U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended August 31, 1998.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____________ to ___________.
COMMISSION FILE NUMBER: 0-15482
WAVETECH INTERNATIONAL, INC.
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(Name of small business issuer in its Charter)
Nevada 86-0916826
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(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711
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(Address of Principal Executive Offices)
(520) 750-9093
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(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Act:
Name of each exchange on
Title of Each Class which registered
None None
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Securities registered under Section 12(b) of the Act:
Common Stock $.001 Par Value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form,
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $157,838.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of November 23, 1998 was approximately $8,610,837 based on the
average bid and asked prices for such Common Stock as reported on the Nasdaq
SmallCap Market.
The number of shares of Common Stock outstanding as of November 23, 1998
was 17,151,137.
Documents Incorporated by Reference - Various like numbered exhibits from
the Company's 1987 Registration Statement File No. 33-8353; Post-Effective
Amendment No. 1 to Form S-18 Registration Statement, SEC File No. 33-8353 filed
September 2, 1988; Form 10-K for the fiscal year ending August 31, 1991.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN STATEMENTS WHICH ARE
FOWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE
STATEMENTS RELATE TO FUTURE EVENTS, INCLUDING A PROPOSED MERGER OR THE FUTURE
FINANCIAL PERFORMANCE OF WAVETECH. IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD,"
"EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS,"
"POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE
TERMINOLOGY. THESE ONLY REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES ON THE
DATE OF THIS REPORT. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THESE
EXPECTATIONS. IN EVALUATING THOSE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER
VARIOUS FACTORS, INCLUDING THE RISK INCLUDED IN THE REPORTS FILED BY WAVETECH
WITH THE SEC. THESE FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANY FORWARD-LOOKING STATEMENTS. WAVETECH IS NOT UNDERTAKING ANY OBLIGATIONS TO
UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.
(A) BUSINESS DEVELOPMENT
COMPANY PROFILE
Wavetech International, Inc. (hereinafter referred to as the "Company" or
"Wavetech") was incorporated in the State of New Jersey on July 10, 1986 under
the name "Wavetech, Inc." In February 1998, the Company reincorporated in the
state of Nevada. The Company became subject to the reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") by filing and registering
with the Securities and Exchange Commission a Form S-18 under the Securities Act
of 1933; 400,000 units, each unit consisting of three shares of Common Stock and
one Class A and one Class B redeemable Common Stock purchase warrant. Its
Registration Statement became effective on February 11, 1987. A total of 400,000
units were sold at the offering price of $6.75 per unit for gross total proceeds
of $2,700,000. The Company's Common Stock is listed on the Nasdaq SmallCap
Market under the symbol "ITEL."
WAVETECH SUBSIDIARIES
INTERNATIONAL ENVIRONMENTAL SERVICES CORPORATION. On June 6, 1991, Wavetech
acquired all of the outstanding stock of International Environmental Services
Corporation (hereinafter referred to as "IES"), a privately held Delaware
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corporation, in exchange for 8,000,000 shares (400,000 shares after the 1-20
split) of the company and a $5 per cubic yard royalty payment on IES's future
operations, if any. IES has not derived any revenue from its operations.
IES was incorporated in 1988 and at the time of its acquisition reported as
its sole asset approximately 1,000 acres of real property located in Carroll
County, Ohio. The property was acquired by IES for the purpose of converting
all, or a portion thereof, to a non-hazardous sanitary landfill facility. In
November 1995, Wavetech was advised that all of the land was sold to satisfy
real estate taxes in arrears by Carroll County, Ohio. This tax sale was
consummated in April 1994. The Company intends to pursue legal recourse to
recover the value of the land from responsible parties.
Following the acquisition of IES, Wavetech was comprised of two divisions:
An Environmental Laboratory Testing and Engineering Division through a
wholly-owned subsidiary, Applied Environmental Technology, Inc. ("Applied") and
a Landfill Development & Management Division ("IES"). During the year ended
August 31, 1995, Wavetech, with the then President abstaining, voted to sell the
stock of Applied to the father of the then President. This divestiture occurred
before March 8, 1995, during the year ended August 31, 1995, resulting in
Wavetech having no further liabilities nor assets on its balance sheet
associated with Applied.
INTERPRETEL, INC. On March 8, 1995, Wavetech, Inc. ("Wavetech") entered
into an agreement with Interpretel, Inc. ("Interpretel") pursuant to which
Wavetech agreed to issue 6,000,000 shares of its Common Stock in exchange for
100% of the outstanding 1,532,140 shares of Common Stock of Interpretel. The
transaction resulted in the former shareholders of Interpretel owning
approximately 80% of the outstanding shares of Wavetech. The Acquisition
agreement also provides that during the three-year period following the March 8,
1995 closing, former shareholders of Interpretel are entitled to receive an
additional 7,500,000 Common Shares of Wavetech through an "earn-out" based upon
before tax net profit. During the two-year period following closing, former
shareholders of Interpretel could earn up to 3,750,000 Common Shares of Wavetech
for every $0.50 net profit before taxes, and an additional 3,750,000 Common
Shares of Wavetech for every $1.00 of cumulative total net profit before taxes.
During the third year following closing, any shares not previously issued
pursuant to this agreement can be earned at $1.50 net profit before taxes per
share. To date, no additional shares have been issued pursuant to the "earn
out."
Interpretel is a facilities-based telecommunication company using an
advanced computer telephony platform to deliver enhanced calling card services.
Incorporated in the state of Arizona in September of 1993, the Company was
formed to create a simple calling card product featuring direct access to
over-the-phone language interpreters with services provided by AT&T Language
Line. Employing a digital computer/telephony integrated platform (switch) as a
back-bone, the company's products and services have evolved significantly to
capitalize on features and capabilities of the system. The Company now focuses
on highly customized and branded, enhanced calling cards, virtual office and
interactive marketing applications. Since its inception, Interpretel has focused
on creating an infrastructure to support product development, administration,
sales, marketing, and customer support.
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Following the acquisition of Interpretel by Wavetech, the former principals
of Interpretel were elected to serve as the management for the newly-structured
corporation.
INTERPRETEL (CANADA) INC. On March 10, 1995, Interpretel (Canada) Inc. was
incorporated under the laws of the Province of Ontario as a wholly owned
subsidiary of Interpretel, Inc. It was formed to secure a long distance
reseller's registration and license in that country through the Canadian Radio
and Television Commission (CRTC), which is the Canadian equivalent of the FCC.
This reseller's license qualifies Interpretel (Canada) Inc. to operate as a
reseller of long distance services and secure contracts with Canadian
corporations and organizations as a Canadian entity. Interpretel (Canada) Inc.
is essentially a sales and customer service operation.
TELPLEX INTERNATIONAL COMMUNICATIONS, INC. On January 1, 1997, the Company
acquired certain intangible assets of Telplex, Inc., an Arizona corporation, in
exchange for $25,000 in cash. These assets, which consisted primarily of
goodwill, an international long distance wholesaler's license, a few customer
contracts for the resale of switchless international long distance numbers, as
well as a non-compete agreement from the owner of Telplex, Inc., were acquired
by the Company through its new wholly-owned subsidiary Telplex International
Communications, Inc. ("Telplex"). The Company did not assume any of the
liabilities of Telplex, Inc. Subsequent to February 28, 1998, the Company had no
revenues from Telplex International Communications, Inc. The Company no longer
had the sales and billing support staff to accommodate the international long
distance wholesale business.
(B) BUSINESS OF ISSUER AND SUBSIDIARIES
OVERVIEW
The Company conducts most of its operations through its wholly-owned
subsidiary, Interpretel. Interpretel is a facilities-based telecommunication
company using an advanced computer telephony platform to deliver enhanced
calling card services. The Company's products are highly customized and branded
for specific distributor applications and feature a single point of access, via
any touch-tone telephone, to a suite of information and communication services.
Sample services include worldwide direct calling, instant conference
calling, over-the-phone language interpretation supporting over 100 languages,
fax-based language translation, news, weather and sports headlines, integrated
voice and fax mail, integration with customer call centers; and in Canada, Dun &
Bradstreet Express business services, and legal consultations and referrals. All
services are billed on a post-pay basis directly to the subscriber, usually via
a credit card.
Positioned as an added-value service, principal benefits to distributors
include cost-effective information distribution, and interactive marketing and
promotion capability. The product also becomes a customer retention vehicle and
new profit center.
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Since its inception, Interpretel has focused primarily on product
specifications, proprietary application software (including call-processing,
billing, membership and customer service database software), execution of vendor
contracts, development of corporate infrastructure (including customer service,
sales and marketing divisions, regional sales staff), design and printing of
product and marketing brochures, and strategic planning for international
business development. The Company's software packages are integrated into a
state-of-the-art communications system creating a platform network that can be
easily duplicated in other locations.
Interpretel has been issued a tariff, bearing F.C.C. Tariff No. 2, filed in
compliance with the requirements of the Communication Act of 1934, as amended,
with the Federal Communications Commission.
Interpretel has a staff of five employees of which four are employed on a
full-time basis. Wavetech has no employees. The Company currently has operations
underway in the United States and Canada.
FEATURES AND CAPABILITIES OF THE COMPANY'S INTERACTIVE SYSTEM
The Company's call-processing architecture is a UNIX-based multi-tasking
digital call-processing system integrated with a Tandem database server, which
provides the ability to manage a wide range of diverse applications on a single
platform. The Company's computer telephony integration technology is modularly
designed and can support virtually limitless expansion and capacity. The system
offers direct connectivity with the public telephone network via MCI and it is
also networked remotely for customer service and database management.
The Company's database management system is currently administered from its
corporate offices in Tucson, Arizona, with the call processing platforms located
in Lincoln, Nebraska. In 1996 the Company sold an Interpretel System, consisting
of hardware and various call processing and billing software programs, to a
subsidiary of Tech Pacific Holdings Pty Limited in Sydney, Australia.
The Company currently offers the following programs:
1. THE INTERPRETEL TRAVELER CARD. Designed for worldwide business and
travel use, this application offers voice and fax mail with pager notification;
over-the-phone language interpretation; fax-based document translation; 12-way
conference calling; news and sports headlines; and access to domestic and
international calling card long distance service. Line charges are billed to the
subscriber's credit card of choice. The Company has distributed this program by
bundling it with other third party membership packages, where the demographics
of the membership base include frequent and/or regular travel. The Company has
also promoted this product through direct mail marketing.
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2. THE AFFINITY CARD PROGRAM. Building on the Interpretel Card, this
program allows a company to customize and brand Interpretel's communication
services, as well as integrate present or new services into an automated
telephone application. The Company currently has Affinity Card programs with
Diners Club International and Delta Hotels & Resorts. The Affinity Card Program
has historically constituted the cornerstone of the Company's marketing and
sales initiatives.
3. THE VIRTUAL OFFICE PROGRAM. Built as a customized "affinity" product
and featuring many of the same services as the Interpretel Traveler Card, this
product is positioned for the Small Office/Home Office (SOHO) market and uses a
private '888' number for access. Unique to this program is a "follow-me"
function which dials and searches multiple phone numbers to locate the
subscriber.
4. THE INTERACTIVE MARKETING PROGRAM. The Company's advanced
call-processing system can be used for non-card based applications, including
interactive voice response, fax-backs, surveys/polling and meet-me conferencing
systems. The modular call-processing architecture allows easy creation of
applications with virtually no limit. If the Company is able to develop greater,
stronger sales and marketing infrastructure and resources, this program will
receive greater attention in the future.
To date, the Company has been unable to generate significant revenues from
its Interpretel program offerings. However, to the extent that it has received
such revenues, they have been almost entirely from the Interpretel Traveler
Card.
STRATEGIES FOR THE FUTURE
The Company's management and Board of Directors believe that the Company
has strong relationships and contracts with major companies and also has product
offerings that can easily be customized and expanded to meet a variety of
business and individual needs. However, the Company lacks the resources needed
to properly market these products and services and thereby achieve high
distribution and usage, which would generate revenues. Early in fiscal 1998, the
Board of Directors instructed the Company's management to seek out a potential
business combination for the Company. The Board determined that a business
combination presented a greater opportunity to rapidly promote its products than
commercial or other financing. In addition, the Board believed that any
financing that would be available to the Company would be so on terms that were
unattractive. As a result of these considerations, in January 1998, the Company
executed a Reorganization Agreement with Imagitel, Inc. However, in August 1998,
the Reorganization Agreement was terminated because the Company determined it
was no longer in the best interests of its shareholders due to certain material
adverse changes in Imagitel's business since execution of that Agreement.
Promptly following termination of the Imagitel agreement, the Company reviewed
dozens of potential merger and acquisition candidates. After considering the
relative risks and merits of the opportunities which it reviewed, on November 6,
1998, the Company signed a Merger Agreement with DCI Telecommunications, Inc.
(OTCBB:DCTC) ("DCI"), an international provider of telephone and other services,
including long distance, prepaid telephone cards and Internet services. DCI has
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an extensive distribution network throughout North America, Europe and the Far
East. DCI owns telephone switching facilities in Canada, the United Kingdom,
Spain and Denmark and has 12 operating facilities serving customers in eight
countries. The Company expects the Merger to combine the strengths of both
companies and to create an international carrier with enhanced services and call
management switching equipment in the U.S., Canada and Europe. The Merger is
anticipated to provide the support the Company needs to successfully market its
product through its current and future contracts. The Merger is subject to a
number of conditions and there can be no assurance, however, when or if the
Merger will be completed.
If the Merger is completed, it will result in a change of control of the
Company, with DCI's shareholders holding in excess of 85% of the outstanding
Common Stock and a new slate of executive officers and directors. As a result,
the strategy for developing and marketing the Company's products will be
directed by this new management. In the interim, the Company has pursued the
promotion of its products through the following methods: select advertising in
travel-related publications for the Interpretel Traveler Card designed to
increase the number of subscribers of the Company's basic product. In addition,
the Company is also working with current clients to revise existing programs in
order to increase distribution and usage of the services. The Company is
preserving its capital pending the completion of the Merger, if ever.
COMPETITION
Wavetech's strategy is to gain a competitive advantage by being among the
first companies to offer single point of access for enhanced information and
communication services, being an innovator in the enhanced communications
service market and offering unique and innovative services to its subscribers.
The Company seeks to capitalize on strategic relationships with
DinersClub/enRoute, ShipTel, Delta Hotels & Resorts, among others, to build its
subscriber base and to maintain and increase subscriber loyalty. The Company
believes that the principal competitive factors affecting the market for
enhanced communications services are price, quality of service, reliability of
service, degree of service integration, ease of use and service features. The
Company believes it can compete in those areas. However, to date, the Company
has lacked the resources necessary to introduce its products and services to a
significant number of customers.
The market for the Company's services is 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. Although the Company is aware of
several companies that are marketing enhanced calling cards, it is not aware of
any major competitor that is providing enhanced communication services identical
to the services marketed by the Company. The Company believes that existing
competitors are likely to expand their service offerings and that new
competitors are likely to enter the enhanced communication market and attempt to
integrate such services, resulting in greater competition for the Company. Such
competition could materially adversely affect the Company's business, financial
condition and results of operations.
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The Company attempts to differentiate itself from its competition by
offering an integrated suite of information and communications services that are
customized and branded for each client. A number of other providers currently
offer each of the individual services and a certain combination of the services
offered by the Company. The Company's worldwide long distance services and
features, such as conference calling, compete with services provided by
companies such as AT&T Corporation ("AT&T"), MCI WorldCom, Inc. ("MCI") and
Sprint Communications Company ("Sprint") as well as smaller interexchange long
distance carriers. The Company's voice mail services compete with voice mail
services provided by certain regional bell operating companies ("RBOCs") and
other service bureaus as well as by equipment manufacturers, such as Octel
Communications Corporation ("Octel"), NorthernTelecom, Inc. (Nortel), and
Siemens Business Communications Systems, Inc. ("Siemens"), among others.
The Company may introduce enhancements to its existing services in the
future. Such services are likely to compete with services offered by other
companies, many of which have greater marketing, financial and other resources
than the Company. The Company also expects that other parties will develop and
implement information and telecommunications service platforms similar to that
of the Company, thereby increasing competition for the Company's existing
services.
In addition, the Telecommunications Act of 1996 (the "1996 Act") allows the
RBOC's to immediately provide long distance telephone services between Local
Access and Transport Areas ("LATAs") located outside of their local service
territories, which will likely significantly increase competition for long
distance services. The 1996 Act also grants the Federal Communications
Commission (the "FCC") the authority to deregulate certain aspects of the
telecommunications industry, which in the future may, if authorized by the FCC,
facilitate the offering of an integrated suite of personal communications
services by regulated entities, including the RBOCs, in competition with the
Company.
The Company expects that information and telecommunication 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 right,
contractually or otherwise, to prevent its subscribers from using competing
products and the Company's subscribers may generally terminate their services
with the Company at will. 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.
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DEPENDENCE ON PRINCIPAL SUPPLIERS
The Company currently maintains four UNIX-based multi-tasking call
processing platforms integrated with a Tandem database server located in
Lincoln, Nebraska. The Company's network service operations are dependent on
Interact, Inc., who on a contractual basis with the Company, is providing a
facility, technical support, repair, maintenance, use of the Tandem database
server and access to the public network through an MCI DS-3 connection. In the
event that the Company chooses not to rely on Interact, or Interact ceases
business, the Company is developing contingency plans for relocating the call
processing operations to another facility with minimal interruption of service.
In the event that an alternative supplier of call processing systems is
required, the Company has investigated the availability of alternative providers
and has identified several telecommunication equipment manufacturers and
software vendors whose systems could provide the equivalent level of service as
offered by Interact, Inc. However, the Company does not have any commitments
from such alternative suppliers. There can be no assurances that alternative
suppliers will be able to provide services to the Company when needed and, if
available, will be on terms favorable to the Company.
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, 1998, MCI was responsible for carrying traffic representing
approximately 100% of the minutes of long distance transmission billed to the
Company. Further, the Company is dependent upon local exchange carriers for call
origination and termination. If there is an outage affecting the Company's
terminating carriers, the Company's call processing platform may not complete a
call. The Company has not experienced significant losses in the past because of
interruptions of service at terminating carriers, but no assurance can be made
in this regard with respect to the future integrity of such carriers.
GOVERNMENT REGULATION
The Company is subject to regulation by the FCC and by various state public
service and public utility commissions. Federal and state regulations and
regulatory trends have had, and may have in the future, both positive and
negative effects on the Company and on the information and telecommunications
service industries as a whole. FCC policy currently requires interexchange
carriers to provide resale of the use of their transmission facilities. The FCC
also requires local exchange carriers to provide all interexchange carriers with
equal access to the origination and termination of calls. If either or both of
these requirements were removed, the Company would be adversely affected.
In order to provide intrastate long distance service, the Company is
required to obtain certification to provide telecommunications service from the
public service or pubic 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.
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TARIFFS AND DETARIFFING. The Company is classified by the FCC as a
non-dominant carrier for its domestic interstate and international long distance
services. Common carriers that provide domestic interstate and international
telecommunications services must maintain tariffs on file with the FCC
describing rates, terms and conditions of service. While the tariffs of
non-dominant carriers, such as the Company, are subject to FCC review, they are
presumed to be lawful upon filing with the FCC. In October 1996, the FCC issued
an order detariffing long distance service which prohibited non-dominant long
distance carriers from filing tariffs for domestic, interstate, long distance
services in the future. The FCC's scheduled detariffing rules were to become
effective September 22, 1997. The detariffing rules were appealed by several
parties, and in February 1997, the U.S. Court of Appeals for the District of
Columbia Circuit issued a temporary stay preventing the rules from taking effect
pending judicial review. This stay is still in effect and the Company is unable
to predict what impact the outcome of the FCC's detariffing proceeding will have
on the Company.
UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC released an order
establishing a significantly expanded federal telecommunications subsidy regime.
For example, the FCC established new subsidies for schools and libraries with an
annual cap of $2.5 billion and for rural health care providers with an annual
cap of $400 million. Providers of interstate telecommunications service, such as
the Company, as well as certain other entities, must pay for the federal
programs. The Company's contribution to the federal subsidy funds will be based
on their share of total interstate (including certain international)
telecommunications services and on certain defined telecommunications and user
revenues. Several parties have appealed the May 8, 1997 order, and those appeals
have been consolidated in the U.S. Court of Appeals for the Fifth Circuit. No
assurance can be given that the FCC's universal service order will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
PAYPHONE COMPENSATION. In September 1996, the FCC issued an order adopting
rules to implement the 1996 Act's requirements establishing "a per call
compensation plan to ensure all payphone service providers are fairly
compensated for each and every completed call using their payphone." This order
included a specific fee to be paid to each payphone service provider by long
distance carriers and intra-LATA toll providers (including LECs) on all "dial
around" calls, including debit card and calling card calls. In decisions
released on July 1, 1997, and September 16, 1997, the U.S. Court of Appeals for
the D.C. Circuit vacated and remanded some of the FCC rules for the
implementation plan. In response to these decisions, on October 7, 1997, the FCC
issued a second order, revising the per-call compensation amount to be paid to
payphone service providers. Specifically, the FCC decreased the compensation
amount to $0.284 per call. This compensation amount will remain in effect until
October 6, 1999, when a market-based rate will become effective. The Company
pays these charges through its long distance carrier MCI. Payphone compensation
charges appear on the Company's MCI phone bills which are paid when due.
Although the Company incurs additional costs to receive "dial around" calls that
originate from payphones, to date, the Company has not passed this cost on to
its customers.
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RESEARCH AND DEVELOPMENT
The Company has not spent any capital during each of the last two fiscal
years on research and development activities.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its office and administrative space at 5210 E. Williams
Circle, Suite 200, Tucson, Arizona 85711. The lease expires November 30, 2001,
and requires the Company to make payments thereunder in an average amount of
approximately $8,400 per month over the term of the lease. Effective May 13,
1998, the Company began to sublet approximately 2,000 square feet for $3,000 per
month on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
On March 14, 1996, Steven A. Ezell ("Ezell"), a former officer of the
Company, sued the Company and two of its current officers and directors in the
Superior Court of the State of Arizona in an action titled EZELL VS. WAVETECH,
INC., GERALD I. QUINN AND TERENCE E. BELSHAM. The Complaint alleges that the
Company breached its employment contract with Ezell and that Messrs. Quinn and
Belsham tortiously interfered with Ezell's employment contract with the Company.
The complaint seeks unspecified compensatory damages, including costs and
attorney's fees. The Company believes Ezell's claims have no merit and intends
to vigorously defend this action. A trial date is scheduled for January 26,
1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq SmallCap Market. The
high and low bid prices of the Company's Common Stock as reported by Nasdaq from
September 1, 1996 through August 31, 1998 by fiscal quarters (i.e. 1st Quarter =
September 1 through November 30) were as follows:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------------ ------------ ----------- -----------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1997:
- ----
Common Stock 1-1/16 17/32 1-1/32 1/4 15/16 11/32 3/4 5/16
1998:
- ----
Common Stock 19/32 3/8 15/32 13/32 11/16 9/16 23/32 7/32
The bid and the asked price of the Company's Common Stock on November 23,
1998 were 19/32 and 17/32, respectively.
As of November 23, 1998, the Company had 165 shareholders of record of its
Common Stock. As of June 24, 1998, the Company had 2,240 shareholders that
beneficially own the stock in the name of various brokers.
The Company has never declared any cash dividends and currently plans to
retain additional revenues, if any, for its business operations.
NASDAQ DELISTING. The Company has been notified by Nasdaq that it is
currently not in compliance with the $1.00 minimum bid price requirement.
Wavetech appealed Nasdaq's decision to delist its Common Stock for failure to
meet this requirement at a hearing in November 1998. 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. Even if Wavetech's appeal is successful, Nasdaq will
need to approve the listing of the shares of Wavetech Common Stock to be issued
as a result of the proposed merger with DCI. If Wavetech Common Stock is
delisted for any of the results discussed above, the result would be 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.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATIONS OVERVIEW
The Company's business consists of operating, marketing, selling and
customizing interactive communication systems through the application of
"intelligent" call processing technology and proprietary software to reflect or
target the needs of an identified audience. These systems are often used as
privatized networks for organizations and special purpose groups. During 1995
and 1994, the Company's operations focused primarily on the development of the
infrastructure for its call processing and data management systems. Operations
in the U.S. and Canada commenced on a limited basis in 1996. During the fiscal
year 1997, the Company sold an Interpretel System, consisting of certain
hardware and proprietary software to Switch Telecommunications Pty Ltd. of
Australia and installed this system on site.
During 1998, the Company spent the majority of its management's time and
other resources working to complete a merger with Imagitel, Inc. On January 6,
1998, the Company executed a definitive reorganization agreement with Imagitel,
Inc. After that date, the Company did not implement new solicitation and
marketing initiatives for its services in an attempt to conserve capital and
resources pending completion of the Merger. On August 24, 1998, the Board of
Directors of Wavetech and Imagitel each determined that the Reorganization
Agreement should be terminated due to an unanticipated decline in Imagitel's
revenues and the uncertainty about Imagitel's future revenues.
On June 30, 1998, an agreement was reached between the Company and Switch
which terminated an existing license agreement and any future obligations
thereunder. Consideration of $150,000 was received in connection with this
agreement. The license agreement would have entitled Wavetech to receive license
fees equal to 2% of gross revenues generated by use of the licensed technology
upon Switch activating a minimum of 15,000 cards. However, Switch and Wavetech
were unable to mutually agree upon the calculation of such revenues. Also on
June 30, 1998, an agreement was reached between the Company and Switch which set
forth the terms and conditions of a put option for the shares of common stock of
Switch which the Company acquired in August 1996. The option established a sale
price of $2,100,000 and had a term of one year. On August 25, 1998, the Company
exercised the put option thereby selling its entire interest in Switch and
receiving $2,100,000 in proceeds.
On November 6, 1998, the Company signed a Merger Agreement with DCI to
create an international carrier with enhanced services and call management
switch equipment able to provide services in the U.S., Canada, Europe, and the
Far East.
The Company continues to support its current subscribers and to acquire new
subscribers through its ongoing programs. The Company acquired 72 new
subscribers during the year and as of August 31, 1998 had a total of 307
subscribers on its system. As of November 23, 1998, the Company had a total of
277 subscribers on its system.
14
<PAGE>
REVENUES. Revenues decreased to $157,838 in 1998 from $719,142 in 1997. Of
this decrease, $474,106 was attributable to the extraordinary revenues received
from the sale of an Interpretel System to Switch Telecommunications Pty Ltd. in
Australia in 1997. An additional decrease of $89,000 was from lowered revenues
due to less minutes sold for the resale of international long distance minutes.
The $157,838 in revenues during fiscal year 1998 includes $60,151 in resale of
international long distance minutes, $24,687 in enhanced calling card services,
$12,000 in application generation fees, and $59,523 for revenue recognized
pursuant to a licensing agreement with Switch.
COST OF SALES. Costs of sales decreased to $85,082 in 1998 from $679,930 in
1997. Of the decrease, $378,009 is from previous year costs to purchase hardware
and software components to duplicate an Interpretel System for the sale to
Switch in 1997. A decrease of $76,637 was for costs associated with the resale
of international long distance minutes due to less minutes sold. A decrease of
$69,168 was attributable to reduced marketing and fulfillment costs associated
with a direct mail marketing campaign initiated in 1997. Due to lower revenues
for enhanced calling card services the Company had lower associated costs such
as long distance and interpretation services resulting in an additional decrease
of $58,151. Reduction in the number of T-1 telephone lines and software
maintenance resulted in a decrease of $8,662.
The $85,082 in costs of sales for fiscal year 1998 included $49,129 in
costs to resell international long distance minutes; $15,662 for costs
associated with providing enhanced calling card services; $19,427 for T-1 lines
and software maintenance; and $864 in commissions to clients distributing the
Interpretel Card service to its membership.
GENERAL AND ADMINISTRATIVE EXPENSES. Operating expenses decreased to
$785,171 in 1998 from $1,584,747 in 1997. A reduction of the Company's workforce
resulted in a decrease of $353,786 in payroll related expenses. Investor
relations expenses decreased by $66,243 due to higher fees paid to an investment
relations firm in 1997 and also costs associated with the 1997 annual meeting.
Renegotiation of the fees paid by the Company for platform services and support
resulted in an additional decrease of $63,765. During 1997, the Company incurred
expenses in compensating certain vendors for creating and printing general
Company marketing materials. In 1998, the Company did not create or print any
additional marketing materials, which resulted in a decrease of $48,661 in 1998
for general marketing and advertising expenses. Travel expenses decreased in
1998 by $28,701. General legal and professional fees decreased by $127,862 due
to reclassifying costs associated with the proposed, but terminated, Merger from
"General and Administrative Expenses" into "Other Expenses -- Costs incurred in
connection with the Merger." See "Costs incurred in connection with Merger"
below for details on these costs.
The $785,171 of operating expenses includes $280,373 in payroll and related
expenses; $94,369 in rent; $78,107 for platform services and support; $63,996 in
general legal expenses; $62,482 for investor relations expenses; $40,421 in
accounting fees and other professional fees; $34,010 for licenses and fees to
Nasdaq and to the Company's transfer agent; $22,941 for outside services,
15
<PAGE>
primarily for EDGARizing filings for the Securities and Exchange Commission and
expenses related to solicitation of proxies in connection with the 1998 Special
Meeting; and $18,646 in travel related expenses, and $17,347 in operating lease
expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased to $156,965 for fiscal year 1998 from $211,786 for fiscal
year 1997. The Company purchased one computer for $1,985 during the year ended
August 31, 1998.
INTEREST INCOME. Interest income was $6,565 from interest earned on the
Company's money market account.
INTEREST EXPENSE. Interest expense increased to $45,182 for fiscal year
1998 from $26,893 for fiscal year 1997. The increase in interest expense was
related to interest payable with the Company's financing through a $400,000
short-term line of credit, and certain convertible notes payable and capital
leases.
LICENSE AGREEMENT TERMINATION INCOME. Effective June 30, 1998, an agreement
was reached between the Company and Switch terminating the licensing agreement.
