U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended February 28, 1999.
[ ] 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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(Exact name of small business issuer as specified in its charter)
Nevada 86-0916826
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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(Issuer's telephone number)
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(Former name, former address, formal fiscal year, if changed from last report)
Check whether the issuer (1) has 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.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: April 12, 1999.
Class No. of Shares Outstanding
----- -------------------------
Common Stock. Par Value $.001 3,427,369
Transitional Small Business Disclosure Format (Check One): [ ] Yes [X] No
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INDEX
WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
February 28, 1999 (unaudited) and August 31, 1998
(audited)..................................................... 3
Condensed Consolidated Statement of Operations -
Six Months Ended February 28, 1999 and February 28, 1998
(unaudited)................................................... 4
Condensed Consolidated Statements of Operations -
Three Months Ended February 28, 1999 and February 28, 1998
(unaudited)................................................... 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended February 28, 1999 and February 28, 1998
(unaudited)................................................... 6
Notes to Condensed Consolidated Financial Statements -
February 28, 1999 and February 28, 1998
(unaudited)................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 14
ITEM 2. Change in Securities.......................................... 14
ITEM 3. Defaults upon Senior Securities............................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders........... 14
ITEM 5. Other Information............................................. 14
ITEM 6. Exhibits and Reports on Form 8-K.............................. 15
SIGNATURES ................................................................ 16
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WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1999 (UNAUDITED) AND AUGUST 31, 1998
ASSETS
FEBRUARY 28 AUGUST 31
1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 1,742,122 $ 2,202,573
Accounts receivable, net of allowance of $9,927 18,276 18,276
Prepaid expenses and other assets 8,268 6,547
----------- -----------
Total current assets 1,768,666 2,227,396
Property and equipment, net 208,697 259,270
Noncurrent assets:
Investment in DCI Telecommunications, Inc 1,421,684 --
Intangibles, net 23,389 25,422
Deposits and other assets 25,083 30,083
----------- -----------
Total noncurrent assets 1,470,156 55,505
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Total assets $ 3,447,519 $ 2,542,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 225,170 $ 246,666
Accrued interest payable 3,542 8,579
Notes payable, current portion 13,000 63,000
Capital leases payable, current portion 45,305 45,709
----------- -----------
Total current liabilities 287,017 363,954
Noncurrent liabilities:
Capital leases payable 3,966 25,265
----------- -----------
Total liabilities 290,983 389,219
Stockholders' equity:
Common Stock, par value
$.001 Per share; 50,000,000 shares
authorized, 3,427,369 and 2,832,481 shares
issued and outstanding 3,428 2,832
Additional paid in capital 10,074,173 8,531,086
Accumulated deficit (6,921,065) (6,380,966)
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Total stockholders' equity 3,156,536 2,152,952
----------- -----------
Total liabilities and stockholders' equity $ 3,447,519 $ 2,542,171
=========== ===========
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WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED FEBRUARY 28, 1999
AND FEBRUARY 28, 1998 (UNAUDITED)
1999 1998
----------- -----------
Revenues: $ 5,489 $ 114,389
Expenses:
Cost of sales (less depreciation and
amortization listed separated below) 7,339 75,189
General and administrative 317,351 440,816
Depreciation and amortization 52,607 78,434
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Total Expenses 377,297 594,439
Net loss from operations (371,808) (480,050)
Other income and expense:
Interest income 43,434 52
Interest expense (5,450) (18,931)
Settlement costs (15,000) --
Issuance costs (72,000) --
Merger expenses (101,176) --
Debt conversion expense -- (92,894)
----------- -----------
Total other income and expense (150,192) (111,773)
Net loss before preferred dividends (522,000) (591,823)
Dividends on preferred stock 18,100 --
----------- -----------
Net loss available to common shareholders $ (540,100) $ (591,823)
=========== ===========
Net loss per common share, basic $ (0.18) $ (0.23)
=========== ===========
Net loss per share, assuming dilution $ (0.18) $ (0.23)
=========== ===========
Weighted average number of shares
outstanding, basic (Note 4) 2,932,346 2,546,107
=========== ===========
Weighted average number of shares
outstanding, diluted (Note 4) 2,932,346 2,546,107
=========== ===========
