the Merger
Shares 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 stockholder shall, without any
action on his part, be entitled to receive 32.99 shares of Wavetech Common
Stock, after giving effect to the Reverse Split, in exchange for each share of
Imagitel Common Stock issued and outstanding immediately prior to the Effective
Time. The actual aggregate number of shares of Wavetech Common Stock to be
issued as a result of the Merger will depend upon the number of shares of
Imagitel Common Stock outstanding immediately prior to the Effective Time. Based
upon the number of shares of Imagitel Common Stock outstanding as of June 15,
1998, Wavetech would be required to issue approximately 6.6 million shares of
Wavetech Common Stock plus reserve approximately 700,000 additional shares of
Wavetech Common Stock for issuance upon the exercise of options to purchase
Imagitel Common Stock outstanding as of June 15, 1998 which would be converted
into options to purchase a number of shares of Wavetech Common Stock determined
in accordance with the Conversion Ratio. To the extent Imagitel issues
additional shares of its Common Stock or grants options, warrants or rights
purchase shares of its Common Stock prior to the Effective Time, the aggregate
number of shares of Wavetech Common Stock issuable in connection with the Merger
would be increased. However, in no event shall former shareholders of Imagitel
be issued more than 7,922,861 shares of Wavetech Common Stock in the aggregate
(including shares issuable upon the exercise of options, warrants or other
rights to purchase Imagitel Common Stock, which shall be converted into similar
rights to purchase a number of shares of Wavetech Common Stock determined by the
Conversion Ratio).
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
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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
stockholder 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.
BUSINESS AND MANAGEMENT OF THE REORGANIZED PARENT
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. See "Business of the
Reorganized Parent." 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.
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, Chief Information Officer; Dee
Darby, Vice President of Operations; Scott Moster, President - Carrier Group;
David Crawford, Vice President of Business Development; and Andrew Cauthen,
President, Zapcom. Other non-executive officers are Pat Wills, Director of
Customer Service Operations; and Terry Harmon, Vice President of Marketing. 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 IV, 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 by the stockholders of Imagitel, (ii)
the approval of the issuance of the Merger Shares by the Wavetech Stockholders,
(iii) the absence of any material adverse change in the respective businesses or
financial conditions of Wavetech and Imagitel, (iv) the receipt of all permits,
consents and approvals of any governmental bodies or agencies reasonably deemed
necessary, and (v) 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
certificates executed by officers of the Company certifying as to such matters
reasonably requested by Imagitel, (v) the execution of a registration rights
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agreement relating to the shares of Wavetech Common Stock to be issued to the
stockholders of Imagitel, and (vi) 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
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 Bros., L.P. that the terms of the Reorganization Agreement and the
transactions contemplated thereby are fair to the Company's Stockholders, from a
financial point of view, (vi) none of the stockholders 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 stockholders 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. Imagitel has represented that it shall use its best efforts to
cause its stockholders to provide certain agreements and information in order to
permit the issuance of the Merger Shares to comply with applicable provisions of
federal and state securities laws. 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 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 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 to 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) other than as contemplated by certain obligations
disclosed on Schedule 4.4 to the Reorganization Agreement or in connection with
capital raising transactions which are acceptable to Imagitel, the Company may
not amend its Articles of Incorporation or Bylaws, and (ii) the Company may not
51
<PAGE>
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 for Terry Harmon, Vice President of Marketing for DDD Calling,
provides a base salary of $72,000 for three years and a variable commission that
ranges from one-half of one percent to one percent of all sales which he closes.
The 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") , each of
which is exercisable at a price of $16.78 per share. 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. In addition, Imagitel intends to grant options to
purchase up to an additional 885 shares of Imagitel Common Stock to certain
persons designated by Imagitel to serve as non-employee directors of the
Reorganized Parent. Such additional options, if any, shall be granted prior to
the Effective Time and shall be converted into options to purchase Wavetech
Common Stock in the same manner as the other Imagitel Options, however, they
shall vest upon the earlier of the first anniversary of their appointment to the
Board of Directors of the Reorganized Parent or upon a change in control.
WARRANTS
As of February 28, 1998, no warrants to purchase shares of Imagitel
Common Stock (the "Imagitel Warrants") were outstanding. Imagitel is not
currently obligated to issue any warrants prior to the Effective Time, although
it anticipates doing so. 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 REORGANIZATION 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 any party if an
injunction or order shall have been issued which prevents the consummation of
such transactions, (iii) by any party upon another 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
August 31, 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 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.
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 fees in connection with the Merger. Imagitel is
obligated to pay a fee of $175,000 to its broker as consideration for the
initial introduction of Imagitel to Wavetech, all of which is payable in cash or
shares of Imagitel Common Stock, at the option of Imagitel. In addition,
Imagitel shall be obligated to compensate its financial advisor as consideration
for its services in assisting Imagitel to negotiate and structure the
Reorganization. Imagitel currently anticipates that such fees shall equal
approximately $550,000, exclusive of reimbursable expenses, which are currently
expected to equal approximately $25,000. Imagitel's financial advisor has agreed
to accept payment of up to half of its fee in the form of shares of the capital
stock of the Reorganized Parent to be issued after the Effective Time. The
52
<PAGE>
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
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 increase the aggregate number of Merger
Shares issuable as a result of the Reorganization without the further approval
of the Wavetech 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 Wavetech and to
Wavetech stockholders. 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 Wavetech or its
stockholders as described herein.
Wavetech and holders of Wavetech Common Stock, Preferred Stock, and
options, warrants or other rights to acquire Wavetech Common Stock will not be
subject to any adverse federal income tax consequences as a result of the
Reorganization, including the Merger, regardless of whether the Merger is
treated as a tax-free reorganization under the Code. Wavetech's conclusion that
the Reorganization will not be a taxable event, for federal income tax purposes,
to Wavetech or to holders of Wavetech Common Stock, Preferred Stock, options, or
warrants is based upon the advice of its legal counsel, Squire, Sanders &
Dempsey L.L.P.
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. EACH STOCKHOLDER AND OPTION HOLDER 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. 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 who 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. All of the proceeds from such sale will be for the
benefit of the shareholder on whose behalf the sale is made (other than
discounts or commissions, if any). Such sales are not expected to have any
effect on the Majority Stockholders' ability to retain majority control of the
Reorganized Parent following the Effective Time.
53
<PAGE>
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 Group Holdings, Inc.", the Articles of Incorporation and
Bylaws of the Reorganized Parent will be the same as those currently in effect
with respect to Wavetech. 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.
DISSENTERS RIGHTS OF APPRAISAL
Wavetech Stockholders have no right under Nevada law to dissent from
the Merger. Wavetech Stockholders are being asked to approve the issuance of the
Merger Shares solely in order to comply with the applicable rules of the Nasdaq
SmallCap Market, on which Wavetech's Common Stock is quoted. 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 stockholders 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 ten
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 August 1, 1998, it is anticipated that options to
purchase an aggregate of 320,000 shares of Wavetech Common Stock will be fully
exercisable, of which approximately 78,333 would not otherwise be exercisable at
such time, (each of which amounts gives effect to the Reverse Split).
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.
See "Executive Compensation -- Employment Agreements."
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.
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 with 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.
54
<PAGE>
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 the Federal Trade Commission in the case of federal
law, or by individual state attorneys general.
In conducting various aspects of its business, the Reorganized Parent
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. 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 effect 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 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.
55
<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 and
Imagitel. The unaudited pro forma combined balance sheet presents the financial
position of Wavetech and Imagitel as of March 31, 1998. Also included is the
unaudited combined pro forma income statements for the twelve months ended
December 31, 1997 and the three months ended March 31, 1998. The pro forma
adjustments were applied to the respective historical financial statements to
reflect and account for the business combination. The transaction resulted in
the former shareholders of Imagitel owning approximately 70% 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 Imagitel deemed to be the acquiring entity of the
Company. The purchase price assumes a value of $0.43 per share of Wavetech
Common Stock, which was determined based on the average closing price of the
Wavetech Common Stock during the three trading days immediately prior to the
date on which the Reorganization Agreement was executed.
As a result of the Merger, Imagitel stockholders will be entitled to
receive 32.99 shares of Wavetech Common Stock, (after giving effect to the
Reverse Split) for each share of Imagitel Common Stock issued and outstanding.
Management reviewed historical costs incurred to date of development of
the basic operating system and its proprietary software. While the basic
operating system has been developed, the system requires specific modifications
to become operational for a new user. At the time of acquisition, a formal
evaluation will be considered for allocation of fair value.
The amortization of goodwill was calculated based on five years. On
average, the life of advanced technology telecommunications products, from the
date of commercialization to the date of obsolescence, is three years.
Management believes the functionality of its software and computer telephony
hardware will be five years.
The pro forma financial information also reflect the one-for-six
Reverse Split of Wavetech's issued and outstanding shares of Common Stock to be
implemented at an unspecified date prior to the Effective Time.
56
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
AND IMAGITEL, INC.
BALANCE SHEET
MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
WAVETECH, INT'L INC. IMAGITEL, INC. PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 98,296 $ 1,453,506 $ 1,551,802
Restricted cash 100,000 100,000
Accounts receivable 46,207 7,373,747 7,419,954
Due from affiliate 145,334 145,334
Prepaid expenses and other assets 10,547 364,594 375,141
---------- ----------- -----------
Total current assets 155,050 9,437,181 9,592,231
Property and equipment, net 321,049 635,355 102,000 (1) 1,058,404
Other assets:
Investment in Switch
Telecommunications Pty Ltd 2,316,165 2,316,165
Notes receivable 454,000 454,000
Intangibles, net 27,117 27,117
Goodwill 2,981,606(1) 2,981,606
Deferred tax benefit 755,000(1) 755,000
Deposits and other assets 30,083 11,715 41,798
---------- ----------- ---------- -----------
Total other assets 2,373,365 465,715 3,736,606 6,575,686
---------- ----------- ---------- -----------
Total assets $2,849,464 $10,538,251 $3,838,606 $17,226,321
========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 409,171 $ 2,128,505 $ 2,537,676
Accrued interest payable 8,610 8,610
Advance from factor 5,219,823 5,219,823
Commissions payable to affiliate 340,344 340,344
Notes payable, current portion 63,000 63,000
Capital leases payable, current portion 44,462 44,462
Other liabilities 1,856,502 1,856,502
---------- ----------- -----------
Total current liabilities 525,243 9,545,174 10,070,417
Noncurrent liabilities:
Notes payable 330,000 330,000
Capital leases payable 45,496 45,496
---------- ----------- -----------
Total liabilities 900,739 9,545,174 10,445,913
Stockholders' equity:
Common stock, par value $.001 per
share; 50,000,000 shares authorized,
16,203,095 shares issued and
outstanding. Imagitel common stock,
no par value; 1,000,000 shares
authorized, 200,000 shares issued
and outstanding 16,203 2,000 (2,000)(1)
6,598 (1)
(13,502)(2) 9,299
Additional paid in capital 7,510,814 291,716 (1)
13,502 (2) 7,816,032
Accumulated deficit (5,578,292) 991,077 5,578,292 (1)
(2,036,000)(1) (1,044,923)
----------- ----------- ---------- -----------
Total stockholders' equity 1,948,725 993,077 3,838,606 6,780,408
---------- ----------- ---------- -----------
Total liabilities and
stockholders' equity $ 2,849,464 $10,538,251 3,838,606 $17,226,321
=========== =========== ========= ===========
</TABLE>
See accompanying notes to unaudited pro forma combined
financial information.
57
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
AND IMAGITEL, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
WAVETECH, INT'L INC. IMAGITEL, INC. PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues: $ 16,680 $12,700,873 $12,717,553
Cost of sales:
Direct costs 9,896 6,796,198 6,806,094
---------- ----------- ----------
Gross profit (loss) 6,784 5,904,675 5,911,459
Other costs
Administrative expenses 267,976 2,328,697 150,000 (3) 2,746,673
Commissions & other selling expenses 2,633,189 2,633,189
---------- ----------- ----------
Operating profit (loss) before other
income (expenses) (261,192) 942,789 (150,000) 531,597
Other income (expense)
Interest income 161 161
Interest expense (7,961) (218,330) (444,620)
---------- ----------- ----------
Total other income (expense) (7,800) (218,330) (444,459)
---------- ----------- ----------
Earnings (loss) before taxes (268,992) 724,459 (150,000) 87,138
Provision for income taxes 34,855 (3) 34,855
---------- ----------- --------- ----------
Net earnings (loss) $ (268,992) $ 724,459 $(184,855) $ 52,283
========== =========== ==========
Earnings (loss) per common share $ (0.10) $ 3.62 $ .0057
========== =========== ==========
Weighted average number of Shares
outstanding 2,567,800 200,000 9,165,800
========== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined
financial information.
58
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
AND IMAGITEL, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
WAVETECH, INT'L INC. IMAGITEL, INC. PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues: $ 918,173 $42,494,761 $43,412,934
Cost of sales:
Direct costs 707,653 20,098,609 20,806,262
----------- ----------- -----------
Gross profit 210,520 22,396,152 22,606,672
Other costs
Development and administrative
expenses 1,532,788 9,704,619 596,000 11,833,407
Commissions and other selling
costs 8,765,465 8,765,465
----------- ----------- -----------
Operating profit (loss) before other
income (expenses) (1,322,268) 3,926,068 (596,000)(3) 2,007,800
Other income (expense)
Interest income 1,031 1,031
Debt conversion expense (92,893) (92,893)
Interest expense (37,623) (890,868) (928,491)
----------- ----------- -----------
Total other income (expense) (129,485) (890,868) (1,020,353)
----------- ----------- -----------
Earnings (loss) before taxes (1,451,753) 3,035,200 (596,000) 987,447
Benefit from income taxes 394,979 (3) 394,979
----------- ----------- -----------
Net earnings (loss) $(1,451,753) $ 3,035,200 $(990,979) $ 592,468
=========== =========== ===========
Earnings (loss) per common share $ (0.60) $ 15.18 $ 0.07
=========== =========== ===========
Weighted average number of shares
Outstanding 2,409,195 200,000 9,007,195
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined
financial information.
59
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) To record the Reorganization of Wavetech with Imagitel based on a purchase
price of $0.43 per share of outstanding Common Stock of Wavetech and a
Conversion Ratio of 32.99 shares of Wavetech for each outstanding share of
Imagitel (after giving effect to the Reverse Split). Allocation of the purchase
price is based on the historical software development costs and research and
development costs incurred by Wavetech. The deferred tax benefit was calculated
based upon future utilization of net operating losses.
(2) To record the one-for-six Reverse Split. Prior to the Reverse Split,
Wavetech had 16,203,095 shares outstanding and subsequent to the split, Wavetech
will have approximately 2,700,516 shares outstanding.
(3) 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 is anticipated to be a non-recurring item.
Goodwill is amortized over 5 years.