The Company recognized income of $86,906 from unamortized deferred revenue and
$150,000 as income from the termination fee. See "--Operations Overview above."
LOSS ON SALE OF INVESTMENT IN SWITCH. The June 30, 1998 agreement between
the Company and Switch, included the grant to the Company of a put option with
respect to the sale of shares of common stock of Switch which were acquired by
the Company in August 1996. On August 25, 1998, the Company exercised the put
option thereby selling its entire interest in Switch. On August 31, 1998, the
Company received $2,100,000 upon exercise of the put option. The Company
recognized a capital loss of $216,165 upon disposition of the investment.
DEBT CONVERSION EXPENSE. Debt conversion costs of $92,894 were recorded
during the quarter ended November 30, 1997. This expense relates to certain
notes payable and accrued interest thereon that were converted into shares of
the Company's Common Stock at the rate of $0.4375 per share. The difference
resulted in an increase in expenses which was charged to debt conversion
expense.
COSTS INCURRED IN CONNECTION WITH MERGER. The Company had expenses of
$236,737 directly related to the proposed, but terminated, merger with Imagitel,
Inc. These expenses included $125,000 in legal fees, $91,737 for fairness
opinions and $20,000 in fees for EDGARizing merger-related documents and
solicitation of the proxy.
INCOME TAXES. At August 31, 1998, the Company had net operating loss
carryforwards totaling approximately $8,994,000. These losses may be offset
against future income, if any, during 1998 to 2011 with varying expiration
dates. No tax benefit associated with these carryforwards 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 $3,460,000. The March 8, 1995 acquisition (Note 3)
16
<PAGE>
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, $8,994,000, 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.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998 the Company had working capital of $1,863,442 as
compared to a working capital deficit of $650,761 at August 31, 1997.
During the fiscal year 1998 the Company received capital from the following
sources: during the first quarter, the Company borrowed $250,000 from various
individuals, of which $200,000 plus accrued interest was converted to shares of
the Company's Common Stock in November 1998.
On February 9, 1998, the Company executed a line of credit agreement with
Imagitel pursuant to which the Company was able to borrow up to $450,000 for
working capital purposes. During the year ended August 31, 1998, the Company
borrowed $330,000 under this line of credit. The total principal balance plus
accrued interest was paid by August 31, 1998 and the line of credit was
terminated on the same date.
On April 22, 1998 the Company sold 600 shares of Series A Convertible
Preferred Stock for gross proceeds of $600,000. After paying the costs incurred
in connection with the issuance of the Preferred Stock, the net proceeds
received were $527,925.
During the quarter ended May 31, 1998, the Company offered to certain
warrant holders with warrants expiring May 31, 1998 and an exercise price of
$1.00 per share, the following option: for a specific eleven day period, the
right to exercise their warrants for $0.585 per common share (the market price
of the underlying Common Stock on the date of the offer). A total of 380,280 out
of 784,781 warrants were exercised under this offer and the balance of 404,501
warrants expired on May 31, 1998. The Company received gross proceeds of
$222,503 for the warrants.
On June 30, 1998, an agreement was reached between the Company and Switch
which terminated an existing license agreement and any future obligations
thereunder. Consideration of $150,000 was received in connection with this
agreement.
On August 25, 1998, the Company exercised a put option with Switch thereby
selling its entire equity interest in Switch. On August 31, 1998, the Company
received $2,100,000 upon exercise of the option agreement.
The Company expects to incur operating losses until such time as the Merger
with DCI is completed, if ever. The Company is preserving its capital resources
and focusing its efforts on supporting its current customer base while
17
<PAGE>
completing the Merger. However, there can be no assurances as to when the Merger
will be completed, if ever. The Company has sufficient funds to meet its current
operating expenses for the next fiscal year.
INFLATION
Although the Company's operations are influenced by general economic trends
and, specifically, technology advances in the telecommunications industry, the
Company does not believe that inflation has had or will have a material impact
on its limited operations.
RISKS ASSOCIATED WITH YEAR 2000
Many computer programs were designed to recognize calendar years by their
last two digits. As a result, such programs are expected to misidentify dates
commencing in calendar year 2000. This problem is referred to as the "Year 2000
Issue." These errors are likely to lead to computer errors, miscalculations,
delays and business interruptions if not properly corrected in a timely manner.
The Company's main billing program was originally written to accept dates from
the year 2000 and beyond. However, the Company plans on having an independent
consultant review the billing system for the purpose of thoroughly testing its
operation for readiness associated with the Year 2000 Issue. Estimated costs for
the consultant and associated testing activities is $700. The Company
anticipates that such assessment activities will be completed by March 31, 1999.
The Company has completed an assessment of all other internal systems and has
determined that no modifications to such systems are necessary. Total costs
incurred to date by the Company in connection with its assessment of its
internal vulnerability to the Year 2000 Issue equal approximately $5,000.
The Company has also contacted its major supplier, which handles the call
processing software and supports platform services. The Company's call
processing hardware and operating systems are not currently able to address the
Year 2000 Issue. Modifications to this system have begun and the host server's
operating system is expected to be compliant no later than the end of the first
quarter of calendar year 1999. The Company currently estimates that its costs to
be incurred with such modification will be approximately $50,000. The Company
does not have material relationships with any other third partners upon which
its business and operations are substantially dependent. However, it intends to
seek assurances from any third parties with which it enters into agreements in
the future that the systems are compliant with the Year 2000 Issue.
Presently, the Company does not have a contingency plan in the event it is
unable to correct any vulnerability to the Year 2000 Issue, but is reviewing
alternatives, such as using a service bureau to temporarily process calls and
run applications, should any problems arise in system operations.
The Company believes there exist multiple alternative suppliers for these
services. However, if it is unable to obtain such services and at terms
acceptable to it, it may be forced to interrupt or suspend its services. In
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<PAGE>
addition, even if available, the Company may be required to incur substantially
higher costs in order to provide such services. The Company has adequate
resources to complete its Year 2000 assessment and any necessary modifications.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
-----------
REPORT OF INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . . 21
CONSOLIDATED BALANCE SHEET - August 31, 1998. . . . . . . . . . . . . 22
CONSOLIDATED STATEMENT OF OPERATIONS -
For the years ended August 31, 1998 and 1997 . . . . . . . . . . 23
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY -
For the years ended August 31, 1998 and 1997 . . . . . . . . . . 24
CONSOLIDATED STATEMENTS OF CASH FLOWS -
For the years ended August 31, 1998 and 1997 . . . . . . . . . . 25
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 26
19
<PAGE>
WAVETECH INTERNATIONAL, INC.
Audited Financial Statements
For the years ended August 31, 1998 and 1997
-----------
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Wavetech International, Inc.
We have audited the accompanying consolidated balance sheet of Wavetech
International, Inc. as of August 31, 1998 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended August 31, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 International, Inc. as of August 31, 1998 and the results of its
operations and its cash flows for the years ended August 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
/s/ Addison, Roberts & Ludwig, P.C.
Tucson, Arizona
November 6, 1998
21
<PAGE>
WAVETECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
August 31, 1998
-----------
ASSETS
1998
Current assets: -----------
Cash and cash equivalents $ 2,202,573
Accounts receivable, net of allowance of $9,927 18,276
Prepaid expenses and other assets 6,547
-----------
Total current assets 2,227,396
Property and equipment, net 259,270
Noncurrent assets:
Intangibles, net of amortization of $11,578 25,422
Deposits and other assets 30,083
-----------
Total noncurrent assets 55,505
-----------
Total assets $ 2,542,171
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 246,666
Accrued interest payable 8,579
Notes payable, current portion 63,000
Capital leases payable, current portion 45,709
-----------
Total current liabilities 363,954
Noncurrent liabilities:
Capital leases payable 25,265
-----------
Total liabilities 389,219
Commitments -0-
Stockholders' equity:
Preferred stock 6%, par value $.001 per share;
10,000,000 shares authorized, 600 shares
issued and outstanding, with a liquidation value
of $600,000 -0-
Common stock, par value $.001 per share;
50,000,000 shares authorized, 16,994,887
shares issued and outstanding 16,995
Additional paid-in capital 8,516,923
Accumulated deficit (6,380,966)
-----------
Total stockholders' equity 2,152,952
-----------
Total liabilities and stockholders' equity $ 2,542,171
===========
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
WAVETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended August 31, 1998 and 1997
-----------
1998 1997
------------ ------------
Revenues $ 157,838 $ 719,142
------------ ------------
Expenses:
Cost of sales 85,082 679,930
General and administrative 785,171 1,584,747
Depreciation and amortization expense 156,965 211,786
------------ ------------
Total expenses 1,027,218 2,476,463
------------ ------------
Net loss from operations (869,380) (1,757,321)
Other income and expense:
Interest income 6,565 8,500
Interest expense (45,182) (26,893)
License agreement termination income 236,906 -0-
Loss on sale of investment in Switch (216,165) -0-
Debt conversion expense (92,894) -0-
Costs incurred in connection with merger (236,737) -0-
------------ ------------
Total other income and expense (347,507) (18,393)
------------ ------------
Net loss $ (1,216,887) $ (1,775,714)
============ ============
Net loss per common share, basic $ (.08) $ (.12)
============ ============
Net loss per common share, diluted $ (.08) $ (.12)
============ ============
Weighted average number of
shares outstanding, basic 15,979,543 14,455,167
============ ============
Weighted average number of
shares outstanding, diluted 15,979,543 14,455,167
============ ============
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
WAVETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended August 31, 1998 and 1997
-----------
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, August 31, 1996 14,114,441 $ 14,114 $ 6,747,967 $(3,252,371) $ 3,509,710
Common stock issued 962,366 963 256,856 257,819
Warrants issued 20,000 20,000
Net loss (1,775,714) (1,775,714)
----------- ----------- ----------- ----------- -----------
Balances, August 31, 1997 15,076,807 15,077 7,024,823 (5,028,085) 2,011,815
Common stock issued for
payroll and services 476,069 476 155,754 156,230
Warrants exercised 380,280 380 222,123 222,503
Conversion of debt into
common stock 1,061,731 1,062 370,511 371,573
Debt conversion expense 92,894 92,894
Sale of Series A Preferred Stock 527,924 527,924
Preferred stock conversion benefit 122,894 122,894
Preferred stock dividend (135,994) (135,994)
Net loss (1,216,887) (1,216,887)
----------- ----------- ----------- ----------- -----------
Balances, August 31, 1998 16,994,887 $ 16,995 $ 8,516,923 $(6,380,966) $ 2,152,952
=========== =========== =========== =========== ===========
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE>
WAVETECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 1998 and 1997
------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,216,887) $(1,775,714)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 156,965 211,876
Common stock issued for services and
accrued interest 168,732 204,180
Debt conversion expense 92,894 -0-
Loss on disposition of Switch shares 216,165 -0-
Changes in assets and liabilities:
(Increase) decrease in accounts receivable
and other current assets 11,175 1,108
(Increase) decrease in inventory deposit -0- 241,037
Increase (decrease) in accounts payable
and accrued expenses (154,757) 264,507
Increase (decrease) in accrued interest
payable 3,331 5,248
Increase (decrease) in unearned revenue (146,429) (153,556)
----------- -----------
Total adjustments 348,076 774,400
----------- -----------
Net cash used in operating activities (868,811) (1,001,314)
Cash flows from investing activities:
Purchase of property and equipment (1,985) (25,237)
(Increase) decrease in other assets 5,550 -0-
Proceeds from sale of investment in Switch 2,100,000 -0-
Payment of notes receivable -0- 45,282
Purchase of intangibles -0- (25,000)
----------- -----------
Net cash provided by (used in) investing activities 2,103,565 (4,955)
Cash flows from financing activities:
Proceeds from notes payable 580,000 172,071
Payments on notes payable (330,000) -0-
Payments on capital lease payable (39,037) (29,961)
Proceeds from common stock issued 222,503 -0-
Proceeds from preferred stock issued 527,924 -0-
Proceeds from sale of warrants -0- 20,000
Dividends paid (6,900) -0-
----------- -----------
Net cash provided by financing activities 954,490 162,110
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,189,244 (844,159)
Cash and cash equivalents, beginning of year 13,329 857,488
----------- -----------
Cash and cash equivalents, end of year $ 2,202,573 $ 13,329
=========== ===========
</TABLE>
See independent auditor's report.
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
1. ORGANIZATION
The consolidated financial statements include the accounts of Wavetech
International, Inc. (the Company) and its wholly owned subsidiaries,
Interpretel, Inc. (Interpretel), Interpretel (Canada) Inc., Telplex
International Communications, Inc. and International Environmental Services
Corporation (an inactive corporation). All material intercompany balances
and transactions have been eliminated. As of August 31, 1998, and for the
previous four 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, 1998.
The Company is currently conducting minimal operations while actively
pursuing a merger candidate. The Company has recorded net operating losses
in each of the previous five years and does not anticipate realization of
full operations until a qualified merger or acquisition can be effected.
The Company is currently negotiating a merger agreement. (Note 16)
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.
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.
26
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
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 that increase the useful lives of the
asset are capitalized. When items are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts and any gain or loss
is included in income.
INTANGIBLE ASSETS
Intangible assets consist of start-up costs. These costs are primarily
consulting fees and other costs incurred in connection with the development
of the Company. Management believes that these costs will be recovered with
future operations. Start-up costs are amortized over five years using the
straight-line method. Intangibles are presented net of accumulated
amortization of $11,578 and $7,511 for the years ended August 31, 1998 and
1997, respectively.
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.
27
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1998, the Company maintained cash balances in bank accounts
insured by the FDIC. The cash balance exceeded the FDIC insurable amount by
$2,090,015.
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 that 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,
accounts payable and notes payable approximate fair value because of the
short maturity of these instruments. 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 no advertising costs
during the year ended August 31, 1998.
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 over the
term of the agreement. Revenue from the installation of equipment is
recognized when delivered. Revenue from the resale of minutes is recorded
when the minutes are used by the customer. Cost of sales includes expenses
28
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
directly related to the operation and maintenance of the telephony
platform. Depreciation and amortization expense is separately stated.
CONCENTRATION OF REVENUE
During the year ended August 31, 1998, the Company recognized revenue of
$59,523 from the recognition of income from the sale of a licensing
agreement and $236,906 from termination of the licensing agreement all from
Switch. This represents 74% of total revenue for the year ended August 31,
1998.
During the year ended August 31, 1997, the Company recognized revenue from
the installment of equipment of $474,160 and $53,571 from the recognition
of income from the sale of a licensing agreement all from Switch. This
represents 73% of total revenue for the year ended August 31, 1997.
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
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128), which became effective in 1997, requires presentation of two
calculations of earnings per common share. "Basic" earnings (loss) per
common share equals net income (loss) divided by weighted average common
shares outstanding during the period. "Diluted" earnings (loss) per common
share equals net income (loss) divided by the sum of weighted average
common shares outstanding during the period plus common stock equivalents.
Common stock equivalents are shares assumed to be issued if outstanding
stock options were exercised. Common stock equivalents from stock options
and warrants are excluded from the computation when the effect is
antidilutive. Prior period amounts have been restated in accordance with
SFAS 128.
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.
29
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
3. 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.
4. 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.
Switch is a wholly owned subsidiary of Tech Pacific Holdings Limited (Tech
Pacific). Tech Pacific is an Australian corporation whose stock is not
publicly traded. Tech Pacific is a wholly owned subsidiary of First
Pacific, a publicly traded company on the Hong Kong stock exchange. Switch
conducts business as a telecommunications Fixed Network Service Provider
and also validates mobile telephone connections for Telestra Mobilenet in
Australia. The Company 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 5).
30
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
4. INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED, CONTINUED
On June 30, 1998, an agreement was reached between the Company and Switch
which sets forth the terms and conditions of a one year put option for the
shares of common stock of Switch which are owned by the Company. On August
25, 1998, the Company exercised the put option thereby selling its entire
interest in Switch for $2,100,000. The sale resulted in recognition of a
net loss on the investment of $216,165.
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.
5. 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 an 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 provided for a licensing fee in the amount of $500,000
to be paid to Interpretel over a three-year period. Switch shall not have
an obligation to pay any fees pursuant to termination provisions in the
agreement. The 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. A payment of $150,000 was due on May 22, 1998.
Effective June 30, 1998, an agreement was reached between the Company and
Switch terminating the license agreement. Switch agreed to pay the Company
$150,000 in consideration of the termination of the agreement. The payment
was received on July 10, 1998. In consideration of the termination of the
licensing agreement, the Company agreed to release Switch from any other
obligations including the gross revenue fee. In connection with the
termination of the licensing fee, the Company recognized $86,906 in
unamortized deferred revenue and $150,000 termination payment for a total
of $236,906 in license fee termination income.
6. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 1998:
31
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
6. PROPERTY AND EQUIPMENT, CONTINUED
1998
---------
Furniture and fixtures $ 170,415
Computer equipment 507,362
Software 112,318
---------
Total property and equipment, at cost 790,095
Less: accumulated depreciation and amortization (530,825)
---------
Net property and equipment $ 259,270
=========
Depreciation expense related to capital leases was $36,139 and $37,257 for
the years ended August 31, 1998 and 1997, respectively.
7. NOTES PAYABLE
Notes payable are composed of the following at August 31, 1998:
Note payable to a shareholder and officer of the
Company due on demand with interest payable at 15%
annually. This Note is uncollateralized. (Note 13) $ 13,000
Note payable to an unrelated entity due and payable on
demand with interest payable at 12%. At the option of
the holder, principal and interest can be paid in shares
of common stock of Wavetech, Inc. with an aggregate
payoff value equal to the amount of principal plus
interest. This Note is uncollateralized. 50,000
---------
Total short-term notes payable $ 63,000
=========
8. 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.
32
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
8. CAPITAL LEASES PAYABLE, CONTINUED
Future lease commitments are as follows:
1999 $ 45,709
2000 23,671
2001 1,594
---------
70,974
Amounts due within one year 45,709
---------
Long-term debt $ 25,265
=========
9. COMMITMENTS
The Company has entered into cancelable operating agreements with a
telecommunications service provider. The Company has agreed to a $2,575
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, 1998 and 1997 approximated $121,000 and $107,000, respectively.
The Company has entered into a lease agreement for office space.
Future lease commitments are as follows:
1999 $ 105,056
2000 110,659
2001 116,262
2002 29,416
---------
$ 361,393
=========
10. PREFERRED STOCK
During the year ended August 31, 1998, the Company issued 600 shares of
Series A Convertible Preferred Stock (6% Preferred) at $1,000 per share.
The 6% Preferred stockholders are entitled to receive annual cash dividends
of $60 per share per annum, accrued daily and payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, in
preference and priority to any payment to any other class or series of
stock of the Corporation. Series A Preferred stockholders do not have any
voting rights.
33
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
10. PREFERRED STOCK, CONTINUED
The 6% Preferred is convertible at the option of the Company at any time
after January 1, 1999, on at least ten (10) days advance notice, at a
conversion price determined as set forth in the subscription agreement. A
beneficial conversion feature of $122,894 resulted in a charge to retained
earnings in the current period.
The 6% Preferred is redeemable at the option of the Company after the date
on which a registration statement under the Securities Act has been
declared effective; provided the Company has given at least 5 days written
notice. If any conversion of preferred shares in aggregate cause the
Company to issue in excess of 20% of common shares outstanding and issued,
the Company shall redeem such number of preferred shares as is necessary to
limit the issuance of the common shares to 20% unless shareholder approval
has been obtained to issue in excess of 20% of the outstanding and issued
common shares.
If redemption occurs, the Company must remit within 5 days of notice in the
form of a cashiers check $1,250 per preferred share plus all accrued and
unpaid dividends.
Liquidation, dissolution or winding up of the Company entitles the
preferred shareholders to receive, prior to and in preference of any
distribution of assets to any other class or series of share the amount of
$1,000 per share plus the accrued but unpaid dividends.
11. COMMON STOCK
During the year ended August 31, 1998, the Company issued 348,187 shares of
common stock for consulting services pursuant to various agreements valued
at $130,477. 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, 1998, the Company issued 54,557 deferred
shares of common stock under the 1997 Stock Incentive Plan to meet payroll
expenses in the amount of $25,753. 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, 1998, the Company issued 73,325 shares of
common stock in satisfaction for services valued at $29,000 performed in
the previous year. The previous values assigned to the common stock were
charged to expense in the period the services were performed and based on
the fair market values of the common stock.
34
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
11. COMMON STOCK, CONTINUED
During the quarter ended May 31, 1998, the Company offered to all warrant
holders with warrants expiring May 31, 1998 and an exercise price of $1.00
per share, the following option: for a specific eleven day period, the
right to exercise their warrants for $0.585 per common share (the fair
market value on the date of the warrant exchange offer). The warrants were
initially issued with convertible notes that matured during the year ended
August 31, 1996 and were converted into common shares at the face value of
the notes plus accrued interest. A total of 380,280 out of 784,781 warrants
were exercised under this offer and the balance of 404,501 warrants expired
on May 31, 1998. The Company received $222,503 for the warrants. The
Company recorded the exercise of the warrants as an increase to additional
paid-in-capital and common stock.
In October of 1997, the Company received proceeds of $250,000 from the
issuance of convertible notes payable. The notes were issued with attached
warrants to purchase an aggregate of 40,000 shares of the Company's common
stock. Each of the warrants is convertible at any time prior to October 24,
1999 by the holder thereof at an exercise price of $0.46 per share. The
warrants are granted at fair market value of the common stock on the date
of the grant. The warrants are valued at $18,400. These warrants remained
outstanding at August 31, 1998. The notes accrued interest at a rate of 12%
per annum and principal and accrued interest thereon were payable on or
before April 24, 1998. On November 30, 1998, $200,000 in notes payable
along with accrued interest of $2,067 were converted into 577,333 shares of
common stock. A beneficial conversion feature of $92,894 was charged to
expense in the period of the conversion. The balance of $50,000 remains
payable at August 31, 1998.
On November 30, 1997, The Company converted $165,335 in existing notes
payable plus accrued interest of $4,171 to 484,307 shares of common stock.
The conversion price was based on the fair market value of the common stock
on the date of the conversion.
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
35
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
11. COMMON STOCK, CONTINUED
stock was based on the fair market value of the common stock on the date of
the agreement was negotiated.
During the year ended August 31, 1997, the Company issued 438,755 shares of
stock in satisfaction for services valued at $203,125 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 values of the common stock.
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.
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 expired June 30,
1998.
During August, 1996 and pursuant to an agreement with Switch (Note 4) 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 4).
During the year ended August 31, 1997, 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, 1998, is 2,295,000.
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.
36
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
11. COMMON STOCK, CONTINUED
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 5.60%, dividend
yield of 0%, volatility factor of the expected market price of the
Company's common stock of .91, 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 that 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.
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 Year ended
August 31, 1998 August 31, 1997
--------------- ---------------
Net loss, as reported $(1,216,887) $(1,629,285)
Pro forma compensation expense
for stock options
1997 grants (414,000)
1998 grants (17,000)
----------- -----------
Pro forma net loss (1,233,887) (2,043,285)
----------- -----------
Pro forma loss per share $ (.08) $ (.14)
=========== ===========
37
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
11. COMMON STOCK, CONTINUED
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
Granted 1,550,000 1.73
Canceled (450,000) 1.94
----------- -----------
Outstanding, August 31, 1996 1,236,250 1.73
Granted 2,328,935 .68
Canceled (1,236,250) 1.73
----------- -----------
Outstanding, August 31, 1997 2,328,935 $ .68
=========== ===========
Granted 70,000 .40
Canceled (78,935) .48
----------- -----------
Outstanding, August 31, 1998 2,320,000 $ .69
=========== ===========
Exercise prices for options outstanding as of August 31, 1998 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 1,650,000
shares were immediately exercisable at August 31, 1998.
Pro forma compensation expense presented may not be representative of
future pro forma expense, when amortization of multiple years of awards may
be reflected.
The weighted average fair values of stock options granted during 1998 for
which the exercise price was equal to the fair market value of the stock
were $0.40 per share. 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.
38
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
12. INCOME TAXES
At August 31, 1998, the Company has net operating loss carryforwards
totaling approximately $8,994,000 that may offset future income from 1998
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 $3,460,000. The March 8,
1995 acquisition (Note 3) 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, $8,994,000, 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.
The income tax benefit for the years ended August 31 is comprised of the
following amounts:
1998 1997
------------ ------------
Current $ -0- $ -0-
Deferred
Federal (453,000) (429,000)
State (19,000) (28,000)
------------ ------------
(472,000) (457,000)
Valuation allowance 472,000 457,000
------------ ------------
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:
1998 1997
------------ ------------
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%
============ ============
39
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
12. INCOME TAXES, CONTINUED
The components of the net deferred tax asset are as follows:
1998
------------
Deferred tax asset:
Amortization of organization costs $ (70,000)
Net operating loss carryforward (3,390,000)
------------
(3,460,000)
Valuation allowance (3,460,000)
------------
$ -0-
============
13. COSTS INCURRED IN CONNECTION WITH MERGER
During the year ended August 31, 1998, the Company incurred costs in
connection with merger negotiations with an unrelated Company. The merger
negotiations were terminated by mutual agreement and the costs charged to
expense in the current period.
14. 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 $2,575 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. During the year ended
August 31, 1997, 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. During the year ended August 31, 1998, an
additional amount of $6,264 was advanced. On November 30, 1997, $115,335
plus accrued interest of $1,422 was converted to shares of common stock at
$0.35 per share (the fair market value of the stock on the date of the
conversion).
An officer and shareholder advanced $13,000 to the Company which is
reflected in notes payable (Note 7).
During the year ended August 31, 1997 a shareholder of the Company advanced
$50,000 to the Company. 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 was released and the note converted to shares of
common stock of the Company (Note 11).
40
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
14. RELATED PARTY TRANSACTIONS, CONTINUED
During the year ended August 31, 1998, the Company issued promissory notes
for the benefit of the wife and son of a director of the Company, in the
aggregate principal amount of $100,000. The notes were due on April 24,
1998 and accrued interest at a rate of 12% per annum. On November 30, 1997,
$100,000, plus accrued interest of $833, was converted into 288,096 shares
of the Company's common stock at $0.35 per share (the fair market value of
the stock on the date of conversion). (Note 11)
15. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the year ended August 31, 1998, the Company converted $365,335 in
notes payable to 1,061,731 shares of common stock of the Company. The
conversion price was the fair market value of the common stock on the date
of conversion.
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.
Supplemental disclosure of cash flow information:
1998 1997
------------ ------------
Cash paid during the period for:
Income taxes $ 200 $ 50
============ ============
Interest $ 30,282 $ 20,454
============ ============
16. SUBSEQUENT EVENTS
The Company received correspondence on September 16, 1998 from Nasdaq that
the Company must petition to remain eligible for listing on the Nasdaq
Smallcap Market due to the inability to meet the bid price requirement, as
set forth in NASD Marketplace Rule 4310(c)(4). The Company has appealed to
the Listing Qualifications Panel. Final determination of the Company's
listing has been stayed until the outcome of such hearing has been
determined.
On October 12, 1998, a note payable for $50,000, plus accrued interest, to
an unrelated entity (Note 7) was converted into 156,250 shares of Common
Stock. The conversion price was based on the average of the high and low
41
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------
16. SUBSEQUENT EVENTS, CONTINUED
price on the date of the letter of agreement for repayment of this note
payable.
On November 6, 1998, the Company executed a definitive merger agreement
with DCI Telecommunications, Inc., an international provider of telephone
services, including long distance, prepaid telephone cards and Internet
services. Pursuant to such agreement, DCI Telecommunications, Inc. will be
merged into the Company. In addition, Wavetech plans to effect as soon as
practicable 1-for-6 reverse stock split. At closing, Wavetech will exchange
one share of its common stock for each share of DCI common stock.
Completion of the merger is subject to conclusion of due-diligence, review
by the Securities and Exchange Commission and shareholder approval. The
Company intends to solicit approval by its stockholders at a meeting to be
held in early calendar year 1999.
42
<PAGE>
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
All directors hold office until the next annual meeting of stockholders of
the Company and thereafter until their successors are chosen and qualified. All
officers hold office at the selection and pleasure of the Board of Directors of
the Company.
DIRECTORS AND OFFICERS
The current directors and executive officers of the Company are as follows:
Name Age Position Held with Company
- ---- --- --------------------------
Gerald I. Quinn 55 President, Chief Executive Officer and a member
of the Company's Board of Directors
Lydia M. Montoya 45 Chief Financial Officer
Richard P. Freeman 41 Vice President, Investor Relations and Product
Development and a member of the Company's Board
of Directors
Terrence H. Pocock 65 Director
John P. Clements 48 Director
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
43
<PAGE>
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 ("Cableshare"). Mr. Quinn has been a
director of Cableshare since 1993 and has chaired its board committee on mergers
and acquisitions. In 1997 Mr. Quinn negotiated a merger of Cableshare with
Source Media, Inc. (NASDAQ:SRCM) culminating in Source Media, Inc. owning 100%
of Cableshare. Mr. Quinn is active in numerous civic and professional
organizations and has been recognized for his work in marketing, sales,
promotion and public relations by various trade organizations. Mr. Quinn has two
arts degrees with majors in English, Economics and Political Science. Mr.
Quinn's sister is married to Terrence H. Pocock.
LYDIA M. MONTOYA joined the Company in September 1996 as its Chief
Financial Officer. From May 1994 until September 1996, Ms. Montoya was
self-employed as a Certified Public Accountant. Ms. Montoya was Controller of
Ugly Duckling Corporation, a publicly traded company ("Ugly Duckling") from
November 1992 to May 1994. Ugly Duckling is an operator of nine used car
dealerships which also finance and service retail installment contracts
generated from the sale of used cars by its dealerships. From July 1987 to
October 1992, Ms. Montoya was Director of Partnership Accounting for Verde
Investments, Inc., a real estate development company that constructed, operated
and sold over 5,000 apartment units. Ms. Montoya began her career with Coopers &
Lybrand (now PriceWaterhouseCoopers LLP). Ms. Montoya has a B.S. in Accounting
from the University of Arizona and a B.S. in Sociology from Arizona State
University.