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WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED FEBRUARY 28, 1999
AND FEBRUARY 28, 1998 (UNAUDITED)
1999 1998
----------- -----------
Revenues: $ 2,213 $ 45,502
Expenses:
Cost of sales (less depreciation and
amortization listed separated below) 2,814 22,619
General and administrative 153,878 232,037
Depreciation and amortization 26,304 39,217
----------- -----------
Total expenses 182,996 293,873
Net loss from operations (180,783) (248,371)
Other income and expense:
Interest income 19,377 50
Interest expense (2,139) (6,121)
Settlement costs (15,000) --
Issuance costs (72,000) --
Merger expenses (90,144) --
----------- -----------
Total other income and expense (159,906) (6,071)
Net loss before preferred dividends (340,689) (254,442)
Dividends on preferred stock 9,000 --
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Net loss available to common shareholders $ (349,689) $ 254,442)
=========== ===========
Net loss per common share, basic $ (0.15) $ (0.10)
=========== ===========
Net loss per share, assuming dilution $ (0.15) $ (0.10)
=========== ===========
Weighted average number of shares
outstanding, basic (Note 4) 2,286,104 2,567,800
=========== ===========
Weighted average number of shares
outstanding, diluted (Note 4) 2,286,104 2,567,800
=========== ===========
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WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDING FEBRUARY 28, 1999 AND 1998 (UNAUDITED)
1999 1998
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Cash flows from operating activities:
Net Loss $ (522,000) $(591,823)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 52,607 78,434
Common stock issued for services and
accrued interest -- 50,196
Debt conversion expense -- 92,894
Preferred stock issuance costs 72,000 --
Changes in assets and liabilities:
(Increase) in other current assets (1,722) (20,786)
(Decrease) increase in accounts payable
and accrued expenses (21,196) 62,282
(Decrease) increase in accrued interest payable (5,037) 107
(Decrease) in unearned revenue -- (35,714)
----------- ---------
Total Adjustments 96,652 227,413
----------- ---------
Net cash used in operating activities (425,348) (364,410)
Cash flows from investing activities:
Decrease (increase) in other assets 5,000 (44,450)
----------- ---------
Net cash used in investing activities 5,000 (44,450)
Cash flows from financing activities:
Proceeds from notes payable -- 460,000
Payments on capital lease payable (21,703) (18,268)
Dividends paid (18,400) --
Proceeds from common stock issued -- 64
----------- ---------
Net cash provided by financing activities (40,103) 441,796
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Net (decrease) increase in cash (460,451) 32,936
Cash and cash equivalents, beginning of period 2,202,573 13,329
----------- ---------
Cash and cash equivalents, end of period $ 1,742,122 $ 46,265
=========== =========
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WAVETECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operation results for the three-month and
six-month periods ended February 28, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending August 31, 1999. For
further information, refer to the Company's financial statements for the year
ended August 31, 1998 included in its Form 10-KSB/A-1.
The consolidated financial statements include the accounts of Wavetech
International, Inc. (the Company), and its wholly owned subsidiaries,
Interpretel, Inc. (Interpretel) and Telplex International Communications, Inc.
(Telplex). All material intercompany balances and transactions have been
eliminated.
On December 18, 1998, the Company effected a one-for-six reverse stock
split. All share and per share information have been restated to retroactively
show the effect of this stock split.
NOTE 2 - INVESTMENT IN DCI TELECOMMUNICATIONS, INC.
On February 26, 1999, the Company entered into an agreement with DCI
Telecommunications, Inc. ("DCI") (OTCBB:DCTC) to exchange an equity interest in
the Company for an equity interest in DCI. The equity interests consist of
outstanding common stock of the respective companies. The Company received
576,047 shares of DCI common stock representing 2% of its issued and outstanding
common stock, in exchange for 568,846 shares of the Company's stock representing
16.6% of its existing shares outstanding.
DCI is a global provider of telecommunications services, including long
distance, prepaid phone cards and Internet services. It has an extensive
distribution network throughout North America, Europe and the Far East. DCI owns
and operates switching facilities in Canada, the United Kingdom, Spain and
Denmark.
The value assigned to the DCI common shares received was determined
using DCI's closing sales price of $2.468 per share on the date the agreement
was signed. The fair market value of the DCI investment is $1,421,684.
NOTE 3 - NOTES PAYABLE
On October 12, 1998, a note payable for $50,000, plus accrued interest,
was converted into 26,042 shares of common stock. The conversion price of $1.92
was based on the closing bid price on the Nasdaq SmallCap Market on the date of
the letter of agreement for repayment of this note.