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 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 $ 155,050
Property, plant and equipment 423,049
Investment in Switch Telecomm. Pty Ltd 2,316,165
Other assets 812,200
Current liabilities (525,243)
Capital lease obligations (45,496)
Other noncurrent liabilities (330,000)
Goodwill 2,981,606
In process research and development costs 2,036,000
----------
$7,823,331
==========
60
<PAGE>
WAVETECH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF WAVETECH'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
PROXY STATEMENT, THE WORDS "ESTIMATE", "PROJECTION", "INTEND", "ANTICIPATES" AND
OTHER SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT
RELATE TO WAVETECH'S FUTURE PERFORMANCE. ALL SUCH STATEMENTS ARE SUBJECT TO
SUBSTANTIAL UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THE FORWARD-LOOKING STATEMENTS SET FORTH BELOW. NEITHER WAVETECH NOR IMAGITEL
UNDERTAKES ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OPERATIONS OVERVIEW
The Company's business consists of developing, operating, marketing and
selling interactive communications systems through the application of
"intelligent" call processing technology and proprietary software to reflect or
target the needs of an identified audience. These systems are often used as
privatized networks for organizations and special purpose groups. During 1995
and 1994, the Company remained focused on the development of the infrastructure
for its call processing and data management systems. Operations in the United
States and Canada commenced on a limited basis in 1996. In addition the Company
signed a licensing agreement with Switch of Australia in 1996 for services to be
provided in Australia.
The Company, after completing the development of its back end systems
during the last quarter of 1996, commenced initial operations. Continued costs
of maintaining the system were charged to operations. Revenues increased to
$865,571 in 1997 from $19,895 in 1996. The increase of $474,106 was from the
sale of the Interpretel system, which consisted of a computer platform, related
software and installation charges to Switch Telecommunications Pty Ltd. Revenues
from the resale of international long distance minutes were $149,155 in 1997 due
to the acquisition of Telplex, Inc. During 1997, the $200,000 licensing fee was
paid which represented the first of three payments due per the agreement with
Switch Telecommunications Pty Ltd.
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1997
REVENUES. Total revenues decreased to $78,675 for the six months ended
February 28, 1998 from $522,639 for the six months ended February 28, 1997. The
decrease was due almost entirely to the sale of the Interpretel system during
the quarter ended February 28, 1997, which system previously generated
substantially all of the Company's revenues.
COST AND EXPENSES. Cost of sales decreased to $75,189 for the six
months ended February 28, 1998 from $515,413 for the six months ended February
28, 1997. The decrease was attributable to the costs associated with the sale of
the Interpretel system during the quarter ended February 28, 1997. Expenses
decreased to $519,250 for the six months ended February 28, 1998 from $905,234
for the six months ended February 28, 1997. The decrease of $385,984 was due to
a reduction in workforce in an effort to temporarily minimize the Company's
operating expenses. However, legal fees and other costs associated with the
preparation of the Company's Proxy Statement in connection with the
Reorganization have increased significantly during the quarter ended February
28, 1998.
YEAR ENDED AUGUST 31, 1997 COMPARED TO YEAR ENDED AUGUST 31, 1996
COSTS AND EXPENSES. Expenses increased to $2,503,356 in 1997 from
$1,912,876 in 1996. $378,009 of this increase was due to the cost of a computer
platform and software for the sale of an Interpretel system and $175,813
represents the cost associated with the resale of international long distance
minutes and the additional overhead costs related to the acquisition of Telplex,
Inc. Print advertising and costs associated with the creative development and
printing of the fulfillment kits for the various cards increased to $126,665 in
1997 from $32,952 in 1996. Investor relations and costs associated with the
annual meeting represented a 100% increase of $106,000 during 1997. Depreciation
and amortization expense increased by $74,974 in 1997. Depreciation and
amortization expenses are allocated to general and administrative expenses.
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LIQUIDITY AND CAPITAL RESOURCES.
LIQUIDITY AND CAPITAL RESOURCES.
Since it commenced its current operations in 1995, the Company's
expenses have exceeded its revenues. The Company has financed its operations
through private placements of equity and borrowings of debt. At August 31, 1997
the Company had a working capital deficit of $579,333 as compared to working
capital of $665,483 at August 31, 1996. During the fiscal year ended August 31,
1997, the Company borrowed $122,000 from certain members of its Board of
Directors in order to meet its then current working capital needs. As a result
of inadequate funds during the last quarter of that fiscal year, the Company
entered into agreements with its employees to compensate such persons' salary
with a number of shares of the Company's Common Stock with a fair market value
on the last day of a regular pay period equal to each respective employee's
salary plus a 10% premium as consideration for entering into such agreements.
All of the shares were issued as Deferred Shares pursuant to the Company's 1997
Stock Incentive Plan. In February 1998, the Company obtained a short term line
of credit from Imagitel for its working capital needs. Pursuant to the terms of
such loan, the Company may borrow up to $450,000, of which $120,000 was
available as of June 15, 1998. The loan accrues interest at a rate of 12% per
annum and is secured by a first priority lien on the Company's assets. The
entire amount of unpaid principal plus interest accrued thereon is payable by
the Company on June 30, 1998. In addition, the Company issued 600 shares of its
Series A Convertible Preferred Stock in April 1998 in a private placement. The
net proceeds to the Company from such sale were approximately $526,000, some of
which the Company applied towards miscellaneous trade payables. During May 1998,
the Company offered to all holders of certain outstanding warrants which expired
May 31, 1998 the right to exercise such warrants at a price of $0.575 per share.
Prior to such offer, the exercise price of these warrants was $1.00 per share.
Warrants to purchase an aggregate of 380,280 shares of Wavetech Common Stock
were exercised pursuant to the Company's offer, resulting in proceeds to the
Company of approximately $222,500. As of June 15, 1998, the Company had an
aggregate of $472,000 of cash available for its future working capital needs.
The Company expects to continue to incur operating losses until such
time, if ever, as it obtains market acceptance for its products and services at
prices and volumes which provide adequate gross profit to cover its operating
costs. In addition, the Company will need to obtain additional funds to finance
its business and growth strategies. See "Risk Factors -- Risks Associated with
Wavetech -- Need for Additional Financing". The Company anticipates that it will
have additional capital resources available to it upon consummation of the
Merger. However, there can be no assurances as to when the Merger will be
closed, if ever, or even if closed that it will provide capital to the Company
sufficient to enable it to meet its future expenses. The Company anticipates
that it currently has sufficient working capital available to meet its needs
over the next approximately three months.
INFLATION
Although the Company's operations are influenced by general economic
trends and technology advances in the telecommunications industry, the Company
does not believe that inflation has a material effect on its operations.
STOCK OPTION PLAN
The Board of Directors has approved a 1997 Stock Incentive Plan (the
"1997 Plan"). Employees (including officers), Directors and consultants of the
Company and its subsidiaries are eligible to receive grants of options,
Restricted Stock or Deferred Stock under the 1997 Plan, under which an aggregate
of 4,600,000 shares of Common Stock is authorized for issuance. Usually, the
only consideration received by the Company for the grant of an award will be
past services and/or the expectation of future services. No options, Restricted
Stock or Deferred Stock may be granted under the 1997 Plan after January 30,
2007. As of August 31, 1997, options to purchase approximately 2,328,935 of such
shares had been granted; such options have terms of up to ten years, with
exercise prices ranging from $0.375 to $0.81 per share, which is the fair market
value of the underlying shares as of the respective dates of grant.
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INCOME TAXES
Wavetech has neither provided for nor paid any federal income taxes
since its inception because the Company has not generated taxable income in any
fiscal year. At August 31, 1997, the Company had 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 on Notes to Financial Statements) 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. Future financings may cause additional changes in
ownership and further limitations on the use of federal net operating loss
carryforwards.
YEAR 2000 ISSUES
As with other organizations, some of the Company's computer programs were
originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields would not work properly with
dates from the year 2000 and beyond. The Company has initiated efforts to remedy
this situation and expects all programs to be corrected and tested prior to the
year 2000. The incremental costs of this project are not expected to have a
material effect on the Company's consolidated financial statements or results of
operations.
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IMAGITEL MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION'S
THE FOLLOWING DISCUSSION OF IMAGITEL'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
PROXY STATEMENT, THE WORDS "ESTIMATE", "PROJECTION", "INTEND", "ANTICIPATES" AND
OTHER SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT
RELATE TO IMAGITEL'S FUTURE PERFORMANCE. ALL SUCH STATEMENTS ARE SUBJECT TO
SUBSTANTIAL UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THE FORWARD-LOOKING STATEMENTS SET FORTH BELOW. NEITHER WAVETECH NOR IMAGITEL
UNDERTAKES ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
Imagitel is a switchless reseller of long distance and enhanced
telecommunications services formed in December 1997 to serve as a holding
company for its operating subsidiaries, RRVE and DDD, each of which was formed
in January 1996. As a result, Imagitel's financial results of operations are
presented on a consolidated basis, which incorporates the operations of its
subsidiaries. All of Imagitel's revenues to date have been derived from RRVE's
sale of a single product, the Consumer Access(TM) card, which is marketed
through a single distribution channel.
Imagitel commenced marketing its services in May 1996 and billed its
first customer in June 1996. As a result, 1997 represents Imagitel's first full
fiscal year of operations. The average revenue per customer per month has
remained relatively flat since the commencement of Imagitel's marketing
activities. Imagitel's costs associated with attracting and retaining key
personnel have dramatically increased since its inception as a result of
significant competition for technically skilled employees, as well as an
increase in competition among employers generally to attract and retain
employees. Imagitel expects this trend to continue as it seeks to develop and
market additional products and services, many of which may be more technically
complex and sophisticated than those offered to date. Additionally, intense
competition in the telecommunications industry generally has resulted in
increased pressure to reduce the prices at which Imagitel can offer products and
services to the marketplace, thereby reducing the net profit realized by
Imagitel per customer.
All of Imagitel's revenues have historically been billed directly to
the end user through the LEC serving the respective geographic area of
Imagitel's customers. These bills are processed pursuant to contractual
arrangements, which Imagitel currently maintains with two intermediate billing
companies, each of which has direct billing and collection contracts with the
LECs. Imagitel is dependent upon these billing companies for the receipt of its
revenues, as the cost to establish its own billing and collection contracts is
expensive, time consuming and requires substantial fees and ongoing financial
commitments. See "Risk Factors--Risks Associated with LEC Billing." In addition,
Imagitel's sales activities have been entirely dependent upon the efforts of
certain third-party dealers who acquire additional customers on behalf of
Imagitel. Future third-party dealer arrangements may provide for ongoing
commissions in lieu of or in addition to initial one-time fees. Such dealers
typically receive a one-time fee, typically in an amount not in excess of the
first month's billings in connection with each customer such dealer acquires on
behalf of Imagitel. In addition, the Majority Stockholders of Imagitel receive a
monthly commission equal to 10% of all of Imagitel's customer revenues from
sales of its Consumer Access(TM) product.
Imagitel's revenues have historically been largely dependent upon its
sweepstakes marketing activities, as well as through sales of its Consumer
Access(TM) program. Effective May 1, 1998, Imagitel ceased all sweepstakes
marketing activities. While it has continued to service existing Consumer
Access(TM) customers, Imagitel's growth strategy is dependent upon the success
of new marketing strategies. As a result, Imagitel's historical results of
operations may not be indicative of future results. Imagitel believes there are
a number of factors that should be considered when evaluating its operating
results and readers are cautioned not to place undue reliance on any single
factor. For example, although revenue is an important indicator of a company's
growth, it can be misleading. In addition, past performance may not necessarily
be indicative of future results, particularly in light of Imagitel's limited
history of operations and future growth strategy.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenues increased by $5,725,767 or 82.1% to $12,700,873 for the three
months ended March 31, 1998 as compared to $6,975,106 for the same period in
1997. This increase resulted from an increase in the number of customers
acquired and maintained by Imagitel. None of the increase resulted from price
increases.
The Cost of Goods Sold ("COGS") increased by 127.6% or $3,809,834 to
$6,796,198 during the three months ended March 31, 1998 as compared to
$2,986,364 during the comparable period of the prior year. However, such
increase resulted in a 10.7 percentage point decrease in Imagitel's gross profit
margin to 46.5% for the three months ended March 31, 1998 from 57.2% for the
comparable period of 1997. The increase in COGS during the 1998 period was a
result of an increase in the number of active customers which subscribed to
Imagitel's system during such periods. The decrease in the gross margin
percentages resulted from an increased use of customer minimum usage minutes.
Commissions and other selling costs increased by $367,859 or 16.2% to
$2,633,189 during the three months ended March 31, 1998 from $2,265,330 during
the comparable period of 1997. These costs as a percentage of Imagitel's
revenues decreased 11.8 percentage points to 20.7% from 32.5% during the three
months ended March 31, 1998 and 1997, respectively. The increase in costs as a
percentage of revenues during the 1998 period as compared to the comparable
period of 1997 was primarily a result of additional one-time payments which
Imagitel makes to third party dealers for their services to Imagitel in
connection with the initial acquisition of additional customers. These one-time
costs, however, were partially offset by the increased size of Imagitel's
existing base of customers, for which Imagitel is not obligated to make such
payments to its third-party dealers. As a result, the percentage of revenues
paid out by Imagitel as commissions tends to decrease in direct relation to that
portion of its customer base during a given month which represents existing
customers as opposed to new customers. To the extent that Imagitel is able to
acquire additional customers in the future, these costs as a percentage of its
revenues will likely increase correspondingly.
General and administrative costs increased by $1,070,954 or 85.2% to
$2,328,697 during the three months ended March 31, 1998 from $1,257,743 during
the comparable period of 1997. The increase in general and administrative costs
primarily resulted from increased operating costs associated with planning,
development and implementation of Imagitel's new product and service offerings.
Interest costs increased by $101,002 or 86.1% to $218,330 during the
three months ended March 31, 1998 from $117,328 during the comparable period of
1997. The increase was directly attributable to an increased gross amount of its
receivables which Imagitel in turn borrowed against in order to generate
additional working capital.
Depreciation increased by $29,129 to $30,379 during the three months
ended March 31, 1998 as compared to $1,250 during the comparable period of the
prior year. The increase was due to significant increases by Imagitel in
property, plant and equipment, which Imagitel incurred in connection with the
initial development of its operations. Imagitel expects to make significant
additional capital investments in the foreseeable future as it implements its
growth strategy. Such investments, if made, are expected to result in
corresponding increases in Imagitel's depreciation costs.
Pre-tax net income increased by $376,118 or 108.0% to $724,459 during
the three months ended March 31, 1998 from $348,341 during the comparable period
of 1997. The increase was due mostly to increased sales, offset by significantly
increased expenditures related to Imagitel's development of systems related to
planned new products and services.
Net income per share increased by $1.88 to $3.62 for the three months
ended March 31, 1998 as compared to $1.74 for the same period of the prior year.
Diluted income per share increased $1.75 or 102.9% to $3.45 for the three months
ended March 31, 1999 as compared to $1.70 for the comparable period of the prior
year. The increase in net income per share was due to the increase in net income
of Imagitel. However, the increase in diluted income per share during such
period was partially attributable to the issuance of options to purchase a
number of shares of Imagitel Common Stock representing approximately 5% of the
aggregate number of shares of Imagitel Common Stock outstanding at the time of
issuance during each of the three month periods ended March 31, 1998 and 1997,
respectively.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues increased by $36,290,035 to $42,494,761 during 1997 from
$6,204,726 during 1996. The increase resulted from an increase in Imagitel
customers as Imagitel commenced its operations. In addition, information for
1996 does not include a full year of operations for Imagitel.