RICHARD P. FREEMAN was a co-founder of Interpretel and has served as
Interpretel's Vice President since 1993 and as a Director of the Company since
March 1995. Prior to joining Interpretel, Mr. Freeman was a principal in several
entrepreneurial companies located in Arizona, which were primarily involved in
the tourism and travel industries. Those companies included Desert Divers, a
scuba retail and boat charter company, and Vacation, Etc., a tour and travel
company which focused on corporate, leisure and adventure travel, wholesale tour
operations and escorted senior travel. Mr. Freeman has also served as a
consultant to several travel-related organizations, including the Business Radio
Network, a national network. Mr. Freeman holds a Bachelor of Arts degree from
the University of Arizona and is active in various civic and community
organizations.
TERRENCE H. POCOCK has been a Director of the Company since March 1997. Mr.
Pocock is the Vice Chairman of Cableshare, a 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.
44
<PAGE>
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 (subsequently named
PriceWaterhouseCoopers LLP) 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.
ITEM 10. EXECUTIVE COMPENSATION
(A) CASH COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer (the "Named Executive Officer"), for services rendered in all
capacities to the Company during each of the fiscal years ended August 31, 1998,
1997 and 1996. None of the Company's other employees received in excess of
$100,000 in compensation during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
- ----------------------------------------------------------------------------------------------------------------------
NAME AND FISCAL SALARY ($) BONUS OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR AWARDS ($) COMPENSATION STOCK UNDERLYING COMPENSATION
AWARDS ($) OPTIONS
(#) (5)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GERALD I. QUINN 1998 $85,000(2) $-0- $-0- $-0- 800,000 $-0-
PRESIDENT/CEO
1997 $85,000(1) $-0- $-0- $-0- 800,000 $-0-
1996 $85,000 $-0- $-0- $203,637 500,000 $-0-
</TABLE>
- ------------------
(1) Includes the fair market value of 88,853 shares of Common Stock, for which
Mr. Quinn elected to receive 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) Includes the fair market value of 18,817 shares of Common Stock, for which
Mr. Quinn elected to receive 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 respective deferral periods equaled $8,734.
45
<PAGE>
There were no grants of stock options made to the Named Executive Officer
during the last completed fiscal year.
The following table sets forth certain information concerning the
aggregated value of the unexercised options of the Named Executive Officer as of
August 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)
- ----------------------------------------------------------------------------------------------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GERALD I. QUINN -0- $0 800,000(1) -0- $0 $0
</TABLE>
- ------------------
(1) All of these options are immediately exercisable at any time prior to
January 2007 at a price of $0.66 per share.
(B) COMPENSATION PURSUANT TO PLANS
None.
(C) COMPENSATION OF DIRECTORS
All Directors are reimbursed for their reasonable out-of-pocket expenses
incurred in connection with attendance at Board meetings. Directors who are
employees of the Company do not receive compensation for service on the Board in
addition to their compensation as employees. In March 1997, the Company adopted
the 1997 Stock Incentive Plan (the "Plan"). As originally adopted, the Plan
provided that each Director would receive options to purchase 10,000 shares of
Common Stock upon election to the Board, and annual automatic grants of 10,000
options for each year of service thereafter. In March 1998, the Board of
Directors amended and restated the 1997 Stock Incentive Plan to provide greater
flexibility in the methods by which the Board of Directors may provide
incentives and rewards. Under the Restated Plan, members of the Board of
Directors of the Company, who are not employees of the Company or its
subsidiaries, will receive an option to purchase 30,000 shares of the Company's
Common Stock upon their initial election to the Board and thereafter receive an
annual grant of an additional 30,000 options. Board members serving on the Audit
Committee receive an additional option to purchase 20,000 shares of the
Company's Common Stock upon their initial designation to the Audit Committee.
All these options vest one year from the respective date of grant and terminate
upon the earlier of 10 years from the date of grant or 24 months after the
Director ceases to be a member of the Board.
46
<PAGE>
(D) EMPLOYMENT CONTRACTS
In May 1996, the Board of Directors approved a two-year employment
agreement with Gerald I. Quinn for services as President and Chief Executive
Officer. The agreement requires Mr. Quinn to devote his full time to the Company
and provides for a 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 May 1998, Mr. Quinn's contract was renewed for an additional
one-year term.
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 May 1998, Mr. Freeman's
contract was renewed under the same terms.
After their initial terms, each of the above-described agreements continue
at will, terminable with/on ninety days written notice by either party to the
other. The agreements terminate upon the occurrence of any of the following
events: (i) if the employee voluntarily terminates; (ii) if the employee dies;
(iii) if the employee is unable to properly discharge his obligations under his
employment agreement due to illness, disability or accident for three
consecutive months or for a period aggregating six months in any continuous
twelve months; (iv) if the employee is convicted of a crime of moral turpitude
by a court of competent jurisdiction; (v) if the employee is convicted of a
felony, except to the extent that the charge arises from an act taken at the
board's direction; or (vi) if the employee is grossly negligent or guilty of
willful misconduct in connection with the performance of his duties, which
negligence or misconduct, if curable, is not cured within fifteen days of a
notice of cure by the Board or the Chairman of the Board. Each of the
above-described agreements provides that the employee shall not compete with the
Company during the term of the agreement and for a period of one year
thereafter.
In the event of any Corporate Transaction or Change of Control of the
Company (each as defined in the Plan), the Common Stock at the time subject to
each outstanding option, but not otherwise vested, shall automatically vest in
full, so that each such option shall, immediately prior to the effective date of
such corporate transaction or change of control, become fully exercisable for
all of the Common Shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested Common Stock. The
proposed Merger will constitute a "Corporate Transaction."
(E) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than 10% of the Company's
outstanding Common Stock to file initial reports of ownership and changes in
ownership with the Commission. Officers, directors, and greater than 10%
stockholders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon a review of
copies of such filings or written representations that no forms were required
that were furnished to the Company, the Company believes that all of the
47
<PAGE>
Company's executive officers, directors, and greater than 10% stockholders
complied during the fiscal year ended August 31, 1998 with the reporting
requirements of Section 16(a), with the exception of one Form 3 filing by Tech
Pacific Holdings Pty Limited, which was made after the applicable deadline.
(F) COMPENSATION COMMITTEE REPORT ON REPRICING
None.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 23, 1998 certain information
with regard to the beneficial ownership of the Company's Common Stock by (i)
each shareholder known by the Company to beneficially own 5% or more of the
Company's outstanding Common Stock, (ii) each Director individually, (iii) the
Named Executive Officer and (iv) all Officers and Directors of the Company as a
group:
Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Owner (2)(3) Percent of Class (3)
- --------------------------------------------------------------------------------
Gerald I. Quinn (4) 1,337,230 7.4%
Richard P. Freeman (5) 1,195,192 6.9%
Terrence H. Pocock (6) 488,096 2.8%
John P. Clements (7) 150,200 *
Terence E. Belsham (8) 1,179,024 6.8%
Tech Pacific Holdings Pty
Limited (9) 3,544,110 18.5%
All Directors and executive
officers as a group (5 persons)
(4)(5)(6)(7) 3,320,718 17.6%
- ------------------
* Represents less than one percent of the outstanding Common Stock.
(1) Unless otherwise noted, the address of each holder is 5210 East Williams
Circle, Suite 200, Tucson, Arizona 85711.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from November 23, 1998 through the exercise of any
option, warrant or other right. Shares of Common Stock subject to options,
warrants or rights which are currently exercisable or exercisable within 60
days are deemed outstanding solely for computing the percentage of the
person holding such options, warrants or rights, but are not deemed
outstanding for computing the percentage of any other person.
48
<PAGE>
(3) The amounts and percentages in the table are based upon 17,151,137 shares
of Common Stock outstanding as of November 23, 1998.
(4) Includes 800,000 shares underlying outstanding options exercisable at a
price of $0.66 per share.
(5) Includes 200,000 shares underlying outstanding options, exercisable at a
price of $0.81 per share.
(6) Includes 200,000 shares underlying outstanding options, exercisable at
prices ranging from $0.25 to $0.375 per share. Also includes 288,096
outstanding shares, all of which are held by Mr. Pocock's spouse and son.
Mr. Pocock expressly disclaims beneficial ownership of such shares.
(7) Includes 150,000 shares underlying outstanding options, exercisable at a
price of $0.25 per share. Also includes 200 outstanding shares, all of
which are held by Mr. Clements' sons. Mr. Clements expressly disclaims
ownership of such shares.
(8) Includes 200,000 shares underlying outstanding options, exercisable at a
price of $0.81 per share.
(9) Based on a Form 3 filing, this holder has an address at Level 2, Epping
Road, Lane Cover, N.S.W. Australia 2066. This amount includes shares
underlying a warrant to purchase 2,000,000 Common Shares at $1.50 per
share.
(C) CHANGE IN CONTROL
On November 6, 1998, the Company entered into a Merger Agreement with DCI
Telecommunications, Inc. At closing, DCI will be merged into Wavetech and
Wavetech will issue shares of its Common Stock to the then former shareholders
of DCI in exchange for their shares of DCI Common Stock. It is currently
anticipated that following the Merger, DCI's shareholders will own, in the
aggregate, in excess of 85% of the Company's Common Stock. Consummation of the
Merger with DCI is subject to a number of conditions, including the approval of
Wavetech's and DCI's shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended August 31, 1997, Gerald I. Quinn, an officer and
director of the Company advanced $109,071 to the Company. During the year ended
August 31, 1998, an additional amount of $6,264 was advanced. The Company issued
a promissory note to Mr. Quinn in consideration of such advances in the
principal amount of $115,335. The note was due April 24, 1998 and accrued
interest at a rate of 12% per annum. On November 30, 1997 $115,335 principal
amount, plus accrued interest of $1,422, was converted into 333,593 shares of
the Company's Common Stock at $0.35 per share (the fair market value of the
stock on the date of conversion).
During the year ended August 31, 1998, the Company issued promissory notes
for the benefit of the wife and son of Terrence H. Pocock, a director of the
Company, in the aggregate principal amount of $100,000. The notes were due on
April 24, 1998 and accrued interest at a rate of 12% per annum. On November 30,
49
<PAGE>
1997 $100,000 principal amount, plus accrued interest of $833, was converted
into 288,096 shares of the Company's Common Stock at $0.35 per share (the fair
market value of the stock on the date of conversion). Mr. Pocock expressly
disclaims beneficial ownership of such shares.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) (1) THE FINANCIAL STATEMENTS LISTED IN THE INDEX SET FORTH IN ITEM 7 OF
THIS FORM 10-KSB ARE FILED AS PART OF THIS REPORT.
(A) (2) EXHIBITS
Method
Number Description of Filing
- ------ ----------- ---------
2 Merger Agreement, dated November 6, 1998, between the *
Registrant and DCI Telecommunications, Inc.
10.1 Put Option, dated June 30, 1998, between the Registrant and *
Tech Pacific Holdings Pty Limited
10.2 License Termination Agreement, dated June 30, 1998, between *
the Registrant and Switch Telecommunications Pty Limited
21 Subsidiaries of the Registrant *
23 Consent of Addison, Roberts & Ludwig *
27 Financial Data Schedule *
- ------------------
* Filed herewith.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT ARE AS FOLLOWS:
None.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WAVETECH INTERNATIONAL, INC.
Date: November 30, 1998 By: /s/ Gerald I. Quinn
------------------------------------
Name: Gerald I. Quinn
----------------------------------
Title: President & CEO
---------------------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: November 30, 1998 By: /s/ Gerald I. Quinn
------------------------------------
GERALD I. QUINN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, DIRECTOR
(Principal Executive Officer)
Dated: November 30, 1998 By: /s/ Lydia M. Montoya
------------------------------------
LYDIA M. MONTOYA,
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Dated: November 30, 1998 By: /s/ Richard P. Freeman
------------------------------------
RICHARD P. FREEMAN, DIRECTOR
Dated: November 30, 1998 By: /s/ Terrence H. Pocock
------------------------------------
TERRENCE H. POCOCK, DIRECTOR
Dated: November 30, 1998 By: /s/ John P. Clements
------------------------------------
JOHN P. CLEMENTS, DIRECTOR
51
EXHIBIT 2
MERGER AGREEMENT
by and between
WAVETECH INTERNATIONAL, INC.
AND
DCI TELECOMMUNICATIONS, INC.
Dated November 6, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER
1.1 The Merger............................................................. 1
1.2 Effect of the Merger................................................... 1
1.3 Consummation of the Merger............................................. 2
1.4 Articles of Incorporation and Bylaws; Officers......................... 2
1.5 Other Agreements....................................................... 2
1.6 Conversion of Securities............................................... 3
1.7 Closing of Company Transfer Books...................................... 4
1.8 Exchange of Certificates............................................... 4
1.9 Dissenting Shares...................................................... 5
1.10 Tax Consequences; Accounting Treatment................................. 5
1.11 Taking of Necessary Action; Further Action............................. 5
1.12 Employee Stock Options................................................. 6
1.13 Warrants............................................................... 7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF WAVETECH
2.1 Organization and Qualification......................................... 8
2.2 Authority Relative to this Agreement................................... 8
2.3 Capitalization......................................................... 9
2.4 SEC Filings............................................................10
2.5 Financial Statements...................................................11
2.6 Subsidiaries...........................................................11
2.7 Absence of Undisclosed Liabilities.....................................11
2.8 No Material Adverse Changes............................................12
2.9 Absence of Certain Developments........................................12
2.10 Title to Properties....................................................14
2.11 Accounts Receivable....................................................15
2.12 Inventories............................................................15
2.13 Tax Matters............................................................16
2.14 Contracts and Commitments..............................................17
2.15 Proprietary Rights.....................................................18
2.16 Litigation.............................................................19
2.17 Brokerage..............................................................19
2.18 Employment Matters.....................................................19
2.19 Employee Benefit Plans.................................................19
2.20 Insurance..............................................................21
2.21 Affiliate Transactions.................................................21
2.22 Suppliers..............................................................22
2.23 Officers and Directors; Bank Accounts..................................22
i
<PAGE>
2.24 Compliance with Laws; Permits; Certain Operations......................22
2.25 Disclosure.............................................................22
2.26 Non-Contravention; Consents............................................23
2.27 Stockholder Vote Required..............................................24
2.28 Board Approval.........................................................24
2.29 Opinion of Financial Advisor...........................................24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Organization and Qualification.........................................24
3.2 Authority Relative to this Agreement...................................25
3.3 Capitalization.........................................................25
3.4 SEC Filings............................................................27
3.5 Financial Statements...................................................27
3.6 Subsidiaries...........................................................28
3.7 Absence of Undisclosed Liabilities.....................................28
3.8 No Material Adverse Changes............................................28
3.9 Absence of Certain Developments........................................29
3.10 Title to Properties....................................................31
3.11 Accounts Receivable....................................................32
3.12 Inventories............................................................32
3.13 Tax Matters............................................................32
3.14 Contracts and Commitments..............................................33
3.15 Proprietary Rights.....................................................35
3.16 Litigation.............................................................35
3.17 Brokerage..............................................................36
3.18 Employment Matters.....................................................36
3.19 Employee Benefit Plans.................................................36
3.20 Insurance..............................................................37
3.21 Affiliate Transactions.................................................38
3.22 Suppliers..............................................................38
3.23 Officers and Directors; Bank Accounts..................................38
3.24 Compliance with Laws; Permits; Certain Operations......................38
3.25 Disclosure.............................................................39
3.26 Non-Contravention; Consents............................................39
3.27 Stockholder Vote Required..............................................40
3.28 Board Approval.........................................................40
ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER
4.1 Conduct of Business Pending the Merger.................................41
4.2 Delivery of Disclosure Letters.........................................41
4.3 Notification; Updates to Disclosure Schedule...........................42
4.4 Shareholder Approval...................................................42
ii
<PAGE>
ARTICLE V ADDITIONAL AGREEMENTS
5.1 Joint Proxy Statement; Registration Statement..........................43
5.2 Shareholders' Meetings.................................................45
5.3 Accountant Comfort Letters.............................................45
5.4 Expenses...............................................................46
5.5 Additional Agreements..................................................47
5.6 No Negotiations, etc...................................................47
5.7 Notification of Certain Matters........................................47
5.8 Access to Information; Confidentiality.................................47
5.9 Shareholder Claims.....................................................48
5.10 Consents...............................................................48
5.11 State Securities Law Compliance........................................49
5.12 Affiliate Agreements...................................................49
5.13 Commercially Reasonable Efforts........................................49
5.14 Tax Matters............................................................49
5.15 Board of Directors.....................................................49
5.16 Indemnification........................................................50
5.17 Nasdaq Listing.........................................................51
5.18 Employees..............................................................51
ARTICLE VI CONDITIONS
6.1 Conditions to Obligations of Each Party To Effect the Merger...........52
6.2 Additional Conditions to Obligation of the Company.....................53
6.3 Additional Conditions to Obligations of Wavetech.......................55
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER
7.1 Termination............................................................56
7.2 Termination Procedures.................................................58
7.3 Effect of Termination..................................................58
ARTICLE VIII GENERAL PROVISIONS
8.1 Amendment..............................................................58
8.2 Waiver.................................................................59
8.3 Public Statements......................................................59
8.4 Notices................................................................59
8.5 Interpretation.........................................................60
8.6 Severability...........................................................60
8.7 Miscellaneous..........................................................60
8.8 Non-survival of Representations and Warranties.........................61
8.9 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership....61
iii
<PAGE>
Exhibit 1 Form of Amended Articles of Incorporation
Exhibit 2 Form of Amended Bylaws
Exhibit 3 Form of Wavetech Warrant
Exhibit 4 Form of Affiliate Agreement (Company)
Exhibit 5 Form of Affiliate Agreement (Wavetech)
Exhibit 6 Affiliated Persons
Exhibit 7 Form of Representation Certificate (Wavetech)
Exhibit 8 Form of Representation Certificate (Company)
Exhibit 9 Form of Shareholder's Representation Certificate
Schedule A Wavetech Disclosure Letter
Schedule B DCI Disclosure Letter
iv
<PAGE>
MERGER AGREEMENT
This MERGER AGREEMENT is dated November 6, 1998 (this "Agreement"), by and
between Wavetech International, Inc. a Nevada corporation ("Wavetech"), and DCI
Telecommunications, Inc., a Colorado corporation (the "Company").
RECITALS
I. Wavetech and the Company have agreed to the merger described in
Article 1 (the "Merger").
II. The respective boards of directors of Wavetech and the Company have
determined that it is advisable to consummate the Merger, as a result of which
all of the outstanding common stock, $.001 par value per share, of the Company
("Company Common Stock") will be converted into shares of the common stock,
$.001 par value per share, of Wavetech ("Wavetech Common Stock") and the Company
will be merged into Wavetech; all on the terms and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
THE MERGER
The respective boards of directors of Wavetech and the Company have, by
resolutions duly adopted, approved the following provisions of this Article 1 as
the plan of merger required by the laws of the states of Colorado and Nevada in
connection with the Merger:
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3), in
accordance with this Agreement and applicable law, the Company shall be merged
with and into Wavetech, the separate existence of the Company (except as may be
continued by operation of law) shall cease, and Wavetech shall continue as the
surviving corporation under the name "DCI Telecommunications, Inc." as provided
in the Amended Articles of Incorporation of Wavetech pursuant to Section 1.4 of
this Agreement. Wavetech, in its capacity as the corporation surviving the
Merger, sometimes is referred to herein as the "Surviving Corporation."
1.2 EFFECT OF THE MERGER. The Surviving Corporation shall possess all the
rights, privileges, immunities and franchises, of a public as well as of a
private nature, of each of Wavetech and the Company (collectively, the
"Constituent Corporations"); and all property, real, personal and mixed, and all
debts due on whatever account, including subscriptions to shares, and all other
choses in action, and all and every other interest of or belonging to or due to
each of the Constituent Corporations, shall be taken and deemed to be
transferred to and vested in the Surviving Corporation without further act or
deed; and the Surviving Corporation shall be responsible and liable for all
liabilities and obligations of each of the Constituent Corporations.
<PAGE>
1.3 CONSUMMATION OF THE MERGER. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at such time,
place and date as mutually agreed upon by Wavetech and the Company, which date
shall be no later than the third business day after the later of the Wavetech
Shareholders' Meeting and the Company Shareholders Meeting (each as hereinafter
defined), unless extended by mutual agreement of the parties hereto (the
"Scheduled Closing Time"). The date on which the Closing actually takes place is
referred to in this Agreement as the "Closing Date." On the Closing Date, the
parties hereto will cause articles of merger relating to the Merger to be
delivered to the Secretaries of State of the states of Colorado and Nevada in
such form as required by, and executed in accordance with, the relevant
provisions of applicable law. The Merger shall be effective at such time as such
articles of merger are duly filed with and accepted by the Secretaries of State
of the states of Colorado and Nevada in accordance with applicable law, unless a
later time is expressly provided for in such articles (the "Effective Time").
1.4 ARTICLES OF INCORPORATION AND BYLAWS; OFFICERS.
(a) The Articles of Incorporation and Bylaws of Wavetech, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
(except that such Articles of Incorporation shall be amended as set forth in
Exhibit 1 attached hereto) and Bylaws (except that such Bylaws shall be amended
as set forth in Exhibit 2 attached hereto) of the Surviving Corporation
immediately after the Effective Time and shall thereafter continue to be its
Articles of Incorporation and Bylaws until amended as provided therein and under
the applicable law.
(b) The officers of the Surviving Corporation from and after the
Effective Time shall be as follows: Joseph J. Murphy, President and Chief
Executive Officer; Larry Shatsoff, Vice President, Secretary, and Chief
Operating Officer; John J. Adams, Vice President and Chief Marketing Officer;
Russell B. Hintz, Vice President, Treasurer and Chief Financial Officer; Daniel
J. Murphy, Vice President of Strategic Planning; Gerald Quinn, Chairman of the
Board of Directors.
1.5 OTHER AGREEMENTS. At or prior to the Effective Time:
(a) Wavetech shall take such actions as are reasonably necessary to
effect a one (1) for six (6) reverse stock split of its issued and outstanding
common stock (the "Reverse Stock Split").
(b) The number of directors to serve on the Board of Directors of the
Surviving Corporation shall be increased to seven (7), five (5) of whom shall be
designated by the Company and the remaining two (2) shall be designated by the
present management of Wavetech, PROVIDED, HOWEVER, that at least one of
Wavetech's designees and one of the Company's designees shall not be a member of
management of the Surviving Corporation or own in excess of five percent (5%) of
the outstanding capital stock of the Surviving Corporation.
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1.6 CONVERSION OF SECURITIES. Subject to Sections 1.8(b) and 1.9, at the
Effective Time, by virtue of the Merger and without any action on the part of
Wavetech, the Company or the holder of any of the following securities:
(a) Each share of Company Common Stock, and each option, warrant,
convertible preferred share and other right to receive a share of Company Common
Stock, issued or granted and outstanding immediately prior to the Effective Time
(and other than shares to be canceled pursuant to Section 1.6(b)) shall
automatically be canceled and extinguished and be converted into and become a
right to receive one (1) share (the "Exchange Ratio") of Wavetech Common Stock
(after giving effect to the Reverse Stock Split), provided, however, that in the
event Wavetech's unaudited balance sheet dated as of the Closing Date (the
"Closing Balance Sheet") reflects aggregate cash and cash equivalents in an
amount less than One Million Eight Hundred Dollars ($1,800,000) but equal to or
greater than One Million Six Hundred Thousand Dollars ($1,600,000), the Exchange
Ratio shall be adjusted pursuant to the following formula: For each dollar or
fraction thereof that the Closing Balance Sheet reflects cash and cash
equivalents in an amount less than One Million Eight Hundred Thousand Dollars
($1,800,000), Wavetech shall issue an aggregate of 1.5888 additional shares of
Wavetech Common Stock (the "Closing Adjustment Shares"). All of the Closing
Adjustment Shares to be issued pursuant to this Section 1.6(a) shall be equally
allocated on a per share basis among all of the issued and outstanding shares of
Company Common Stock and then outstanding options, warrants, convertible
preferred stock and other rights to receive shares of Company Common Stock.
Notwithstanding anything in this Agreement to the contrary, the expenses payable
by Wavetech pursuant to Section 5.4 hereof shall not be treated as paid prior to
the Closing Date solely for purposes of determining the aggregate amount of cash
and cash receivables reflected on the Closing Balance Sheet to be delivered as
contemplated by this Section 1.6(a).
(b) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time and held in the treasury of the Company
or owned by Wavetech shall automatically be canceled and extinguished and no
payment shall be made with respect thereto.
(c) Each share of Wavetech Common Stock issued and outstanding
immediately prior to the Effective Time (after giving effect to the Reverse
Stock Split) shall automatically be entitled to receive one Warrant to purchase
.2099 of a share of Wavetech Common Stock at a per share exercise price of $2.50
in the form attached hereto as Exhibit 3 (the "Wavetech Warrants"). The terms of
such form of Wavetech Warrant shall include, specifically, but without
limitation, a three (3) year term, exercisable only upon registration under the
Securities Act of 1933, as amended (the "Securities Act"), of the shares
underlying the Wavetech Warrants (the Wavetech Shares"), demand registration
rights exercisable by the holders of a specified percentage of Warrants (i.e.,
not less than 51%) commencing on or after the first anniversary of the date of
issuance of the Wavetech Warrant, and piggy-back registration rights (such
piggy-back rights being subject to standard underwriter cut-backs).
Notwithstanding anything in this Agreement to the contrary, nothing in this
Agreement shall be construed so as to require that the Warrant Shares be
included as part of the securities to be registered in the Form S-4 (as defined
herein).
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(d) If any shares of Company Common Stock outstanding immediately
prior to the Effective Time are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company, then the shares of
Wavetech Common Stock issued in exchange for such shares of Company Common Stock
will also be unvested and subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates representing such shares of
Wavetech Common Stock may accordingly be marked with appropriate legends.
1.7 CLOSING OF COMPANY TRANSFER BOOKS. At the Effective Time, holders of
certificates representing shares of Company Common Stock that were outstanding
immediately prior to the Effective Time shall cease to have any rights as
shareholders of the Company, and the stock transfer books of the Company shall
be closed and no transfer of shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall thereafter be made.
If, after the Effective Time, valid certificates previously representing such
shares are presented to the Surviving Corporation or the Disbursing Agent (as
defined in Section 1.8), they shall be exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) After the Effective Time, American Stock Transfer & Trust Company
shall act as disbursing agent (the "Disbursing Agent") in effecting the exchange
of Wavetech Common Stock for certificates which, immediately prior to the
Effective Time, represented shares of Company Common Stock. As soon as
practicable after the Effective Time, the Disbursing Agent shall mail a
transmittal form to each holder of certificates theretofore representing such
shares advising such holder of the procedure for surrendering such certificates
to the Disbursing Agent. If a certificate for Wavetech Common Stock issued
pursuant to Section 1.6(a) is to be issued in the name of a person other than
the person in whose name the certificates for shares surrendered for exchange
are registered, it shall be a condition of the exchange that the person
requesting such exchange shall pay to the Disbursing Agent any transfer or other
taxes required by reason of the issuance of such certificate in the name of a
person other than the registered owner of the certificates surrendered, or shall
establish to the satisfaction of the Disbursing Agent that such tax has been
paid or is not applicable. Notwithstanding the foregoing, neither the Disbursing
Agent nor any party hereto shall be liable to a holder of certificates
theretofore representing shares of Company Common Stock for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Upon the surrender and exchange of a certificate theretofore
representing shares of Company Common Stock, the holder shall be issued a
certificate representing the number of shares of Wavetech Common Stock to which
such person is entitled pursuant to Section 1.6(a) and the certificate
theretofore representing shares of Company Common Stock shall forthwith be
canceled. Until so surrendered and exchanged, each Certificate theretofore
representing shares of Company Common Stock shall represent solely the right to
receive the Wavetech Common Stock into which the shares it theretofore
represented shall have been converted pursuant to Section 1.6(a), and the
Surviving Corporation shall not be required to pay the holder thereof the
Wavetech Common Stock to which such holder otherwise would be entitled; provided
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that procedures allowing for payment against lost or destroyed certificates
against receipt of customary and appropriate certifications and indemnities
shall be provided.
(b) No fractional shares of Wavetech Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any fractional share
interest in Wavetech Common Stock which a holder of Company Common Stock would
otherwise be entitled to receive in the Merger (after aggregating all fractional
shares of Wavetech Common Stock that would otherwise be issuable to such holder)
shall be rounded up to the nearest whole share if such fraction is 0.5 or
greater and shall be rounded down to the nearest whole share if such fraction is
less than 0.5.
1.9 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of Company Common Stock that, as of the Effective Time,
are or may become "dissenter" shares within the meaning of Article 113 of the
Colorado Business Corporation Act (the "Colorado Law") shall not be converted
into or represent the right to receive Wavetech Common Stock in accordance with
Section 1.6, and the holder or holders of such shares shall be entitled only to
such rights as may be granted to such holder or holders under applicable
Colorado Law; provided, however, that if the status of any such shares as
"dissenter" shares shall not be perfected, or if any such shares shall lose
their status as "dissenting shares," then, as of the later of the Effective Time
or the time of the failure to perfect such status or the loss of such status,
such shares shall automatically be converted into and shall represent only the
right to receive (upon the surrender of the certificate or certificates
representing such shares) Wavetech Common Stock in accordance with Section 1.6.
(b) The Company shall give Wavetech prompt notice of any written
demand received by the Company prior to the Effective Time to require the
Company to purchase shares of capital stock of the Company pursuant to Colorado
Law and of any other demand, notice or instrument delivered to the Company prior
to the Effective Time pursuant to the Colorado Law. The Company shall not make
any payment or settlement offer prior to the Effective Time with respect to any
such demand unless Wavetech shall have consented in writing to such payment or
settlement offer.