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NOTE 4 - PER SHARE DATA
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. On December 18, 1998, the Company effected a one-for-six reverse
stock split. All share and per share information have been restated to
retroactively show the effect of this stock split. At February 28, 1999, the
Company had outstanding options to purchase 458,331 shares of Common Stock at
exercise prices ranging from $1.50 to $4.86 per share and 382,500 common stock
warrants with exercise prices ranging from $2.28 to $10.50 per share. At
February 28, 1998, the Company had outstanding options to purchase 386,667
shares of common stock at exercise prices ranging from $2.25 to $4.86 per share
and 518,234 common stock warrants with exercise prices ranging from $2.28 to
$21.00 per share. Common stock equivalents from stock options and warrants are
excluded from the computation when the effect is anti-dilutive. Prior period
amounts have been restated in accordance with SFAS 128.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN STATEMENTS WHICH
ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE
STATEMENTS RELATE TO FUTURE EVENTS, INCLUDING A PROPOSED MERGER WITH DCI AND 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.
OPERATIONS OVERVIEW
The Company specializes in creating 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 their
members, companies and their suppliers and/or customers and special purpose
groups. During the six-month period ended February 28, 1999, the majority of the
Company's management time and other resources were spent in activities related
to the pending merger with DCI Telecommunications, Inc. ("DCI"). Details as to
this merger are included in the Company's Quarterly Report on Form 10-QSB for
the three months ended November 30, 1998.
The Company was previously notified by The Nasdaq Stock Market
("Nasdaq") that its Common Stock would be delisted from the Nasdaq SmallCap
Market because it was not in compliance with the $1.00 minimum bid price
requirement. The Company appealed Nasdaq's decision to delist its Common Stock
for failure to meet this requirement at a hearing on November 19, 1998. On
December 9, 1998, the Company was notified by Nasdaq that its Common Stock will
continue to be listed on the Nasdaq SmallCap market via an exception from the
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minimum bid price requirement, provided the Company meets certain conditions.
One of the conditions was that the Company's stock meet the $1.00 minimum bid
price. To comply with this requirement, on December 18, 1998, the Company
effected a one-for-six reverse split, which had been previously approved by its
shareholders on May 26, 1998. The Company has satisfied each of the other
conditions required by Nasdaq, with the exception of the requirement that it
consummate the pending merger with DCI on or before March 31, 1999. The Company
has asked Nasdaq to remove any further conditions to the continued listing of
its Common Stock or, in the alternative, permit an extension through June 30,
1999 to either consummate the merger with DCI or demonstrate its ability to
satisfy all continued listing requirements. Nasdaq has not yet rendered a
decision on this latest appeal. To the extent Nasdaq declines to grant the
Company's request, its Common Stock will be delisted from the Nasdaq SmallCap
Market.
Commencing in May 1998, the Company took certain steps in order to
dramatically reduce its operations in order to conserve its cash resources until
such time as it could consummate a business combination. Since that period, the
Company has continued to support its current subscribers and acquire new
subscribers through its ongoing programs. As of February 28, 1999, the Company
had 211 cardholders active on its system. Nine new customers subscribed during
the quarter ended February 28, 1999. However, the Company has increased its cash
resource through exercising a put option with Switch Telecommunications Pty Ltd
of Australia in June 1998, the issuance of Series A Convertible Preferred Stock
in April 1998 and the exercise of shareholder warrants in May 1998. The
Company's Board of Directors has authorized management to begin to apply these
resources to expanding the Company's operations. Pursuant to this new direction,
the Company is currently negotiating an agreement to obtain more competitive
long distance rates. With more competitive rates, the Company believes it can
now significantly grow its business.
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO SIX MONTHS ENDED
FEBRUARY 28, 1998.
REVENUES. Revenues decreased to $5,489 for the six months ended
February 28, 1999 from $114,389 for the six months ended February 28, 1998.
During fiscal 1998, the Company made a decision to wind down its wholesale
business of reselling international long distance minutes. The Company made this
decision in order to conserve the cash resources that would otherwise need to be
applied towards supporting these activities, and because it was unable to
purchase long distance minutes at prices that were low enough to permit them to
be competitive and still result in net revenues. Revenues from the resale of
international long distance minutes therefore decreased to zero for the six
months ended February 28, 1999 as compared to $60,151 for the six months ended
February 28, 1998. A licensing agreement with Switch Telecommunications was also
terminated during fiscal 1998 resulting in license fee revenues decreasing to
zero for the six months ended February 28, 1999 as compared to $35,714 for the
three months ended February 28, 1998. During the six months ended February 28,
1999, the Company did not initiate any new marketing to solicit new subscribers.