COGS increased by $17,440,714 to $20,098,609 during 1997 as compared to
$2,657,895 during 1996, which resulted in a gross margin of 52.7% and 57.2%
respectively. The increase in cost of goods sold resulted from an increase in
the number of customers using Imagitel's system and the fact that Imagitel
operated its current business for less than a full year in 1996. The decrease in
gross margin as a percentage of sales is primarily attributable to an increase
in the volume of usage by Imagitel's customers of their minimum usage minutes,
which increase was in turn magnified by a large increase in the number of new
customers of Imagitel.
Commissions and other selling costs increased by $6,839,937 or 238.8%
to $9,704,619 during 1997 as compared to $2,864,682 during 1996, representing
22.9% and 46.2% of revenues respectively. The increase in aggregate commission
and other selling costs in 1997 over 1996 is the direct result of a significant
increase in the increased size of Imagitel's customer base and Imagitel's rapid
growth during its initial stage of operation. The decrease from 1996 to 1997 in
commission and other selling costs as a percentage of revenues was primarily
attributable to the increased percentage of Imagitel's customers which were
previously existing customers during such period. While Imagitel pays
commissions on all revenues related to customer sales of its Consumer Access(TM)
program, it is obligated to pay additional one-time commissions in connection
with each initial acquisition of a customer. As a result, its commissions and
other selling costs as a percentage of revenues during a given period increases
in proportion to the number of customers initially acquired during such period.
General and administrative costs increased by $7,339,355 to $8,765,465
during 1997 from $1,426,110 during 1996. The increase was a result of additional
personnel, which were needed in order to service Imagitel's increased customer
base and other operations as it sought to initially develop its business. The
decrease in general and administrative costs as a percentage of sales during
1997 as compared to 1996 was mostly due to the developmental nature of
Imagitel's business during 1996 as Imagitel expended substantial resources in
connection with the introduction of its initial product offerings.
Interest costs increased to $890,868 during 1997 from $63,036 during
1996. This increase in Imagitel's interest cost during 1997 was due to the
commencement of factoring agreements with third parties. See "-- Liquidity and
Capital Resources."
Depreciation cost increased by $47,834 to $62,042 in 1997 from $14,208
during 1996. The increase was due to significant increases by Imagitel in
property, plant and equipment that Imagitel incurred in connection with the
initial development of its operations. Imagitel expects to make significant
additional capital investments in the foreseeable future as it implements its
growth strategy. Such investments, if made, are expected to result in
corresponding increases in Imagitel' s depreciation costs.
Net income increased by $3,842,197 to $3,035,200 during 1997 as
compared to a loss of ($806,997) during 1996. The increase in net income during
1997 as compared to 1996 was due to the increase in sales by Imagitel during
1997.
Basic income per share increased by $19.21 to $15.18 during 1997 from a
loss per share of ($4.03) during 1996. Diluted income per share increased by
$18.53 to $14.50 during 1997 from a loss per share of ($4.03) during 1996. The
increase in net income during 1997 as compared to 1996 was due to the increase
in sales by Imagitel during 1997; however, the diluted per share earnings are
less than the basic per share earnings due to the issuance of common stock
options to an employee of Imagitel during 1997.
LIQUIDITY AND CAPITAL RESOURCES
As a result of its long payment cycles, usually 45 to 60 days after it
provides a service, Imagitel is dependent upon third party finance companies for
its working capital and available cash needs. Since 1997, Imagitel has
historically met its working capital needs by borrowing from third parties
against its receivables as collateral (i.e. "factoring"). These factoring
agreements typically require that Imagitel's receivables be paid to third
parties, none of which Imagitel controls. An interruption or decrease in the
amount of receivables which Imagitel generates or the percentage of such
receivables which it is able to factor or actually collect would have a material
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adverse impact upon Imagitel's business and results of operations and could
potentially force Imagitel to cease its operations.
Currently, Imagitel factors 100% of its receivables, approximately 85%
of which it has historically been able to borrow against, while the remaining
15% is withheld by the factoring company as a reserve against uncollectible
accounts, until such time as the associated revenues are actually received from
the billing company. In addition, Imagitel has historically paid approximately
15% to 20% of its revenues as fees to the billing companies and factoring
agents.
Initially, Imagitel financed its negative operating income and cash
flows with a combination of personal loans from the Majority Stockholders of
Imagitel and a factoring arrangement with one of the two billing companies. In
October 1996, Imagitel entered into a receivables factoring agreement with
Receivables Funding Corporation ("RFC") that provided for up to $10.0 million of
available credit, subsequently increased to up to $20.0 million. (Steve Jaffe, a
proposed board member of Imagitel is the Chief Executive Officer of Receivables
Funding Corporation. See "Certain Relationships and Related Transactions".) The
facility has the effect of restricting Imagitel's ability to grow its business,
as it prohibits Imagitel from borrowing against its available line of credit
until after Imagitel has already billed a customer. Additionally, RFC has the
right to restrict funding if it reasonably believes its ability to collect the
receivables from the LECs may be in jeopardy. In addition, because the
receivables due to Imagitel from the LECs must be paid through Imagitel's two
intermediate billing companies, there is a substantial risk that RFC would
restrict funding if one of such billing companies believed that its ability to
collect funds due from the LEC was doubtful or otherwise in jeopardy.
The billing companies also have an added risk in that an LEC may charge
back fees and previously remitted funds relating to Imagitel. If the billing
company reasonably believes this may happen, the billing company has broad
discretion to withhold payments to RFC, which will then be compelled to withhold
funds from Imagitel. One of the specified trigger events that could lead to a
billing company taking such action is a precipitous drop in Imagitel's revenues
or customer base. As Imagitel has recently suffered such a decline, Imagitel
currently risks a severe or even complete loss of funding. Such a decrease or
loss would have a significant material adverse effect upon Imagitel's business
and could cause it to cease operations. Both of Imagitel's two billing companies
have informally assured Imagitel that they will not withhold payments to
Imagitel at this time; however, each of the billing companies reserves the right
to withhold funds in the future if they deem it appropriate. There can be no
assurances that such billing arrangements will continue to exist and if so, that
the billing companies will not withhold such payments from Imagitel.
Imagitel believes that it has sufficient capital to meet its liquidity
and capital requirements for approximately the next sixty days, although
Imagitel's capital requirements are subject to numerous contingencies, many of
which are beyond the control of Imagitel. See "Risk Factors." Imagitel must
obtain additional capital in order to implement its current and future operating
and marketing plans. Imagitel is currently seeking additional sources of
capital; however, it does not have any commitments to provide additional capital
when needed. If it is unable to obtain such financing, Imagitel may be required
to curtail its introduction of existing as well as new products and services,
new or expanded distribution channels or make other capital investments. There
can be no assurance that any additional financing will be available when needed,
or, if available, will be on terms acceptable to Imagitel. In addition, any debt
financing could result in additional interest costs to Imagitel and any
additional issuances of equity securities could be potentially dilutive to
existing shareholders of Imagitel.
Cash provided by (used for) operating activities during the three
months ended March 31, 1998 increased by $1,817,504 to $1,293,126 from
($524,378) during the comparable period of 1997. Cash provided by (used for)
operating activities in each of the years ended December 31, 1997 and 1996 was
$400,329 and ($2,058,867), respectively. The increases in each of 1997 and the
three months ended March 31, 1998 as compared to the comparable prior periods
was a direct result of Imagitel accumulating a critical mass of sales, thereby
allowing Imagitel to operate at a profit commencing in mid-1997. This critical
mass was the direct result of additional customers being added to the Imagitel
systems and a slowing of the internal rate of growth of Imagitel. Imagitel
expenses all customer acquisition costs as incurred, which can result in lower
profits being reported during times of rapid growth.
Cash used for investing activities during the three months ended March
31, 1998 and 1997 was ($856,225) and ($9,687), respectively. Cash used for
investing activities in each of the years ended December 31, 1997 and 1996 was
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($240,474) and ($199,286), respectively. The increase during 1997 as compared to
1996 resulted from a decrease in capital investment and an increase due to a
letter of credit Imagitel posted to guarantee a small line of credit. The
increase during the interim period of 1998 as compared to the corresponding
period of 1997 resulted from significant capital expenditures to support
Imagitel's new planned product offerings and the extension of a working capital
line of credit by Imagitel to Wavetech. See "The Merger -- Certain Material
Contracts of Transactions.".
Cash provided by financing activities during the three months ended
March 31, 1998 and 1997 was ($455,819) and $ 1,052,754, respectively. Cash
provided by financing activities in each of the years ended December 31, 1997
and 1996 was ($1,312,570) and $2,258,153, respectively. The decrease during the
interim period of 1998 as compared to the same period in 1997 is due to an 80%
decrease in payments due from the third party which factored certain of
Imagitel's receivables, reflecting the moderating growth of Imagitel and the
payment of distributions and advances to affiliates to provide cash to the
stockholders of Imagitel to pay 1997 income taxes resulting from the Imagitel's
organization under Subchapter S of the Code. The difference in 1997 as compared
to 1996 resulted from the payment of distributions and the repayment of
stockholder loans made to Imagitel to fund its initial operations.
The provision for income taxes is merely an estimate of the federal and
state taxes that would have been owed by Imagitel, had it been a regular
"C-Corporation" during the demonstrated periods. Imagitel is a corporation
organized under Subchapter S of the Code and as such all tax liabilities have
historically inured to Imagitel's stockholders. As a result, when Imagitel
suffered a loss in 1996, the corresponding tax-loss carryforwards did not accrue
to Imagitel, but rather were allocated to its stockholders. Imagitel is
obligated to make cash distributions to its stockholders in amounts equal to any
tax liabilities incurred by the stockholders as a result of their respective
ownership of Imagitel. Imagitel intends to change to a C-Corporation prior to
effecting the Merger.
SEASONALITY
Imagitel's business has historically been slightly seasonal, with sales
to new customers typically decreasing by approximately 15% during the fourth
quarter of each calendar year. Sales to existing customers have not historically
been impacted by seasonal trends. However, as Imagitel seeks to increase the
percentage of commercial, as opposed to residential, customers which it serves,
its revenues may become more susceptible to seasonal variations.
YEAR 2000 ISSUES
As with other organizations, some of Imagitel's computer programs were
originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields will not function properly
using dates from January 1, 2000 and thereafter. Based upon a cursory internal
investigation, Imagitel believes that its existing internal systems are able to
recognize such dates, and it has adopted a policy which requires that all third
parties with which it enters into agreements be similarly equipped with
technology capable of recognizing such dates. However, as with most
telecommunications companies, Imagitel's operations are largely dependent upon
the technology and equipment of third parties such as the RBOC's, long-distance
telecommunications carriers and other industry participants of the public
switched telephone network, almost all of which have refused to contractually
warrant or represent that such technology and equipment are prepared to address
this issue. Imagitel believes, based upon reasonable diligence, that such
entities are not currently compliant. To the extent such entities are not
compliant and, as a result, experience errors, disruptions or complete
cessations in their service, Imagitel's business could be materially adversely
affected. Imagitel could even be required to suspend or completely cease its own
operations.
INFLATION
Inflation has had no material effect on Imagitel's operations or
financial condition to date.
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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 EXECUTIVE 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
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 is 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
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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.
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 of the Company since March 1997.
Mr. Pocock is the Vice Chairman of Cableshare Interactive Technology, Inc.
("Cableshare"), 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 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 Reorganized Parent.
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 WILL ALSO BE DEEMED A VOTE FOR EACH OF THE FOLLOWING PERSONS TO BE
ELECTED AS A DIRECTOR OF THE REORGANIZED PARENT.
JAMES B. GAMBRELL IV has been designated to serve as a director of the
Reorganized Parent. If the issuance of the Merger Shares 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
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and corporate advisory firm. Mr. Gambrell holds a B.S. in Business from the
State University of New York, and an Executive MBA from Baylor University.
RICHARD HARTMAN has been designated to serve as a director of the
Reorganized Parent. If the issuance of the Merger Shares 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 issuance of the Merger Shares is approved by the
Stockholders, Mr. Hawk shall commence service as a director of the Reorganized
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 issuance of the Merger Shares 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. See "Certain Relationships and
Related Transactions." 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 issuance of the Merger Shares 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.
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 issuance of the Merger Shares 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.
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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 they served.
PROPOSAL NO. TWO:
ELECTION OF DIRECTORS
If the issuance of the Merger Shares pursuant to Proposal No. 1 is
approved, all of the Imagitel designees named above will be appointed to serve
as directors of the Reorganized Parent, until the next annual meeting. In
addition to the four Imagitel designees named above, the Board of Directors of
the Reorganized Parent intends to nominate a fifth person to fill the vacancy of
a fifth director. Imagitel has not yet identified a person to fill such vacancy.
If the issuance of the Merger Shares is not approved, the Company's
Board of Directors has nominated each of Messrs. Quinn, Belsham, Freeman, Pocock
and Clements to serve as directors of the Company until the next annual meeting
of stockholders. Unless otherwise instructed, the proxies will vote to elect
each of the Wavetech designees. Each nominee designated by Imagitel who receives
the vote of a majority of the votes cast at the Annual Meeting will be elected
to serve as a director. Stockholders are not entitled to cumulate votes. If any
nominee becomes unavailable for reelection for any reason, or if a vacancy on
the Board of Directors should occur prior to the Annual Meeting, which events
are not anticipated, the shares represented by the enclosed proxy may be voted
for such other person as the Board of Directors may recommend.
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 $100,000 in compensation during the last completed fiscal year.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- -------------------------
RESTRICTED SECURITIES
NAME AND FISCAL BONUS OTHER ANNUAL STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) AWARDS($) COMPENSATION AWARDS($) OPTIONS (#)
- - - - ------------------ ---- ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gerald I. Quinn 1997 $85,000(1) $-0- $-0- -0- 800,000(2)
President/CEO 1996 $85,000 -0- -0- $203,637 500,000
1995 $58,000 -0- -0- -0- 300,000
</TABLE>
(1) Includes the fair market value of 8,853 shares of Common Stock, 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 $34,163.
(2) Effective January 31, 1997, the exercise price with respect to an aggregate
of 800,000 options to purchase Common Stock previously granted to Mr. Quinn
was amended in connection with the cancellation of such previously
outstanding options in exchange for a new grant of an equal number of
options under the Company's 1997 Stock Incentive Plan. The exercise price
of the new options is equal to the fair market value of the Company's
Common Stock on the date of grant. All of such options were deemed fully
vested as of the date of grant. See "-- Compensation Committee Report on
Repricing."
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTIONS VALUE AS OF AUGUST
31, 1997
The following table sets forth certain information concerning each
exercise of stock options during the year ended August 31, 1997 by the Named
Executive Officer and the aggregated fiscal year-end value of the unexercised
options of such Named Executive Officer.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END (#) AT FISCAL YEAR END ($)
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."
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 January 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 10 years from the date of grant.
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
110,000 shares of the Common Stock of Reorganized Parent at an exercise price of
$2.40 per share (after giving effect to the Reverse Split). Of such options, it
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is anticipated that an aggregate of approximately 885 will be granted to each of
Robert Hawk, Steve Jaffe and Richard Hartman. All of such options will be
granted in exchange for options to purchase shares of Imagitel Common Stock to
be granted prior to the Effective Time. Such options will vest on the first
anniversary of the commencement of the grantee's service to the Board of
Directors of the Reorganized Parent.
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.