1.10 TAX CONSEQUENCES; ACCOUNTING TREATMENT. For federal income tax
purposes, the Merger is intended to constitute a reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"). The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations. For accounting purposes, the Merger is
intended to be accounted for as a purchase.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. Wavetech, on the one hand,
and the Company, on the other hand, shall use all reasonable efforts to take all
such action (including specifically, but without limitation, action to cause the
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satisfaction of the conditions of the other to effect the Merger) as may be
necessary or appropriate in order to effectuate the Merger as promptly as
possible. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full possession of all the rights, privileges,
immunities and franchises of the Constituent Corporations, the officers and
directors of the Surviving Corporation are fully authorized in the name of the
Constituent Corporations or otherwise to take, and shall take, all such actions.
1.12 EMPLOYEE STOCK OPTIONS
(a) At the Effective Time, each option that is then outstanding under
the Company's 1995 Stock Option Plan (the "Stock Plan"), whether vested or
unvested (a "Company Option"), shall be assumed by Wavetech in accordance with
the terms (as in effect on the date hereof) of the Stock Plan and the stock
option agreement, if any, by which such Company Option is evidenced. All rights
with respect to Company Common Stock under outstanding Company Options shall
thereupon be converted, subject to the provisions hereof, into rights with
respect to Wavetech Common Stock. From and after the Effective Time, (i) each
Company Option assumed by Wavetech (collectively, the "Assumed Options") may be
exercised solely for shares of Wavetech Common Stock, (ii) the number of shares
of Wavetech Common Stock subject to each such Assumed Option shall be equal to
the number of shares of Wavetech Common Stock which the holder of such Assumed
Option would have received pursuant to Section 1.6 in exchange for the shares of
Company Common Stock subject to such Assumed Option if such Assumed Option had
been exercised immediately prior to the Effective Time, (iii) the per share
exercise price for the Wavetech Common Stock issuable upon exercise of each such
Assumed Option shall be determined by dividing the exercise price per share of
Company Common Stock subject to such Assumed Option, as in effect immediately
prior to the Effective Time, by a fraction the numerator of which is the number
of shares of Wavetech Common Stock subject to such Assumed Option immediately
after the Effective Time and the denominator of which is the number of shares of
Company Common Stock subject to such Assumed Option immediately prior to the
Effective Time, and rounding the resulting exercise price up to the nearest
whole cent, and (iv) all restrictions on the exercise of each such Assumed
Option shall continue in full force and effect and the term, exercisability,
vesting schedule, status as an incentive or nonqualified option, and other
provisions of such Company Option shall otherwise remain unchanged; PROVIDED,
HOWEVER, that each such Assumed Option shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split, reverse
stock split, stock dividend, recapitalization or other similar transaction
effected by Wavetech after the Effective Time. The Company and Wavetech shall
take all action that may be necessary (under the Stock Plan and otherwise) to
effectuate the provisions of this Section 1.12.
(b) Wavetech will use its best efforts to cause the Wavetech Common
Stock issuable upon exercise of the Assumed Options to be registered under the
Securities Act on Form S-8 promulgated by the Securities and Exchange Commission
(the "SEC"), to the extent Wavetech is eligible to use such registration form at
the time of such registration, and to be registered or qualified (or to have
established that an exemption from such registration or qualification is
available) under the "blue sky" laws of all states in which the holders of
Company Options reside, within 30 business days after the Effective Time, and
Wavetech shall use its best efforts to maintain the effectiveness of such
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registration statement or registration statements for so long as such Assumed
Options remain outstanding. With respect to any Company employee or director who
subsequent to the Merger will be subject to the reporting requirements under
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), with respect to the securities of Wavetech beneficially owned by such
person, Wavetech shall administer the Assumed Options in a manner that complies
with the disinterested administration requirements of Rule 16b-3 promulgated by
the SEC under the Exchange Act. At or prior to the Effective Time, Wavetech will
reserve a sufficient number of shares of Wavetech Common Stock for issuance upon
exercise of the Assumed Options.
1.13 WARRANTS. At the Effective Time, each warrant to purchase shares
of Company Common Stock that is then outstanding (the "Company Warrants") shall
be assumed by Wavetech in accordance with the terms (as in effect on the date
hereof) of the agreement or instrument by which such Company Warrant is
evidenced. All rights with respect to Company Common Stock under outstanding
Company Warrants shall thereupon be converted, subject to the provisions hereof,
into rights with respect to Wavetech Common Stock. From and after the Effective
Time, (i) each Company Warrant assumed by Wavetech (collectively, the "Assumed
Warrants") may be exercised solely for shares of Wavetech Common Stock, (ii) the
number of shares of Wavetech Common Stock subject to each such Assumed Warrant
shall be equal to the number of shares of Wavetech Common Stock which the holder
of such Assumed Warrant would have received pursuant to Section 1.6 in exchange
for the shares of Company Common Stock subject to such Assumed Warrant if such
Assumed Warrant had been exercised immediately prior to the Effective Time,
(iii) the per share exercise price for the Wavetech Common Stock issuable upon
exercise of each such Assumed Warrant shall be determined by dividing the
exercise price per share of Company Common Stock subject to such Assumed
Warrant, as in effect immediately prior to the Effective Time, by a fraction the
numerator of which is the number of shares of Wavetech Common Stock subject to
such Assumed Warrant immediately after the Effective Time and the denominator of
which is the number of shares of Company Common Stock subject to such Assumed
Warrant immediately prior to the Effective Time, and rounding the resulting
exercise price up to the nearest whole cent, and (iv) all restrictions on the
exercise of each such Assumed Warrant shall continue in full force and effect
and the term, exercisability, limitations, and other provisions of such Company
Warrant shall otherwise remain unchanged; provided, however, that each such
Assumed Warrant shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, reverse stock split, stock
dividend, recapitalization or other similar transaction effected by Wavetech
after the Effective Time. The Company and Wavetech shall take all action that
may be necessary (under the agreements and instruments evidencing the Assumed
Warrants and otherwise) to effectuate the provisions of this Section 1.13.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF WAVETECH
Wavetech hereby represents and warrants to the Company that, except as
otherwise disclosed in Wavetech's Annual Report on Form 10-KSB for the fiscal
year ended August 31, 1997 ("Wavetech's Latest 10-KSB") or Wavetech's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 1998 ("Wavetech's
Latest 10-QSB"):
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2.1 ORGANIZATION AND QUALIFICATION. Wavetech is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Nevada, and has the requisite corporate and other power and authority (including
all licenses, permits and authorizations) to own and operate its properties and
to carry on its business as now conducted and presently proposed to be conducted
and to perform its obligations under all contracts, instruments, notes or other
binding commitments to which it is or my become a party or by which it is or its
assets are or may become bound. The copies of Wavetech's Articles of
Incorporation and Bylaws, which have been furnished or made available by
Wavetech to the Company prior to the date of this Agreement, reflect all
amendments made thereto through the date hereof and are correct and complete in
all material respects. Wavetech is qualified to do business and is in good
standing as a foreign corporation in every jurisdiction in which the nature of
its business or its ownership of property requires it to be qualified and which
the failure to be so qualified would have a material adverse effect on the
financial condition and operations of Wavetech, taken as a whole.
2.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Wavetech has the requisite
corporate and other power and authority to enter into and perform this Agreement
and to carry out its obligations hereunder (it being understood that Wavetech's
obligations hereunder to effect the Merger is subject to the approval of its
shareholders as set forth in this Agreement). The execution and delivery of this
Agreement by Wavetech and the consummation by Wavetech of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Wavetech and, except for the approval of Wavetech's shareholders, no other
corporate proceedings on the part of Wavetech are necessary to authorize this
Agreement and such transactions. This Agreement has been duly executed and
delivered by Wavetech and constitutes a valid and binding obligation of
Wavetech, enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization or similar laws
relating to the enforcement of creditors' rights generally and by general
principles of equity. Except as set forth in the Wavetech Disclosure Letter
attached hereto as SCHEDULE A, Wavetech is not subject to, or obligated under,
any provision of (a) its Articles of Incorporation or Bylaws, (b) any agreement,
arrangement or understanding, (c) any license, franchise or permit or (d)
subject to compliance with any of the statutes referred to in the next sentence,
any law, regulation, order, judgment or decree, which would be breached or
violated, or in respect of which a right of termination or acceleration or any
encumbrance on any of its or any of its Subsidiaries' assets would be created,
by its execution, delivery and performance of this Agreement and the
consummation by it of the transactions contemplated hereby, and Wavetech has not
taken any action that is inconsistent in any material respect with any
resolution adopted by Wavetech, its board of directors or any committee thereof.
The books of account, stock records, minute books and other records of Wavetech
are accurate, up-to-date and complete in all material respects and have been
maintained in accordance with prudent business practices. Other than in
connection with or in compliance with the provisions of the Nevada Law, the
Securities Act and the Exchange Act, no authorization, consent or approval of,
or filing with, any public body, court or authority is necessary on the part of
Wavetech for the consummation by each of the transactions contemplated by this
Agreement.
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2.3 CAPITALIZATION.
(a) The authorized equity capitalization of Wavetech consists of
50,000,000 shares of Wavetech Common Stock, 17,151,137 shares of which are
issued and outstanding as of the date hereof (2,858,523 of which will be issued
and outstanding after giving effect to the Reverse Stock Split), and 10,000,000
shares of preferred stock, 600 shares of which have been designated as Series A
Convertible Preferred Stock, $.001 par value ("Wavetech Preferred Stock"), and
are issued and outstanding. All of the issued and outstanding shares of Wavetech
Common Stock and Wavetech Preferred Stock are validly issued, fully paid and
nonassessable. Wavetech's capital structure as of the date hereof is disclosed
to the Company under the caption "Capitalization" in the Wavetech Disclosure
Letter.
(b) As of the date of this Agreement, Wavetech has reserved 3,700,231
shares of Wavetech Common Stock for issuance under its 1997 Amended and Restated
Stock Incentive Plan, of which vested and unvested options to purchase 2,550,000
shares are outstanding as of the date of this Agreement. The Wavetech Disclosure
Letter, under the caption "Wavetech Options," accurately sets forth, with
respect to each Wavetech Option that is outstanding as of the date of this
Agreement: (i) the name of the holder of such Wavetech Option; (ii) the total
number of shares of Wavetech Common Stock that are subject to such Wavetech
Option and the number of shares of Wavetech Common Stock with respect to which
such Wavetech Option is immediately exercisable; (iii) the date on which such
Wavetech Option was granted and the term of such Wavetech Option; (iv) the
vesting schedule for such Wavetech Option; (v) the exercise price per share of
Wavetech Common Stock purchasable under such Wavetech Option; and (vi) whether
such Wavetech Option has been designated an "incentive stock option" as defined
in Section 422 of the Code. The Wavetech Disclosure Letter, under the caption
"Wavetech Warrants," accurately sets forth, with respect to each Wavetech
Warrant that is outstanding as of the date of this Agreement: (i) the name of
the holder of such Wavetech Warrant; (ii) the total number of shares of Wavetech
Common Stock that are subject to such Wavetech Warrant; (iii) the date on which
such Wavetech Warrant was granted and the expiration date of such Wavetech
Warrant; (iv) the exercise price per share of Wavetech Common Stock subject to
such Wavetech Warrant; and (v) a description of any registration or other rights
granted to the holder of such Wavetech Warrant.
(c) Except as specifically referred to in Sections 2.3(a) and (b)
above, or as set forth in the Wavetech Disclosure Letter, there is no: (i)
outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of Wavetech; (ii) outstanding security, instrument or obligation that
is or may become convertible into or exchangeable for any shares of the capital
stock or other securities of Wavetech; (iii) contract or agreement under which
Wavetech is or may become obligated to sell or otherwise issue any shares or its
capital stock or any other securities; or (iv) condition or circumstance that
may give rise to or provide a basis for the assertion of a claim by any person
or entity to the effect that such person or entity is entitled to acquire or
receive any shares of capital stock or other securities of Wavetech.
(d) All outstanding shares of Wavetech Common Stock and all
outstanding Wavetech Options and Wavetech Warrants have been issued and granted
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in compliance with (i) all applicable securities laws and other applicable laws
and regulations, and (ii) all requirements set forth in applicable contracts and
agreements.
(e) Except as set forth in the Wavetech Disclosure Letter under the
caption "Acquisition of Shares," Wavetech has never repurchased, redeemed or
otherwise reacquired shares of capital stock or other securities of Wavetech.
All securities so reacquired by Wavetech were reacquired in compliance with (i)
the applicable provisions of the Nevada Law and all other applicable laws and
regulations, and (ii) all requirements set forth in applicable restricted stock
purchase agreements and other applicable contracts and agreements.
(f) Except as set forth in the Wavetech Disclosure Letter under the
caption "Registration Rights," the Company is not under any obligation to
register under the Securities Act any of its presently outstanding securities or
any securities that may be subsequently issued, and no person or entity holds
any right to participate in new issuances of securities by Wavetech.
(g) Except as set forth in the Wavetech Disclosure Letter under the
caption "Agreements Relating to Wavetech Common Stock," Wavetech is not a party
to or obligated under any agreement, arrangement or understanding, contingent or
otherwise, (i) involving the repurchase or redemption of any amount of Wavetech
Common Stock, (ii) requiring Wavetech to issue any amount of Wavetech Common
Stock to any person at any time, or (iii) contemplating the issuance at any time
of shares of Wavetech Common Stock or other consideration to any person as a
guarantee by Wavetech of a minimum market price for Wavetech Common Stock.
(h) Except as set forth in the Wavetech Disclosure Letter under the
caption "Derivative Securities Not Effected by the Reverse Stock Split", all
options, warrants, preferred stock and other rights to acquire shares of
Wavetech Common Stock shall, immediately following effectuation of the Reverse
Stock Split, represent an option, warrant, preferred stock or other right to
acquire one-sixth the number of shares of Wavetech Common Stock covered
immediately prior to the Reverse Stock Split (except as may be adjusted for
fractional shares).
2.4 SEC FILINGS. Wavetech has heretofore delivered or made available to
the Company copies of Wavetech's (a) Latest 10-KSB, (b) Latest 10-QSB, and (c)
all other reports, registrations statements and other documents filed by
Wavetech with the SEC since January 1, 1995, in each case as filed with the SEC
(collectively, the "Wavetech SEC Filings"), and Wavetech has heretofore made
available to the Company all other reports, registration statements and other
documents filed by Wavetech with the SEC under the Exchange Act or the
Securities Act since Wavetech's inception. Except as set forth in the Wavetech
Disclosure Letter, since January 1, 1995, Wavetech has timely filed all reports,
registration statements and other documents required to be filed with the SEC
under the rules and regulations of the SEC, and all such reports, registration
statements and other documents complied as to form with the requirements of the
Securities Act or the Exchange Act, as the case may be. As of their respective
dates, the reports, statements and other documents referred to in the
immediately preceding sentence did not contain any untrue statement of material
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fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
2.5 FINANCIAL STATEMENTS. The audited financial statements and unaudited
interim financial statements of Wavetech and its Subsidiaries included (or
incorporated by reference) in the Wavetech SEC Filings have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto), are accurate and complete in all material respects and fairly present
the consolidated financial position of Wavetech and its Subsidiaries as of the
dates thereof and the consolidated results of their operations and the changes
in their consolidated financial position for the periods then ended, in the case
of the unaudited interim financial statements subject to year-end audit
adjustments which will not, individually or in the aggregate, be material in
magnitude. Such unaudited interim financial statements reflect all adjustments
necessary to present a fair statement of the results for the interim periods
presented.
2.6 SUBSIDIARIES.
(a) Except as set forth under the caption "Subsidiaries" in the
Wavetech Disclosure Letter, Wavetech does not own, beneficially or otherwise,
any stock or other equity interest, partnership interest, joint venture
interest, or any other security issued by any other corporation, organization or
entity, and Wavetech has not agreed and is not obligated to make any future
investment in or capital contribution to any such corporation, organization or
entity. Except as set forth under the caption "Subsidiaries" in the Wavetech
Disclosure Letter, Wavetech owns all of the outstanding capital stock of each
Subsidiary, free and clear of all liens, charges and encumbrances, and there are
no subscription rights, warrants, options, conversion rights or agreements of
any kind outstanding to purchase or otherwise acquire any shares of capital
stock of any Subsidiary or any securities or obligations of any kind convertible
into or exchangeable for any such shares of capital stock. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and has the requisite corporate and other
power and authority (including all authorizations, licenses and permits)
necessary to own and operate its properties and to carry on its business as now
conducted and presently proposed to be conducted. The copies of the charter
documents and bylaws of each Subsidiary which have been furnished by Wavetech to
the Company prior to the date of this Agreement reflect all amendments made
thereto through the date hereof and are correct and complete. Each Subsidiary is
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions in which the nature of its business or its ownership of property
requires it to be qualified.
(b) For purposes of this Article II, the term "Subsidiary" means any
corporation of which securities having a majority of the ordinary voting power
in electing directors are, at the time of determination, owned by Wavetech
directly or through another Subsidiary.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Wavetech nor any
Subsidiary has any obligations or liabilities (whether accrued, absolute,
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contingent, unliquidated or otherwise, whether due or to become due and
regardless of when asserted) arising out of transactions heretofore entered
into, or any action or inaction, or any state of facts existing, including taxes
with respect to or based upon transactions or events heretofore occurring,
except (a) obligations under contracts or commitments described in the Wavetech
Disclosure Letter under the caption "Contracts," or under contracts and
commitments which are not required to be disclosed thereunder (but not
liabilities for breaches thereof), (b) liabilities reflected on the balance
sheet included in Wavetech's Latest 10-QSB, (c) liabilities which have arisen
after the date of the balance sheet included in Wavetech's Latest 10-QSB in the
ordinary course of business (none of which is a material uninsured liability for
breach of contract, breach of warranty, tort, infringement, claim or lawsuit),
and (d) liabilities otherwise disclosed in the Wavetech Disclosure Letter.
2.8 NO MATERIAL ADVERSE CHANGES. Except as set forth under the caption
"Adverse Changes" in the Disclosure Letter, since May 31, 1998, there has been
no material adverse change, and no event has occurred that will or that would be
reasonably be expected to result in a material adverse change, in the
consolidated assets, financial condition, operating results, customer, employee,
supplier or franchise relations, business condition or prospects, or financing
arrangements of Wavetech and its Subsidiaries, taken as a whole. Each of the
parties to this Agreement hereby acknowledge and agree that the de-listing of
Wavetech Common Stock by the Nasdaq SmallCap Market shall not constitute a
Material Adverse Change for purposes of this Agreement.
2.9 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth under the caption
"Developments" in the Wavetech Disclosure Letter, since May 31, 1998, Wavetech
has not and, since the date of acquisition by Wavetech, each Subsidiary has not:
(a) redeemed or purchased, directly or indirectly, any shares of its
capital stock, or declared, accrued, set aside or paid any dividends or
distributions with respect to any shares of its capital stock;
(b) other than upon the exercise of outstanding warrants or options,
issued or sold any of its equity securities, securities convertible into or
exchangeable for its equity securities, warrants, options or other rights to
acquire its equity securities, or its bonds or other securities; PROVIDED,
HOWEVER, that the Company acknowledges and agrees that the issuance of the
Wavetech Warrants and the underlying Warrant Shares as contemplated by Section
1.6(c) shall not constitute a breach of this paragraph (b);
(c) borrowed any amount or incurred, guaranteed or become subject to
any material liability, except current liabilities incurred in the ordinary
course of business;
(d) discharged or satisfied any material lien or encumbrance or paid
any material liability, other than current liabilities paid in the ordinary
course of business;
(e) mortgaged, pledged or subjected to, or otherwise permitted to
become subject to, any lien, charge or other encumbrance, any of the assets of
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Wavetech or any Subsidiary with a fair market value in excess of $50,000, except
liens for current property taxes not yet due and payable;
(f) sold, assigned or transferred (including without limitation
transfers to any employees, shareholders or affiliates of Wavetech or any
Subsidiary) any tangible assets, except for fair value in the ordinary course of
business, or canceled any debts or claims;
(g) sold, assigned or transferred (including without limitation
transfers to any employees, shareholders or affiliates of Wavetech or any
Subsidiary) any patents, trademarks, trade names, copyrights, trade secrets or
other intangible assets, except for fair value in the ordinary course of
business, or disclosed any proprietary confidential information to any person
other than the Company or such persons who have agreed to maintain the
confidentiality of such information;
(h) suffered any extraordinary loss or waived any rights of material
value, whether or not in the ordinary course of business or consistent with past
practice;
(i) taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any Insider (as defined in
Section 2.21);
(j) suffered any material theft, damage, destruction or loss of or
to, or any material interruption in the use of, any property or properties owned
or used by it, whether or not covered by insurance;
(k) made or granted any bonus or any wage, salary or compensation
increase, or made or granted any increase in any employee benefit plan or
arrangement, or amended or terminated any existing employee benefit plan or
arrangement or adopted any new employee benefit plan or arrangement, with
respect to any director, officer or consultant of Wavetech or, except in the
ordinary course of Wavetech's business and consistent with Wavetech's historical
compensation practices, any other employee or group of employees;
(l) amended or waived any of its rights under, or permitted the
acceleration of vesting under, (i) any provision of its Stock Plan or (ii) any
provision of any agreement evidencing any outstanding Wavetech Option or
Wavetech Warrant;
(m) made any capital expenditures or commitments therefor (other than
any such expenditures or commitments made in the ordinary course of business for
leasehold improvements at, or the furnishing or equipping of, the facilities
operated by Wavetech as of the date of this Agreement) that aggregate in excess
of $60,000;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons that aggregate in excess of $50,000;
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(o) effected or been a party to any acquisition transaction,
recapitalization, reclassification of shares, stock split, reverse stock split
or similar transaction (except that nothing shall prohibit Wavetech from
effecting the Reserve Stock Split as contemplated by Section 1.5 hereof;
(p) formed any subsidiary or acquired any equity interest or other
interest in any other entity;
(q) written off as uncollectible, or established any reserve with
respect to, any account receivable or other indebtedness in excess of a total of
$50,000;
(r) changed any of its methods of accounting or accounting practices
in any material respect;
(s) made any tax election;
(t) commenced or settled any legal proceeding;
(u) waived or agreed to waive any applicable statute of limitations
or any similar statutory or judicial doctrine benefiting Wavetech or any
Subsidiary;
(v) entered into any material transaction or taken any other material
action outside the ordinary course of business or inconsistent with its past
practices; or
(w) made charitable contributions or pledges which in the aggregate
exceed $10,000.
2.10 TITLE TO PROPERTIES.
(a) Wavetech or one of the Subsidiaries owns good and marketable
title to each the tangible properties and tangible assets reflected on the
balance sheet included in Company's Latest 10-QSB or acquired since the date
thereof, free and clear of all liens and encumbrances, except for (A) liens for
current taxes not yet due and payable, (B) liens set forth under the caption
"Real Estate" in the Wavetech Disclosure Letter, (C) the equipment and
properties subject to the leases set forth under the caption "Leases" in the
Wavetech Disclosure Letter, (D) liens securing indebtedness of Wavetech under
existing bank credit facilities disclosed in the Wavetech SEC Filings and (E)
assets disposed of since the date of the balance sheet included in Wavetech's
Latest 10-QSB in the ordinary course of business consistent with past practices.
(b) (i) the real estate described under the caption "Real Estate" in
the Wavetech Disclosure Letter and the demised leases described under the
caption "Leases" in the Wavetech Disclosure Letter constitutes all of the real
estate used or occupied by the Company and the Subsidiaries (the "Real Estate")
and (ii) the Real Estate has access, sufficient for the conduct of Wavetech's
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and the Subsidiaries' businesses as now conducted or as presently proposed to be
conducted, to public roads and to all utilities, including electricity, sanitary
and storm sewer, potable water, natural gas and other utilities, used in the
operations of Wavetech and the Subsidiaries.
(c) The leases described under the caption "Leases" in the Wavetech
Disclosure Letter are in full force and effect, and Wavetech or one of the
Subsidiaries, as the case may be, has a valid and existing leasehold interest
under each such lease for the term set forth therein. Wavetech has delivered to
the Company complete and accurate copies of each of the leases described under
such caption and none of such leases has been modified in any material respect,
except to the extent that such modifications are disclosed by the copies
delivered to the Company. Neither Wavetech nor any Subsidiary is in default, and
no circumstances exist which could result in such default, under any of such
leases; nor, to the best knowledge of Wavetech or any Subsidiary, is any other
party to any of such leases in default.
(d) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of Wavetech's and the Subsidiaries' businesses
are in good condition and repair (except where the failure to be in such
condition and repair, either individually or in the aggregate, would not have a
material adverse effect on Wavetech or any Subsidiary and except for ordinary
wear and tear), and are usable in the ordinary course of business. Wavetech and
the Subsidiaries own, or lease under valid leases which afford peaceful and
undisturbed possession of the subject matter of the lease, all buildings,
machinery, equipment and other tangible assets necessary for the conduct of
their businesses.
(e) Neither Wavetech nor any of the Subsidiaries is in violation of
any applicable zoning ordinance or other law, regulation or requirement relating
to the operation of any properties used in the operation of its business,
including without limitation applicable environmental protection and
occupational health and safety laws and regulations, and neither Wavetech nor
any Subsidiary has received any notice of any such violation, or of the
existence of any condemnation proceeding with respect to any properties owned or
leased by Wavetech or any Subsidiary.
2.11 ACCOUNTS RECEIVABLE. Wavetech's and the Subsidiaries' notes and
accounts receivable recorded on the balance sheet included in Wavetech's Latest
10-QSB and those arising since the date thereof are valid receivables (subject
to a reasonable allowance for doubtful accounts as set forth in Wavetech's
Latest 10-QSB) arising from bona fide transactions entered into in the ordinary
course of business and are current and collectible in full in accordance with
their terms, subject to no valid counterclaims or setoffs.
2.12 INVENTORIES. Except as set forth under the caption "Inventory" in the
Disclosure Letter, the inventories of Wavetech and the Subsidiaries recorded on
the balance sheet included in Wavetech's Latest 10-QSB, and the inventory
created or purchased since the date thereof, consists of a quantity and quality
usable and salable in the ordinary course of business, is not slow-moving as
determined in accordance with past practices, obsolete or damaged, is
merchantable and fit for its particular use, and is not defective.
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2.13 TAX MATTERS. Except as set forth under the caption "Tax Matters" in
the Wavetech Disclosure Letter,
(a) Wavetech and the Subsidiaries have timely filed all returns that
are required to be filed by them with respect to any taxes, and all such returns
have been accurately and completely prepared in compliance with all applicable
legal requirements and are true, correct, and complete; all taxes due and
payable by Wavetech and the Subsidiaries have been paid; Wavetech's and the
Subsidiaries' provisions for taxes on the balance sheet included in Wavetech's
Latest 10-KSB are sufficient for all accrued and unpaid taxes as of the date of
such balance sheet; Wavetech and the Subsidiaries have paid all taxes due and
payable by them or which they are obligated to withhold from amounts owing to
any employee, creditor, or third party; neither Wavetech nor any Subsidiary has
waived any statute of limitations in respect of taxes relating to any of their
businesses or agreed to any extension of time with respect to a tax assessment
or deficiency relating to any of their businesses; the assessment of any
additional taxes relating to their businesses for periods for which returns have
been filed is not expected, and no audit of Wavetech or any Subsidiary is
ongoing, threatened, or anticipated; and there are no unresolved questions or
claims concerning the tax liability of Wavetech or any Subsidiary;
(b) All material elections with respect to taxes of Wavetech and any
Subsidiary are set forth in the "Tax Matters" section of the Wavetech Disclosure
Letter; neither Wavetech nor any Subsidiary (i) has consented at any time under
Section 341(f) of the Code to have the provisions of Section 341(f) apply to any
disposition of assets of Wavetech or any Subsidiary, (ii) has agreed, or is
required, to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise that will affect the liability of
Wavetech or any Subsidiary for taxes, (iii) has made an election, or is
required, to treat any asset of Wavetech or any Subsidiary as owned by another
person pursuant to the provisions of Section 168(f) of the Code or as tax-exempt
bond financed property or tax-exempt use property within the meaning of Section
168 of the Code, or (iv) has made any of the foregoing elections or consents or
is required to apply any of the foregoing rules under any comparable state,
county, local, or foreign tax provision.
(c) Neither Wavetech nor any Subsidiary is or has ever been an
includible corporation in an affiliated group of corporations, within the
meaning of Section 1504 of the Code, other than in the affiliated group of which
Wavetech is the common Wavetech corporation;
(d) Neither Wavetech nor any Subsidiary is now or has ever been a
party to any tax-sharing agreements or similar arrangements;
(e) Neither Wavetech nor any Subsidiary has made or become obligated
to make, or will, as a result of any event connected with the Merger
contemplated herein, make or become obligated to make, any "excess parachute
payment," as defined in Section 280G of the Code (without regard to subsection
(b)(4) thereof);
(f) There are no liens for taxes (other than for current taxes that
are not yet due and payable or are being contested in good faith) upon the
assets of Wavetech or any Subsidiary;
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(g) All joint ventures, partnerships, or other arrangements or
contracts to which Wavetech or any Subsidiary is a party and that could be
treated as a partnership for federal income tax purposes are set forth under the
caption "Tax Matters" in the Wavetech Disclosure Letter;
(h) There are no outstanding balances of deferred gain or loss
accounts related to deferred intercompany transactions or outstanding
intercompany items related to intercompany transactions (as each such term is
defined in Treas. Reg. Section 1.1502-13, as such regulation is or was
applicable to Wavetech and the Subsidiaries in each relevant taxable period)
between Wavetech and any Subsidiary or between any Subsidiaries; and
(i) There exists no excess loss account (as such item is defined in
Treas. Reg. Section 1.1502-19) with respect to the capital stock of Wavetech or
any Subsidiary.
For purposes of this Agreement, the terms "tax" and "taxes" shall include
income, gross receipts, excise, real and personal property, sales, franchise,
employment, and other taxes imposed by any federal, foreign, state, county,
municipal, local, or other governmental agency, including interest and penalties
relating to taxes and assessments in the nature of taxes.