The Company's management believes that the absence of such initiatives is at
least partially responsible for a decrease in its revenues from enhanced calling
card services, such as domestic long distance minutes and voice and fax mail
services. During this period, revenues from these operations decreased by
$13,058 to $5,489.
COST OF SALES. Cost of sales decreased to $7,339 for the six-month
period ended February 28, 1999 from $75,189 for the six months ended February
28, 1998. Costs associated with the resale of international minutes decreased to
zero for the six months ended February 28, 1999 from $48,990 for the six months
ended February 28, 1998, due to the decision to wind down the wholesale business
of reselling international long distance minutes. During fiscal 1998, the
Company renegotiated fees related to T1 telephone access lines and related
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maintenance costs. This resulted in a decrease of $10,150 for the six months
ended February 28, 1999 as compared to the six months ended February 28, 1998.
Costs to provide enhanced calling card services, such as domestic long distance
and voice and fax mail services, decreased by $8,171 for the six months ended
February 28, 1999 as compared to the six months ended February 28, 1998. This
decrease resulted from the Company's decision not to implement new marketing
initiatives. As a result, the Company's costs associated with lower revenues for
the enhanced calling card services also decreased.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $317,351 for the six months ended February 28, 1999 from
$440,816 for the six months ended February 28, 1998. During fiscal 1998, the
Company renegotiated fees for its call processing platform services which
resulted in a decrease of $48,795 for these expenses for the six months ended
February 28, 1998. A decrease of $22,191 was due to expenses in the prior year
period for consulting fees for an investor relations firm. The Company handled
investor relations in house during the six months ended February 28, 1999.
General legal and professional fees decreased by $50,545 for the six months
ended February 28, 1999. However, legal expenses of $44,805 were incurred in
connection with the pending merger with DCI and have been included in a separate
expense category "Merger Expenses" (see "Merger Expenses" paragraph below).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased to $52,607 for the six months ended February 28, 1999 from
$78,434 for the six months ended February 28, 1998. This decrease was due to
normal depreciation and amortization adjustments as assets age.
INTEREST INCOME. Interest income increased to $43,434 for the six
months ended February 28, 1999 from $52 for the six months ended February 28,
1998. All of the Company's interest income during both periods was from its
money market fund. The increase in interest income was attributable to increased
funds in its money market account.
INTEREST EXPENSE. Interest expense decreased to $5,451 for the six
months ended February 28, 1999 from $18,932 for the six months ended February
28, 1998. The decrease in interest expense was related to higher interest costs
in the prior year period associated with notes payables, convertible notes
payable and capital leases.
SETTLEMENT COSTS. On January 21, 1999, the Company finalized an
out-of-court settlement with Mr. Steven A. Ezell by agreeing to pay Mr. Ezell
$15,000 in settlement of all pending legal claims. These costs represent a
one-time expense. For more information concerning this legal proceeding, please
refer to the discussion under "Legal Proceedings" in Part II of this Report.
ISSUANCE COSTS. The Company incurred $72,000 in costs relating to the
Series A Convertible Preferred Stock which was issued in April 1998. As part of
this issuance, the Company agreed to register the resale of the underlying
shares of Common Stock and cause it to become effective by August 31, 1998. The
Company has filed a Registration Statement on Form S-3 to register these shares,
however, the registration statement has not yet been declared effective by the
Securities and Exchange Commission ("SEC"). Per the conditions of the agreement,
the Company is required to pay an amount equal to 2% of the total purchase price
of the shares for each 30-day period after August 31, 1998, until such time as
the registration statement is declared effective. The purchaser of the Preferred
Stock has agreed to accept payment for the penalties in restricted common shares
in lieu of cash. The common shares will be priced at fair market value, based on
the closing sales price of the Company's common stock on the date the penalty
payment is due each month.