After their initial terms, each of the above-described agreements
continue at will, terminable within 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 an aggregate period of 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, as defined below), 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." In December 1997, the Board of
Directors approved a one-year employment agreement with Lydia M. Montoya for her
services as Chief Financial Officer. The agreement provides for a base salary of
$40,000 per year.
1997 STOCK INCENTIVE PLAN
The Plan is administered by the Compensation Committee of the Board of
Directors, which selects the persons to whom stock options are granted and
determines the number of shares of Common Stock covered by the option, its
exercise price or purchase price, and its expiration date.
Directors and consultants of the Company and its subsidiaries are
eligible to receive grants of options, Restricted Stock or Deferred Stock under
the Plan, under which an aggregate of 4,600,000 shares of Common Stock are
authorized for issuance. Usually, the only consideration received by the Company
for the grant of an award will be past services and/or the expectation of future
services. No options, Restricted Stock or Deferred Stock may be granted under
the Plan after January 30, 2007.
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STOCK OPTIONS. The Plan provides for the granting to employees of
either "incentive stock options" within the meaning of Section 422 of the Code,
or non-qualified stock options. Directors, officers, employees and consultants
of the Company and its subsidiaries who, in the opinion of the Board of
Directors, are responsible for the continued growth and development and
financial success of the Company are eligible to be granted options under the
Plan. Generally, the exercise price of incentive stock options granted under the
Plan must be not less than the fair market value of the underlying shares on the
date of grant, and the term of each option may not exceed ten years. Options are
generally subject to a five-year vesting schedule. Incentive stock options
granted to persons who have voting control over 10% or more of the Company's
capital stock are granted at 110% of the fair market value of the underlying
shares on the date of grant and expire five years after the date of grant.
The Plan provides the Board of Directors with the discretion to
determine when options granted thereunder shall become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
The Board, in its sole discretion, may accelerate the benefits of any
award under the Plan in the event of a Corporate Transaction or Change of
Control (each as defined in the Plan), with such acceleration rights being
granted in connection with an award pursuant to an agreement evidencing the same
or at any time after an award has been granted to a Participant.
NONEMPLOYEE DIRECTOR AUTOMATIC OPTIONS. The Plan contains an Automatic
Option Grant Program limited to those persons who serve as nonemployee members
of the Board, including any nonemployee Chairman of the Board ("Eligible
Directors"). Each individual who first becomes an Eligible Director after the
date of approval of the Plan by the shareholders, is automatically entitled to
receive a Non-Statutory Option to purchase 10,000 shares of Common Stock. On the
date which is five days after the Company publicly announces its annual
operating results, beginning with the fiscal year 1998 annual operating results,
each person who is at that time serving as an Eligible Director will
automatically be granted a Non-Statutory Option to purchase 10,000 shares of
Common Stock, provided that such person has attended at least 75% of all
meetings of the Board of Directors held during the most recently completed
fiscal year.
There is no limit on the number of automatic option grants that any one
Eligible Director may receive. All grants to an Eligible Director under the Plan
will have a maximum term of 10 years from the automatic grant date. Each
automatic grant will vest one year from the date of grant, provided that the
Director continues to serve until the next annual meeting of shareholders
following such grant. If an Eligible Director ceases to serve as a Board member
for any reason other than Death or permanent disability while holding one or
more automatic option grants, then the option grants exercisable at the time
such person ceased to be a Board member shall be exercisable for up to six
months following cessation of Board service. In the event an Eligible Director
dies during such six-month period, then the options otherwise exercisable by the
Eligible Director may be exercised by the Eligible Director's legatees, personal
representative or distributees for up to 12 months following the date of the
Eligible Director's death. The exercise price of all options shall be equal to
the fair market value of the Common Stock on the automatic grant date.
In the event an Eligible Director becomes permanently disabled or dies
while serving as a Board member, then all shares of Common Stock subject to
automatic option grants shall immediately vest in full, and the Eligible
Director, or the legatees, personal representatives or distributees in the case
of the Eligible Director's death, may exercise the options for up to 12 months
following the date of the permanent disability or death of the Eligible
Director.
In the event of any Corporate Transaction or Change of Control, all
outstanding director options shall automatically vest and become fully
exercisable and remain exercisable following the Corporate Transaction or Change
of Control until the expiration or sooner termination of the option term.
Immediately following the Corporate Transaction or Change of Control, all
automatic option grants to Eligible Directors shall terminate.
Director options are generally not transferable, and are exercisable
during the Eligible Director's lifetime only by the Eligible Director. An
Eligible Director has no rights as a shareholder with respect to any shares
covered by an option until the option has been validly exercised.
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<PAGE>
RESTRICTED AND DEFERRED STOCK. The Plan permits the Board to grant or
sell shares of Common Stock to participants with a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to be
determined by the Board as of the date of the award. Each grant or sale of
Restricted Stock will constitute an immediate transfer of the ownership of
Common Stock to the participant in consideration of the performance of services,
permitting such participant to dividend, voting and other ownership rights,
subject to the substantial risk of forfeiture and restrictions on transfer
adopted at the date of the award. The Common Stock subject to the restrictions
may not be sold, assigned, transferred, pledged or otherwise encumbered, and any
dividends or other distributions paid on the Restricted Stock will be
sequestered and reinvested on an immediate or deferred basis. At the expiration
of the restriction period, the Company will deliver to the participant
unlegended stock certificates in exchange for cancellation of the legended stock
certificates.
The Board may also authorize grants or sales of Deferred Shares to
participants. Each grant or sale of Deferred Stock will constitute an agreement
by the Company to issue or transfer Common Stock to a participant in the future
in consideration of the performance of services, subject to the fulfillment
during the Deferral Period for such conditions as the Board may specify. Each
grant or sale may be made without additional consideration from the participant
or in consideration of a payment that is less than the fair market value on the
date of grant. During the Deferral Period, the participant will not have any
rights of ownership in the Deferred Stock and will not have the right to vote
the Deferred Stock. The Board may, at its sole discretion, authorize the payment
of dividend equivalents on the Deferred Stock in cash or additional shares of
Common Stock on a current, deferred or contingent basis.
No more than 500,000 shares of Common Stock may be issued as Restricted
Stock and Deferred Stock.
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, Mr. 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 Stockholders. Mr. Quinn was
not a significant Stockholder and was not being paid a large salary.
Consequently, the Board felt the change in the option plan for Mr. 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
Program of the Plan provides that all options granted pursuant to such program
automatically vest upon a Corporate Transaction or 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
The following is a summary of transactions entered into on behalf of
the Company or its subsidiaries since August 31, 1996, in which the amount
involved exceeded $60,000 and in which officers, directors, nominees and/or
greater than 5% beneficial owners of the Company's Common Stock (or an immediate
family members of the foregoing) had, or will have, a direct or indirect
material interest. There is also disclosed below, a description of certain
76
<PAGE>
transactions entered into among Imagitel and (i) a person designated to serve as
a director of the Reorganized Parent and (ii) the Majority Stockholders.
On January 21, 1997, the Company granted a warrant to Switch
Telecommunications Pty Ltd. to purchase up to 200,000 shares of the Company's
Common Stock at a price of $1.50 per share, in exchange for consideration of
$20,000. 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 for its
working capital purposes. 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.
Steve Jaffe has been designated by Imagitel to serve as a director of
the Reorganized Parent, if the issuance of the Merger Shares is approved by the
Wavetech stockholders. Mr. Jaffe is the Chief Executive Officer of Receivables
Funding Corporation ("RFC"), which has a receivables factoring agreement with
Imagitel. During the year ended December 31, 1997, RFC financed all of
Imagitel's eligible receivables at a cost of approximately $87,300 in feesplus
approximately $800,000 in interest.
During the year ended December 31, 1997, Imagitel paid an aggregate of
approximately $2.2 million in commissions, directly and indirectly, to the
Majority Stockholders as consideration for certain marketing services which they
performed on behalf of Imagitel, pursuant to an oral agreement.
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.
77
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information, as of May 31, 1998,
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)
the persons designated by Imagitel to serve as director of the Reorganized
Parent, (iv) all directors and officers of the Company as a group and (v)
persons known to the Company to own 5% or more of the Company's outstanding
Common Stock before and after the Merger and Reverse Split.
<TABLE>
<CAPTION>
BEFORE REVERSE SPLIT AFTER REVERSE SPLIT
AND MERGER AND MERGER
---------------------------------- ----------------------------
PERCENTAGE OF PERCENTAGE OF
NAME AND ADDRESS OF NUMBER OF TOTAL SHARES NUMBER OF TOTAL SHARES
BENEFICIAL OWNER (+) SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
- - - - -------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Terence E. Belsham 1,179,024 (1) 6.9% 197,980(1) 2.1%
Richard P. Freeman 1,195,192 (2) 7.0% 199,199(2) 2.1%
Gerald I. Quinn 1,346,083 (3) 7.4% 224,348(3) 2.3%
Terrence H. Pocock 298,096 (4) 1.7% 49,683(4) *
John P. Clements 200 (5) * 0 *
Switch Telecommunications Pty Ltd. 3,544,110 (6) 18.7% 590,685(6) 6%
55 Mentmove Ave.
Rosebery, New South Wales 2018
Australia
James Rautio (7) 0 0 2,969,100 31.5%
Bruce Robin (7) 0 0 2,969,100 31.5%
Scott Moster (7) 0 0 659,800 7%
James B. Gambrell IV (7) 0 0 347,253(8) 3.6%
Richard Hartman (7) 0 0 0 0
Robert C. Hawk (7) 0 0 0 0
Steven B. Jaffe (7) 0 0 0 0
All Officers and Directors as
a Group(9) 4,018,595(1)(2)(3)(4)(5) 21.2% 347,253(8) 3.6%
</TABLE>
* 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-Reverse Split) shares of Common Stock
issuable in connection with options to purchase Common Stock. The options
are exercisable at $0.81 ($4.86 post-Reverse Split) per share and have
fully vested.
(2) Includes 200,000 (33,334 post-Reverse Split) shares of Common Stock
issuable in connection with options to purchase Common Stock. The options
are exercisable at $0.81 ($4.86 post-Reverse Split) per share and have
fully vested.
(3) Includes 800,000 (133,334 post-Reverse Split) shares of Common Stock
issuable in connection with options to purchase Common Stock. The options
are exercisable at $0.66 ($3.96 post-Reverse Split) per share and have
fully vested.
(4) Includes 10,000 (1,667 post-Reverse 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-Reverse Split) of the options are exercisable.
Includes 288,096 (48,016 post-Reverse Split) shares of Common Stock and
warrants to purchase an aggregate of 20,000 (3,334 post-Reverse 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 Mr. Clements' sons.
(6) Includes a warrant to purchase 2,000,000 (333,334 post-Reverse Split)
shares of Common Stock at $1.50 ($9.00 post-Reverse Split) per share.
(7) This holder has an address at c/o Imagitel, Inc., Penthouse Suite, 1132
Bishop Street, Honolulu, Hawaii 96813.
(8) Represents options to purchase 10,526 shares, all of which will become
immediately exercisable at the Effective Time.
(9) Includes shares beneficially owned by 5 persons prior to the Effective Time
and shares beneficially owned by 4 persons after the Effective Time.
79
<PAGE>
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 issuance of the
Merger Shares 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 issuance of the Merger Shares 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.
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 each of the fiscal
quarters ended November 30, 1997, February 28, 1998 and May 31, 1998 are as
follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
1996 (1)
Common Stock $2 1/16 $ 3/4 $ 1 3/8 $ 3/4 $2 1/8 $ 3/4 $2 $ 3/4
1997 (1)
Common Stock $1 1/16 $17/32 $1 1/32 $ 1/4 $15/16 $11/32 $3/4 $5/16
1998 (1)
Common Stock $ 19/32 $ 3/8 $ 15/32 $13/32 $11/16 $ 9/16 N/A N/A
(1) THE INFORMATION SET FORTH ABOVE CONCERNING THE HISTORICAL PRICE OF
THE WAVETECH COMMON STOCK HAS NOT BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO
THE REVERSE SPLIT.
The bid and the asked price of the Wavetech Common Stock on June 15,
1998 were $.594 and $.656, respectively.
As of the Record Date, the Company had 146 stockholders 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.
79
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
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, (ii) the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended November 30, 1997 and (iii) the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended February 28, 1998. 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 Special 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 any document which is incorporated herein by reference. 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 , 1998.
1997 ANNUAL REPORT TO SHAREHOLDERS
A copy of the Company's 1997 Annual Report to Shareholders is being
delivered herewith. Shareholders are encouraged to review the information
included in the 1997 Annual Report in conjunction with the information set forth
in this Proxy Statement.
80
<PAGE>
GLOSSARY OF DEFINED TERMS
ANNUAL MEETING means the special meeting in lieu of the 1998 Annual
Meeting of Stockholders of Wavetech to be held on July __, 1998.
CODE means the Internal Revenue Code of 1986, as amended.
COMPANY means Wavetech International, Inc., a Nevada corporation,
(formerly Wavetech, Inc., a New Jersey corporation) together with its
subsidiaries unless the context otherwise implies.
CONVERSION RATIO means the rate at which each share of outstanding
Imagitel Common Stock will be exchanged for a number of shares of authorized but
unissued shares of Wavetech Common Stock in connection with the Merger. The
Conversion Ratio is 32.99 shares of Wavetech Common Stock for each share of
Imagitel Common Stock outstanding, after giving effect to the Reverse Split.
DDD means DDD Calling, Inc., a Texas corporation and wholly owned
operating subsidiary of Imagitel.
EFFECTIVE TIME means the time immediately following consummation of the
Merger and Reorganization.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
FCC means the U.S. Federal Communications Commission.
IMAGITEL means Imagitel, Inc., a closely held Nevada corporation,
together with its subsidiaries.
IMAGITEL COMMON STOCK means the no par value per share common stock
authorized for issuance by Imagitel.
INTERIM means Wavetech Interim, Inc., a Nevada corporation wholly owned
by Wavetech and formed for the purpose of effecting the Merger.
INTERPRETEL means Interpretel, Inc., an Arizona corporation and wholly
owned operating subsidiary of Wavetech.
ISP means internet service provider.
KAUFMAN means Kaufman Brothers, LP, an investment banking and financial
advisory firm engaged by the Company to render an opinion with respect to the
fairness, from a financial point of view, of the Conversion Ratio.
LATA means local access and transport area.
LECS means the local exchange carriers of telecommunications services.
MAJORITY STOCKHOLDERS means James Rautio and Bruce Robin, each of whom
owns approximately 45% of the outstanding Imagitel Common Stock and who shall,
collectively, own in excess of 60% of the common stock of the Reorganized Parent
to be outstanding immediately following the Effective Time.
MERGER means the merger of Interim with and into Imagitel pursuant to
the Reorganization Agreement.
MERGER SHARES means the up to 7,922,861 shares of Wavetech Common Stock
to be issued to the former stockholders of Imagitel in exchange for all of the
outstanding shares of Imagitel Common Stock connection with the Merger.
"NASDAQ" means the Nasdaq SmallCap Market which is maintained by the
Nasdaq Stock Market, Inc. and on which the Company's Common Stock is currently
quoted.
PICS means primary interexchange carrier of a particular end user's
telecommunications services.
PIN means personal identification number of an authorized user of a
telecommunications service.
PROXY means the proxy by which Stockholders are asked to grant
authority to each of Gerald I. Quinn and Richard P. Freeman to vote shares of
Wavetech Common Stock held by the person granting such authority in accordance
with the instructions specified thereon.