2.14 CONTRACTS AND COMMITMENTS.
(a) Except as set forth under the caption "Contracts" in the Wavetech
Disclosure Letter, neither Wavetech nor any Subsidiary is a party to any: (i)
collective bargaining agreement or contract with any labor union; (ii) bonus,
pension, profit sharing, retirement, or other form of deferred compensation
plan; (iii) hospitalization insurance or similar plan or practice, whether
formal or informal; (iv) contract for the employment of any officer, individual
employee, or other person on a full-time or consulting basis or relative to
severance pay for any such person; (v) agreement or indenture relating to the
borrowing of money in excess of $100,000 or to mortgaging, pledging or otherwise
placing a lien on any of the assets of Wavetech or any Subsidiary; (vi) guaranty
of any obligation for borrowed money or otherwise, other than endorsements made
for collection; (vii) lease or agreement under which it is lessor of, or permits
any third party to hold or operate, any property, real or personal, for an
annual rental in excess of $100,000; (viii) contract or group of related
contracts with the same party for the purchase of products or services, under
which the undelivered balance of such products and services has a purchase price
in excess of $50,000; (ix) contract or group of related contracts with the same
party for the sale of products or services under which the undelivered balance
of such products or services has a sales price in excess of $50,000; (x) other
contract or group of related contracts with the same party continuing over a
period of more than six months from the date or dates thereof, either not
terminable by it on 30 days' or less notice without penalty or involving more
than $50,000; (xi) contract which prohibits either Wavetech or any Subsidiary
from freely engaging in business anywhere in the world; (xii) contract relating
to the distribution of Wavetech's or any Subsidiary's products; (xiii) franchise
agreement; (xiv) contract, agreement or understanding with any shareholder who
beneficially owns 5% or more of Wavetech Common Stock or with any officer,
director or employee (other than for employment on customary terms); (xv)
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license agreement or agreement providing for the payment or receipt of royalties
or other compensation by Wavetech or any Subsidiary in connection with the
proprietary rights listed under the caption "Proprietary Rights" in the Wavetech
Disclosure Letter; or (xvi) other agreement material to Wavetec s or any
Subsidiary's business or not entered into in the ordinary course of business.
(b) Except as specifically disclosed under the caption "Contracts" in
the Wavetech Disclosure Letter, (i) no contract or commitment required to be
disclosed under such caption has been breached or canceled by the other party;
(ii) since the date of the balance sheet included in Wavetech's Latest 10-QSB,
no customer or supplier has indicated that it will stop or decrease the rate of
business done with Wavetech or any Subsidiary, except for changes in the
ordinary course of Wavetech' and the Subsidiaries' businesses; (iii) Wavetech
and the Subsidiaries have performed all obligations required to be performed by
them in connection with the contracts or commitments required to be disclosed
under such caption and are not in receipt of any claim of default under any
contract or commitment required to be disclosed under such caption; (iv) neither
Wavetech nor any Subsidiary has any present expectation or intention of not
fully performing any obligation pursuant to any contract or commitment or
commitment set forth under such caption; and (v) neither Wavetech nor any
Subsidiary has any knowledge of any breach or anticipated breach by any other
party to any contract or commitment set forth under such caption.
(c) Prior to the date of this Agreement, Wavetech has made available
to the Company a true and correct copy of each written contract or commitment,
and a written description of each oral contract or commitment, referred to under
the caption "Contracts" in the Wavetech Disclosure Letter, together with all
amendments, waivers or other changes thereto.
2.15 PROPRIETARY RIGHTS. Except as set forth under the caption "Proprietary
Rights" in the Wavetech Disclosure Letter, there are no patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, trade secrets or other proprietary rights owned by Wavetech or any
Subsidiary or necessary to the conduct of Wavetech's or any Subsidiary's
businesses as now conducted. Wavetech or a Subsidiary owns and possesses all
rights, titles and interest, or a valid license, in and to the proprietary
rights set forth under such caption. The Wavetech Disclosure Letter describes
under such caption all proprietary rights that have been licensed to third
parties and all proprietary rights which are licensed from third parties by
Wavetech or any Subsidiary. Wavetech and the Subsidiaries have taken all
necessary action to protect the proprietary rights set forth under such caption.
Neither Wavetech nor any Subsidiary has received any notice of, nor is it aware
of any facts which indicate a likelihood of, any infringement, misappropriation,
or conflict from any third party with respect to the proprietary rights which
are listed under such caption; neither Wavetech nor any Subsidiary has
infringed, misappropriated or otherwise conflicted with any proprietary rights
of any third parties, nor is it aware of any infringement, misappropriation or
conflict which will occur in the continued operation of Wavetech or any
Subsidiary; and no claim by any third party contesting the validity of any
proprietary rights listed under such caption has been made, is currently
outstanding, or to the best knowledge of Wavetech or any Subsidiary is
threatened.
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2.16 LITIGATION. Except as set forth under the caption "Litigation" in the
Wavetech Disclosure Letter, there are no actions, suits, claims, proceedings,
orders or investigations pending or threatened against Wavetech or any
Subsidiary or otherwise affecting any of their respective properties or assets,
or that challenges or may have the effect of preventing, delaying, making
illegal or otherwise interfering with the Merger or any other transactions
contemplated by this Agreement, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or that could reasonably
be expected to have a material adverse effect on the business, properties,
assets, condition (financial or otherwise) or business prospects of Wavetech and
there is no basis known to Wavetech or any Subsidiary for any of the foregoing.
There is no order, writ, injunction, judgment or decree:
(a) to which Wavetech or any Subsidiary or any of the assets owned or
used by Wavetech or any Subsidiary is subject, or
(b) to which any officer or employee of Wavetech or any Subsidiary is
subject that prohibits such officer or employee from engaging in or continuing
any conduct, activity or practice relating to Wavetech's or any Subsidiary's
business. Except as set forth under such caption, neither Wavetech nor any
Subsidiary has received any opinion or legal advice to the effect that Wavetech
or any Subsidiary is exposed from a legal standpoint to any liability or
disadvantage which may be material to it or its prospects.
2.17 BROKERAGE. Except as set forth under the caption "Brokerage
Agreements," there are no claims for investment banking fees, brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Wavetech or any Subsidiary. In addition,
Wavetech currently intends, however, to enter into an agreement or arrangement
with a qualified investment banking or financial advisory firm regarding the
study of and the rendering of an opinion with respect to the fairness of the
Merger.
2.18 EMPLOYMENT MATTERS. To the best knowledge of Wavetech and the
Subsidiaries, (i) no key executive employee of Wavetech or any Subsidiary, and
no group of Wavetech's or any subsidiary's employees, has any plans to terminate
his or its employment, (ii) Wavetech and the Subsidiaries have complied with all
laws relating to the employment of labor, including provisions thereof relating
to wages, hours, equal opportunity, collective bargaining and the payment of
social security and other taxes, and (iii) Wavetech and the Subsidiaries have no
material labor relations problems pending and their labor relations are
satisfactory.
2.19 EMPLOYEE BENEFIT PLANS. With respect to the employee benefits provided
to employees and former employees of Wavetech and the Subsidiaries:
(a) Wavetech and the Subsidiaries currently maintain only the
employee pension benefit plans, as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as are listed
under the caption "Employee Benefits" in the Disclosure Letter.
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(b) Wavetech and the Subsidiaries currently maintain only the
employee welfare benefit plans, as defined in Section 3(1) of ERISA (including
but not limited to, life insurance, medical, hospitalization, holiday, vacation,
disability dental and vision plans) as are listed under the caption "Employee
Benefits" in the Wavetech Disclosure Letter (the "Welfare Plans").
(c) Wavetech and the Subsidiaries currently maintain, or have entered
into, only the compensation programs and/or employment arrangements, (including
but not limited to, incentive compensation, bonus, severance, sick pay, salary
continuation, deferred compensation, supplemental executive compensation plans,
and employment and consulting agreements) as are listed under the caption
"Employee Benefits" in the Wavetech Disclosure Letter (the "Compensation
Programs").
(d) Wavetech and the Subsidiaries do not contribute, and have not
contributed within the last five years, to any multiemployer plan, as defined by
Section 3(37) of ERISA.
(e) Each Pension Plan and Welfare Plan is in compliance with ERISA;
each Pension Plan which is intended to be qualified under Section 401(a) of the
Code has been determined by the Internal Revenue Service to be so qualified or a
request for such determination has been timely filed with the Internal Revenue
Service (and to Wavetech's best knowledge nothing has occurred between the date
of the last such determination and the Closing Date to cause the Internal
Revenue Service to revoke such determination).
(f) Any Pension Plan or any Welfare Plan designed to satisfy the
requirements of Section 125, Section 401, Section 401(k), Section 409, Section
501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such
section.
(g) No accumulated funding deficiency, as defined in Section
302(a)(2) of ERISA, exists (whether or not waived) with respect to any Pension
Plan as of the date hereof.
(h) All amounts required to be paid by Wavetech and or any Subsidiary
with respect to each Pension Plan, Welfare Plan and Compensation Program on or
before the Closing Date have been paid.
(i) None of the Pension Plans or Wavetech or any party in interest or
disqualified person has engaged in any non-exempt "prohibited transactions" as
defined in Section 406 of ERISA or Section 4975 of the Code.
(j) Except as disclosed under the caption "Employee Benefits" in the
Wavetech Disclosure Letter, no Pension Plan or Welfare Plan provides benefits,
including without limitation death or medical benefits (whether or not insured),
with respect to current or former employees beyond their retirement or other
termination of service other than (i) coverage mandated by applicable law, (ii)
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retirement benefits under a Pension Plan, (iii) death benefits under a Welfare
Plan, (iv) deferred compensation accrued on the books of Wavetech or a
Subsidiary, or (v) benefits the full cost of which is borne by the current or
former employee (or his or her beneficiary).
(k) No "leased employee," as that term is defined in Section 414(n)
of the Code, performs services for Wavetech or any Subsidiary.
(l) No liability has been, or is expected by Wavetech or any
Subsidiary to be, incurred by Wavetech or a Subsidiary under Section 4062 of
ERISA with respect to any Pension Plan.
(m) No reportable event within the meaning of Title IV of ERISA has
occurred with respect to any Pension Plan.
(n) Wavetech has furnished the Company with correct and complete
copies of each Pension Plan, Welfare Plan, and Compensation Program, together
with any trust agreements, summary plan descriptions, employee informational
material, financial statements relating thereto and participant listings.
2.20 INSURANCE. The Wavetech Disclosure Letter, under the caption
"Insurance," lists and briefly describes (including name of insurer, agent,
coverage and expiration date) each insurance policy maintained by, at the
expense of or for the benefit of Wavetech or any of the Subsidiaries with
respect to its properties and assets and describes any material claims made
thereunder. All of such insurance policies are in full force and effect and
neither Wavetech nor any Subsidiary is in default with respect to its
obligations under any of such insurance policies. Except as set forth in the
Wavetech Disclosure Letter under the caption "Insurance," Wavetech is the sole
beneficiary of each such policy. The insurance coverage of Wavetech and the
Subsidiaries is customary for corporations of similar size engaged in similar
lines of businesses. Wavetech has not received any notice or other communication
regarding any actual or possible (a) cancellation or invalidation of any
insurance policy, (b) refusal of any coverage or rejection of any claim under
any insurance policy or (c) material adjustment in the amount of premiums
payable with respect to any insurance policy.
2.21 AFFILIATE TRANSACTIONS. Except as set forth under the caption
"Affiliate Transactions" in the Wavetech Disclosure Letter, no officer or
director of Wavetech or any Subsidiary or any member of the immediate family of
any such officer or director, or any entity in which any of such persons owns
any beneficial interest (other than a publicly-held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market and
less than 5% of the stock of which is beneficially owned by any of such persons)
(collectively "Insiders"), (a) has any agreement with Wavetech or any Subsidiary
(other than normal employment arrangements) or any interest in any property,
real, personal or mixed, tangible or intangible, used in or pertaining to the
business of Wavetech or any Subsidiary, (b) has been indebted to Wavetech in
amounts in excess of $10,000 in the aggregate at any time, (c) has at any time
competed, directly or indirectly, with Wavetech, or (d) has any claim or right
against Wavetech (other than rights under Wavetech Options and rights to receive
compensation for services performed as an employee of Wavetech). For purposes of
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the preceding sentence, the members of the immediate family of an officer or
director shall consist of the spouse, Wavetech's, children, siblings, mothers-
and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law
of such officer or director.
2.22 SUPPLIERS. The Wavetech Disclosure Letter, under the caption
"Suppliers," lists the 10 largest suppliers of Wavetech and the Subsidiaries (on
a consolidated basis) for the fiscal year ended August 31, 1998, and sets forth
opposite the name of each such supplier the total amount of purchases from such
supplier by Wavetech and the Subsidiaries during such period.
2.23 OFFICERS AND DIRECTORS; BANK ACCOUNTS. The Wavetech Disclosure Letter,
under the caption "Officers and Directors," lists all officers and directors of
Wavetech and the Subsidiaries and, under the caption "Bank Accounts," lists all
of Wavetech's and the Subsidiaries' accounts at any bank or other financial
institution (designating each authorized signer).
2.24 COMPLIANCE WITH LAWS; PERMITS; CERTAIN OPERATIONS. Wavetech, each of
the Subsidiaries and their respective officers, directors, agents and employees
have complied in all respects, and currently are in compliance in all respects,
with all applicable laws and regulations of foreign, federal, state and local
governments and all agencies thereof which affect the businesses or any owned or
leased properties of Wavetech and the Subsidiaries and to which Wavetech or any
of the Subsidiaries may be subject, and no claims have been filed against
Wavetech or any of the Subsidiaries alleging a violation of any such law or
regulation, except as set forth in the Wavetech Disclosure Letter under the
caption "Compliance." Neither Wavetech nor any Subsidiary has given or agreed to
give any money, gift or similar benefit (other than incidental gifts of articles
of nominal value, gifts and prizes awarded pursuant to promotional programs
approved by Wavetech's management and non-extraordinary entertainment
expenditures) to any actual or potential customer, supplier, foreign or domestic
governmental employee or any other person in a position to assist or hinder
Wavetech or any of the Subsidiaries in connection with any actual or proposed
transaction. Wavetech and the Subsidiaries hold all of the permits, licenses,
certificates and other authorizations of foreign, federal, state and local
governmental agencies required for the conduct of their businesses. Without
limiting the generality of the foregoing, neither Wavetech nor any Subsidiary
has violated, or received a notice or charge asserting any violation of, the
Occupational Safety and Health Act of 1970 or any other state or federal acts or
laws (including rules and regulations thereunder) regulating or otherwise
affecting employee health and safety or the environment.
2.25 DISCLOSURE.
(a) Neither this Agreement nor any other agreement or instrument
executed in connection with the transactions contemplated hereby nor any of the
attachments or exhibits hereto nor the Wavetech Disclosure Letter contains any
untrue statement of a material fact or omits a material fact necessary to make
the statements contained herein or therein, in light of the circumstances in
which they were made, not misleading, and there is no fact which has not been
disclosed in writing to Wavetech of which any officer or director of Wavetech or
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any Subsidiary is aware which materially affects adversely or could reasonably
be anticipated to materially affect adversely the business, including operating
results, assets, customer relations, employee relations and business prospects,
of Wavetech and the Subsidiaries, taken as a whole.
(b) None of the information supplied or to be supplied by Wavetech
for inclusion or incorporation by reference in the Form S-4 and the Joint
Prospectus/Proxy Statement will, at the time the S-4 is declared effective, at
the date the Joint Prospectus/Proxy Statement is mailed to the shareholders of
Wavetech or at the time of the Wavetech Shareholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein (in light of
the circumstances under which they are made) not misleading.
2.26 NON-CONTRAVENTION; CONSENTS. Except as set forth under the caption
"Consents" in the Wavetech Disclosure Letter, neither (1) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, nor (2) the consummation of the Merger or any of
the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Wavetech's or any Subsidiary's Articles of Incorporation or
Bylaws, or (ii) any resolution adopted by Wavetech's or any Subsidiary's
shareholders, Wavetech's or any Subsidiary's board of directors or any committee
of such board of directors;
(b) contravene, conflict with or result in a violation of, or give
any governmental authority or other person or entity the right to challenge any
of the transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any legal requirement or any order, writ, injunction,
judgment or decree to which Wavetech or any Subsidiary, or any of the assets
owned or used by Wavetech or any Subsidiary, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any governmental authority the right to
revoke, withdraw, suspend, cancel, terminate or modify, any governmental permit
or authorization that is held by Wavetech or any Subsidiary or that otherwise
relates to Wavetech's business or to any of the assets owned or used by Wavetech
or any Subsidiary;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any contract or agreement to
which Wavetech or any Subsidiary is a party, or give any person or entity the
right to (i) declare a default or exercise any remedy under any such contract or
agreement, (ii) accelerate the maturity or performance of any such contract or
agreement, or (iii) cancel, terminate or modify any such contract or agreement;
or
(e) result in the imposition or creation of any lien or other
encumbrance upon or with respect to any asset owned or used by Wavetech or any
Subsidiary (except for minor liens that will not, in any case or in the
aggregate, materially detract from the value of the assets subject thereto or
materially impair the operations of Wavetech).
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Except as set forth under the caption "Consents" in the Wavetech Disclosure
Letter, Wavetech is not and will not be required to make any filing with or give
any notice to, or to obtain any consent from, any person or entity in connection
with (x) the execution, delivery or performance of this Agreement or any of the
other agreements referred to in this Agreement, or (y) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
2.27 STOCKHOLDER VOTE REQUIRED. To the extent the Wavetech Common Stock is
listed on the Nasdaq SmallCap Market, the affirmative vote of a majority of the
votes entitled to be cast by holders of the outstanding shares of Wavetech
Common Stock (voting as a class) are the only votes of the holders of any class
or series of Wavetech's capital stock necessary to approve this Agreement and
the Merger under the rules of the Nasdaq SmallCap Market. In addition, to the
extent the Nevada Revised Statutes requires the affirmative vote of a majority
of the votes entitled to be cast by holders of the outstanding shares of the
Wavetech Common Stock (voting as a class), are the only votes of the holders of
any class or series of Wavetech's Capital Stock necessary to approve the Merger.
2.28 BOARD APPROVAL. The board of directors of Wavetech has (i) approved
the Merger and the execution of this Agreement, (ii) determined that the Merger
is in the best interests of the shareholders of Wavetech and is on terms that
are fair to such shareholders, and (iii) recommended that holders of Wavetech
Common Stock vote in favor of this Agreement and the Merger, to the extent such
shareholder approval is required under applicable law or under the rules of the
Nasdaq SmallCap Market.
2.29 OPINION OF FINANCIAL ADVISOR. Promptly following the execution of this
Agreement, Wavetech intends to seek an opinion of its financial advisor that,
from a financial point of view, the consideration to be offered to the
shareholders of Wavetech in the Merger contemplated hereby is fair to Wavetech.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Wavetech that, except as
otherwise disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998 (the "Company's Latest 10-K") or the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998 (the
"Company's Latest 10-Q"):
3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Colorado, and has the requisite corporate and other power and authority
(including all licenses, permits and authorizations) to own and operate its
properties and to carry on its business as now conducted and presently proposed
to be conducted and to perform its obligations under all contracts, instruments,
notes or other binding commitments to which it is or m become a party or by
which it is or its assets are, or may become, bound. The copies of the Company's
Articles of Incorporation and Bylaws which have been furnished by the Company to
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Wavetech prior to the date of this Agreement reflect all amendments made thereto
through the date hereof and are correct and complete. The Company is qualified
to do business and is in good standing as a foreign corporation in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be qualified.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the requisite
corporate and other power and authority to enter into and perform this Agreement
and to carry out its obligations hereunder (it being understood that the
Company's obligations hereunder to effect the Merger is subject to the approval
of its shareholders as set forth in Section 3.27). The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of the Company and, except for the approval of its shareholders as set
forth in Section 3.27, no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement and such transactions. This Agreement
has been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization or similar laws relating to the enforcement of creditors' rights
generally and by general principles of equity. Except as set forth in the DCI
Disclosure Letter, neither the Company nor any of its Subsidiaries (as defined
in Section 3.6(b)) is subject to, or obligated under, any provision of (a) its
Certificate of Incorporation, Articles of Incorporation or Bylaws, (b) any
agreement, arrangement or understanding, (c) any license, franchise or permit or
(d) subject to compliance with any of the statutes referred to in the next
sentence, any law, regulation, order, judgment or decree, which would be
breached or violated, or in respect of which a right of termination or
acceleration or any encumbrance on any of its or any of its Subsidiaries' assets
would be created, by its execution, delivery and performance of this Agreement
and the consummation by it of the transactions contemplated hereby, and the
Company has not taken any action that is inconsistent in any material respect
with any resolution adopted by the Company's shareholders, its board of
directors or any committee of its board of directors. The books of account,
stock records, minute books and other records of the Company are accurate,
up-to-date and complete in all material respects and have been maintained in
accordance with prudent business practices. Other than in connection with or in
compliance with the provisions of the Colorado Law and the Exchange Act, no
authorization, consent or approval of, or filing with, any public body, court or
authority is necessary on the part of the Company for the consummation by the
Company of the transactions contemplated by this Agreement.
3.3 CAPITALIZATION.
(a) The authorized equity capitalization of the Company consists of
500,000,000 shares of Company Common Stock, 21,677,802 shares of which are
issued and outstanding as of the date hereof, and 5,000,000 shares of preferred
stock, 3,000 of which are issued and outstanding as of the date hereof. All of
the issued and outstanding shares of Company Common Stock are validly issued,
fully paid and nonassessable. The Company's capital structure as of the date
hereof is disclosed to Wavetech under the caption "Capitalization" in the DCI
Disclosure Letter.
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(b) The Company has reserved 10,000,000 shares of Company Common
Stock for issuance under the Stock Plan, of which vested and unvested options to
purchase 4,226,065 shares are outstanding as of the date of this Agreement. The
DCI Disclosure Letter, under the caption "Company Options," accurately sets
forth, with respect to each Company Option that is outstanding as of the date of
this Agreement: (i) the name of the holder of such Company Option; (ii) the
total number of shares of Company Common Stock that are subject to such Company
Option and the number of shares of Company Common Stock with respect to which
such Company Option is immediately exercisable; (iii) the date on which such
Company Option was granted and the term of such Company Option; (iv) the vesting
schedule for such Company Option; (v) the exercise price per share of Company
Common Stock purchasable under such Company Option; and (vi) whether such
Company Option has been designated an "incentive stock option" as defined in
Section 422 of the Code. The DCI Disclosure Letter, under the caption "Company
Warrants," accurately sets forth, with respect to each Company Warrant that is
outstanding as of the date of this Agreement: (i) the name of the holder of such
Company Warrant; (ii) the total number of shares of Company Common Stock that
are subject to such Company Warrant; (iii) the date on which such Company
Warrant was granted and the expiration date of such Company Warrant; (iv) the
exercise price per share of Company Common Stock subject to such Company
Warrant; and (v) a description of any registration or other rights granted to
the holder of such Company Warrant.
(c) Except as specifically referred to in Sections 3.3(a) and (b)
above, or as set forth in the DCI Disclosure Letter, there is no: (i)
outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of the Company; (ii) outstanding security, instrument or obligation
that is or may become convertible into or exchangeable for any shares of the
capital stock or other securities of the Company; (iii) contract or agreement
under which the Company is or may become obligated to sell or otherwise issue
any shares or its capital stock or any other securities; or (iv) condition or
circumstance that may give rise to or provide a basis for the assertion of a
claim by any person or entity to the effect that such person or entity is
entitled to acquire or receive any shares of capital stock or other securities
of the Company.
(d) All outstanding shares of Company Common Stock and all
outstanding Company Options and Company Warrants have been issued and granted in
compliance with (i) all applicable securities laws and other applicable laws and
regulations, and (ii) all requirements set forth in applicable contracts and
agreements.
(e) Except as set forth in the DCI Disclosure Letter under the
caption "Acquisition of Shares," the Company has never repurchased, redeemed or
otherwise reacquired shares of capital stock or other securities of the Company.
All securities so reacquired by the Company were reacquired in compliance with
(i) the applicable provisions of the Colorado Law and all other applicable laws
and regulations, and (ii) all requirements set forth in applicable restricted
stock purchase agreements and other applicable contracts and agreements.
(f) Except as set forth in the DCI Disclosure Letter under the
caption "Registration Rights," the Company is not under any obligation to
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register under the Securities Act any of its presently outstanding securities or
any securities that may be subsequently issued, and no person or entity holds
any right to participate in new issuances of securities by the Company.
(g) Except as set forth in the DCI Disclosure Letter under the
caption "Agreements Relating to Company Common Stock," the Company is not a
party to or obligated under any agreement, arrangement or understanding,
contingent or otherwise, (i) involving the repurchase or redemption of any
amount of Company Common Stock, (ii) requiring the Company to issue any amount
of Company Common Stock to any person at any time, or (iii) contemplating the
issuance at any time of shares of Company Common Stock or other consideration to
any person as a guarantee by the Company of a minimum market price for Company
Common Stock.
3.4 SEC FILINGS. The Company has heretofore delivered or made available to
Wavetech copies of the Company's (a) Latest 10-K, (b) Latest 10-Q, (c)
definitive proxy statement relating to the Company's 1998 annual meeting of
shareholders held on July 30, 1998, and (e) all other reports, registrations
statements and other documents filed by the Company with the SEC since January
1, 1995, in each case as filed with the SEC (collectively, the "Company SEC
Filings"), and the Company has heretofore made available to Wavetech all other
reports, registration statements and other documents filed by the Company with
the SEC under the Exchange Act or the Securities Act since the Company's
inception. Except as set forth in the Disclosure Letter, since January 1, 1995,
the Company has timely filed all reports, registration statements and other
documents required to be filed with the SEC under the rules and regulations of
the SEC, and all such reports, registration statements and other documents
complied as to form with the requirements of the Securities Act or the Exchange
Act, as the case may be. As of their respective dates, the reports, statements
and other documents referred to in the immediately preceding sentence did not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
3.5 FINANCIAL STATEMENTS. The audited financial statements and unaudited
interim financial statements of the Company and its Subsidiaries included (or
incorporated by reference) in the Company SEC Filings have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto), are accurate and complete in all material respects and fairly present
the consolidated financial position of the Company and its Subsidiaries as of
the dates thereof and the consolidated results of their operations and the
changes in their consolidated financial position for the periods then ended, in
the case of the unaudited interim financial statements subject to year-end audit
adjustments which will not, individually or in the aggregate, be material in
magnitude. Such unaudited interim financial statements reflect all adjustments
necessary to present a fair statement of the results for the interim periods
presented.
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3.6 SUBSIDIARIES.
(a) Except as set forth under the caption "Subsidiaries" in the
Disclosure Letter, the Company does not own, beneficially or otherwise, any
stock or other equity interest, partnership interest, joint venture interest, or
any other security issued by any other corporation, organization or entity, and
the Company has not agreed and is not obligated to make any future investment in
or capital contribution to any such corporation, organization or entity. Except
as set forth under the caption "Subsidiaries" in the DCI Disclosure Letter, the
Company owns all of the outstanding capital stock of each Subsidiary, free and
clear of all liens, charges and encumbrances, and there are no subscription
rights, warrants, options, conversion rights or agreements of any kind
outstanding to purchase or otherwise acquire any shares of capital stock of any
Subsidiary or any securities or obligations of any kind convertible into or
exchangeable for any such shares of capital stock. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and has the requisite corporate and other
power and authority (including all authorizations, licenses and permits)
necessary to own and operate its properties and to carry on its business as now
conducted and presently proposed to be conducted. The copies of the charter
documents and bylaws of each Subsidiary which have been furnished by the Company
to Wavetech prior to the date of this Agreement reflect all amendments made
thereto through the date hereof and are correct and complete. Each Subsidiary is
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions in which the nature of its business or its ownership of property
requires it to be qualified.
(b) For purposes of this Agreement, the term "Subsidiary" means any
corporation of which securities having a majority of the ordinary voting power
in electing directors are, at the time of determination, owned by the Company
directly or through another Subsidiary.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any
Subsidiary has any obligations or liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due and
regardless of when asserted) arising out of transactions heretofore entered
into, or any action or inaction, or any state of facts existing, including taxes
with respect to or based upon transactions or events heretofore occurring,
except (a) obligations under contracts or commitments described in the DCI
Disclosure Letter under the caption "Contracts," or under contracts and
commitments which are not required to be disclosed thereunder (but not
liabilities for breaches thereof), (b) liabilities reflected on the balance
sheet included in the Company's Latest 10-Q, (c) liabilities which have arisen
after the date of the balance sheet included in the Company's Latest 10-Q in the
ordinary course of business (none of which is a material uninsured liability for
breach of contract, breach of warranty, tort, infringement, claim or lawsuit),
and (d) liabilities otherwise disclosed in the DCI Disclosure Letter.
3.8 NO MATERIAL ADVERSE CHANGES. Except as set forth under the caption
"Adverse Changes" in the DCI Disclosure Letter, since June 30, 1998, there has
been no Material Adverse Change, and no event has occurred that will or that
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would reasonably be expected to result in a material adverse change, in the
consolidated assets, financial condition, operating results, customer, employee,
supplier or franchise relations, business condition or prospects, or financing
arrangements of the Company and its Subsidiaries, taken as a whole.