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MERGER EXPENSES. Costs incurred during the six months ended February
28, 1999 in connection with the pending merger with DCI totaled $101,176. These
expenses included $44,805 for legal fees for preparation and filing of the joint
proxy and S-4 Registration Statement, $24,340 to the SEC for applicable fees
related to the merger, $20,000 for an independent fairness opinion letter, and
$3,400 for Nasdaq related expenses. No such costs were incurred during the
comparable period of the prior year.
DEBT CONVERSION EXPENSE. Debt conversion costs decreased to zero for
the six months ended February 28, 1999 from $92,894 for the six months ended
February 28, 1998. This decrease was due to an expense in fiscal 1998 resulting
from converting certain notes payable and accrued interest thereon into common
stock.
PREFERRED DIVIDENDS. Preferred dividends increased $18,100 for the six
months ended February 28, 1999. The increase is due to the issuance of 600
shares of Series A Convertible Preferred Stock in April 1998. Dividends
accumulate, with respect to outstanding shares of the Preferred Stock, at a rate
of 6% per annum and are payable quarterly, and may be paid in cash or in shares
of 6% Preferred Stock valued at $1,000 per share, at the Company's option. The
Company has previously paid the dividends in cash. Beginning January 1, 1999,
the Company will pay the dividends in a number of restricted common shares
having a fair market value equal to the cash penalty otherwise payable, based on
the closing sales price of the Company's Common Stock on the date the dividend
is due each month.
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1998.
REVENUES. Revenues decreased to $2,213 for the three months ended
February 28, 1999 from $45,502 for the three months ended February 28, 1998.
During fiscal 1998, the Company made a decision to wind down its wholesale
business of reselling international long distance minutes. The Company made this
decision in order to conserve the cash resources that would otherwise need to be
applied towards supporting these activities, and because it was unable to
purchase long distance minutes at prices that were low enough to permit them to
be competitive and still result in net revenues. Revenues from the resale of
international long distance minutes therefore decreased to zero for the three
months ended February 28, 1999 as compared to $20,831 for the three months ended
February 28, 1998. A licensing agreement with Switch Telecommunications was also
terminated during fiscal 1998. As a result, license fee revenues decreased to
zero in the three months ended February 28, 1999 as compared to $17,857 for the
three months ended February 28, 1998. During the three months ended February 28,
1999, the Company did not initiate any new marketing efforts to solicit new
subscribers. The Company's management believes that the absence of such
initiatives is at least partially responsible for a decrease in its revenues
from enhanced calling card services, such as domestic long distance minutes and
voice and fax mail services. During this period, revenues from these operations
decreased by $4,601 to $2,213.
COST OF SALES. Cost of sales decreased to $2,814 for the three-month
period ended February 28, 1999 from $22,619 for the three months ended February
28, 1998. Costs associated with the resale of international minutes decreased to
zero for the three months ended February 28, 1999 from $16,981 for the three
months ended February 28, 1998, due to the decision to wind down the wholesale
business of reselling international long distance minutes. Costs to provide
enhanced calling card services, such as domestic long distance and voice and fax
mail services, decreased by $2,576 for the three months ended February 28, 1999
as compared to the three months ended February 28, 1998. This decrease resulted
from the Company's decision not to implement new marketing initiatives. As a
result, the Company's costs associated with lower revenues for the enhanced
calling card services also decreased.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $153,878 for the three months ended February 28, 1999 from
$232,037 for the three months ended February 28, 1998. During fiscal 1998, the
Company renegotiated fees for its call processing platform services which
resulted in a decrease of $23,564 for these expenses for the three months ended
February 28, 1999. A decrease of $13,043 was due to expenses in the prior year
period for consulting fees paid to an investor relations firm. The Company
handled investor relations in house during the three months ended February 28,
1999. General legal and professional fees decreased by $35,308 for the three
months ended February 28, 1999. However, additional legal expenses of $44,805
were incurred in connection with the pending merger with DCI and have been
included in a separate expense category "Merger Expenses" (see "Merger Expenses"
paragraph below).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses decreased to $26,304 for the three months ended February 28, 1999 from
$39,217 for the three months ended February 28, 1998. This decrease was due to
normal depreciation and amortization adjustments as assets age.
INTEREST INCOME. Interest income increased to $19,377 for the three
months ended February 28, 1999 from $50 for the three months ended February 28,
1998. All of the Company's interest income during both periods was from its
money market fund. The increase in interest income was attributable to increased
funds in its money market account.