81
<PAGE>
PROXY STATEMENT means this proxy statement prepared in accordance with
Rule 14a of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, pursuant to which the Company is soliciting
proxies to be voted at the Annual Meeting.
RBOCS means the regional Bell operating companies. RECORD DATE means
June 24, 1998.
REORGANIZATION means the series of transactions contemplated by the
Reorganization Agreement, including but not limited to the Merger, the change in
control of Wavetech and the issuance by Wavetech of the Merger Shares.
REORGANIZATION AGREEMENT means the Reorganization Agreement, dated as
of January 5, 1998 by and among Wavetech, Interim and Imagitel pursuant to which
such parties agree to effect the Reorganization, as amended.
REORGANIZED PARENT means Wavetech as it shall exist following the
Reorganization, at which time it shall be renamed "Imagitel Group Holdings,
Inc.", which shall be controlled by the Majority Stockholders.
REVERSE SPLIT means the one-for-six reverse split of outstanding shares
of Wavetech Common Stock previously approved by Wavetech Shareholders and which
is planned to become effective at an unspecified date prior to the
Reorganization.
R&R means R&R Ventures, Ltd., a Nevada corporation affiliated with
Imagitel as a result of its common ownership by the Majority Stockholders.
RRVE means RRV Enterprises, Inc., a Texas corporation and wholly owned
operating subsidiary of Imagitel. SEC means the U.S. Securities and Exchange
Commission.
SECURITIES ACT means the Securities Act of 1933, as amended.
STOCKHOLDERS means holders of record of Wavetech Common Stock as of the
close of business on the Record Date.
SURVIVING SUB means Imagitel, Inc., the surviving corporation of the
Merger which shall be wholly owned by the Reorganized Parent.
SWITCH means Switch Telecommunications Pty Ltd, an Australian
corporation, which holds approximately 5% of the currently outstanding shares of
Wavetech Common Stock and which has entered into that certain license agreement,
dated as of August 28, 1996.
WAVETECH means Wavetech International, Inc., a Nevada corporation,
(formerly Wavetech, Inc., a New Jersey corporation) together with its
subsidiaries unless the context otherwise implies.
WAVETECH COMMON STOCK means the $.001 par value per share common stock
authorized for issuance by Wavetech.
82
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF WAVETECH, 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
Notes to the Financial Statements ...................................... F-7
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF WAVETECH INTERNATIONAL,
INC. AND ITS SUBSIDIARIES FOR THE SIX MONTH PERIODS ENDED FEBRUARY 28,
1998 AND 1997.
Condensed Consolidated Balance Sheets for February 28, 1998 (unaudited)
and August 31,1997 (audited).......................................... F-18
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended February 28, 1998 and 1997 (unaudited)............ F-19
Condensed Consolidated Statements of Operations for the Six Month
Periods Ended February 28, 1998 and 1997 (unaudited).................. F-20
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods Ended February 28, 1998 and 1997 (unaudited).................. F-21
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-22
CONSOLIDATED FINANCIAL STATEMENTS OF IMAGITEL, INC. FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
Report of Independent Accountants....................................... F-23
Consolidated Balance Sheets - 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
CONSOLIDATED FINANCIAL STATEMENTS OF IMAGITEL, INC. FOR THE QUARTERS
ENDED MARCH 31, 1998 AND 1997
Consolidated Balance Sheets -March 31, 1998 (unaudited) and
December 31, 1997 (audited)........................................... F-32
Consolidated Statements of Operations - (unaudited)..................... F-33
Consolidated Statements of Cash Flows - (unaudited)..................... F-34
Notes to the Consolidated Financial Statements.......................... F-35
<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.
Addison, Roberts & Ludwig, P.C.
Tucson, Arizona
December 4,1997
Except for Note 15 as to which the date is March 31, 1998
F-2
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997
ASSETS
1997
----
Current assets:
Cash and cash equivalents $ 13,329
Accounts receivable, net of allowance of $527 26,273
Prepaid expenses and other assets 9,725
-----------
Total current assets 49,327
-----------
Property and equipment, net 410,182
Noncurrent assets:
Investment in Switch Telecommunications Pty Limited 2,316,165
Intangibles, net of amortization of $7,511 29,489
Deposits and other assets 35,633
-----------
Total noncurrent assets 2,381,287
-----------
Total assets $ 2,840,796
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 395,222
Accrued interest payable, noncurrent portion 5,248
Notes payable, current portion 172,071
Capital leases payable, current portion 56,119
-----------
Total current liabilities 628,660
Noncurrent liabilities:
Capital leases payable 53,892
-----------
Total liabilities 682,552
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 $ 2,840,796
===========
See Independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
1997 1996
---- ----
Revenues $ 865,571 $ 19,895
----------- -----------
Expenses:
Cost of sales 679,930 -0-
Development -0- 297,935
General and administrative 1,796,533 1,603,356
----------- -----------
Total expenses 2,476,463 1,901,291
----------- -----------
Net loss from operations (1,610,892) (1,881,396)
Other income and expense:
Interest income 8,500 32,777
Interest expense (26,893) (11,585)
----------- -----------
Total other income and expense (18,393) 21,192
----------- -----------
Net loss $(1,629,285) $(1,860,204)
=========== ===========
Net loss per common share $ (.11) $ (.17)
=========== ===========
Weighted average number of shares outstanding 14,455,167 11,200,401
=========== ===========
See Independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances, August 31, 1995 9,455,078 $ 9,455 $1,540,223 $(1,392,167) $ 157,511
Common stock issued 4,659,363 4,659 5,207,744 5,212,403
Net loss (1,860,204) (1,860,204)
---------- ------- ---------- ----------- -----------
Balances, August 31, 1996 14,114,441 14,114 6,747,967 (3,252,371) 3,509,710
Common stock issued 962,366 963 276,856 277,819
Net loss (1,629,285) (1,629,285)
---------- ------- ---------- ----------- -----------
Balances, August 31, 1997 15,076,807 $15,077 $7,024,823 $(4,881,656) $ 2,158,244
========== ======= ========== =========== ===========
</TABLE>
See Independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(1,629,285) $(1,860,204)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 211,876 136,902
Common stock issued for services 204,180 203,125
Changes in assets and liabilities:
(Increase) decrease in accounts receivable and
other current assets 1,108 (32,758)
(Increase) decrease in license fee receivable 200,000 (500,000)
(Increase) decrease in inventory deposit 241,037 (241,037)
Increase (decrease) in accounts payable and
accrued expenses 264,507 (104,339)
Increase (decrease) in accrued interest payable 5,248 (39,327)
Increase (decrease) in unearned revenue (499,985) 799,985
----------- -----------
Total adjustments 627,971 222,551
----------- -----------
Net cash used in operating activities (1,001,314) (1,637,653)
Cash flows from investing activities:
Purchase of property and equipment (25,237) (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 (4,955) (137,142)
Cash flows from financing activities:
Proceeds from (payments on) notes payable 172,071 (324,600)
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 162,110 2,346,490
----------- -----------
Net increase (decrease) in cash (844,159) 571,695
Cash and cash equivalents, beginning of year 857,488 285,793
----------- -----------
Cash and cash equivalents, end of year $ 13,329 $ 857,488
=========== ===========
See Independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
WAVETECH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The consolidated financial statements include the accounts of Wavetech,
Inc.(the "Company") and its wholly owned subsidiaries, Interpretel,
Inc.(Interpretel), Interpretel(Canada)Inc., Telplex International, Inc. and
International Environmental Services Corporation (an inactive corporation). All
material intercompany balances and transactions have been eliminated. As of
August 31, 1997, and for the previous three years, the Company had no operations
other than its investment in Interpretel which was made on March 8, 1995. On
March 10, 1995, Interpretel (Canada) Inc. was incorporated in Ontario, Canada as
a wholly owned subsidiary of Interpretel. Interpretel (Canada) Inc. had not yet
had any activities as of August 31, 1997.
Interpretel was incorporated April 15, 1993, under the laws of the
state of Arizona to develop, market and provide interactive telecommunication
systems and services to business and individual customers. The systems
incorporate interactive call processing, computer-telephony integration, card
production/fulfillment, bill services, marketing, sales support, and customer
service to provide features and services, including but not limited to, long
distance dialing, voice/fax messaging, voice/fax broadcast, language
interpretation/translation, information retrieval, interface to existing
databases, and product promotion services. Each Interpretel system is developed
to reflect or target the needs of an identified (target) market, with services
provided to individual customers via a calling card product incorporating the
use of certain trade secrets, trademarks, service marks, and materials related
thereto. In prior years, Interpretel was deemed to be a development stage
enterprise. For the year ended August 31, 1997, Interpretel is considered to be
an operating company.
On January 1, 1997, the Company acquired certain intangible assets of
Telplex, Inc., an Arizona corporation, in exchange for $25,000 in cash. These
assets were placed in a new wholly-owned subsidiary of Wavetech 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.
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.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTANGIBLE ASSETS
Intangible assets consist of start-up costs. These costs are primarily
consulting fees and other costs incurred in connection with the development of
the Company. Management believes that these costs will be recovered with future
operations. Start-up costs are amortized over five years using the straight-line
method.
INCOME TAXES
The Company uses Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a liability approach
to accounting for deferred income taxes in that the deferred income tax
liability or benefit at the end of an accounting period should reflect the
estimated deferred tax liability or tax benefit on the temporary book-tax
differences at anticipated federal and state income tax rates.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1997, the Company maintained a cash balance in a bank
account insured by the FDIC. The cash balance did not exceed the FDIC insurable
amount.
The Company extends credit to customers on an unsecured basis in the
ordinary course of business. The Company bills its services directly to
authorized customer credit cards as usage is incurred.
SFAS 107 requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
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.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation
arrangements under the provisions of APB No. 25, Accounting for Stock Issued to
Employees.
LOSS PER COMMON SHARE
Loss per common share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation when the effect is antidilutive.
3. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Management utilized certain estimates in connection with establishing
and maintaining the value of the common stock of Switch (Note 5). It is at least
reasonably possible that these estimates may change in the near term due to one
or more future events. Such a change would change the value of the common stock
of Switch. The effect of the change could be material to the financial
statements.
4. BUSINESS COMBINATION -- COMMITMENT
On March 8, 1995, the Company entered into an agreement with
Interpretel pursuant to which the Company agreed to issue 6,000,000 shares of
its common stock in exchange for 100% of the outstanding 1,532,140 shares of
common stock of Interpretel. The transaction resulted in the former shareholders
of Interpretel owning approximately 80% of the outstanding shares of the
Company. In accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations," the acquisition has been accounted for as a reverse acquisition
with Interpretel deemed to be the acquiring entity of the Company. The common
shares issued in connection with the acquisition were assigned no value because
the Company had no assets or liabilities at the date of the acquisition.
The acquisition agreement also provides that during the three year
period following the March 8, 1995 closing, former shareholders of Interpretel
can receive an additional 7,500,000 common shares of the Company through an
"earn-out" based upon before tax net profit. During the two year period
following closing, former shareholders of Interpretel shall earn up to 3,750,000
common shares of the Company for every $0.50 net profit before taxes, and an
additional 3,750,000 common shares of the Company for every $1.00 of cumulative
total net profit before taxes. During the third year following closing, any
shares not previously issued pursuant to this agreement can be earned at $1.50
net profit before taxes per share.
These additional shares will not be considered in recording the
Acquisition transaction until such time as the earnings targets have been met.
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 representing 5% of the issued and outstanding
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).
F-9
<PAGE>
5. INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED CONTINUED
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).
The value assigned to the Switch shares received was determined by
management valuing the whole of the issued capital of Switch on the basis of
discounting the anticipated future cash flow. This method determines the net
present value of the underlying cash flow of a business. It recognizes that
money has a time value by discounting future cash flows at an appropriate
discount rate. A valuation using discounted cash flow procedures requires the
determination of the nature of timing of future cash inflows and outflows and
the discount factor to be applied to the cash flows. Future cash flows may not
be achieved and consequently any future variation between the actual cash flow
and those utilized by management will affect the valuation. Since Switch is a
privately held company, the market value of the shares is not readily
ascertainable and is subject to uncertainty. There have been no events known to
the Company which would signify an impairment of the value of the investment.
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 purchased 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. Consideration of $20,000 was received for the warrants.
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. The Company received $200,000 of the licensing fee
during the year ended August 31, 1997.The agreement provides for payments of
$150,000 each in year two and three.
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
calling 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
F-10
<PAGE>
6. LICENSING AGREEMENT CONTINUED
year ended August 31, 1997, Switch did not pay any royalty fees to the Company.
Management believes fees are due to the Company but the amount is not yet
readily determinable; therefore no amount due is recorded in these financial
statements.
7. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 1997:
1997
Furniture and fixtures $ 170,415
Computer equipment 505,377
Software 112,318
----------
Total property and equipment, at cost 788,110
Less: accumulated depreciation (377,928)
---------
Net property and equipment $ 410,182
==========
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-11
<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
--------
Total $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. 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. The value assigned to the common stock was based on the fair market
value of the common stock on the date that the liability was incurred. The value
of the consulting services was charged to expense during the period incurred.
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. The value assigned to the common
stock was based on the fair market value on the date of issue.
During the year ended August 31, 1997, the Company issued 100,000
shares in satisfaction of a note payable of $53,639. The value assigned to the
common stock was based on the fair market value of the common stock on the date
the agreement was negotiated.
During the year ended August 31, 1997, the Company issued 438,755
shares of stock in satisfaction for services performed in the previous year. The
previous values assigned to the common stock and charged to expense in the
period the services were performed were based on the fair market value of the
common stock.
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.
The value of the common stock charged to expense in the period the services were
performed were based on the fair market value of the common stock.
F-12
<PAGE>
11. COMMON STOCK, CONTINUED
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. Consideration received was $20,000. The value assigned to the
warrants was based on an allocation pursuant to the comprehensive agreement
(Note 5).
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 exercise price reflects the fair
market value of the shares of common stock on the date of the grant of the
warrants.
The total number of warrants outstanding at August 31, 1997, is
3,079,630.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock issued to Employees ("APB No. 25") and related
Interpretations in accounting for its stock options because as discussed below,
the alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB No. 25, because the exercise
price of the Company's stock options equals or exceeds the fair market value of
the underlying stock on the dates of grant, no compensation expense is
recognized.
During the year ended August 31, 1997, the Company adopted the
Wavetech, Inc. 1997 Stock Incentive Plan. Under this plan, the Company is
authorized to issue up to 4,600,000 shares of common stock. Such options have
terms of up to ten years. Shares may be issued as incentive stock options,
deferred shares or restricted shares. The options were granted at the fair
market value of the common stock on the date of the grant.