3.9 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth under the caption
"Developments" in the Disclosure Letter, since June 30, 1998, the Company has
not and, since the date of acquisition by the Company, each Subsidiary has not:
(a) redeemed or purchased, directly or indirectly, any shares of its
capital stock, or declared, accrued, set aside or paid any dividends or
distributions with respect to any shares of its capital stock;
(b) other than upon the exercise of outstanding warrants or options,
issued or sold any of its equity securities, securities convertible into or
exchangeable for its equity securities, warrants, options or other rights to
acquire its equity securities, or its bonds or other securities;
(c) borrowed any amount or incurred, guaranteed or become subject to
any material liability, except current liabilities incurred in the ordinary
course of business;
(d) discharged or satisfied any material lien or encumbrance or paid
any material liability, other than current liabilities paid in the ordinary
course of business;
(e) mortgaged, pledged or subjected to, or otherwise permitted to
become subject to, any lien, charge or other encumbrance, any of the assets of
the Company or any Subsidiary with a fair market value in excess of $500,000,
except liens for current property taxes not yet due and payable;
(f) sold, assigned or transferred (including without limitation
transfers to any employees, shareholders or affiliates of the Company or any
Subsidiary) any tangible assets, except for fair value in the ordinary course of
business, or canceled any debts or claims;
(g) sold, assigned or transferred (including without limitation
transfers to any employees, shareholders or affiliates of the Company or any
Subsidiary) any patents, trademarks, trade names, copyrights, trade secrets or
other intangible assets, except for fair value in the ordinary course of
business, or disclosed any proprietary confidential information to any person
other than Wavetech or such persons who have agreed to maintain the
confidentiality of such information;
(h) suffered any extraordinary loss or waived any rights of material
value, whether or not in the ordinary course of business or consistent with past
practice;
(i) taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any Insider (as defined in
Section 3.21);
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(j) suffered any material theft, damage, destruction or loss of or
to, or any material interruption in the use of, any property or properties owned
or used by it, whether or not covered by insurance;
(k) made or granted any bonus or any wage, salary or compensation
increase, or made or granted any increase in any employee benefit plan or
arrangement, or amended or terminated any existing employee benefit plan or
arrangement or adopted any new employee benefit plan or arrangement, with
respect to any director, officer or consultant of the Company or, except in the
ordinary course of the Company's business and consistent with the Company's
historical compensation practices, any other employee or group of employees;
(l) amended or waived any of its rights under, or permitted the
acceleration of vesting under, (i) any provision of its Stock Plan or (ii) any
provision of any agreement evidencing any outstanding Company Option or Company
Warrant;
(m) made any capital expenditures or commitments therefor (other than
any such expenditures or commitments made in the ordinary course of business for
leasehold improvements at, or the furnishing or equipping of, the facilities
operated by the Company as of the date of this Agreement) that aggregate in
excess of $600,000;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons that aggregate in excess of $500,000;
(o) effected or been a party to any acquisition transaction,
recapitalization, reclassification of shares, stock split, reverse stock split
or similar transaction;
(p) formed any subsidiary or acquired any equity interest or other
interest in any other entity;
(q) written off as uncollectible, or established any reserve with
respect to, any account receivable or other indebtedness which in the aggregate
exceed $500,000;
(r) changed any of its methods of accounting or accounting practices
in any material respect;
(s) made any tax election;
(t) commenced or settled any legal proceeding;
(u) waived or agreed to waive any applicable statute of limitations
or any similar statutory or judicial doctrine benefiting the Company or any
Subsidiary;
(v) entered into any material transaction or taken any other material
action outside the ordinary course of business or inconsistent with its past
practices; or
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(w) made charitable contributions or pledges which in the aggregate
exceed $100,000.
3.10 TITLE TO PROPERTIES.
(a) The Company or one of the Subsidiaries owns good and marketable
title to each the tangible properties and tangible assets reflected on the
balance sheet included in the Company's Latest 10-Q or acquired since the date
thereof, free and clear of all liens and encumbrances, except for (A) liens for
current taxes not yet due and payable, (B) liens set forth under the caption
"Real Estate" in the DCI Disclosure Letter, (C) the properties subject to the
leases set forth under the caption "Leases" in the DCI Disclosure Letter, (D)
liens securing indebtedness of the Company and (E) assets disposed of since the
date of the balance sheet included in the Company's Latest 10-Q in the ordinary
course of business consistent with past practices.
(b) (i) the real estate described under the caption "Real Estate" in
the DCI Disclosure Letter and the demised leases described under the caption
"Leases" in the DCI Disclosure Letter constitutes all of the real estate used or
occupied by the Company and the Subsidiaries (the "Real Estate") and (ii) the
Real Estate has access, sufficient for the conduct of the Company's and the
Subsidiaries' businesses as now conducted or as presently proposed to be
conducted, to public roads and to all utilities, including electricity, sanitary
and storm sewer, potable water, natural gas and other utilities, used in the
operations of the Company and the Subsidiaries.
(c) The leases described under the caption "Leases" in the DCI
Disclosure Letter are in full force and effect, and the Company or one of the
Subsidiaries, as the case may be, has a valid and existing leasehold interest
under each such lease for the term set forth therein. The Company has delivered
to Wavetech complete and accurate copies of each of the leases described under
such caption and none of such leases has been modified in any material respect,
except to the extent that such modifications are disclosed by the copies
delivered to Wavetech. Neither the Company nor any Subsidiary is in default, and
no circumstances exist which could result in such default, under any of such
leases; nor, to the best knowledge of the Company or any Subsidiary, is any
other party to any of such leases in default.
(d) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Company's and the Subsidiaries'
businesses are in good condition and repair (except where the failure to be in
such condition and repair, either individually or in the aggregate, would not
have a material adverse effect on the Company or any Subsidiary and except for
ordinary wear and tear), and are usable in the ordinary course of business. The
Company and the Subsidiaries own, or lease under valid leases which afford
peaceful and undisturbed possession of the subject matter of the lease, all
buildings, machinery, equipment and other tangible assets necessary for the
conduct of their businesses.
(e) Neither the Company nor any of the Subsidiaries is in violation
of any applicable zoning ordinance or other law, regulation or requirement
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relating to the operation of any properties used in the operation of its
business, including without limitation applicable environmental protection and
occupational health and safety laws and regulations, and neither the Company nor
any Subsidiary has received any notice of any such violation, or of the
existence of any condemnation proceeding with respect to any properties owned or
leased by the Company or any Subsidiary.
3.11 ACCOUNTS RECEIVABLE. The Company's and the Subsidiaries' notes and
accounts receivable recorded on the balance sheet included in the Company's
Latest 10-Q and those arising since the date thereof are valid receivables
(subject to a reasonable allowance for doubtful accounts as set forth in the
Company's Latest 10-Q) arising from bona fide transactions entered into in the
ordinary course of business and are current and collectible in full in
accordance with their terms, subject to no valid counterclaims or setoffs.
3.12 INVENTORIES. Except as set forth under the caption "Inventory" in the
DCI Disclosure Letter, the inventories of the Company and the Subsidiaries
recorded on the balance sheet included in the Company's Latest 10-Q, and the
inventory created or purchased since the date thereof, consists of a quantity
and quality usable and salable in the ordinary course of business, is not
slow-moving as determined in accordance with past practices, obsolete or
damaged, is merchantable and fit for its particular use, and is not defective.
3.13 TAX MATTERS. Except as set forth under the caption "Tax Matters" in
the DCI Disclosure Letter,
(a) the Company and the Subsidiaries have timely filed all returns
that are required to be filed by them with respect to any taxes, and all such
returns have been accurately and completely prepared in compliance with all
applicable legal requirements and are true, correct, and complete; all taxes due
and payable by the Company and the Subsidiaries have been paid; the Company's
and the Subsidiaries' provisions for taxes on the balance sheet included in the
Company's Latest 10-K are sufficient for all accrued and unpaid taxes as of the
date of such balance sheet; the Company and the Subsidiaries have paid all taxes
due and payable by them or which they are obligated to withhold from amounts
owing to any employee, creditor, or third party; neither the Company nor any
Subsidiary has waived any statute of limitations in respect of taxes relating to
any of their businesses or agreed to any extension of time with respect to a tax
assessment or deficiency relating to any of their businesses; the assessment of
any additional taxes relating to their businesses for periods for which returns
have been filed is not expected, and no audit of the Company or any Subsidiary
is ongoing, threatened, or anticipated; and there are no unresolved questions or
claims concerning the tax liability of the Company or any Subsidiary;
(b) All material elections with respect to taxes of the Company and
any Subsidiary are set forth in the "Tax Matters" section of the DCI Disclosure
Letter; neither the Company nor any Subsidiary (i) has consented at any time
under Section 341(f) of the Code to have the provisions of Section 341(f) apply
to any disposition of assets of the Company or any Subsidiary, (ii) has agreed,
or is required, to make any adjustment under Section 481(a) of the Code by
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reason of a change in accounting method or otherwise that will affect the
liability of the Company or any Subsidiary for taxes, (iii) has made an
election, or is required, to treat any asset of the Company or any Subsidiary as
owned by another person pursuant to the provisions of Section 168(f) of the Code
or as tax-exempt bond financed property or tax-exempt use property within the
meaning of Section 168 of the Code, or (iv) has made any of the foregoing
elections or consents or is required to apply any of the foregoing rules under
any comparable state, county, local, or foreign tax provision.
(c) Neither the Company nor any Subsidiary is or has ever been an
includible corporation in an affiliated group of corporations, within the
meaning of Section 1504 of the Code, other than in the affiliated group of which
the Company is the common Company corporation;
(d) Neither the Company nor any Subsidiary is now or has ever been a
party to any tax-sharing agreements or similar arrangements;
(e) Neither the Company nor any Subsidiary has made or become
obligated to make, or will, as a result of any event connected with the Merger
contemplated herein, make or become obligated to make, any "excess parachute
payment," as defined in Section 280G of the Code (without regard to subsection
(b)(4) thereof);
(f) There are no liens for taxes (other than for current taxes that
are not yet due and payable or are being contested in good faith) upon the
assets of the Company or any Subsidiary;
(g) All joint ventures, partnerships, or other arrangements or
contracts to which the Company or any Subsidiary is a party and that could be
treated as a partnership for federal income tax purposes are set forth under the
caption "Tax Matters" in the DCI Disclosure Letter;
(h) There are no outstanding balances of deferred gain or loss
accounts related to deferred intercompany transactions or outstanding
intercompany items related to intercompany transactions (as each such term is
defined in Treas. Reg. Section 1.1502-13, as such regulation is or was
applicable to the Company and the Subsidiaries in each relevant taxable period)
between the Company and any Subsidiary or between any Subsidiaries; and
(i) There exists no excess loss account (as such item is defined in
Treas. Reg. Section 1.1502-19) with respect to the capital stock of the Company
or any Subsidiary.
For purposes of this Agreement, the terms "tax" and "taxes" shall include
income, gross receipts, excise, real and personal property, sales, franchise,
employment, and other taxes imposed by any federal, foreign, state, county,
municipal, local, or other governmental agency, including interest and penalties
relating to taxes and assessments in the nature of taxes.
3.14 CONTRACTS AND COMMITMENTS.
(a) Except as set forth under the caption "Contracts" in the DCI
Disclosure Letter, neither the Company nor any Subsidiary is a party to any: (i)
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collective bargaining agreement or contract with any labor union; (ii) bonus,
pension, profit sharing, retirement, or other form of deferred compensation
plan; (iii) hospitalization insurance or similar plan or practice, whether
formal or informal; (iv) contract for the employment of any officer, individual
employee, or other person on a full-time or consulting basis or relative to
severance pay for any such person; (v) agreement or indenture relating to the
borrowing of money in excess of $1,000,000 or to mortgaging, pledging or
otherwise placing a lien on any of the assets of the Company or any Subsidiary;
(vi) guaranty of any obligation for borrowed money or otherwise, other than
endorsements made for collection; (vii) lease or agreement under which it is
lessor of, or permits any third party to hold or operate, any property, real or
personal, for an annual rental in excess of $100,000; (viii) contract or group
of related contracts with the same party for the purchase of products or
services, under which the undelivered balance of such products and services has
a purchase price in excess of $500,000; (ix) contract or group of related
contracts with the same party for the sale of products or services under which
the undelivered balance of such products or services has a sales price in excess
of $500,000; (x) other contract or group of related contracts with the same
party continuing over a period of more than six months from the date or dates
thereof, either not terminable by it on 30 days' or less notice without penalty
or involving more than $500,000; (xi) contract which prohibits either the
Company or any Subsidiary from freely engaging in business anywhere in the
world; (xii) contract relating to the distribution of the Company's or any
Subsidiary's products; (xiii) franchise agreement; (xiv) contract, agreement or
understanding with any shareholder who beneficially owns 5% or more of the
Company Common Stock or with any officer, director or employee (other than for
employment on customary terms); (xv) license agreement or agreement providing
for the payment or receipt of royalties or other compensation by the Company or
any Subsidiary in connection with the proprietary rights listed under the
caption "Proprietary Rights" in the DCI Disclosure Letter; or (xvi) other
agreement material to the Company's or any Subsidiary's business or not entered
into in the ordinary course of business.
(b) Except as specifically disclosed under the caption "Contracts" in
the DCI Disclosure Letter, (i) no contract or commitment required to be
disclosed under such caption has been breached or canceled by the other party;
(ii) since the date of the balance sheet included in the Company's Latest 10-Q,
no customer or supplier has indicated that it will stop or decrease the rate of
business done with the Company or any Subsidiary, except for changes in the
ordinary course of the Compan s and the Subsidiaries' businesses; (iii) the
Company and the Subsidiaries have performed all obligations required to be
performed by them in connection with the contracts or commitments required to be
disclosed under such caption and are not in receipt of any claim of default
under any contract or commitment required to be disclosed under such caption;
(iv) neither the Company nor any Subsidiary has any present expectation or
intention of not fully performing any obligation pursuant to any contract or
commitment or commitment set forth under such caption; and (v) neither the
Company nor any Subsidiary has any knowledge of any breach or anticipated breach
by any other party to any contract or commitment set forth under such caption.
(c) Prior to the date of this Agreement, Wavetech has been supplied
with a true and correct copy of each written contract or commitment, and a
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written description of each oral contract or commitment, referred to under the
caption "Contracts" in the DCI Disclosure Letter, together with all amendments,
waivers or other changes thereto.
3.15 PROPRIETARY RIGHTS. Except as set forth under the caption "Proprietary
Rights" in the DCI Disclosure Letter, there are no patents, patent applications,
trademarks, service marks, trade names, corporate names, copyrights, trade
secrets or other proprietary rights owned by the Company or any Subsidiary or
necessary to the conduct of the Company's or any Subsidiary's businesses as now
conducted. The Company or a Subsidiary owns and possesses all rights, titles and
interest, or a valid license, in and to the proprietary rights set forth under
such caption. The DCI Disclosure Letter describes under such caption all
proprietary rights which have been licensed to third parties and all proprietary
rights which are licensed from third parties by the Company or any Subsidiary.
The Company and the Subsidiaries have taken all necessary action to protect the
proprietary rights set forth under such caption. Neither the Company nor any
Subsidiary has received any notice of, nor is it aware of any facts which
indicate a likelihood of, any infringement, misappropriation, or conflict from
any third party with respect to the proprietary rights which are listed under
such caption; neither the Company nor any Subsidiary has infringed,
misappropriated or otherwise conflicted with any proprietary rights of any third
parties, nor is it aware of any infringement, misappropriation or conflict which
will occur in the continued operation of the Company or any Subsidiary; and no
claim by any third party contesting the validity of any proprietary rights
listed under such caption has been made, is currently outstanding, or to the
best knowledge of the Company or any Subsidiary is threatened.
3.16 LITIGATION. Except as set forth under the caption "Litigation" in the
DCI Disclosure Letter, there are no actions, suits, claims, proceedings, orders
or investigations pending or threatened against the Company or any Subsidiary or
otherwise affecting any of their respective properties or assets, or that
challenges or may have the effect of preventing, delaying, making illegal or
otherwise interfering with the Merger or any other transactions contemplated by
this Agreement, at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or that could reasonably be expected to
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise) or business prospects of the Company and there is no
basis known to the Company or any Subsidiary for any of the foregoing. There is
no order, writ, injunction, judgment or decree:
(a) to which the Company or any Subsidiary or any of the assets owned
or used by the Company or any Subsidiary is subject, or
(b) to which any officer or employee of the Company or any Subsidiary
is subject that prohibits such officer or employee from engaging in or
continuing any conduct, activity or practice relating to the Company's or any
Subsidiary's business. Except as set forth under such caption, neither the
Company nor any Subsidiary has received any opinion or legal advice to the
effect that the Company or any Subsidiary is exposed from a legal standpoint to
any liability or disadvantage which may be material to it or its prospects.
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3.17 BROKERAGE. There are no claims for investment banking fees, brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of the Company or any Subsidiary. The Company
currently intends, however, to enter into an agreement or arrangement with a
qualified investment banking or financial advisory firm regarding the study of
and the rendering of an opinion with respect to the fairness of the Merger.
3.18 EMPLOYMENT MATTERS. To the best knowledge of the Company and the
Subsidiaries, (i) no key executive employee of the Company or any Subsidiary,
and no group of the Company's or any subsidiary's employees, has any plans to
terminate his or its employment, (ii) the Company and the Subsidiaries have
complied with all laws relating to the employment of labor, including provisions
thereof relating to wages, hours, equal opportunity, collective bargaining and
the payment of social security and other taxes, and (iii) the Company and the
Subsidiaries have no material labor relations problems pending and their labor
relations are satisfactory.
3.19 EMPLOYEE BENEFIT PLANS. With respect to the employee benefits provided
to employees and former employees of the Company and the Subsidiaries:
(a) The Company and the Subsidiaries currently maintain only the
employee pension benefit plans, as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as are listed
under the caption "Employee Benefits" in the DCI Disclosure Letter.
(b) The Company and the Subsidiaries currently maintain only the
employee welfare benefit plans, as defined in Section 3(1) of ERISA (including
but not limited to, life insurance, medical, hospitalization, holiday, vacation,
disability dental and vision plans) as are listed under the caption "Employee
Benefits" in the DCI Disclosure Letter (the "Welfare Plans").
(c) The Company and the Subsidiaries currently maintain, or have
entered into, only the compensation programs and/or employment arrangements,
(including but not limited to, incentive compensation, bonus, severance, sick
pay, salary continuation, deferred compensation, supplemental executive
compensation plans, and employment and consulting agreements) as are listed
under the caption "Employee Benefits" in the DCI Disclosure Letter (the
"Compensation Programs").
(d) The Company and the Subsidiaries do not contribute, and have not
contributed within the last five years, to any multiemployer plan, as defined by
Section 3(37) of ERISA.
(e) Each Pension Plan and Welfare Plan is in compliance with ERISA;
each Pension Plan which is intended to be qualified under Section 401(a) of the
Code has been determined by the Internal Revenue Service to be so qualified or a
request for such determination has been timely filed with the Internal Revenue
Service (and to Company's best knowledge nothing has occurred between the date
of the last such determination and the Closing Date to cause the Internal
Revenue Service to revoke such determination).
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(f) Any Pension Plan or any Welfare Plan designed to satisfy the
requirements of Section 125, Section 401, Section 401(k), Section 409, Section
501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such
section.
(g) No accumulated funding deficiency, as defined in Section
302(a)(2) of ERISA, exists (whether or not waived) with respect to any Pension
Plan as of the date hereof.
(h) All amounts required to be paid by the Company and or any
Subsidiary with respect to each Pension Plan, Welfare Plan and Compensation
Program on or before the Closing Date have been paid.
(i) None of the Pension Plans or the Company or any party in interest
or disqualified person has engaged in any non-exempt "prohibited transactions"
as defined in Section 406 of ERISA or Section 4975 of the Code.
(j) Except as disclosed under the caption "Employee Benefits" in the
DCI Disclosure Letter, no Pension Plan or Welfare Plan provides benefits,
including without limitation death or medical benefits (whether or not insured),
with respect to current or former employees beyond their retirement or other
termination of service other than (i) coverage mandated by applicable law, (ii)
retirement benefits under a Pension Plan, (iii) death benefits under a Welfare
Plan, (iv) deferred compensation accrued on the books of the Company or a
Subsidiary, or (v) benefits the full cost of which is borne by the current or
former employee (or his or her beneficiary).
(k) No "leased employee," as that term is defined in Section 414(n)
of the Code, performs services for the Company or any Subsidiary.
(l) No liability has been, or is expected by the Company or any
Subsidiary to be, incurred by the Company or a Subsidiary under Section 4062 of
ERISA with respect to any Pension Plan.
(m) No reportable event within the meaning of Title IV of ERISA has
occurred with respect to any Pension Plan.
(n) The Company has furnished Wavetech with correct and complete
copies of each Pension Plan, Welfare Plan, and Compensation Program, together
with any trust agreements, summary plan descriptions, employee informational
material, financial statements relating thereto and participant listings.
3.20 INSURANCE. The DCI Disclosure Letter, under the caption "Insurance,"
lists and briefly describes (including name of insurer, agent, coverage and
expiration date) each insurance policy maintained by, at the expense of or for
the benefit of the Company or any of the Subsidiaries with respect to its
properties and assets and describes any material claims made thereunder. All of
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such insurance policies are in full force and effect and neither the Company nor
any Subsidiary is in default with respect to its obligations under any of such
insurance policies. Except as set forth in the DCI Disclosure Letter under the
caption "Insurance," the Company is the sole beneficiary of each such policy.
The insurance coverage of the Company and the Subsidiaries is customary for
corporations of similar size engaged in similar lines of businesses. The Company
has not received any notice or other communication regarding any actual or
possible (a) cancellation or invalidation of any insurance policy, (b) refusal
of any coverage or rejection of any claim under any insurance policy or (c)
material adjustment in the amount of premiums payable with respect to any
insurance policy.
3.21 AFFILIATE TRANSACTIONS. Except as set forth under the caption
"Affiliate Transactions" in the DCI Disclosure Letter, no officer or director of
the Company or any Subsidiary or any member of the immediate family of any such
officer or director, or any entity in which any of such persons owns any
beneficial interest (other than a publicly-held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market and
less than 5% of the stock of which is beneficially owned by any of such persons)
(collectively "Insiders"), (a) has any agreement with the Company or any
Subsidiary (other than normal employment arrangements) or any interest in any
property, real, personal or mixed, tangible or intangible, used in or pertaining
to the business of the Company or any Subsidiary, (b) has been indebted to the
Company in amounts in excess of $10,000 in the aggregate at any time, (c) has at
any time competed, directly or indirectly, with the Company, or (d) has any
claim or right against the Company (other than rights under Company Options and
rights to receive compensation for services performed as an employee of the
Company). For purposes of the preceding sentence, the members of the immediate
family of an officer or director shall consist of the spouse, Wavetech's,
children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and
brothers- and sisters-in-law of such officer or director.
3.22 SUPPLIERS. The DCI Disclosure Letter, under the caption "Suppliers,"
lists the 10 largest suppliers of the Company and the Subsidiaries (on a
consolidated basis) for the fiscal year ended March 31, 1998, and sets forth
opposite the name of each such supplier the total amount of purchases from such
supplier by the Company and the Subsidiaries during such period.
3.23 OFFICERS AND DIRECTORS; BANK ACCOUNTS. The DCI Disclosure Letter,
under the caption "Officers and Directors," lists all officers and directors of
the Company and the Subsidiaries and, under the caption "Bank Accounts," lists
all of the Company's and the Subsidiaries' accounts at any bank or other
financial institution (designating each authorized signer).
3.24 COMPLIANCE WITH LAWS; PERMITS; CERTAIN OPERATIONS. The Company, each
of the Subsidiaries and their respective officers, directors, agents and
employees have complied in all respects, and currently are in compliance in all
respects, with all applicable laws and regulations of foreign, federal, state
and local governments and all agencies thereof which affect the businesses or
any owned or leased properties of the Company and the Subsidiaries and to which
the Company or any of the Subsidiaries may be subject, and no claims have been
filed against the Company or any of the Subsidiaries alleging a violation of any
such law or regulation, except as set forth in the DCI Disclosure Letter under
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the caption "Compliance." Neither the Company nor any Subsidiary has given or
agreed to give any money, gift or similar benefit (other than incidental gifts
of articles of nominal value, gifts and prizes awarded pursuant to promotional
programs approved by the Company's management and non-extraordinary
entertainment expenditures) to any actual or potential customer, supplier,
foreign or domestic governmental employee or any other person in a position to
assist or hinder the Company or any of the Subsidiaries in connection with any
actual or proposed transaction. The Company and the Subsidiaries hold all of the
permits, licenses, certificates and other authorizations of foreign, federal,
state and local governmental agencies required for the conduct of their
businesses. Without limiting the generality of the foregoing, neither the
Company nor any Subsidiary has violated, or received a notice or charge
asserting any violation of, the Occupational Safety and Health Act of 1970 or
any other state or federal acts or laws (including rules and regulations
thereunder) regulating or otherwise affecting employee health and safety or the
environment.
3.25 DISCLOSURE.
(a) Neither this Agreement nor any other agreement or instrument
executed in connection with the transactions contemplated hereby nor any of the
attachments or exhibits hereto nor the DCI Disclosure Letter contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements contained herein or therein, in light of the circumstances in which
they were made, not misleading, and there is no fact which has not been
disclosed in writing to Wavetech of which any officer or director of the Company
or any Subsidiary is aware which materially affects adversely or could
reasonably be anticipated to materially affect adversely the business, including
operating results, assets, customer relations, employee relations and business
prospects, of the Company and the Subsidiaries, taken as a whole.
(b) None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the Form S-4 and the Joint
Prospectus/Proxy Statement will, at the time the S-4 is declared effective, at
the date the Joint Prospectus/Proxy Statement is mailed to the shareholders of
the Company or at the time of the Company Shareholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein (in light of
the circumstances under which they are made) not misleading.
3.26 NON-CONTRAVENTION; CONSENTS. Except as set forth under the caption
"Consents" in the DCI Disclosure Letter, neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Company's or any Subsidiary's Articles of Incorporation or
Bylaws, or (ii) any resolution adopted by the Company's or any Subsidiary's
shareholders, the Company's or any Subsidiary's board of directors or any
committee of such board of directors;
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(b) contravene, conflict with or result in a violation of, or give
any governmental authority or other person or entity the right to challenge any
of the transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any legal requirement or any order, writ, injunction,
judgment or decree to which the Company or any Subsidiary, or any of the assets
owned or used by the Company or any Subsidiary, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any governmental authority the right to
revoke, withdraw, suspend, cancel, terminate or modify, any governmental permit
or authorization that is held by the Company or any Subsidiary or that otherwise
relates to the Company's business or to any of the assets owned or used by the
Company or any Subsidiary;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any contract or agreement to
which the Company or any Subsidiary is a party, or give any person or entity the
right to (i) declare a default or exercise any remedy under any such contract or
agreement, (ii) accelerate the maturity or performance of any such contract or
agreement, or (iii) cancel, terminate or modify any such contract or agreement;
or
(e) result in the imposition or creation of any lien or other
encumbrance upon or with respect to any asset owned or used by the Company or
any Subsidiary (except for minor liens that will not, in any case or in the
aggregate, materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).
Except as set forth under the caption "Consents" in the DCI Disclosure Letter,
the Company is not and will not be required to make any filing with or give any
notice to, or to obtain any consent from, any person or entity in connection
with (x) the execution, delivery or performance of this Agreement or any of the
other agreements referred to in this Agreement, or (y) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
3.27 STOCKHOLDER VOTE REQUIRED. The affirmative vote of a majority of the
votes entitled to be cast by holders of the outstanding shares of Company Common
Stock (voting as a class) are the only votes of the holders of any class or
series of the Company's capital stock necessary to approve this Agreement and
the Merger under Colorado Law.
3.28 BOARD APPROVAL. The board of directors of the Company has (i) approved
the Merger and the execution of this Agreement, (ii) determined that the Merger
is in the best interests of the shareholders of the Company and is on terms that
are fair to such shareholders, and (iii) recommended that holders of Company
Common Stock vote in favor of this Agreement and the Merger.
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ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
4.1 CONDUCT OF BUSINESS PENDING THE MERGER.
(a) COVENANTS OF THE COMPANY. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, the Company agrees as to itself and its respective
Subsidiaries (except to the extent that Wavetech shall otherwise consent in
writing, which consent shall not be unreasonably withheld, or as otherwise
expressly contemplated or permitted by this Agreement) to carry on its business
in the usual, regular, and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other obligations when due,
and, to the extent consistent with such business, to use all reasonable efforts
consistent with its past practices and policies to preserve intact its present
business organization, to keep available the services of its present officers
and key employees and preserve its relationships with customers, suppliers,
franchisees, distributors, licensors, licensees, and others having business
dealings with it, to the end that its goodwill and ongoing businesses shall be
unimpaired at the Effective Time. The Company shall promptly notify Wavetech of
any event or occurrence not in the ordinary course of business of the Company.
(b) COVENANTS OF WAVETECH. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Wavetech agrees as to itself and its respective
Subsidiaries (except to the extent that the Company shall otherwise consent in
writing which consent shall not be unreasonably withheld or otherwise expressly
contemplated or permitted by this Agreement), to carry on its business in the
usual, regular, and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other obligations when due,
and, to the extent consistent with such business, to use all reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, to keep available the services of its present officers
and key employees and preserve its relationships with customers, suppliers,
franchisees, distributors, licensers, licensees, and others having business
dealings with it, to the end that its goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Wavetech shall promptly notify the Company of
any event or occurrence not in the ordinary course of business of Wavetech.
4.2 DELIVERY OF DISCLOSURE LETTERS. No later than two (2) calendar weeks
from the date of this Agreement, DCI shall deliver the fully completed DCI
Disclosure Letter to Wavetech and Wavetech shall deliver the fully completed
Wavetech Disclosure Letter to DCI.
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4.3 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the period subsequent to the execution of this Agreement
and prior to the Effective Time (the "Pre-Closing Period"), the Company shall
promptly notify Wavetech and Wavetech shall promptly notify the Company in
writing of:
(i) the discovery by either of the parties hereto of any event,
condition, fact or circumstance that occurred or existed on or prior to the date
of this Agreement and that caused or constitutes an inaccuracy in or breach of
any representation or warranty made by Wavetech in Article II or by the Company
in Article III in this Agreement;
(ii) any event, condition, fact or circumstance that occurs,
arises or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty made by
such party in this Agreement if (A) such representation or warranty had been
made as of the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of this
Agreement;
(iii) any breach of any covenant or obligation of such party; and
(iv) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Sections 6.1, 6.2
or 6.3 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to
be disclosed pursuant to Section 4.2(a) requires any change in either the
Wavetech Disclosure Letter or the DCI Disclosure Letter, as the case may be or
if any such event, condition, fact or circumstance would require such a change
assuming the Wavetech Disclosure Letter or the DCI Disclosure Letter were dated
as of the date of the occurrence, existence or discovery of such event,
condition, fact or circumstance, then the Company or Wavetech, as the case may
be, shall promptly deliver to the other party an update in writing to the
Disclosure Letter specifying such change and disclosing all material facts
related thereto. No such update shall be deemed to supplement or amend the
respective Disclosure Letter for the purpose of (i) determining the accuracy of
any of the representations and warranties made by the Company in this Agreement,
or (ii) determining whether any of the conditions set forth in Sections 6.1, 6.2
or 6.3 has been satisfied.
