U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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.
--------------------------------------------
(Name of small business issuer in its Charter)
Nevada 86-0916826
- ---------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
5210 E. Williams Circle, Suite 200, Tucson, Arizona 85711
---------------------------------------------------------
(Address of Principal Executive Offices)
(520) 750-9093
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
None None
Securities registered under Section 12(b) of the Act:
Common Stock $.001 Par Value
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form, 10-KSB or any
amendment to this Form 10-KSB. [ ]
<PAGE>
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]
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
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.
10
<PAGE>
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.
11
<PAGE>
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.
12
<PAGE>
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.
PREFERRED DIVIDENDS. Preferred dividends increased to $135,994 for the
year ended August 31, 1998 from zero for the year ended August 31, 1997. The
increase is due to the issuance of 600 shares of Series A Convertible Preferred
Stock in April 1998. The amount is comprised of $122,894 recorded as the
preferred stock conversion benefit and $13,100 recorded as the cumulative
preferred dividend. 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 opted to pay the cumulative
preferred dividend in cash.
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.
17
<PAGE>
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
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 has 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. Estimated costs
for the consultant and associated testing activities is $700. The Company
anticipates that such assessment and any necessary modifications will be
completed by March 31, 1999. The Company is in the process of testing all other
internal systems and believes that no modifications to such systems will be
necessary. Total costs incurred and expensed to date by the Company in
connection with its assessment of its Year 2000 software compliance 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 March 31, 1999. The
Company does not have material relationships with any other third parties 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. When costs
associated with the Year 2000 Issue are incurred, the Company intends to charge
these costs to "Expense."
Presently, the Company is exploring options to develop a contingency plan
in the event it is unable to correct any vulnerability to the Year 2000 Issue,
such as using a service bureau to temporarily process calls and run
applications, should any problems arise in system operations.
18
<PAGE>
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
addition, even if available, the Company may be required to incur substantially
higher costs in order to provide such services. In the event the computer
applications of the Company or any third party with which it has a material
relationship are not Year 2000 compliant, the Company's business may be
interrupted. The Company may be unable to compute customer charges and/or be
unable to correctly bill and collect those charges.
The Company has adequate resources to complete its Year 2000 assessment
and any necessary modifications. The Company estimates that it has completed 85%
of its assessment and that 30% of the necessary modifications have been made.
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 (exclusive of depreciation
and amortization shown separately below) 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 before preferred dividends $(1,216,887) $(1,775,714)
Cumulative preferred dividends declared and
Preferred stock conversion benefit $ 135,994 --
----------- ----------
Net loss available to common shareholders $(1,352,881) $(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
1998 1997
---- ----
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
=========== ===========
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 directly
28
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
31
<PAGE>
WAVETECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 1998:
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
$100,000 in compensation during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------- --------------------------------------
RESTRICTED SECURITIES
NAME AND FISCAL BONUS OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) AWARDS($) COMPENSATION AWARDS($) OPTIONS(#) COMPENSATION(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 *
- ----------
* Previously filed.
** 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 amendment to its report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WAVETECH INTERNATIONAL, INC.
Date: February 25, 1999 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: February 25, 1999 By: /s/ Gerald I. Quinn
---------------------------------
Gerald I. Quinn, President and
Chief Executive Officer, Director
(Principal Executive Officer)
Dated: February 25, 1999 By: /s/ Lydia M. Montoya
---------------------------------
Lydia M. Montoya,
Chief Financial Officer
(Principal Financial Officer)
Dated: February 25, 1999 By: /s/ Richard P. Freeman
---------------------------------
Richard P. Freeman, Director
Dated: February 25, 1999 By: /s/ Terrence H. Pocock
---------------------------------
Terrence H. Pocock, Director
Dated: February 25, 1999 By: /s/ John P. Clements
---------------------------------
John P. Clements, Director
51
[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., for the
year ended August 31, 1998, included in or made a part of this Form 10-KSB/A.
/s/ Addison, Roberts & Ludwig, P.C.
Addison, Roberts & Ludwig, P.C.
Tucson, Arizona
February 25, 1999