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, and such information has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rate of 5.64%, dividend yield of 0%,
volatility factor of the expected market price of the Company's common stock of
.98, and a weighted-average expected life of the options of 2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
F-13
<PAGE>
11. COMMON STOCK, CONTINUED
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the related vesting period. The Company's
pro forma information follows:
YEAR ENDED
AUGUST 31, 1997
---------------
Net loss, as reported $(1,629,285)
Pro forma compensation expense for stock options:
1997 grants (414,000)
Pro forma net loss (2,043,285)
-----------
Pro forma loss per share $ (.14)
===========
A summary of the Company's stock options activity is as follows:
WEIGHTED
NUMBER OF EXERCISE PRICE
OPTIONS GRANTED PER SHARE
--------------- ---------
Outstanding, August 31, 1995 136,250 $1.39
Issue 1,550,000 1.73
Canceled (450,000) 1.94
---------- ----
Outstanding, August 31, 1996 1,236,250 1.73
Issued 2,328,935 .68
Canceled (1,236,250) 1.73
---------- ----
Outstanding, August 31, 1997 2,328,935 $ .68
========== ====
Exercise prices for options outstanding as of August 31, 1997 ranged
from $0.36 per share to $0.81 per share. The remaining contractual life of such
options ranged from two to ten years. Options for the purchase of 1,468,935
shares were immediately exercisable at August 31, 1997.
Pro forma compensation expense presented may not be representative of
future pro forma expense, when amortization of multiple years awards may be
reflected.
The weighted average fair values of stock options granted during 1997
for which the exercise price was equal to the fair market value of the stock
were $0.68 per share.
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-14
<PAGE>
12. INCOME TAXES, CONTINUED
The income tax benefit for the years ended August 31 is comprised of
the following amounts:
1997 1996
---- ----
Current $ -0- $ -0-
Deferred
Federal (429,000) (628,000)
State (28,000) (67,000)
---------- ----------
(457,000) (695,000)
Valuation allowance 457,000 695,000
---------- ----------
Total tax benefit $ -0- $ -0-
========== ==========
The Company's tax benefit differs from the benefit calculated using the
federal statutory income tax rate for the following reasons:
1997 1996
---- ----
Statutory tax rate (35.0)% (35.0)%
State income taxes (9.0)% (9.0)%
Amortization of organization costs 7.0% 7.0%
Release of valuation allowance 37.0% 37.0%
----- -----
Effective tax rate .0% .0%
===== =====
The components of the net deferred tax asset are as follows:
1997
----
Deferred tax asset:
Amortization of organization costs $ (120,000)
Net operating loss carryforward (2,868,000)
-----------
(2,988,000)
Valuation allowance 2,988,000
-----------
$ -0-
===========
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 at $.35 per share.
An officer and shareholder advanced $13,000 to the Company which is
reflected in notes payable (Note 8).
F-15
<PAGE>
13. RELATED PARTY TRANSACTIONS CONTINUED
A shareholder of the Company advanced $50,000 to the Company which is
reflected in notes payable (Note 8). The Company pledged as collateral a
security interest in accounts receivable, inventory, general intangibles,
equipment, instruments and personal guarantees of corporate officers. As of
November 30, 1997 the collateral has been released and the shares converted to
shares of common stock of the Company.
14. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the year ended August 31, 1997, the Company entered into capital
leases in the amount of $53,783 to purchase office equipment.
During the year ended August 31, 1997, the Company issued 100,000
shares of common stock in satisfaction of a note payable of $53,639.
During the year ended August 31, 1996, the Company entered into capital
leases in the amount of $108,213 to purchase office equipment.
During the year ended August 31, 1996, the Company entered into an
agreement with Switch to exchange an equity interest in the Company for an
equity interest in Switch (Note 4). The Company issued 1,544,110 shares of its
common stock in exchange for 5 shares of the common stock of Switch.
Supplemental disclosure of cash flow information:
1997 1996
---- ----
Cash paid during the period for:
Income taxes $ 50 $ 50
======= =======
Interest $20,454 $39,327
======= =======
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 a 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 November 30, 1997.
F-16
<PAGE>
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-17
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 (UNAUDITED) AND AUGUST 31, 1997 (AUDITED)
ASSETS
FEBRUARY 28 AUGUST 31
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 46,265 $ 13,329
Accounts receivable, net of allowance of $527 46,237 26,273
License fee receivable 150,000 150,000
Prepaid expenses and other assets 10,547 9,725
----------- -----------
Total current assets 253,049 199,327
Property and equipment, net 333,782 410,182
Noncurrent assets:
Investment in Switch Telecommunications
Pty Limited 2,316,165 2,316,165
Intangibles, net 27,455 29,489
Deposits and other assets 80,083 35,633
----------- -----------
Total noncurrent assets 2,423,703 2,381,287
----------- -----------
Total assets $ 3,010,534 $ 2,990,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 457,507 $ 395,222
Accrued interest payable 5,355 5,248
Unearned revenue 150,000 150,000
Notes payable, current portion 273,000 172,071
Capital leases payable, current portion 56,119 56,119
----------- -----------
Total current liabilities 941,981 778,660
Noncurrent liabilities:
Capital leases payable 35,624 53,892
----------- -----------
Total noncurrent liabilities 35,624 53,892
----------- -----------
Total liabilities 977,605 832,552
Stockholders' equity:
Common stock, par value $.001 per share;
50,000,000 shares authorized, 16,203,095 and
15,076,807 shares issued and outstanding 16,203 15,077
Additional paid in capital 7,525,921 7,024,823
Accumulated deficit (5,509,195) (4,881,656)
----------- -----------
Total stockholders' equity 2,032,929 2,158,244
----------- -----------
Total liabilities and stockholders' equity $ 3,010,534 $ 2,990,796
=========== ===========
F-18
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED FEBRUARY 28, 1998
AND FEBRUARY 28, 1997 (UNAUDITED)
1998 1997
---- ----
Revenues: $ 27,645 $ 514,240
Cost of sales:
Direct costs 22,619 464,184
------------ ------------
Gross profit (loss) 5,026 50,056
Other costs
Administrative expenses 271,254 453,117
------------ ------------
Loss before other income (expenses) $ (266,228) $ (403,061)
------------ ------------
Other income (expense)
Interest income 50 1,555
Interest expense (6,121) (3,538)
------------ ------------
Total other income (expense) (6,071) (1,983)
------------ ------------
Net loss $ (272,299) $ (405,044)
============ ============
Per share data
Net loss per share (0.02) (0.03)
Weighted average number of shares outstanding 15,406,797 14,314,442
============ ============
F-19
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED FEBRUARY 28, 1998
AND FEBRUARY 28, 1997 (UNAUDITED)
1998 1997
---- ----
Revenues: $ 78,675 $ 522,639
Cost of sales:
Direct costs 75,189 515,413
----------- -----------
Gross profit (loss) 3,486 7,226
Other costs
Administrative expenses 519,250 905,234
----------- -----------
Net loss from operations (515,764) (898,008)
Other income (expense)
Interest income 52 8,105
Interest expense (18,931) (5,838)
Debt conversion expense (92,894)
----------- -----------
Total other income (expense) (111,773) 2,267
----------- -----------
Net loss $ (627,537) $ (895,741)
=========== ===========
Per share data
Net loss per share (0.04) (0.06)
Weighted average number of shares outstanding 15,276,641 14,228,728
=========== ===========
F-20
<PAGE>
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE SIX-MONTH PERIODS ENDED FEBRUARY 28,
1998 AND 1997 (UNAUDITED)
1998 1997
---- ----
Cash flows from operating activities:
Net Loss $(627,537) $(895,741)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 78,434 97,759
Common stock issued for services and
accrued interest 50,196 23,333
Debt conversion expense 92,894 --
Changes in assets and liabilities:
(Increase) in other current assets (20,786) (23,084)
Decrease in inventory deposit -- 241,037
(Increase) in intangibles due to purchase of
Telplex, Inc. -- (25,000)
Increase in accounts payable and accrued expenses 62,282 160,108
Increase in accrued interest payable 107 --
Decrease in unearned revenue -- (299,985)
--------- ---------
Total Adjustments 263,127 174,168
--------- ---------
Net cash used in operating activities (364,410) (721,573)
Cash flows from investing activities:
Purchase of property and equipment -- (21,897)
Increase in other assets (44,450) --
Net cash used in investing activities (44,450) (21,897)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable 460,000 --
Payments on capital lease payable (18,268) (11,703)
Proceeds from sale of warrants -- 20,000
Proceeds from common stock issued 64 --
--------- ---------
Net cash provided by financing activities 441,796 8,297
Net increase (decrease) in cash 32,936 (735,173)
Cash and cash equivalents, beginning of period 13,329 857,488
--------- ---------
Cash and cash equivalents, end of period $ 46,265 $ 122,315
========= =========
F-21
<PAGE>
WAVETECH INTERNATIONAL, 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 and
six-month periods ended February 28, 1998 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
International, 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 -- NOTES PAYABLE
In February,1998, the Company established a $450,000 secured
line-of-credit with Imagitel, Inc. to facilitate interim financing needs. The
interest rate is 12 percent. Interest and principal are due July 1, 1998. The
note is secured by the assets of the Company. As of February 28, 1998, the
Company had total borrowings of $210,000 under the line-of-credit.
NOTE 3 -- PER SHARE DATA
Per share data is based on the weighted average number of shares
outstanding throughout the periods. For the three months and six months ended
February 28, 1998, earnings per share were calculated with a weighted average
number of common shares outstanding of 15,406,797 and 15,276,641 respectively.
The assumed exercise of stock options outstanding is anti-dilutive.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Imagitel, Inc.
We have audited the accompanying consolidated balance sheets of Imagitel, Inc.
as of December 31, 1997 and 1996 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 1996, 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, except as to Notes 9,10 and 12
for which the date is June 15, 1998
F-23
<PAGE>
IMAGITEL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
ASSETS
Current assets:
Cash $1,472,425 $ --
Restricted cash 100,000 --
Accounts receivable 6,394,990 2,896,154
Prepaid expenses 116,702 31,307
---------- ----------
Total current assets 8,084,117 2,927,461
Property and equipment 263,509 185,078
Other assets 2,900 2,900
---------- ----------
Total assets $8,350,526 $3,115,439
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ -- $ 76,286
Accounts payable 1,545,161 877,131
Advances from factor 5,085,808 1,924,867
Notes payable to stockholders 314,500 --
Commissions payable to affiliate 241,929 617,176
Other accrued liabilities 764,510 204,976
---------- ----------
Total current liabilities 7,951,908 3,700,436
Notes payable to stockholders -- 220,000
---------- ----------
Total liabilities 7,951,908 3,920,436
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock-no par value; 1,000,000 shares
authorized; 200,000 shares issued and
outstanding 2,000 2,000
Retained earnings 396,618 (806,997)
---------- ----------
398,618 (804,997)
---------- ----------
Total liabilities and stockholders' equity $8,350,526 $3,115,439
========== ==========
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 1,426,110
Interest expense 890,868 63,036
----------- ----------
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 (deficit), 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 $ 38,995,925 $ 3,308,572
Payments to suppliers and employees (37,704,728) (5,304,403)
Interest paid (890,868) (63,036)
------------ -----------
Net cash provided by (used in) operating
activities 400,329 (2,058,867)
------------ -----------
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) --
Advances from factor, net 3,160,941 1,924,867
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 financing activities 1,312,570 2,258,153
------------ -----------
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 (3,498,836) (2,896,154)
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
------------ -----------
(2,634,871) (1,251,870)
------------ -----------
Net cash provided by (used in) operating
activities $ 400,329 $(2,058,867)
============ ===========
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 RRVE 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(TM) 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.
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.
F-27
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 12), 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 and 1996 is comprised of the
following:
1997 1996
---- ----
Receivables assigned to factor $ 5,679,160 $2,541,084
Unfactored accounts receivable 1,591,419 607,070
Due from another reseller 374,411 --
Allowance for doubtful accounts (1,250,000) (252,000)
----------- ----------
$ 6,394,990 $2,896,154
=========== ==========
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. Advances from the factor have
been reflected as a liability at December 31, 1997 and 1996.
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-28
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 is summarized as
follows:
1997 1996
---- ----
Equipment $ 276,820 $ 139,750
Furniture and fixtures 62,938 59,536
--------- ---------
339,758 199,286
Less accumulated depreciation (76,249) (14,208)
--------- ---------
$ 263,509 $ 185,078
========= =========
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.
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(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 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 comprises a
significant portion of the Company's revenue. In the event these states obtain a
F-29
<PAGE>
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.
In early March 1998, the Company 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 the Company
to temporarily cease the use of sweepstakes marketing in Missouri. The Company
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 the Company will be
allowed to continue marketing or servicing its existing customers in Missouri.
The Company has agreed to no longer market its products in Missouri with the use
of sweepstakes promotion, until such time as the Company and the State of
Missouri reach a settlement on this matter. The Company continues to service and
bill its existing customers base in Missouri. The State of Missouri is seeking
recision of all contracts, full restitution (plus an extra 10% for a state fund)
and the cost of the action in addition to a $1,000 fine for each violation.
Customers in the State of Missouri comprise less than 5% of the active customer
base of the Company. The Company cannot at this time determine the possible
range of potential damages. However, the Company does not believe that it is
probable that the State of Missouri will prevail.
In April 1998, the West Virginia Attorney General's Office filed suit
against the Company alleging among other things, deceptive trade practices and
sought injunctive relief barring it from marketing, providing services or
billing any consumers within the State of West Virginia, The Company entered
into a voluntary agreement with the State of West Virginia that allows the
Company to continue servicing and billing its existing customer base, but
requires the Company to cease marketing its products with its existing
sweepstakes program. The Company believes it has conducted its billing in a
lawful manner and is 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 West Virginia. However, there can be no
assurances that the Company will be allowed to continue marketing or servicing
its existing customers in West Virginia. The State of West Virginia is seeking
recision of all contracts, refund of all monies and the cost of the action in
addition to a $5,000 fine for each violation. Customers in the State of West
Virginia comprise less than 5% of the active customer base of the Company. The
Company cannot at this time determine the possible range of potential damages.
However, the Company does not believe that it is probable that the State of West
Virginia will prevail.
In 1997, the State of Florida conducted an investigation into the
business practices relating to the Company's Consumer Access(TM) program. The
Company 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. Management currently does not anticipate a loss related to
this matter.
10. BILLING
In late April 1998, the Company was notified that a Local Exchange
Carrier ("LEC") that had historically billed its customers on behalf of the
Company would no longer do so. The region served by the LEC represents more than
30% of the Company's business and $1.4 million per month in revenue. Because of
the low average bill amount for each customer, it is not practical for the
Company to bill customers directly. Although the Company was able to negotiate
the resumption of such billing services by the LEC for those customers that were
billed by the Company prior to April 1998, the Company's revenues during the
period in which services were suspended were approximately $2.0 million less
(unaudited) than anticipated for such period.
In addition, one of the Company's billing aggregators and another LEC
also informed the Company in May 1998, that they would no longer process the
Company's billing transactions. The billing aggregator processes approximately
70% of the Company's business and has since agreed to resume its billing
activities on behalf of the Company. The other LECs billing activities have
historically represented less than $200,000 in monthly revenues for the Company.
The Company has retained legal counsel for this billing matter. However, it has
not yet determined what, if any, remedies are available.
F-30
<PAGE>
Continued billings to existing customers by the LECs and the billing
aggregator are dependent on discontinuance of the Company's sweepstakes
marketing program and a low level of consumer complaints, as defined. Billing to
new customers are dependent on approval of the Company's new marketing programs
by certain LECs.
11. 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. The options
consisted of approximately five percent of the then outstanding shares of the
Company. These options vest after three years or sooner if there is a trigger
event. Management does not intend to recognize compensation expense upon
issuance as the fair value of the Company's stock approximates the option
exercise price. This was based upon a recent cash offer for the Company,
discounted to account for restrictions on vesting of the options and the
illiquid nature of the shares.