4.4 SHAREHOLDER APPROVAL.
(a) The Company will call a meeting of its shareholders (the "Company
Shareholders' Meeting"), to be held after the Form S-4 shall have been declared
effective by the SEC, to submit this Agreement, the Merger and related matters
for the consideration and approval of the Company's shareholders. Subject to the
fiduciary obligations of the Company's directors, the Form S-4 will include a
statement to the effect that the Company's board of directors has recommended
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that the Company's shareholders vote in favor of the Merger. The Company
Shareholders' Meeting will be called, held and conducted, and any proxies will
be solicited, in compliance with applicable law. The Company shall, if and to
the extent requested by Wavetech, subject to the fiduciary obligations of the
directors of the Company as advised by counsel, use its best efforts to solicit
from shareholders of the Company proxies in favor of such adoption and approval
and shall take all other action necessary or, in the opinion of Wavetech,
helpful to secure a vote of shareholders in favor of the Merger. At the Company
Shareholders' Meeting, the Company shall cause to be voted all shares of Company
Common Stock with respect to which proxies in the form distributed by the
Company shall have been given in favor of the Merger.
(b) To the extent required by applicable Nevada law or the rules of
the Nasdaq SmallCap Market (if such rules are applicable), Wavetech will call a
meeting of its shareholders (the "Wavetech Shareholders' Meeting"), to be held
after the Form S-4 shall have been declared effective by the SEC, to submit this
Agreement, the Merger, the issuance of Wavetech Common Stock pursuant to the
Merger and related matters for the consideration and approval of Wavetech's
shareholders (the "Wavetech Voting Proposals"). The Wavetech Shareholder Meeting
will be called, held and conducted, and any proxies will be solicited, in
compliance with applicable law. Wavetech shall, if and to the extent requested
by the Company, subject to the fiduciary obligations of the directors of
Wavetech as advised by counsel, use its best efforts to solicit from
shareholders of Wavetech proxies in favor of such adoption and approval and
shall take all other action necessary or, in the opinion of Wavetech, helpful to
secure a vote of shareholders in favor of the Wavetech Voting Proposals. At the
Wavetech Shareholders' Meeting, Wavetech shall cause to be voted all shares of
Wavetech Common Stock with respect to which proxies in the form distributed by
Wavetech shall have been given in favor of the Wavetech Voting Proposals.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 JOINT PROXY STATEMENT; REGISTRATION STATEMENT.
(a) As promptly as practical after the execution of this Agreement,
Wavetech and the Company shall prepare and file with the SEC a joint proxy
statement/prospectus to be sent to the shareholders of Wavetech and the Company
in connection with the Wavetech Shareholders' Meeting and the Company
Shareholders' Meeting to consider the Merger (the "Joint Proxy
Statement/Prospectus"), and Wavetech shall prepare and file with the SEC a
registration statement on Form S-4 pursuant to which the issuance of the shares
of Wavetech Common Stock as a result of the Merger will be registered with the
SEC under the Securities Act (the "Registration Statement"), in which the Joint
Proxy Statement/Prospectus will be included as a prospectus. Wavetech and the
Company shall use all reasonable efforts to cause the Registration Statement to
become effective as soon after such filing as is practical. The Joint Proxy
Statement/Prospectus shall include the recommendation of the Board of Directors
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of the Company in favor of this Agreement and the Merger and the recommendation
of the Board of Directors of Wavetech, in favor of this Agreement, the Merger
and the issuing of Wavetech Common Stock in the Merger and such other proposals
as are necessary to carry out the intent of the transactions contemplated by
this Agreement (the "Wavetech Voting Proposals"), provided that the Board of
Directors of either the Company or Wavetech may withdraw such recommendation if
such Board of Directors shall have determined in good faith, after consultation
with its outside legal counsel, that the withdrawal of such recommendation is
necessary for such Board of Directors to comply with its fiduciary duties under
applicable law. Wavetech and the Company shall make all other necessary filings
with respect to the Merger under the Securities Act and Exchange Act and the
rules and regulations thereunder. Wavetech shall have the right in its sole and
absolute discretion to approve or disapprove of the outside legal counsel
selected by the Company for purposes of this Section 5.1(a).
(b) The Company shall take such action as may be necessary to insure
that (i) the information to be supplied by the Company for inclusion in the
Registration Statement shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact or
omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement, in light of the circumstances under which they were made, not
misleading, and (ii) the information supplied by the Company for inclusion in
the Joint Proxy Statement/Prospectus shall not, on the date the Joint Proxy
Statement/Prospectus is first mailed to shareholders of the Company or Wavetech,
at the time of the Company Shareholders' Meeting and the Wavetech Shareholders'
Meeting, and at the Effective Time, contain any statement which, at such time
and in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Joint Proxy
Statement/Prospectus not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Shareholders' Meeting or Wavetech
Shareholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to the Company or any of its
Affiliates, officers, or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Joint Proxy Statement/Prospectus, the Company shall promptly
so inform Wavetech.
(c) Wavetech shall take such action as may be necessary to insure
that (i) the information supplied by Wavetech for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared effective
by the SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information supplied by Wavetech for inclusion in the Joint Proxy
Statement/Prospectus shall not on the date the Joint Proxy Statement/Prospectus
is first mailed to shareholders of Wavetech or the Company, at the time of the
Wavetech Shareholders' Meeting and Company Shareholders' Meeting, and at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement/Prospectus not false or
misleading, or omit to state any material fact necessary to correct any
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statement in any earlier communication with respect to the solicitation of
proxies for the Wavetech Shareholders' Meeting or Company Shareholders' Meeting
which has become false or misleading. If at any time prior to the Effective Time
any event relating to Wavetech or any of its Affiliates, officers, or directors
should be discovered by Wavetech which should be set forth in an amendment to
the Registration Statement or a supplement to the Joint Proxy
Statement/Prospectus, Wavetech shall promptly so inform the Company.
5.2 SHAREHOLDERS' MEETINGS. To the extent required by applicable statutory
law or the rules of the Nasdaq SmallCap Market (if such rules are applicable),
Wavetech and the Company each shall call a meeting of its respective
shareholders to be held as promptly as practicable for the purpose of voting, in
the case of the Company, upon this Agreement and the Merger and, in the case of
Wavetech, upon the Wavetech Voting Proposals. Subject to Section 5.1 hereof,
Wavetech and the Company will, through their respective Boards of Directors,
recommend to their respective shareholders approval of such matters and will
coordinate and cooperate with respect to the timing of such meetings and shall
use their best efforts to hold such meetings on the same day and as soon as
practicable after the date hereof. Subject to Section 5.1 hereof, each party
shall use all reasonable efforts to solicit from its shareholders proxies in
favor of such matters.
5.3 ACCOUNTANT COMFORT LETTERS.
(a) Prior to the date of this Agreement, the Company has delivered to
Wavetech a letter from Schnitzer & Kondub, P.C. addressed to the Company and
Wavetech and dated a date not more than one day (excluding Saturdays, Sundays
and holidays) before the date of this Agreement, confirming that they are
independent accountants within the meaning of the Exchange Act and the
applicable published rules and regulations thereunder and stating to the effect
that in their opinion the audited financial statements and financial statement
schedules included in the Company's Latest 10-KSB and reported on by them comply
as to form in all material respects with the applicable accounting requirements
of the Exchange Act and the related published rules and regulations.
(b) In addition, prior to the date (the "Mailing Date") the Proxy
Statement is mailed to the shareholders of the Company, the Company shall
deliver to Wavetech a letter from Schnitzer & Kondub, P.C. addressed to the
Company and Wavetech and dated a date not more than one day (excluding
Saturdays, Sundays and holidays) before the Mailing Date, confirming that they
are independent accountants within the meaning of the Exchange Act and the
applicable published rules and regulations thereunder and stating to the effect
that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Joint Prospectus/Proxy Statement
and reported on by them comply as to form in all material respects with the
applicable accounting requirements of the Exchange Act and the related published
rules and regulations;
(ii) on the basis of a reading of the amounts included in the
Joint Prospectus/Proxy Statement in response to Item 301 of Regulation S-K and
of the latest unaudited consolidated financial statements made available by the
Company and the Subsidiaries and the latest unaudited financial statements
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included in the Joint Prospectus/Proxy Statement relating to the Company and the
Subsidiaries; carrying out certain specified procedures (but not an examination
in accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments set
forth in such letter; a reading of the minutes of the meetings of the
shareholders, directors and executive committees of the Company and the
Subsidiaries; and inquiries of certain officials of the Company and the
Subsidiaries who have responsibility for financial and accounting matters of the
Company and the Subsidiaries as to transactions and events subsequent to the
date of the latest unaudited financial statements included in the Joint
Prospectus/Proxy Statement relating to the Company and the Subsidiaries, nothing
came to their attention which would cause them to believe that:
(A) the unaudited financial statements included in the
Joint Prospectus/Proxy Statement of the Company and the Subsidiaries do not
comply as to form in all material respects with applicable accounting
requirements of the Exchange Act and with the published rules and regulations of
the SEC with respect to proxy statements; or that said unaudited financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Joint Prospectus/Proxy
Statement and reported on by them; or
(B) with respect to the period subsequent to the date of
the latest unaudited financial statements included in the Joint Prospectus/Proxy
Statement relating to the Company and the Subsidiaries, there were any changes,
at a specified date not more than five days (excluding Saturdays, Sundays and
holidays) prior to the date of the letter, in the long-term debt of the Company
and the Subsidiaries or capital stock of the Company or any decreases in the
cash and cash equivalents, marketable securities or shareholders' equity of the
Company and the Subsidiaries as compared with the amounts shown on the unaudited
consolidated balance sheet included in the Joint Prospectus/Proxy Statement, or
for the period from the date of the latest unaudited financial statements
included in the Joint Prospectus/Proxy Statement relating to the Company and the
Subsidiaries, to such specified date there were any decreases, as compared with
the corresponding period in the preceding year, in income (loss) before
extraordinary items, or in total or per share amounts of net income (loss), of
the Company and the Subsidiaries, except in all instances for changes or
decreases set forth in such letter, in which case the letter shall be
accompanied by an explanation by the Company as to the significance thereof; and
(iii) they have performed certain other specified procedures as
a result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company and the Subsidiaries) set forth in the Joint Prospectus/Proxy Statement
as reasonably designated by Wavetech, insofar as it relates to the Company and
the Subsidiaries, agrees with the accounting records of the Company and the
Subsidiaries, excluding any legal interpretation.
5.4 EXPENSES. In no event shall the aggregate costs and expenses incurred
by the Company and Wavetech in connection with this Agreement, the Merger and
the transactions contemplated thereby exceed $400,000. The parties hereto
acknowledge and agree that the expenses to be paid by them according to this
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Section 5.4 shall include, but not be limited to, all legal fees and expenses
incurred in connection with the negotiation and preparation of this Agreement,
the Joint Proxy/Prospectus and all matters contemplated thereby or related
thereto, accounting fees and expenses, SEC registration fees, Nasdaq listing
fees, "blue sky" fees and expenses, fees associated with filings pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott Act"), transfer agent fees, fairness opinions and investment
advisory services.
5.5 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
including using reasonable efforts to obtain all necessary waivers, consents and
approvals and to effect all necessary registrations and filings, including, but
not limited to, any required filings under the Hart-Scott Act and submissions of
information requested by governmental authorities.
5.6 NO NEGOTIATIONS, ETC. The Company shall not (nor shall it permit any
of the Subsidiaries to), directly or indirectly, through any officer, director,
agent or otherwise, solicit, initiate or encourage submission of any inquiry,
proposal or offer from any person or entity (including any of its or their
officers or employees) other than Wavetech relating to any liquidation,
dissolution, recapitalization, merger, consolidation or acquisition or purchase
of all or a material portion of the assets of, or any equity interest in, the
Company or any Subsidiary or other similar transaction or business combination
involving the Company or any Subsidiary, or, unless the Company's Board of
Directors receives a written opinion from the Company's outside counsel stating
that there would be a material risk of liability on the part of the members of
the Company's Board of Directors to the Company's shareholders for failure to do
so, participate in any discussions or negotiations regarding, or furnish to any
other person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by, or consider, entertain or accept any proposal or offer from, any
other person or entity to do or seek any of the foregoing. The Company shall
promptly notify Wavetech if any such proposal or offer, or any inquiry from or
contact with any person with respect thereto, is made and shall promptly provide
Wavetech with such information regarding such proposal, offer, inquiry or
contact as Wavetech may request.
5.7 NOTIFICATION OF CERTAIN MATTERS. Each party shall give prompt notice
to each other party of (a) the occurrence or failure to occur of any event,
condition, fact or circumstance which occurrence or failure would be likely to
cause any representation or warranty on its part contained in this Agreement to
be untrue or inaccurate at, or at any time prior to, the Effective Time, and (b)
any material failure of such party, or any officer, director, shareholder,
employee or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder.
5.8 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) Wavetech and its
attorneys, accountants, consultants and representatives shall continue to have
access to the books and records of the Company and such other information
pertaining to the business and assets of the Company as Wavetech shall
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reasonably request, and the Company and its attorneys, accountants, consultants
and representatives shall continue to have access to the books and records of
Wavetech and such other information pertaining to the business and assets of
Wavetech as the Company shall reasonably request, and each of Wavetech and the
Company shall provide the other with reasonable access to its officers and other
personnel.
(b) Each party shall treat in confidence all documents, materials,
and other information which it has and shall have obtained regarding the other
party during the course of the negotiations leading to the consummation of the
transactions contemplated by this Agreement (whether obtained before or after
the date of this Agreement) and the preparation of this Agreement and other
related documents. The obligation of each party to treat such documents,
materials and other information in confidence shall not apply to any information
which (i) such party can demonstrate was already lawfully in its possession
prior to the disclosure thereof by the other party, (ii) is known to the public
and did not become so known through any violation of a legal obligation, (iii)
became known to the public through no fault of such party, (iv) is later
lawfully acquired by such party from other sources, (v) is required to be
disclosed under the provisions of any Federal, state or local statute or
regulation issued by a duly authorized agency, board or commission thereof, or
(vi) is required to be disclosed by a rule or order of any court of competent
jurisdiction. Each party agrees, if it breaches any of the terms of this SECTION
5.8(b), it will consent to the issuance of a temporary and/or permanent
injunction by any court of competent jurisdiction enjoining such party from
continuing to breach the terms of this SECTION 5.8(b). In the event that this
Agreement shall be terminated for any reason, the parties hereto shall, and
shall cause their respective officers, directors, employees and agents to,
promptly return any and all copies of all documents, materials and other
information which are confidential, proprietary or otherwise relate to a trade
secret of the other party which was received in connection with the negotiation
of the transactions contemplated by this Agreement.
5.9 SHAREHOLDER CLAIMS. The Company shall not settle or compromise any
claim brought by any present, former or purported holder or owner of any
securities of the Company in connection with the Merger without the prior
written consent of Wavetech.
5.10 CONSENTS. As promptly as practicable after the execution of this
Agreement, each party to this Agreement (a) shall make all filings (if any) and
give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use all commercially reasonable efforts to obtain all
consents (if any) required to be obtained (pursuant to any applicable law,
regulation, contract or agreement, or otherwise) by such party in connection
with the Merger and the other transactions contemplated by this Agreement.
Wavetech shall (upon request) promptly deliver to the Company a copy of each
such filing made, each such notice given and each such consent obtained by
Wavetech during the period subsequent to the date hereof and prior to the
Effective Time; and the Company shall (upon request) promptly deliver to
Wavetech a copy of each such filing made, each such notice given and each such
consent obtained by the Company during the period subsequent to the date hereof
and prior to the Effective Time.
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5.11 STATE SECURITIES LAW COMPLIANCE. Wavetech shall use commercially
reasonable efforts to (a) qualify, prior to the Effective Time, the Wavetech
Common Stock to be issued pursuant to the Merger under state "blue sky" laws of
every jurisdiction of the United States in which (i) any registered shareholder
of the Company has an address on the records of the Company as of the date of
this agreement, and (ii) an exemption from the qualification requirements under
such laws is unavailable with respect to the issuance of Wavetech Common Stock
in the Merger, and (b) qualify, prior to the Effective Time, the Assumed Options
and Assumed Warrants under the state "blue sky" laws of every jurisdiction of
the United States in which (i) the records of the Company, as of the date of
this Agreement, indicate that a holder of such Assumed Options or Assumed
Warrants resides, and (ii) an exemption from the qualification requirements
under such laws is unavailable.
5.12 AFFILIATE AGREEMENTS. The Company shall use all commercially
reasonable efforts to cause each Company-Affiliated Person identified on Exhibit
4 (and any other Person that Wavetech notifies the Company may reasonably be
deemed to be an "Affiliate" of the Company for purposes of the Securities Act),
to execute and deliver to Wavetech, as promptly as practicable after the
execution of this Agreement, an Affiliate Agreement in the form of Exhibit 5,
which Affiliate Agreement shall include, specifically, but without limitation,
an agreement to vote such shares in favor of the Merger and such other proposals
to be voted upon at the Company Shareholders' Meeting. Wavetech shall use all
commercially reasonable efforts to cause each Wavetech-Affiliated Person listed
on Exhibit 6 and each other Person that could reasonably be deemed to be an
"Affiliate" of Wavetech for purposes of the Securities Act to execute and
deliver to Wavetech, as promptly as practical after execution of this Agreement,
an Affiliate Agreement in the form of Exhibit 5.
5.13 COMMERCIALLY REASONABLE EFFORTS. During the Pre-Closing Period, (a)
the Company shall use all commercially reasonable efforts to cause the
conditions set forth in Sections 6.1 and 6.3 to be satisfied on a timely basis,
and (b) Wavetech shall use all commercially reasonable efforts to cause the
conditions set forth in Section 6.1 and 6.2 to be satisfied on a timely basis.
5.14 TAX MATTERS. Prior to the Closing, (a) Wavetech and the Company shall
execute and deliver to Squire, Sanders & Dempsey L.L.P. Representation
Certificates in substantially the forms of Exhibits 7 and 8 (which shall be used
in connection with any legal opinion contemplated by this Agreement, and (b)
each of the Company-Affiliated Persons listed on Exhibit 5 shall execute and
deliver to Squire, Sanders & Dempsey L.L.P. a Shareholders' Representation
Certificate in the form of Exhibit 9.
5.15 BOARD OF DIRECTORS. Contemporaneously with the consummation of the
Merger, persons designated by the Company (the "Company Nominees") pursuant to
Section 1.5 shall be appointed to Wavetech's board of directors to serve until
the first annual meeting of shareholders of Wavetech to occur following
consummation of the Merger. The Board of Directors of the Surviving Company
shall agree, except to the extent that they shall have a reasonable significant
objection at such time, to nominate and support the persons designated by
Wavetech (the "Wavetech Nominees") pursuant to Section 1.5 for election to the
Surviving Corporation's board of directors at the first annual meeting of
shareholders of the Surviving Corporation to occur following consummation of the
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Merger. If the seat on the Surviving Corporation's board of directors held by
the Wavetech Nominees shall become vacant for any reason during the period
commencing upon consummation of the Merger and ending on the date of the second
annual meeting of shareholders of the Surviving Corporation to occur following
consummation of the Merger, the Surviving Corporation's agrees, except to the
extent the Surviving Corporation shall have a reasonable significant objection
at such time, to appoint to the Surviving Corporation's board of directors to
serve the remaining term of such Wavetech Nominees a person designated by the
other Wavetech Nominee.
5.16 INDEMNIFICATION.
(a) The Articles of Incorporation and Bylaws of the Surviving
Corporation shall contain the same provisions with respect to indemnification,
advancement and director exculpation set forth in the Articles of Incorporation
and Bylaws of Wavetech on the date of this Agreement, which provisions shall not
be amended, repealed or otherwise modified for a period of six (6) years after
the Effective Time in any manner that would adversely affect the rights
thereunder of persons who at any time prior to the Effective Time were entitled
to indemnification, advancement or exculpation under the Articles of
Incorporation or Bylaws of Wavetech in respect of actions or omissions occurring
at or prior to the Effective Time.
(b) From and after the Effective Time, the Surviving Corporation
shall indemnify, defend and hold harmless the present and former officers,
directors and employees of the Company (collectively, the "Indemnified Parties")
against all losses, expenses, claims, damages, liabilities or amounts that are
paid in settlement of (with approval of Wavetech and the Surviving Corporation),
or otherwise in connection with, any claim, action, suit, proceeding or
investigation (a "Claim"), based in whole or in part on the fact that such
person is or was such a director, officer or employee and arising out of actions
or omissions occurring at or prior to the Effective Time, in each case to the
fullest extent permitted under the Nevada law, (and shall pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the fullest extent permitted under the Nevada law, upon
receipt from the Indemnified Party to whom expenses are advanced of the
undertaking to repay such advances.
(c) Any Indemnified Party wishing to claim indemnification under this
Section 5.18, upon learning of any such Claim, shall notify the Surviving
Corporation (although the failure so to notify the Surviving Corporation shall
not relieve the Surviving Corporation from any liability that it may have under
this Section 5.16, except to the extent such failure materially prejudices such
party). Wavetech and the Surviving Corporation shall have the right to assume
the defense thereof and the Surviving Corporation, including its affiliates,
shall not be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified Parties
in connection with the defense thereof, except that if Wavetech and the
Surviving Corporation elect not to assume such defense or there is a conflict of
interest between, or different defenses exist for the Surviving Corporation and
the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory
to them (and reasonably satisfactory to the Surviving Corporation) and the
Surviving Corporation shall pay all reasonable fees and expenses of such counsel
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for the Indemnified Parties promptly as statements therefor are received;
PROVIDED, HOWEVER, that (i) the Surviving Corporation, including its affiliates,
shall not, in connection with any one such action or proceeding or separate but
substantially similar actions or proceedings arising out of the same general
allegations, be liable for the fees and expenses of more than one separate firm
of attorneys at any time for all Indemnified Parties except to the extent that
local counsel, in addition to such parties' regular counsel, is necessary or
desirable in order to effectively defend against such action or proceeding, (ii)
the Surviving Corporation and the Indemnified Parties will cooperate in the
defense of any such matter, and (iii) the Surviving Corporation, including its
affiliates, shall not be liable for any settlement effected without Wavetech's
prior written consent, which consent will not be unreasonably withheld or
delayed, and PROVIDED, FURTHER, however, that the Surviving Corporation,
including its affiliates, shall not have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and not subject to
further appeal, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. No Indemnified Party shall
consent to entry of judgment or enter into any settlement that does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release, in form and substance reasonably satisfactory to
such Indemnified Party, from all liability in respect of such claim or
litigation for which such Indemnified Party would be entitled to indemnification
hereunder.
(d) This Section 5.16 is intended to be for the benefit of, and shall
be enforceable by, the Indemnified Parties referred to herein, their heirs and
personal representatives and shall be binding on the Surviving Corporation and
their respective successors and assigns.
5.17 NASDAQ LISTING. To the extent it is at the time eligible to do so,
Wavetech shall use all reasonable efforts to cause the shares of Wavetech Common
Stock to be issued in the Merger and the shares of Wavetech Common Stock to be
reserved for issuance under the Assumed Options and the Assumed Warrants to be
approved for listing on the Nasdaq SmallCap Market, subject to official notice
of issuance, prior to the Closing Date. Notwithstanding anything in this
Agreement to the contrary, the de-listing of Wavetech Common Stock subsequent to
the date of this Agreement shall not be deemed to be a breach of any
representation, warranty or covenant of Wavetech made in this Agreement and
shall not be a basis for the Company to terminate this Agreement.
5.18 EMPLOYEES. Following the Effective Time, the Surviving Corporation
shall honor in accordance with their terms all employee benefit plans disclosed
by the Company under the caption "Employee Benefit Plans" under the DCI
Disclosure Schedule, and all accrued benefits vested thereunder. Wavetech agrees
to provide, after the Effective Time, or cause the Surviving Corporation to
provide, employees of the Company, not otherwise covered by collective
bargaining agreements, with employee benefits in the aggregate substantially no
less favorable than those benefits provided to Wavetech's similarly situated
employees for a period ending on the second anniversary of the Effective Time.
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ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) this Agreement (including without limitation the plan of merger
contained herein) and the Merger, and, in the case of Wavetech only, the
issuance of Wavetech Common Stock as a result of the Merger, shall have been
approved and adopted by the requisite vote of the shareholders of Wavetech and
the Company as may be required by law, by the rules of the Nasdaq SmallCap
Market, and by any applicable provisions of their respective charter and bylaws;
(b) the Form S-4 shall have been declared effective by the SEC and no
order or other declaration suspending the effectiveness of the S-4 shall have
been issued or promulgated;
(c) there shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly to restrain or prohibit, the consummation of the Merger,
or seeking to obtain material damages in connection with the Merger, (ii)
seeking to prohibit direct or indirect ownership or operation by Wavetech of all
or a material portion of the business or assets of the Company and the
Subsidiaries or of Wavetech and its Subsidiaries, or to compel Wavetech or any
of its Subsidiaries or the Company or any of the Subsidiaries to dispose of or
to hold separately all or a material portion of the business or assets of
Wavetech and its subsidiaries or of the Company and the Subsidiaries, as a
result of the Merger, (iii) seeking to impose or confirm limitations on the
ability of Wavetech effectively to exercise directly or indirectly full rights
of ownership of any shares of Company Common Stock on all matters properly
presented to the Company's shareholders, (iv) seeking to require direct or
indirect divestiture by Wavetech of any shares of Company Common Stock or any
shares of the Surviving Corporation to be issued in the Merger, (v) seeking or
causing any material diminution in the direct or indirect benefits expected to
be derived by Wavetech a result of the transactions contemplated by this
Agreement, (vi) invalidating or rendering unenforceable any material provision
of this Agreement (including without limitation any of the exhibits or
attachments hereto), (vii) which otherwise might materially adversely affect the
Company and the Subsidiaries or Wavetech and its subsidiaries, or (viii)
otherwise relating to the transactions contemplated by this Agreement or the
Merger;
(d) there shall not have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on the Nasdaq SmallCap Market or
the Nasdaq National Market, (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by United States authorities on the extension of credit by lending
institutions, (iii) a commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the United
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States, (iv) any limitation by any governmental authority on, or any other event
which, in the sole judgment of Wavetech, might affect the extension of credit by
banks or other lending institutions in the United States, or (v) in the case of
any of the foregoing existing at the date hereof, a material acceleration or
worsening thereof;
(e) each of Wavetech, the Company and their respective Subsidiaries
shall have obtained each material consent and approval necessary in order that
the Merger and the transactions contemplated herein not constitute a breach or
violation of, or result in a right of termination or acceleration or any
encumbrance on any of their respective assets pursuant to the provisions of, any
agreement, arrangement or understanding or any license, franchise or permit;
(f) there shall have been no damage, destruction or loss of or to any
property or properties owned or used by the Company or any of the Subsidiaries,
whether or not covered by insurance, which in the aggregate has a material
adverse effect on the Company and the Subsidiaries, taken as a whole;
(g) the principal terms of this Agreement and the Merger shall have
been approved and adopted by the Company's shareholders in accordance with all
applicable laws and regulations and the Company's Articles of Incorporation and
By-Laws; and
(h) no party hereto shall have terminated this Agreement as permitted
herein.
6.2 ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of
the Company to effect the Merger is also subject to the following conditions:
(a) the representations and warranties of Wavetech set forth in
Article 2 shall be true and correct in all material respects as of the Effective
Time as if made at and as of the Effective Time, and Wavetech shall in all
material respects have performed each obligation and agreement and complied with
each covenant to be performed and complied with by it hereunder at or prior to
the Effective Time. A representation or warranty that is expressly subject to a
materiality limitation shall not be subject to a further materiality limitation
as a result of the use of the phrase "in all material respects" in the preceding
sentence;
(b) Wavetech shall have furnished to the Company a certificate in
which Wavetech shall certify that Wavetech has no reason to believe that the
conditions set forth in Section 6.2(a) have not been fulfilled;
(c) Wavetech shall have furnished to the Company (i) a copy of the
text of the resolutions by which the corporate action on the part of Wavetech
necessary to approve this Agreement and the Merger were taken, (iii)
certificates executed on behalf of Wavetech by its respective corporate
secretary or assistant corporate secretary certifying to the Company, in each
case, that such copy is a true, correct and complete copy of such resolutions
and that such resolutions were duly adopted and have not been amended or
rescinded, and (iii) an incumbency certificate executed on behalf of Wavetech by
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its respective corporate secretary or assistant corporate secretary certifying,
in each case, the signature and office of each officer executing this Agreement
or any other agreement, certificate or other instrument executed pursuant
hereto;
(d) the Company shall have received a letter addressed to the Company
from Squire, Sanders & Dempsey L.L.P., based on customary reliance and subject
to customary qualifications, to the effect that:
(i) Wavetech is a corporation validly existing and in good
standing under the laws of the State of Nevada.
(ii) Wavetech has the corporate power to consummate the
transactions on its part contemplated by this Agreement. Wavetech has duly taken
all requisite corporate action to authorize this Agreement; and this Agreement
has been duly executed and delivered by Wavetech and constitutes the valid and
binding obligation of Wavetech.
(iii) The authorized capital of Wavetech consists of 50,000,000
shares of capital stock, designated "Common Stock," having a par value of $0.001
per share, of which the number of shares indicated in such letter are
outstanding, all of which were duly and validly issued and are fully paid and
non-assessable, and 10,000,000 shares of capital stock, designated "Preferred
Stock," having a par value of $.001 per share, of which the number of shares
indicated in such letter are outstanding, all of which were duly and validly
issued and are fully paid and non-assessable.
(iv) Each of the Subsidiaries is a corporation validly existing
and in good standing under the laws of its jurisdiction of incorporation.