INTEREST EXPENSE. Interest expense decreased to $2,139 for the three
months ended February 28, 1999 from $6,121 for the three months ended February
28, 1998. The decrease in interest expense was related to higher interest costs
in the prior year period associated with notes payables, convertible notes
payable and capital leases.
SETTLEMENT COSTS. On January 21, 1999, the Company finalized an
out-of-court settlement with Mr. Steven A. Ezell by agreeing to pay Mr. Ezell
$15,000 in settlement of all pending legal claims. These costs represent a
one-time expense. For more information concerning this legal proceeding, please
refer to the discussion under "Legal Proceedings" in Part II of this Report.
ISSUANCE COSTS. The Company incurred $72,000 in costs relating to the
Series A Convertible Preferred Stock which was issued in April 1998. As part of
this issuance, the Company agreed to register the resale of the underlying
shares of Common Stock and cause it to become effective by August 31, 1998. The
Company has filed a Registration Statement on Form S-3, however, the
registration statement has not yet been declared effective by the Securities and
Exchange Commission ("SEC"). Per the conditions of the agreement, the Company is
required to pay an amount equal to 2% of the total purchase price of the shares
for each 30-day period after August 31, 1998, until such time as the
registration statement is declared effective. The purchaser of the Preferred
Stock has agreed to accept payment for the penalties in restricted common shares
in lieu of cash. The common shares will be priced at fair market value, based on
the closing sales price of the Company's common stock on the date the penalty
payment is due each month.
MERGER EXPENSES. Costs incurred during the three months ended February
28, 1999 in connection with the pending merger with DCI totaled $90,144. These
expenses included $44,805 for legal fees for preparation and filing of the joint
proxy and S-4 Registration Statement, $24,340 to the SEC for applicable fees
related to the merger, $20,000 for an independent opinion letter, and $1,000 for
Nasdaq related expenses. No such costs were incurred during the comparable
period of the prior year.
PREFERRED DIVIDENDS. Preferred dividends increased $9,000 for the
quarter ended February 28, 1999. The increase is due to the issuance of 600
shares of Series A Convertible Preferred Stock in April 1998. Dividends
accumulate, with respect to outstanding shares of the Preferred Stock, at a rate
12
<PAGE>
of 6% per annum and are payable quarterly, and may be paid in cash or in shares
of 6% Preferred Stock valued at $1,000 per share, at the Company's option. The
Company has previously paid the dividends in cash. Beginning January 1, 1999,
the Company will pay the dividends in restricted common shares based on the
closing sales price of the Company's Common Stock on the date the dividend is
due each month.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1999 the Company had cash of $1,742,122. The Company
does not generate income sufficient to offset the costs of its operations. As a
result, it has historically relied upon the issuance of debt or equity in order
to raise capital. The Company is currently conserving its capital resources
pending completion of the Merger with DCI. The Company averages approximately
$72,000 a month in expenses, which includes approximately $16,863 per month in
costs associated with the Merger. The Company believes it currently has cash
sufficient to sustain its current operations for at least the next 10 months. In
addition, the Company intends to use a portion of its working capital to finance
new operations and is currently developing a new business plan for operations.
The Company also is continuing to seek other financing resources should
additional funding be required. Currently, the Company has a commitment for
$2,000,000 in additional financing. Any debt issued by the Company may result in
additional interest income and the imposition of certain restrictive covenants
upon the Company and its operations. Additionally, the issuance of equity may be
dilutive to the Company's existing shareholders. However, if the Company is
ultimately unable to generate net revenues or raise additional funds, it may be
necessary to discontinue or cease its operations.
INFLATION
Although the Company's operations are influenced by general economic
trends and technology advances in the telecommunications industry, the Company
does not believe that inflation has had a material effect on its 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. To assure compliance, the Company
hired an independent consultant to review the billing system for the purpose of
thoroughly testing its operation for readiness associated with the Year 2000
Issue. All assessment of internal systems and minor modifications have been
completed. Costs for the consultant, associated testing and modifications are
estimated to be $1,500.
The Company has contacted its major supplier, who handles the call
processing software and supports platform services. The server the Company
utilizes through this supplier is not Y2K compliant and the Company was
previously notified modifications would be complete by March 31, 1999. Updated
estimates for these modifications are not cost effective for the Company and
therefore have not been completed. The Company is proceeding with its
contingency plan of replacing the server with Y2K compliant equipment and/or
contracting with a Y2K compliant service bureau for its current business. 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. The Company currently estimates that its total costs to be incurred
relating to the Year 2000 issue will be approximately $60,000. To date, it has
incurred approximately $5,000 of expenses, which were included in the Company's
August 31, 1997 financial statements.