12. 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 197.95 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 third quarter
of 1998,
OTHER --
In February 1998, the Company made $210,000 available to Wavetech in a
line of credit arrangement.
F-31
<PAGE>
IMAGITEL, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 1,453,506 $1,472,425
Restricted cash 100,000 100,000
Accounts receivable 7,373,747 6,394,990
Due from affiliate 145,334 --
Prepaid expenses and other 364,594 116,702
----------- ----------
Total current assets 9,437,181 8,084,117
Property and equipment 635,355 263,509
Notes receivable 454,000 --
Other assets 11,715 2,900
----------- ----------
Total assets $10,538,251 $8,350,526
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,128,505 $1,545,161
Advances from factor 5,219,823 5,085,808
Notes payable to stockholders -- 314,500
Commissions payable to affiliate 340,344 241,929
Other accrued liabilities 1,856,502 764,510
----------- ----------
Total current liabilities 9,545,174 7,951,908
----------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock-no par value; 1,000,000 shares
authorized; 200,000 shares issued and
outstanding 2,000 2,000
Retained earnings 991,077 396,618
----------- ----------
993,077 398,618
----------- ----------
Total liabilities and stockholders' equity $10,538,251 $8,350,526
=========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-32
<PAGE>
IMAGITEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Carrier revenue $12,700,873 $6,975,106
Costs and expenses:
Cost of phone services and consumer benefits 6,796,198 2,986,364
Commissions and other selling costs 2,633,189 2,265,330
General and administrative costs 2,328,697 1,257,743
Interest expense 218,330 117,328
----------- ----------
11,976,414 6,626,765
----------- ----------
Net Income $ 724,459 $ 348,341
=========== ==========
Net income per share $ 3.62 $ 1.74
=========== ==========
Net income per share, assuming dilution $ 3.45 $ 1.70
=========== ==========
Pro Forma:
Historical income before income taxes $ 724,459
Pro forma provision for income taxes 289,784
-----------
Pro forma net income $ 434,675
===========
Pro forma net income per share $ 2.17
===========
Pro forma net income per share, assuming dilution $ 2.07
===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-33
<PAGE>
IMAGITEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Operating activities:
Receipts from customers $ 11,722,116 $ 4,462,520
Payments to suppliers and employees (10,214,028) (4,887,530)
Interest paid (214,962) (99,368)
------------ -----------
Net cash provided by (used in) operating
activities 1,293,126 (524,378)
------------ -----------
Investing activities:
Notes receivable advances (454,000) --
Capital expenditures (402,226) (9,687)
------------ -----------
Net cash used in investing activities (856,226) (9,687)
------------ -----------
Financing Activities:
Payments on notes payable (314,500) (220,000)
Advance from factor, net 134,015 1,349,040
Bank overdraft repayment -- (76,286)
Advance to affiliate (145,334) --
Payment of distributions (130,000) --
------------ -----------
Net cash provided by (used in) financing
activities (455,819) 1,052,754
------------ -----------
Net change in cash (18,919) 518,689
Cash, beginning of period 1,472,425 --
------------ -----------
Cash, end of period $ 1,453,506 $ 518,689
============ ===========
Reconciliation of net income to net cash provided
by (used in) operating activities:
Net income $ 724,459 $ 348,341
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 30,380 1,249
Change in--
Accounts receivable (978,757) (2,512,586)
Prepaid expenses (247,892) (313,132)
Other assets (8,815) (10,000)
Accounts payable 583,345 1,829,481
Other liabilities 1,091,991 (617,176)
Commissions payable to directors 98,415 749,445
------------ -----------
568,667 (872,719)
------------ -----------
Net cash provided by (used in) operating
activities $ 1,293,126 $ (524,378)
============ ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-34
<PAGE>
IMAGITEL, INC.
NOTES TO THE UNAUDITED INTERIM
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 RRVE 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.
In January 1998, the Company entered into a Reorganization (Merger)
Agreement with Wavetech, Inc. (Wavetech), a public company, pursuant to which
Wavetech will issue 197.95 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.
On December 12, 1997, the Company formed a new wholly-owned subsidiary,
Zapcom International, Inc. The purpose of the new subsidiary is to market
certain telecommunications products.
The unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission applicable to interim financial information. In the Company's
opinion, the unaudited consolidated financial statements include all adjustments
necessary to present fairly the financial position and results of operations for
each interim period presented. All such adjustments are of a normal and
recurring nature. These financial statements should be read in conjunction with
the consolidated financial statements, including the notes thereto for the year
ended December 31, 1997.
2. EARNINGS AND DISTRIBUTIONS 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 three months ended March 31, 1998, earnings per share, assuming
dilution, included 9,985 additional shares, or 209,985 total shares,
representing the dilutive impact of outstanding stock options. For the three
months ended March 31, 1997 earnings per share, assuming dilution, included
4,667 additional shares, or 204,667 total shares, representing the dilutive
impact of outstanding stock options.
Distributions for the three months ended March 31, 1998 amounted to
$130,000 ($0.65 per share). There were no distributions for the three months
ended March 31, 1997.
3. 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., the Company will not retain its S Corporation
status.
4. RECEIVABLES
Notes receivable at March 31, 1998 represent $330,000 in advances to
Wavetech, Inc. and $124,000 to another unrelated entity. The advances to
affiliate of $145,334 were repaid subsequent to March 31, 1998.
F-35
<PAGE>
5. 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(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 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 comprises 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.
In early March 1998, the Company 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 the Company
to temporarily cease the use of sweepstakes marketing in Missouri. The Company
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 the Company will be
allowed to continue marketing or servicing its existing customers in Missouri.
The Company has agreed to no longer market its products in Missouri with the use
of sweepstakes promotion, until such time as the Company and the State of
Missouri reach a settlement on this matter. The Company continues to service and
bill its existing customer base in Missouri. The State of Missouri is seeking
recision of all contracts, full restitution (plus an extra 10% for a state fund)
and the cost of the action in addition to a $1,000 fine for each violation.
Customers in the State of Missouri comprise less than 5% of the active customer
base of the Company. The Company cannot at this time determine the possible
range of potential damages. However, the Company does not believe that it is
probable that the State of Missouri will prevail.
In April 1998, the West Virginia Attorney General's Office filed suit
against the Company alleging among other things, deceptive trade practices and
sought injunctive relief barring it from marketing, providing services or
billing any consumers within the State of West Virginia, The Company entered
into a voluntary agreement with the State of West Virginia that allows the
Company to continue servicing and billing its existing customer base, but
requires the Company to cease marketing its products with its existing
sweepstakes program. The Company believes it has conducted its billing in a
lawful manner and is 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 West Virginia. However, there can be no
assurances that the Company will be allowed to continue in marketing or
servicing its existing customers in West Virginia. The State of West Virginia is
seeking recision of all contracts, refund of all monies and the cost of the
action in addition to a $5,000 fine for each violation. Customers in the State
of West Virginia comprise less than 5% of the active customer base of the
Company. The Company cannot at this time determine the possible range of
potential damages. However, the Company does not believe that it is probable
that the State of West Virginia will prevail.
In 1997, the State of Florida conducted an investigation into the
business practices relating to its Consumer Access(TM) program. The Company 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.Management currently does not anticipate a loss related to this
matter.
F-36
<PAGE>
6. LOCAL EXCHANGE CARRIER BILLINGS
In late April 1998, the Company was notified that a Local Exchange
Carrier ("LEC") that had historically billed its customers on behalf of the
Company would no longer do so. The region served by the LEC represents more than
30% of the Company's business and $1.4 million per month in revenue. Because of
the low average bill amount for each customer, it is not practical for the
Company to bill customers directly. Although the Company was able to negotiate
the resumption of such billing services by the LEC for those customers that were
billed by the Company prior to April 1998, the Company's revenues during the
period in which services were suspended were approximately $2.0 million less
than anticipated for such period.
In addition, one of the Company's billing aggregators and another LEC
also informed the Company in May 1998, that they would no longer process the
Company's billing transactions. The billing aggregator processes approximately
70% of the Company's business and has since agreed to resume its billing
activities on behalf of the Company. The other LECs billing activities have
historically represented less than $200,000 in monthly revenues for the Company.
The Company has retained legal counsel for this billing matter. However, it has
not yet determined what, if any, remedies are available.
Continued billings to existing customers by the LECs and the billing
aggregator are dependent on discontinuance of the Company's sweepstakes
marketing program and a low level of consumer complaints, as defined. Billing to
new customers are dependent on approval of the Company's new marketing programs
by certain LECs.
7. COMAC, INC.
The Company formed a new subsidiary, Comac, Inc., in December 1997. The
new subsidiary, which is presently inactive, has an option to acquire
Accommodations Services, Inc. (ASI) for approximately 4,000 shares of the
Company 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 the Company. The
transaction is not expected to have a material impact on the consolidated
operations or financial position of the Company.
F-37
<PAGE>
EXHIBIT I
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 Reorganization 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 stockholder 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 stockholder
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.
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.
E-1
<PAGE>
IMAGITEL STOCKHOLDER APPROVAL. This term shall mean the approval by the
requisite vote of the stockholders of Imagitel at the Imagitel Stockholders'
Meeting of the Merger, all in accordance with this Reorganization Agreement and
the Plan of Merger.
IMAGITEL STOCKHOLDERS' MEETING. The meeting of the stockholders 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 stockholders 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.
STOCKHOLDER APPROVALS. The Imagitel Stockholders' Approval and the
Wavetech Stockholders' Approval.
SURVIVING SUB. 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.
WAVETECH STOCKHOLDER APPROVALS. This term shall mean, as the context
may require, the duly authorized written consent of Wavetech to the Merger (as
sole stockholder of Interim) and the approval by the requisite vote of the
stockholders of Wavetech at the Wavetech Stockholders' Meeting of the Merger,
all in accordance with this Reorganization Agreement and the Plan of Merger.
WAVETECH STOCKHOLDERS' MEETING. The meeting of the stockholders 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 Sub
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,
E-2
<PAGE>
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. STOCKHOLDER APPROVALS. Each of Wavetech and Imagitel shall call
their respective Stockholders 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 Stockholders' 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 stockholders 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 stockholders 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 stockholders 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 stockholders or to any third Person (such as mailings to
stockholders 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 stockholders 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.
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.
E-3
<PAGE>
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 Stockholder 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 Stockholder 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 RRVE 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.
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
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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 RRVE 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 31.
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.
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
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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.
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;
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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.
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
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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.
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
stockholders of Wavetech, or which shall be contained in the Proxy Statement,
will not, on the date the Proxy Statement is first mailed to stockholders of
Wavetech or on the date of the Wavetech Stockholders' 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
stockholders 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
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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
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 Stockholder 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 Stockholder 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
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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.
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 31.
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
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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.
(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 PIU 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.
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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
4.17. 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.
4.18. 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.
4.19. 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
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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.
(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.
4.20. 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
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.
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4.21. 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.
4.22. 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
stockholders of Imagitel, or which shall be contained in the Proxy Statement,
will not, on the date the Proxy Statement is first mailed to stockholders of
Imagitel or on the date of the Imagitel Stockholders' 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
stockholders with respect to the Merger.
4.23. 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.
4.24. 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 accommodation
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 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.
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(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
(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.
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(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.
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 stockholders 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.
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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 Stockholders' Meeting, Wavetech shall
have its stockholders 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.
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.
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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
stockholders, 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. STOCKHOLDER APPROVALS. The Stockholder 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 stockholders shall have
exercised dissenters' rights.
7.9. SECURITIES MATTERS. Wavetech shall have receive certificates from
Imagitel's stockholders 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.
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8.6. STOCKHOLDER APPROVALS. The Stockholder 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
stockholders.
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.
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.
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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.
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.
WAVETECH, INC.
By: /s/ Gerald I. Quinn
-------------------------
President
WAVETECH INTERIM, INC.
By: /s/ Gerald I. Quinn
-------------------------
President
IMAGITEL, INC.
By: /s/ Jay P. Gambrell IV
-------------------------
President
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<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 SUB" 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.
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 Sub 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 Sub shall be the same as immediately prior to the Merger.
WAVETECH _______________ IMAGITEL_____________
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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 Sub.
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 Sub
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 stockholder
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 Conversion Value of Imagitel
Outstanding 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.
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.
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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 Stockholders 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
Stockholders, 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 STOCKHOLDERS. 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 stockholder 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 STOCKHOLDERS. 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 Stockholders"), 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 Stockholder 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.
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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.
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<PAGE>
ADDENDUM NO. 1
WHEREAS, Wavetech, Inc., which was subsequently renamed Wavetech
International, Inc. ("Wavetech"), Wavetech Interim, Inc. ("Interim") and
Imagitel, Inc. ("Imagitel") entered into that certain Reorganization Agreement,
dated as of January 5, 1998 (the "Agreement") and Plan of Merger attached
thereto (the "Plan of Merger") pursuant to which Wavetech will acquire Imagitel
through the merger of Interim with and into Imagitel;
WHEREAS, Section 11.8 permits the parties to amend the Agreement in
writing;
WHEREAS, the parties did execute that certain Addendum as of June 15,
1998 in order to amend the terms and conditions on which the Merger shall occur;
WHEREAS, such Addendum unintentionally contained certain errors; and
WHEREAS, the parties to the Agreement desire to herein correct such
errors and properly amend the terms and conditions on which the Merger shall
occur.
NOW THEREFORE, the parties to the Agreement do agree to the following
provisions, which shall be deemed incorporated into the Agreement as if fully
set forth herein.
1. AMENDMENTS TO AGREEMENT. In order to reflect the changes to the
Agreement intended to be effectuated by this Addendum, the parties do hereby
amend Sections 2.2, 3.4 (previously misnumbered Section "3.1 CAPITALIZATION OF
IMAGITEL"), 4.4, 5.2 and 8.2 by deleting them in their entirety and replacing
them with the following, respectively:
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 August 31, 1998, either party hereto shall
have the right to terminate this Reorganization Agreement.
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 200,000 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 of RRV Enterprises, Inc., a Texas corporation, and
DDD Calling, Inc., a Texas corporation, Zapcom International, Inc., a
Nevada corporation and Comac Interim, Inc., a Delaware corporation.
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.
- - - - --------------------------------------------------------------------------------
Page 1 of 5
Addendum No. 1 to Reorganization Agreement, dated January 5, 1998, among
Wavetech, Inc., Wavetech Interim, Inc. and Imagitel, Inc.
__/s/____ Wavetech International, Inc. and Imagitel, Inc._/s/______
Wavetech Interim, Inc.
- - - - --------------------------------------------------------------------------------
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<PAGE>
4.4 CAPITALIZATION OF WAVETECH. The authorized capital
stock of Wavetech consists solely of (i) 50,000,000 authorized shares of
common stock ($0.001 par value), of which 16,994,976 are issued and
outstanding as of June 15, 1998, and (ii) 10,000,000 shares of preferred
stock, of which 600 shares of Series A Preferred Stock were issued and
outstanding as of June 15, 1998. 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% or more 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.
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
Imagitel 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 shares in connection with capital
raising transactions which are otherwise acceptable to
Imagitel.
- - - - --------------------------------------------------------------------------------
Page 2 of 5
Addendum No. 1 to Reorganization Agreement, dated January 5, 1998, among
Wavetech, Inc., Wavetech Interim, Inc. and Imagitel, Inc.