(v) Each of the Subsidiaries is a corporation validly existing
and in good standing under the laws of its jurisdiction of incorporation.
(vi) No actions are required to be taken in order to make the
Merger effective which have not been taken on or prior to the delivery of such
letter except the delivery of the articles of merger contemplated in Section 1.3
to the Secretary of State of the State of Nevada in accordance with Nevada Law;
and
(e) a letter from a qualified investment banking or financial
advisory firm confirming the fairness to the Company's shareholders from a
financial point of view of the consideration to be paid in the Merger (the form
of which letter shall have been received by the Company for inclusion in the
Joint Prospectus/Proxy Statement prior to the filing of the Joint
Prospectus/Proxy Statement with the SEC) shall have been delivered to the
Company's Board of Directors prior to the Mailing Date and shall not have been
subsequently withdrawn or amended;
(f) Wavetech's Closing Balance Sheet reflects aggregate cash and cash
equivalents of not less than One Million Six Hundred Thousand ($1,600,000)
(without giving effect to the expenses payable by Wavetech pursuant to Section
5.4); and
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(g) The Reverse Stock Split shall have been effected.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF WAVETECH. The obligations of
Wavetech to effect the Merger are also subject to the following conditions:
(a) the representations and warranties of the Company in this
Agreement shall be true and correct in all material respects as of the Effective
Time as if made at and as of the Effective Time, and the Company shall in all
material respects have performed each obligation and agreement and complied with
each covenant to be performed and complied with by it hereunder at or prior to
the Effective Time. A representation or warranty that is expressly subject to a
materiality limitation shall not be subject to a further materiality limitation
as a result of the use of the phrase "in all material respects" in the preceding
sentence;
(b) the Company shall have furnished to Wavetech a certificate in
which the Chief Executive Officer of the Company shall certify that an
appropriate inquiry has been made of the executive officers and employees of the
Company and the Subsidiaries having principal responsibilities for the matters
as to which representations and warranties have been made by the Company in this
Agreement and for the performance of the covenants of the Company set forth in
this Agreement, and after completion of such inquiry, neither the Company nor
any of the Subsidiaries nor any of the individuals executing such certificate
has any reason to believe that the conditions set forth in Section 6.3(a) have
not been fulfilled;
(c) the Company shall have furnished to Wavetech (i) a copy of the
text of the resolutions by which the board of Directors and shareholders of the
Company approved this Agreement (including, without limitation, the plan of
merger contained herein) and the Merger; (ii) a certificate executed on behalf
of the Company by its corporate secretary certifying to Wavetech that such copy
is a true, correct and complete copy of such resolutions and that such
resolutions were duly adopted and have not been amended or rescinded; and (iii)
an incumbency certificate executed on behalf of the Company by its corporate
secretary certifying the signature and office of each officer executing this
Agreement or any other agreement, certificate or other instrument executed
pursuant hereto;
(d) Wavetech shall have received a letter addressed to Wavetech from
the law firm of Alfano & Baroff, based on customary reliance and subject to
customary qualifications, to the effect that:
(i) The Company is a corporation validly existing and in good
standing under the laws of the State of Colorado.
(ii) The authorized capital of the Company consists of
500,000,000 shares of capital stock, designated "Common Stock," having a par
value of $.0001 per share, of which the number of shares indicated in such
letter are outstanding, all of which were duly and validly issued and are fully
paid and non-assessable, and 5,000,000 shares of capital stock, designated
"Preferred Stock," having a par value of $.0001 per share, of which the number
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of shares indicated in such letter are outstanding, all of which were duly and
validly issued and are fully paid and non-assessable.
(iii)Each of the Subsidiaries is a corporation validly existing
and in good standing under the laws of its jurisdiction of incorporation.
(iv) The Company owns all of the outstanding capital stock of
each of the Subsidiaries, free and clear of any lien, claim or encumbrance.
(v) The Company has the corporate power to consummate the
transactions on its part contemplated by this Agreement; the Company has duly
taken all requisite corporate action to authorize this Agreement and the
articles of merger contemplated in Section 1.3; and this Agreement and such
articles of merger have been duly executed and delivered by the Company and
constitute valid and binding obligations of the Company.
(vi) No actions are required to be taken in order to make the
Merger effective which have not been taken on or prior to the delivery of such
letter except the delivery of the articles of merger contemplated in Section 1.3
to the Secretary of State of the State of Colorado in accordance with Colorado
Law;
(e) Wavetech shall have received a letter from Schnitzer & Kondub,
P.C., dated the date of the Effective Time "bringing down" to a date not more
than three days (excluding Saturdays, Sundays and holidays) prior thereto the
information specified in Section 5.3(b);
(f) Wavetech shall not have discovered any fact or circumstance
existing as of the date of this Agreement which has not been publicly disclosed
by the Company as of the date of this Agreement regarding the business, assets,
properties, condition (financial or otherwise), results of operations or
prospects of the Company and the Subsidiaries which is, individually or in the
aggregate with other such facts and circumstances, materially adverse to the
Company and the Subsidiaries taken as a whole, or to the value of the shares of
Company Common Stock; and
(g) on the date of the Joint Proxy Statement/Prospectus the Board of
Directors of Wavetech shall have received from Wavetech's financial advisor a
written update, dated as of such date, confirming the opinion referred to in
Section 2.29 hereof.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. Subject to Section 7.4, this Agreement may be terminated
prior to the Effective Time:
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(a) by Wavetech if there has been a material breach by the Company of
any covenant or agreement of the Company set forth in this Agreement or in any
other agreement or instrument delivered to Wavetech, which breach has not been
cured within thirty (30) days of the date on which written notice of such breach
was first given to the Company or which is not reasonably anticipated to be
cured by the Scheduled Closing Time;
(b) by the Company if there has been a material breach by Wavetech of
any covenant or agreement of Wavetech in this Agreement, which breach has not
been cured within 30 days of the date on which written notice of such breach was
first given to Wavetech or which is not reasonably anticipated to be cured by
the Scheduled Closing Time;
(c) by Wavetech if Wavetech reasonably determines that the timely
satisfaction of any condition set forth in Section 6.1 or 6.3 by the Scheduled
Closing Time has become impossible (other than as a result of any failure on the
part of Wavetech to comply with or perform any covenant or obligation of
Wavetech set forth in this Agreement);
(d) by Wavetech at or after the Scheduled Closing Time if any
condition set forth in Section 6.1 or 6.3 has not been satisfied by the
Scheduled Closing Time (other than as a result of any failure on the part of
Wavetech to comply with or perform any covenant or obligation of Wavetech set
forth in this Agreement); or
(e) by Wavetech if the Closing has not taken place on or before the
Final Date (other than as a result of any failure on the part of Wavetech to
comply with or perform any covenant or obligation of Wavetech set forth in this
Agreement);
(f) by the Company if the Closing has not taken place on or before
the Final Date (other than as a failure on the part of the Company or any of the
Designated Persons to comply with or perform any covenant or obligation set
forth in this Agreement or in any other agreement or instrument delivered to
Wavetech);
(g) by the Company if, on or prior to the end of the fifth business
day following receipt by the Company of the Wavetech Disclosure Letter the
Company delivers written notice to Wavetech that the Wavetech Disclosure Letter
discloses any material adverse change that has occurred, that will or that would
reasonably be expected to result in a material adverse change in the
consolidated assets, financial condition, operating results, business condition
or prospects, or financing arrangements of Wavetech and its Subsidiaries, taken
as a whole, from that as reflected in Wavetech's Latest 10-KSB and Wavetech's
Latest 10-QSB.
(h) by Wavetech if, on or prior to the end of the fifth business day
following receipt by Wavetech of the DCI Disclosure Letter, Wavetech delivers
written notice to the Company that the DCI Disclosure Letter discloses any
material adverse change that has occurred, that will or that would reasonably be
expected to result in a material adverse change in the consolidated assets,
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financial condition, operating results, business condition or prospects, or
financing arrangements of the Company and its Subsidiaries, taken as a whole,
from that as reflected in the Company's Latest 10-K and the Company's Latest
10-Q.
(i) by the mutual consent of Wavetech and the Company.
As used herein, the Final Date shall be August 31, 1999, except that if a
temporary, preliminary or permanent injunction or other order by any Federal or
state court that would prohibit or otherwise restrain consummation of the Merger
shall have been issued and shall remain in effect on August 31, 1999, and such
injunction shall not have become final and nonappealable, either party, by
giving the other written notice thereof on or prior to August 31, 1999, may
extend the time for consummation of the Merger up to and including the earlier
of the date such injunction shall become final and nonappealable or August 31,
1999, so long as such party shall, at its own expense, use its best efforts to
have such injunction dissolved.
7.2 TERMINATION PROCEDURES. If Wavetech wishes to terminate this Agreement
pursuant to Section 7.1(a), Section 7.1(c), Section 7.1(e) or Section 7.1(g),
Wavetech shall deliver to the Company a written notice stating that Wavetech is
terminating this Agreement and setting forth a brief description of the basis on
which Wavetech is terminating this Agreement. If the Company wishes to terminate
this Agreement pursuant to Section 7.1(b), the Company shall deliver to Wavetech
a written notice stating that the Company is terminating this Agreement and
setting forth a brief description of the basis on which the Company is
terminating this Agreement.
7.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 7.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Wavetech shall
be relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement or of any obligation or liability
arising pursuant to Section 7.4. If this Agreement is terminated pursuant to
Section 7.1 as a result of the inaccuracy of any representation or warranty of
Wavetech set forth in Article 2 or the inaccuracy of any representation or
warranty of the Company set forth in Article 3, the party making such inaccurate
representation or warranty shall be subject to liability for the termination of
this Agreement as a result thereof only if and to the extent that any
Responsible Officer (as defined below) of such party had actual knowledge of
such inaccuracy. For purposes hereof, "Responsible Officer" of any party shall
mean the chairman of the board of directors, the chief executive officer, the
chief operating officer, the chief financial officer, any executive vice
president, the treasurer or the secretary of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 AMENDMENT. This Agreement may not be amended except by an instrument
in writing approved by the parties to this Agreement and signed on behalf of
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each of the parties hereto; provided, however, that, after approval of the
Merger by the shareholders of the Company or Wavetech, no amendment may be made
which changes the amount into which each share of Company Common Stock will be
converted in the Merger or effects any change which would materially and
adversely affect the shareholders of the Company or Wavetech without the further
approval of the shareholders of the Company or Wavetech, as the case may be.
8.2 WAIVER. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreement of
any other party or with any conditions to its own obligations, in each case only
to the extent such obligations, agreements and conditions are intended for its
benefit. No failure on the part of any party hereto to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
party hereto in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy,
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or future exercise thereof or of any other power,
right, privilege or remedy. No party hereto shall be deemed to have waived any
claim arising out of this Agreement, or any power, right, privilege or remedy
under this Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party, and any such waiver shall not be applicable
or have any effect except in the specific instance in which it was given.
8.3 PUBLIC STATEMENTS. Except as required by applicable law, no party
shall make any public announcement or statement with respect to the Merger, this
Agreement or any related transaction without the approval of the other party,
which approval will not be unreasonably withheld or delayed. Moreover, each
party agrees to consult with the other party prior to issuing any such public
announcement or statement.
8.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be sufficiently given if made by hand delivery, by telex, by
telecopier, or by registered or certified mail (postage prepaid and return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by it by like notice):
If to Wavetech: Wavetech International, Inc.
5210 E. Williams Circle
Suite 200
Phoenix, Arizona 85711
Attn.: Gerald I. Quinn
With a copy to: Squire, Sanders & Dempsey L.L.P.
40 N. Central Avenue, Suite 2700
Phoenix, Arizona 85004
Telecopy: (602) 253-8129
Attn: Christopher D. Johnson, Esq.
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If to the Company or
the Surviving Corporation: DCI Telecommunications, Inc.
611 Access Road
Stratford, Connecticut 06497
Attn.: Joseph J. Murphy
With a copy to: Alfano & Baroff
814 Elm Street
Manchester, New Hampshire 03101
Attn.: Paul J. Alfano, Esq.
All such notices and other communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if delivered by mail; when
answered back, if telexed; and when receipt acknowledged, if telecopied.
8.5 INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of Wavetech, the word "subsidiary" means any "majority-owned
subsidiary" (as defined in Rule 12b-2 under the Exchange Act) of Wavetech;
PROVIDED, HOWEVER, that the Company shall in no event and at no time be
considered a subsidiary of Wavetech for purposes of this Agreement. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. References to
Sections and Articles refer to sections and articles of this Agreement unless
otherwise stated. Words such as "herein," "hereinafter," "hereof," "hereto,"
"hereby" and "hereunder," and words of like import, unless the context requires
otherwise, refer to this Agreement (including the exhibits and attachments
hereto). As used in this Agreement, the masculine, feminine and neuter genders
shall be deemed to include the others if the context requires.
8.6 SEVERABILITY. If term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated and the parties shall negotiate
in good faith to modify this Agreement to preserve each party's anticipated
benefits under this Agreement.
8.7 MISCELLANEOUS. This Agreement (together with all other documents and
instruments referred to herein): (a) constitutes the entire agreement, and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties, with respect to the subject matter hereof; (b) is not
intended to confer upon any other person any rights or remedies hereunder; (c)
shall not be assigned by operation of law or otherwise, except that Wavetech may
assign all or any portion of their rights under this Agreement to any wholly
owned subsidiary, but no such assignment shall relieve Wavetech of its
obligations hereunder, and except that this Agreement may be assigned by
operation of law to any corporation with or into which Wavetech may be merged;
and (d) shall be governed in all respects, including validity, interpretation
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and effect, by the internal laws of the State of Arizona, without giving effect
to the principles of conflict of laws thereof. This Agreement may be executed in
two or more counterparts which together shall constitute a single agreement.
8.8 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth herein shall terminate as of the
Effective Time.
8.9 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF OWNERSHIP.
This Agreement (including the documents and the instruments referred to herein)
(a) constitutes the entire agreement among the parties all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, other than any confidentiality agreement previously
entered into among the parties, which should survive the execution and delivery
of this Agreement and (b) except as provided in Sections 5.18 and 5.20, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder. The parties acknowledge that no party shall have the right
to acquire or shall be deemed to have acquired shares of common stock of the
other party pursuant to the Merger until consummation thereof.
[Remainder of Page Intentionally Left Blank.]
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MERGER AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, Wavetech and the Company have caused this Agreement to
be executed on the date first written above by their respective officers
thereunder duly authorized.
WAVETECH INTERNATIONAL, INC.
By: /s/ Gerald I. Quinn
-------------------------------------
Name: Gerald I. Quinn
-----------------------------------
Title: President & CEO
----------------------------------
DCI TELECOMMUNICATIONS, INC.
By: /s/ Joseph J. Murphy
-------------------------------------
Name: Joseph J. Murphy
-----------------------------------
Title: President; CEO
----------------------------------
62
EXHIBIT 10.1
WAVETECH INTERNATIONAL, INC.
and
TECH PACIFIC HOLDINGS PTY LIMITED
ACN 002 956 096
- --------------------------------------------------------------------------------
PUT OPTION
- --------------------------------------------------------------------------------
KPMG Solicitors
The KPMG Centre
45 Clarence Street
Sydney NSW 2000
Tel (02) 9335 7000
Fax (02) 9335 7220
<PAGE>
PUT OPTION
AGREEMENT made on 30 June 1998
PARTIES
1 WAVETECH INTERNATIONAL, INC. of 5210 E. Williams Circle. Suite 200, Tucson,
Arizona, United States of America (Wavetech)
2 TECH PACIFIC HOLDINGS PTY LIMITED ACN 002 956 096 of Level 2, 166 Epping
Road, Lane Cove New South Wales 2066 (Tech Pacific)
RECITALS
A Wavetech intends to subscribe for 5000 shares in Switch Holdings
(Securities).
B Wavetech wishes to have an option to require Tech Pacific to purchase the
Securities in accordance with the terms and conditions of this Agreement.
C Tech Pacific has agreed to grant to Wavetech a put option in accordance
with the terms and conditions of this Agreement.
OPERATIVE PROVISIONS
1 DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context requires otherwise:
AGREEMENT means this put option agreement;
COMPLETION means the completion of the sale and purchase of the Securities
pursuant to an exercise by Wavetech of the option granted to it by this
Agreement.
PARTIES means the parties to this Agreement and PARTY means either of them;
SECURITIES means all of the shares which will be held by Wavetech in Switch
Holdings following its proposed subscription being 5,000 fully paid
ordinary shares;
SWITCH HOLDINGS means Switch Holdings Pty Limited ACN 082 987 835;
SWITCH TELECOMMUNICATIONS means Switch Telecommunications Pty Limited ACN
073 878 716;
<PAGE>
THIRD PARTY INTEREST includes any security interest, option, voting
arrangement, easement, restrictive covenant, notation, interest under any
agreement or trust, or any other, right, equity, entitlement or other third
party interest of any nature; and
WARRANTIES means the representations, warranties and covenants made by
Wavetech under clause 4.1 of this Agreement and WARRANTY means any one of
them.
1.2 INTERPRETATION
In this Agreement, unless the context requires otherwise:
(a) words importing the singular include the plural and vice versa;
(b) references to paragraphs, clauses, recitals and annexures are
references to paragraphs and clauses of, recitals and Annexures to,
this Agreement; and
(c) headings are for convenience only and must be ignored in construing
this Agreement.
2. PUT OPTION
2.1 GRANT OF OPTION
In consideration of the payment of US$100 and for other good and valuable
consideration (receipt of which is hereby acknowledged), Tech Pacific
hereby grants to Wavetech an irrevocable option for a period of one year
from the date of this Agreement (Option Period) to require Tech Pacific to
purchase all (but not part) of the Securities upon the following terms and
conditions.
2.2 EXERCISE OF OPTION
At any time during the Option Period Wavetech may by notice in writing to
Tech Pacific require Tech Pacific to purchase, and Tech Pacific shall
purchase, the Securities.
2.3 SALE OF SHARES BY SWITCH HOLDINGS IN SWITCH TELECOMMUNICATIONS
The put option in clause 2.1 is exercisable only if, at the time of
exercise, Switch Holdings has sold all shares held by it in Switch
Telecommunications.
3. OPTION PRICE
(a) The price payable for the purchase of the Securities in accordance
with a notice given under clause 2.2 of this Agreement shall be
US$2,100,000.
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(b) Completion of the sale and purchase of the Securities following a
notice given under clause 2.2 of this Agreement shall occur within
seven (7) business days of receipt of the said notice.
4 WARRANTIES BY WAVETECH
4.1 WARRANTIES
At the time of the sale of the Securities in accordance with a notice given
under clause 2.2 of this Agreement Wavetech shall warrant to Tech Pacific
that:
(a) the securities are owned absolutely by Wavetech free of all liens,
charges, encumbrances and Third Party Interests;
(b) upon acquisition of the Securities, Tech Pacific will acquire a valid
and marketable title to the Securities;
(c) all of the Securities are fully paid (both as to par and any premium);
and
(d) it has full right, power and authority to sell and transfer the
Securities to Tech Pacific.
4.2 WARRANTIES INDEPENDENT
Each warranty is separate and independent and save as expressly provided is
not limited by reference to any other Warranty or provision of this
Agreement.
5 MISCELLANEOUS
5.1 NOTICES
Any notice in connection with Agreement may be given to a Party by
delivering it or sending it through the post in a prepaid letter addressed
to that Party's address before mentioned or such other address as may be
notified by that Party in accordance with this clause.
5.2 FURTHER ASSURANCES
Each of the Parties agrees that upon receipt of a request by the other
Party, it will promptly do such further acts and deeds and will execute,
acknowledge and deliver everything reasonably necessary for the purpose of,
or to give full effect to, this Agreement and the transactions contemplated
by this Agreement and must procure all relevant third parties, so far as
each Party is able, to do the same as may be necessary from time to time.
3
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5.3 STAMP DUTY
Tech Pacific shall pay all stamp duty which may be payable on or in
connection with this Agreement and the transactions contemplated by this
Agreement.
5.4 BENEFIT OF THIS AGREEMENT
This Agreement will inure to the benefit of, and be binding on, the
Parties, their respective heirs, executors, administrators, successors and
permitted assigns.
5.5 AMENDMENT
This Agreement may be amended only by an instrument in writing signed by
all of the Parties.
5.6 COUNTERPARTS
This Agreement may be executed in any number of counterparts and all such
counterparts taken together will be deemed to constitute one and the same
document.
5.7 GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with the
laws in force in the State of New South Wales and the Parties submit to the
non-exclusive jurisdiction of the Courts of that State.
5.8 NON-MERGER
The Warranties, representations and agreements of the Parties set out in
this Agreement are continuing and will not merge or be extinguished on
Completion and will survive after Completion.
5.9 ENTIRE AGREEMENT
This Agreement, sets forth the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior
understandings, correspondence, agreements, representations, oral or
otherwise.
4
<PAGE>
EXECUTED as an Agreement
SIGNED for and on behalf of )
WAVETECH INTERNATIONAL, )
INC. by its duly authorized officer )
in the presence of: ) /s/ Gerald I. Quinn
------------------------------------
Signature of Duly Authorized Officer
/s/ Richard P. Freeman Gerald I. Quinn
- ---------------------------------- ------------------------------------
Signature of Witness Name of Duly Authorized Officer
Richard P. Freeman
- ----------------------------------
Name of Witness
SIGNED for and on behalf of )
TECH PACIFIC HOLDINGS )
PTY LIMITED by its duly )
authorized officer in the presence )
of: ) /s/ Terry Cuthbertson
------------------------------------
Signature of Duly Authorized Officer
/s/ Gary David Mares Terry Cuthbertson
- ---------------------------------- ------------------------------------
Signature of Witness Name of Duly Authorized Officer
Gary David Mares
- ----------------------------------
Name of Witness
5
EXHIBIT 10.2
SWITCH TELECOMMUNICATIONS PTY LIMITED
ACN 073 878 716
and
INTERPRETEL, INC.
- --------------------------------------------------------------------------------
AGREEMENT
- --------------------------------------------------------------------------------
KPMG Solicitors
The KPMG Centre
45 Clarence Street
Sydney NSW 2000
Tel (02) 9335 7000
Fax (02) 9335 7220
<PAGE>
AGREEMENT
AGREEMENT made on 30 June 1998
PARTIES
1 SWITCH TELECOMMUNICATIONS PTY LIMITED ACN 073 878 716 of 55 Mentmore
Avenue, Roseberry, New South Wales 2018 Australia (Switch)
2 INTERPRETEL, INC. of 5210 E. Williams Circle. Suite 200, Tucson, Arizona,
85711, United States of America (Interpretel)
RECITALS
A Switch is a wholly owned subsidiary of Switch Holdings Pty Limited (Switch
Holdings).
B Interpretel is a wholly owned subsidiary of Wavetech International, Inc.
(Wavetech).
C Switch and Interpretel are parties to an Equipment and Software Turnkey
Agreement which commenced on 21 May 1996 (Licence Agreement) whereby
Interpretel agreed to supply to Switch certain software and hardware and a
licence to use the software.
D Certain disputes and differences have arisen between Switch and Interpretel
in relation to the Licence Agreement.
E Switch and Interpretel have agreed to terminate the Licence Agreement and
grant mutual releases in accordance with the terms and conditions of this
Agreement.
OPERATIVE PROVISIONS
1 DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context requires otherwise:
AGREEMENT means this agreement;
PARTIES means the parties to this Agreement and PARTY means either of them;
RELATED COMPANY has the meaning given to that term is Section 50 of the
Corporations Law;
<PAGE>
SOFTWARE means the software supplied by Interpretel to Switch pursuant to
the Licence Agreement;
SWITCH HOLDINGS means Switch Holdings Pty Limited ACN 082 987 835; and
WAVETECH means Wavetech International, Inc.
1.2 INTERPRETATION
In this Agreement, unless the context requires otherwise:
(a) words importing the singular include the plural and vice versa;
(b) references to paragraphs, clauses and recitals are references to
paragraphs and clauses of and recitals to, this Agreement; and
(c) headings are for convenience only and must be ignored in construing
this Agreement.
2. TERMINATION OF LICENCE AGREEMENT
Switch will pay US$150,000 to Interpretel and thereupon the Licence
Agreement will terminate and Switch and Interpretel will each give to each
other the releases in the terms set out in clause 5.
3. LICENCE TO USE SOFTWARE
For the avoidance of doubt the Parties agree that Switch and Related
Companies of Switch will continue to have a licence in the Territory (as
defined in the Licence Agreement) to use the Software after the termination
of the Licence Agreement free of charge.
4 INDEMNITY PROVISIONS NOT TO APPLY
The Parties agree that notwithstanding clause 5 of this Agreement and
clause 15.2 of the Licence Agreement clauses 12.1 and 12.2 of the Licence
Agreement will not continue to apply after the termination of the Licence
Agreement.
5 MUTUAL RELEASES
5.1 RELEASE BY SWITCH
Switch hereby releases, discharges and forever holds harmless Interpretel
with respect to, and agrees to indemnify and keep indemnified Interpretel
in respect of, any and all loss arising as a result of any and all
causes of action, claims (including, but without limiting the generality
of the foregoing, claims for legal costs and consequential loss of
profits), demands, actions, suits or proceedings of whatever nature
(other than those arising out of this Agreement), which Switch or any
person or entity on Switch's behalf, may now or, but for the execution of
2
<PAGE>
this Agreement, would have had against Interpretel in connection with the
Licence Agreement.
5.2 RELEASE BY INTERPRETEL
Interpretel hereby releases, discharges and forever holds harmless Switch
with respect to, and agrees to indemnify and keep indemnified Switch in
respect of, any and all loss arising as a result of any and all causes of
action, claims (including, but without limiting the generality of the
foregoing, claims for legal costs and consequential loss of profits),
demands, actions, suits or proceedings of whatever nature (other than those
arising out of this Agreement), which Interpretel or any person or entity
on Interpretel's behalf, may now or, but for the execution of this
Agreement, would have had against Switch in connection with the Licence
Agreement.
6 BAR TO ACTION
Switch and Interpretel agree that the mutual releases provided in clause 3
may be pleaded as a bar to any action, suit or proceeding commenced now or
taken at any time by Switch or Interpretel or any person or entity on
either Party's behalf with respect to or in any way connected with the
Licence Agreement or any other cause of action of whatever nature arising
from the same.
7 MISCELLANEOUS
7.1 SUCCESSORS AND ASSIGNS
This Agreement is binding on and has effect for the benefit of the Parties
to this Agreement and their respective successors and permitted assigns.
7.2 GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with the
laws in force in the State of New South Wales and the Parties submit to the
non-exclusive jurisdiction of the Courts of that State.
7.3 COUNTERPARTS
This Agreement may be executed in any number of counterparts and all such
counterparts taken together will be deemed to constitute one and the same
document.
7.4 ENTIRE AGREEMENT
This Agreement, sets forth the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior
understandings, correspondence, agreements, representations, oral or
otherwise.
3
<PAGE>
7.5 COSTS
Each Party to this Agreement must bear its own costs of and incidental to
the preparation, execution and completion of this Agreement.
7.6 FURTHER ASSURANCES
Each of the Parties agrees that upon receipt of a request by the other
Party, it will promptly do such further acts and deeds and will execute,
acknowledge and deliver everything reasonably necessary for the purpose of,
or to give full effect to, this Agreement and the transactions
contemplated by this Agreement and must procure all relevant third parties,
so far as each Party is able, to do the same as may be necessary from time
to time.
EXECUTED as an Agreement
SIGNED for and on behalf of )
SWITCH )
TELECOMMUNICATIONS )
PTY LIMITED by its duly )
authorized officer )
in the presence of: ) /s/ Terry Cuthbertson
------------------------------------
Signature of Duly Authorized Officer
/s/ Gary David Mares Terry Cuthbertson
- ---------------------------------- ------------------------------------
Signature of Witness Name of Duly Authorized Officer
Gary David Mares
- ----------------------------------
Name of Witness
SIGNED for and on behalf of )
INTERPRETEL, INC. )
PTY LIMITED by its duly )
authorized officer in the presence )
of: ) /s/ Gerald I. Quinn
-------------------------------------
Signature of Duly Authorized Officer
/s/ Richard P. Freeman Gerald I. Quinn
- ---------------------------------- ------------------------------------
Signature of Witness Name of Duly Authorized Officer
Richard P. Freeman
- ----------------------------------
Name of Witness
4
EXHIBIT 22
Subsidiaries of Registrant
State of Incorporation % of Ownership
Subsidiary or Jurisdiction by Wavetech, Inc.
- -------------------------- ---------------------- -----------------
International Environment
Services Corporation Delaware 100%
Interpretel (Canada) Inc. Province of Ontario 100%
Interpretel, Inc. Arizona 100%
Telplex International
Communications, Inc. Arizona 100%
EXHIBIT 23
[LETTERHEAD OF ADDISON, ROBERTS & LUDWIG, P.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use of our report dated November 6, 1998, related to
the consolidated financial statements of Wavetech International, Inc. included
in or made a part of this Form 10-KSB, and further its inclusion by
incorporation by reference in the Registration Statement on Form S-3 (File
Number 333-65135), and to the reference to our Firm under the caption "Experts"
in the Prospectus.
/s/ Addison, Roberts & Ludwig, P.C.
Addison, Roberts & Ludwig, P.C.
Tucson, Arizona
November 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statements of Operations, ended
August 31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 2,202,573
<SECURITIES> 0
<RECEIVABLES> 28,203
<INVENTORY> 0
<ALLOWANCES> 9,927
<CURRENT-ASSETS> 2,227,396
<PP&E> 790,095
<DEPRECIATION> (530,825)
<TOTAL-ASSETS> 2,542,171
<CURRENT-LIABILITIES> 363,954
<BONDS> 0
0
0
<COMMON> 16,995
<OTHER-SE> 2,135,957
<TOTAL-LIABILITY-AND-EQUITY> 2,542,171
<SALES> 157,838
<TOTAL-REVENUES> 157,838
<CGS> 85,082
<TOTAL-COSTS> 85,082
<OTHER-EXPENSES> 1,271,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,182
<INCOME-PRETAX> (1,216,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,216,887)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