13
<PAGE>
In developing its contingency plan, the Company has found several
alternative suppliers for these services. The Company may incur higher costs in
order to provide such services through an alternative supplier, although the
Company believes it has adequate time and resources to locate a cost-effective
solution. The Company has completed 100% of its assessment and modifications to
internal systems and estimates that 30% of the necessary assessment for
obtaining an alternative server or service bureau is complete.
PART II
ITEM 1. LEGAL PROCEEDINGS
On January 15, 1999, the Company executed a Settlement Agreement with
Mr. Steven A. Ezell, a former officer of the Company ("Ezell"). The Settlement
Agreement was entered into for the purpose of settling all claims previously
asserted by Ezell in an action filed by Ezell on March 14, 1996 in the Superior
Court of the State of Arizona, titled EZELL V. WAVETECH, INC., GERALD I. QUINN
AND TERENCE E. BELSHAM. In that action, Ezell sought an unspecified amount of
compensatory damages based upon a claim that the Company had breached its
employment contract with Ezell and that Messrs. Quinn and Belsham had interfered
with his employment contract with the Company. Pursuant to the Settlement
Agreement, Wavetech made a single cash payment to Ezell in the amount of
$15,000. As consideration for the terms and conditions agreed to in the
Settlement Agreement, Ezell executed a general release and entered into a
covenant not to sue. The Superior Court then dismissed the case with prejudice
on February 1, 1999.
There were no other material developments in any currently pending
litigation during the quarter ended February 28, 1999.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company was previously notified by The Nasdaq Stock Market
("Nasdaq") that its Common Stock would be delisted from the Nasdaq SmallCap
Market because it was not in compliance with the $1.00 minimum bid price
requirement. The Company appealed Nasdaq's decision to delist its Common Stock
for failure to meet this requirement at a hearing on November 19, 1998. On
December 9, 1998, the Company was notified by Nasdaq that its Common Stock will
continue to be listed on the Nasdaq SmallCap market via an exception from the
minimum bid price requirement, provided the Company meets certain conditions.
One of the conditions was that the Company's stock meet the $1.00 minimum bid
price. To comply with this requirement, on December 18, 1998, the Company
effected a one-for-six reverse split, which had been previously approved by its
shareholders on May 26, 1998. The Company has satisfied each of the other
conditions required by Nasdaq, with the exception of the requirement that it
consummate the pending merger with DCI on or before March 31, 1999. The Company
has asked Nasdaq to remove any further conditions to the continued listing of
its Common Stock or, in the alternative, permit an extension through June 30,
1999 to either consummate the merger with DCI or demonstrate its ability to
satisfy all continued listing requirements. Nasdaq has not yet rendered a
decision on this latest appeal. To the extent Nasdaq declines to grant the
Company's request, its Common Stock will be delisted from the Nasdaq SmallCap
Market.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a) Exhibits.
Number Description Method of Filing
------ ----------- ----------------
27 Financial Data Schedule Filed herewith
b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WAVETECH INTERNATIONAL, INC.
April 14, 1999 By: /s/ Gerald I. Quinn
-------------------------------------
Gerald I. Quinn
President and Chief Executive Officer
April 14, 1999 By: /s/ Lydia M. Montoya
-------------------------------------
Lydia M. Montoya
Chief Financial Officer (Principal
Accounting and Financial Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS, ENDED
FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,742,122
<SECURITIES> 0
<RECEIVABLES> 28,203
<ALLOWANCES> 9,927
<INVENTORY> 0
<CURRENT-ASSETS> 1,768,666
<PP&E> 790,096
<DEPRECIATION> (581,399)
<TOTAL-ASSETS> 3,447,519
<CURRENT-LIABILITIES> 287,017
<BONDS> 0
0
0
<COMMON> 3,428
<OTHER-SE> 3,153,108
<TOTAL-LIABILITY-AND-EQUITY> 3,447,519
<SALES> 5,489
<TOTAL-REVENUES> 5,489
<CGS> 7,339
<TOTAL-COSTS> 7,339
<OTHER-EXPENSES> 558,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,450
<INCOME-PRETAX> (522,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (522,000)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