__/s/____ Wavetech International, Inc. and Imagitel, Inc._/s/______
Wavetech Interim, Inc.
- - - - --------------------------------------------------------------------------------
E-27
<PAGE>
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 that 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.
(i) 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.
8.2 INTENTIONALLY OMITTED.
2. AMENDMENTS TO PLAN OF MERGER. In order to reflect the changes to the
Plan of Merger intended to be effectuated by this Addendum, the parties do
hereby amend Sections 3.1 and 5.1 by deleting them in their entirety and
replacing them with the following, respectively:
- - - - --------------------------------------------------------------------------------
Page 3 of 5
Addendum No. 1 to Reorganization Agreement, dated January 5, 1998, among
Wavetech, Inc., Wavetech Interim, Inc. and Imagitel, Inc.
__/s/____ Wavetech International, Inc. and Imagitel, Inc._/s/______
Wavetech Interim, Inc.
- - - - --------------------------------------------------------------------------------
E-28
<PAGE>
3.1 MERGER CONSIDERATION. (a) 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 32.99 shares of Wavetech Common
Stock for each share of Imagitel Common Stock issued and outstanding
immediately prior to the Effective Time (the "Conversion Ratio");
provided, however, that in no event shall Wavetech issue more than an
aggregate of 7,922,861 shares of Wavetech Common Stock in connection with
the Merger (including shares issuable upon the exercise of Imagitel
Options which shall be converted into options, warrants or other rights to
acquire Wavetech Common Stock pursuant to Section 5.1 hereof). The
Conversion Ratio already gives effect to the one-for-six reverse split
approved by the Wavetech stockholders at a special meeting held on May 26,
1998.
(b) neither the Conversion Ratio, nor the Conversion Value
of Imagitel nor the maximum aggregate number of shares of
Wavetech Common Stock issuable in connection with the Merger (as
set forth in (a) above) shall change if Imagitel acquires
acCOMModation Services, Inc. prior to the Effective Time,
although the number of outstanding shares of Imagitel will
increase.
5.1 OPTIONS AND WARRANTS. At the Effective Time, all options, warrants
and other rights to purchase or acquire shares of Imagitel Common Stock
(collectively "Imagitel Options") shall represent options, warrants or such
other rights to purchase or acquire a number of shares of Wavetech Common
Stock, determined in accordance with the Conversion Ratio. All other terms
and conditions of such Imagitel Options shall be unaffected by such change.
2. INCORPORATION. Except as otherwise provided in this Addendum, the
parties hereto hereby confirm their intent to be bound by the terms and
conditions of the Agreement. This Addendum shall supersede that certain
Addendum, executed as of June 15, 1998, and shall be construed in accordance
with the purposes and intents of the Agreement.
3. DEFINED TERMS. All capitalized terms used in this Addendum shall
have the respective meanings ascribed to them in the Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
- - - - --------------------------------------------------------------------------------
Page 4 of 5
Addendum No. 1 to Reorganization Agreement, dated January 5, 1998, among
Wavetech, Inc., Wavetech Interim, Inc. and Imagitel, Inc.
__/s/____ Wavetech International, Inc. and Imagitel, Inc._/s/______
Wavetech Interim, Inc.
- - - - --------------------------------------------------------------------------------
E-29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have evidenced their agreement
to the terms set forth herein by their signature below, as of this day of June,
1998.
ATTEST: WAVETECH, INC.
/s/ By: /s/
- - - - ------------------------ --------------------------
Secretary Title: President & CEO
ATTEST: WAVETECH INTERIM, INC.
/s/ By: /s/
- - - - ------------------------ --------------------------
Secretary Title: President & CEO
ATTEST: IMAGITEL, INC.
/s/ By: /s/
- - - - ------------------------ --------------------------
Secretary Title: President
- - - - --------------------------------------------------------------------------------
Page 5 of 5
Addendum No. 1 to Reorganization Agreement, dated January 5, 1998, among
Wavetech, Inc., Wavetech Interim, Inc. and Imagitel, Inc.
__/s/____ Wavetech International, Inc. and Imagitel, Inc._/s/______
Wavetech Interim, Inc.
- - - - --------------------------------------------------------------------------------
E-30
<PAGE>
EXHIBIT II
[LETTERHEAD OF KAUFMAN BROS., L.P.]
June 15, 1998
The Board of Directors
Wavetech International, Inc.
5210 East Williams Circle, Suite 200
Tucson, Arizona 85711
Dear Sirs:
We understand that Wavetech International, Inc. (the "Company") has
entered into a reorganization agreement and plan of merger, dated January 5,
1998 (the "Reorganization Agreement") and an Addendum thereto dated June 15,
1998 (the "Amendments") by and among the Company, Wavetech Interim, Inc., a
wholly owned subsidiary of the Company ("Interim") and Imagitel, Inc.
("Imagitel"), pursuant to which 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 on a date estimated to be approximately
July 31, 1998.
The Company has requested that Kaufman Bros., L.P. Kaufman render an
opinion to its Board of Directors as to the fairness to the Company's
shareholders from a financial point of view of the Conversion Ratio (the term
"Conversion Ratio" is defined in the next paragraph). Kaufman has not been
requested nor will make any recommendation to the Board as to the form and
amount of consideration to be paid by Imagitel in the Merger, which has been
determined through arm's length negotiation between the parties. In arriving at
its opinion, Kaufman did not ascribe a specific range of values to the Company
or Imagitel, but rather made its determination as to the fairness, from a
financial point of view, of the Conversion Ratio based on the financial and
comparative analyses described below. Kaufman's opinions are for the use and
benefit of the Board of Directors of the Company in connection with its
consideration of the Merger and are not intended to be and do not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Merger. Kaufman was not requested to opine as
to, and its opinions do not address, the Company's basic business decision to
proceed with or effect the Merger.
THE TERMS OF THE MERGER
As a result of the Merger, each Imagitel shareholder shall be entitled
to receive 32.99 shares (a number based upon the Company having implemented a
previously approved 1:6 reverse stock split) of the Company's common stock for
each share of the common stock of Imagitel issued and outstanding immediately
prior to the effective time of the Merger (the "Conversion Ratio"). Shareholders
of the Company shall not be entitled to receive any cash or securities in
connection with the transactions Contemplated by the Reorganization Agreement
and Amendments. As a result of the Merger, the shareholders of Imagitel common
stock shall hold in the aggregate, approximately 69.1% of the Company's common
stock to be outstanding thereafter (approximately 71.2% on a fully diluted basis
assuming the exercise of outstanding options). In addition, the management and
consolidated business operations of the combined companies will be significantly
changed from that of the Company's present management and consolidated business
operations.
SUMMARY OF ANALYSIS
In connection with the opinion set forth herein Kaufman has reviewed
and analyzed (i) the Reorganization Agreement and the Amendments; (ii) the Form
1O-KSB dated August 31, 1997, the Form 10-QSBs dated November 30, 1997 and
February 28, 1998 and the Form 1O-KSB dated August 31, 1996 and the Addendum
thereto for the Company; (iii) the draft proxy statement prepared in connection
with the 1998 Annual Meeting of the Company's stockholders (the "Draft Proxy
Statement") and the audited 1997 and 1996 financial statements for Imagitel and
the pro forma combined financial data for the Company and Imagitel contained
therein and such other information concerning the Company and Imagitel as
Kaufman believed to be relevant to its analysis; (iv) financial and operating
information with respect to the business, operations and prospects of the
Company and Imagitel, furnished to Kaufman by the Company and Imagitel
E-31
<PAGE>
respectively; (v) trading histories of the Company's common stock and a
comparison of those trading histories with those of other companies that Kaufman
deemed relevant and (vi) a comparison of the historical financial results and
present financial condition of the Company and Imagitel with those of other
companies that Kaufman deemed relevant. In addition, Kaufman had discussions
with the managements of the Company and Imagitel concerning their respective
businesses, operations, assets, financial conditions and prospects and potential
strategic benefits from a combination of the businesses of the Company and
Imagitel, and undertook such other studies, analyses and investigations as
Kaufman deemed appropriate.
In arriving at its opinion, Kaufman assumed and relied upon the
accuracy and completeness of the financial and other information used by Kaufman
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the managements of the
Company and Imagitel that they are not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the
financial projections of Imagitel, upon the advice of Imagitel, Kaufman assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgment of the management of Imagitel as to
the future financial performance of Imagitel and that Imagitel will perform
substantially in accordance with such projections. In arriving at its opinions,
Kaufman did not conduct a physical inspection of the properties and facilities
of the Company and conducted a physical inspection of only the Houston-based
facility of Imagitel and did not make or obtain any evaluations or appraisals of
the assets or liabilities of the Company or Imagitel
Kaufman has performed a variety of financial and comparative analyses,
as described below. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the applications of those methods to the particular
circumstances and therefore such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Kaufman has not
attributed any particular weights to any analysis or factor but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Kaufman believes that its analyses must be considered as a
whole and that considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. In its analyses, Kaufman made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which were beyond the control of
the Company and Imagitel. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or reflect the prices at which businesses actually may
be sold.
COMPARABLE COMPANY ANALYSIS. For the Company, Kaufman compared the
historical financial and stock market performances of certain publicly traded
companies that it considered relevant with the historical financial and stock
market performance of the Company, based upon information provided to Kaufman by
the management of the Company and information that was publicly available. The
companies that Kaufman included as comparable telecommunications companies were
Premiere Technologies, Inc., SmarTalk TeleServices, Inc., DigiTEC 2000, Inc.,
Executive TeleCard, Ltd., Global Telecommunications Solutions, Inc., and DCI
Telecommunications, Inc. (the "Comparable Companies"). Kaufman also compared the
historical financial performance of the Comparable Companies to the historical
financial performance of Imagitel.
Kaufman compared the price performance of the Company's common stock
from May 29, 1997 to June 15, 1998 to that of an index comprising the Comparable
Companies with meaningful trading data. Using May 29,1997 as the base of 100 per
cent, on June 15, 1998, the price of the Company's common stock was 161.5 per
cent of the base value, compared to 55.5 per cent for the Comparable Companies.
Because of inherent differences between the business, operations and prospects
of the Company the businesses, operations, and prospects of the Comparable
Companies, Kaufman believes that it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the analyses, but rather also made
qualitative judgements concerning differences between the financial and
operating characteristics and prospects of the Company and the Comparable
Companies that would affect the public trading values of each.
DISCOUNTED CASH FLOW ANALYSIS. Kaufman performed a discounted cash flow
analysis based on certain limited projected financial information for Imagitel
for 1998 provided by Imagitel's management. Kaufman extended this projection
forward by making certain assumptions to derive a projected stream of after-tax
cash flows through the year 2000.
E-32
<PAGE>
Kaufman discounted to present value the projected steam of after-tax
cash flows and the terminal year value (the "Terminal Value") of the business.
The Terminal Value for the discounted cash flow analysis of the projections was
based upon a range of 1 to 1.5 times projected revenue for fiscal year 2000.
Kaufman used discount rates ranging from 40 to 60 percent which were chosen
based on factors such as the current level of inflation and interest rates, the
inherent business risk of Imagitel and the telecommunications services industry
as a whole, and the cost of capital to Imagitel. These assumptions produced
present values ranging from approximately $22 million to $45 million.
QUALITATIVE FACTORS. In performing its analysis Kaufman has taken into
account a number of significant qualitative factors relating to the Company.
Among these factors is the difficulty experienced by the Company with regard to
financing its current growth plans and business opportunities, a low average
volume of trading in the Company's stock, and the Company's small base of
historical revenues.
CERTAIN ASSUMPTIONS REGARDING LEGAL AND REGULATORY MATTERS
In conducting its analysis, Kaufman has assumed no material adverse
impact on the business or finances of Imagitel from any current or prospective
litigation, prosecution or regulatory action brought by any party, including but
not limited to any state attorney general, any litigant in any state or federal
court, any state public service commission, the Federal Communications
Commission, the Federal Trade Commission, the Securities Exchange Commission or
any other regulatory or governmental agency, whether state or federal. Any such
material adverse impact could potentially change the results of Kaufman's
analysis and the conclusions set forth herein.
In conducting its analysis, Kaufman has assumed no material adverse
impact on the business or finances of Imagitel from any disability in relation
to any statutory, regulatory, licensing or other similar requirement, which may
attach to any officer, director, principal, or stockholder of Imagitel as a
result of past actions on the part of such officer, director, principal, or
stockholder. Any such material adverse impact could potentially change the
results of Kaufman's analysis and the conclusions set forth herein.
Kaufman has not made any independent investigation into the backgrounds
of any officers, directors, principals or stockholders of Imagitel. Kaufman has
not searched the dockets of any state attorney general, any state or federal
court, any public service commission, the Federal Communications Commission, the
Federal Trade Commission, the Securities Exchange Commission or any other
regulatory or governmental agency, whether state or federal, in connection with
any complaints, actions or claims that may have been or may in the future be
brought against Imagitel or any of its officers, directors, principals or
stockholders. Kaufman has made no independent determination or analysis with
regard to whether any of Imagitel's current or prospective business practices
(including but not limited to marketing and billing practices) comply with
existing state and federal laws and regulations, nor has Kaufman made any
independent determination or analysis as to the likelihood that any such
practices may be challenged by any regulatory agency, governmental agency or any
private litigant.
Kaufman is not a law firm and is not qualified to express an opinion as
to the merit of any legal claim or as to the compliance of any of Imagitel's
current or prospective business practices with existing state and federal laws
and regulations. Nothing contained herein should be interpreted or construed to
express a conclusion or opinion regarding any legal claim or a conclusion or
opinion as to the compliance of any of Imagitel's current or prospective
business practices with existing state and federal laws and regulations.
CONCLUSION
Based on the foregoing assumptions and analysis, it is Kaufman's
opinion that, as of the date hereof, the Conversion Ratio is fair to the
Company's shareholders from a financial point of view.
Very truly yours,
KAUFMAN BROS, L.P.
By: /s/ Craig Kaufman
------------------------------------------
Name: Craig Kaufman
Title: Chairman and Chief Executive Officer
E-33
<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 June
, 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 , 1998, at
10:30 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 issuance of up to 7,922,861 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., as amended
[ ]For [ ]Against [ ]Abstain
A vote for issuance of the Merger Shares shall be deemed a vote for
the election to serve as a director of the Company following the
issuance of such Merger Shares each of the following persons who
have been designated by Imagitel, Inc.: James B. Gambrell IV,
Richard Hartman, Robert C. Hawk and Steven B. Jaffe.
[ ]For [ ]Against [ ]Abstain
2. 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 ONE IS APPROVED, YOUR VOTE WITH RESPECT TO THIS PROPOSAL
NO. TWO 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,
(i) FOR ISSUANCE OF THE MERGER SHARES AND ELECTION OF THE DIRECTORS DESIGNATED
BY IMAGITEL, INC., (ii) THE ELECTION OF DIRECTORS NOMINATED BY THE MANAGEMENT OF
THE COMPANY (ONLY IF ISSUANCE OF THE MERGER SHARES IS NOT APPROVED); AND (iii)
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 (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
Signature should so indicate. If shares are held by joint
tenants or as community property, both
stockholders should sign.) (This Proxy should be
- - - - --------------------- dated, signed by the stockholder(s) exactly as his
Signature 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.)