Filed Pursuant to Rule 424(b)(3)
File No. 333-39378
Prospectus
Wavetech International, Inc.
2,318,786 Shares
Common Stock
This prospectus relates to registering for resale shares of common stock
underlying warrants and Series B convertible preferred stock previously issued
by Wavetech International, Inc. in connection with a private placement of our
warrants and Series B convertible preferred stock.
We will not receive any proceeds from the sale of the shares. If all the
warrants we issued under the private placement are exercised, we will receive up
to $350,000 of the warrant exercise price.
Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board
under the symbol ITEL. On May 30, 2000, the closing sale price of our common
stock was $6.8125.
Investing in our common stock involves a high degree of risk. See Risk
Factors on page 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August 31, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Where You Can Find More Information 2
Incorporation of Documents by Reference 2
Summary 3
The Offering 8
Risk Factors 9
Use of Proceeds 23
Market for Common Equity and Related Stockholder Matters 23
Selling Shareholders 24
Determination of Offering Price 25
Plan of Distribution 25
Description of Securities 27
Legal Matters 30
Experts 30
Information with Respect to the Registrant 30
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 30
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the U.S. Securities and Exchange
Commission. You may read and copy any document that we file at the SEC's public
reference facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C.
20549. Please call the SEC at 1-800-732-0330 for more information about its
public reference facilities. Our SEC filings are also available to you free of
charge at the SEC's web site at http://www.sec.gov.
Copies of publicly available documents that we have filed with the SEC can
also be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is a part of the registration statement that we filed on
Form S-2 with the SEC. The registration statement contains more information than
this prospectus about us and our common stock, including exhibits and schedules.
You should refer to the registration statement for additional information about
us and the common stock being offered in this prospectus. Statements that we
make in this prospectus relating to any documents filed as an exhibit to the
registration statement or any document incorporated by reference into the
registration statement may not be complete and you should review the referenced
document itself for a complete understanding of its terms.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them. This means that we can disclose information to you by referring you to
those documents. The documents that have been incorporated by reference are an
important part of the prospectus, and you should review that information in
order to understand the nature of any investment by you in the common stock.
Information contained in this prospectus automatically updates and supersedes
previously filed information. We are incorporating by reference the documents
listed below and all of our filings under the Exchange Act after the date of
filing the initial registration statement and prior to the effectiveness of the
registration statement.
* our annual report on Form 10-KSB for the fiscal year ended August 31,
1999;
* our quarterly reports on Form 10-QSB for the quarterly periods ended
November 30, 1999, February 29, 2000 and May 31, 2000;
* our current report on Form 8-K dated May 1, 2000;
* the description of our common stock included in our Registration
Statement on Form 8-A, filed March 11, 1987.
If you would like a copy, at no cost, of any of these documents, please
write or call us at:
Wavetech International, Inc.
5210 East Williams Circle, Suite 200
Tucson, Arizona 85711
Attn: Corporate Secretary
Telephone: (520) 750-9093
You should only rely upon the information included in or incorporated by
reference into this prospectus or in any prospectus supplement that is delivered
to you. We have not authorized anyone to provide you with additional or
different information. You should not assume that the information included in or
incorporated by reference into this prospectus or any prospectus supplement is
accurate as of any date later than the date on the front of the prospectus or
prospectus supplement.
We have not authorized any person to provide you with information different
from that contained or incorporated by reference in this prospectus. The selling
shareholders are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of common stock.
2
<PAGE>
SUMMARY
The following summary should be read by you together with the more detailed
information in other sections of this prospectus. You should also carefully
consider the factors described under Risk Factors at page 18 of this prospectus.
Throughout this prospectus, we refer to Wavetech International, Inc. as
Wavetech, we, our, ours, and us.
WAVETECH INTERNATIONAL, INC.
Founded on July 10, 1986, Wavetech International, Inc. is a Nevada
corporation which develops, prepares, markets and sells interactive
communication systems to reflect or target the needs of a specific audience.
Although founded in 1986, we did not begin our operations until 1995. From
1995 until June 1999, we developed software for customized calling card services
and created an infrastructure to market and distribute our product and services.
During this period, our efforts were primarily focused on hiring management and
other key personnel, raising capital, procuring governmental authorizations and
space in central offices, acquiring equipment and facilities, developing,
acquiring and integrating billing and database systems. We marketed these
systems to the business traveler and to large organizations or companies with a
membership base. In the late 1990's, due to the wide scale deployment of
cellular telephones with messaging capability, the market for business related
calling card services greatly diminished. In June 1999, we discontinued our
calling card services.
At February 29, 2000, Wavetech had an accumulated deficit of $8,664,216.
Wavetech had net losses for the nine months ended May 31, 2000 of $4,615,361. We
expect to continue to spend considerable financial and management resources on
the roll-out of our Bestnetcall service which is described below. Further,
Wavetech has substantial future capital requirements with respect to the roll
out of its Bestnetcall service. Accordingly, we expect to continue to incur
significant additional losses and continued negative cash flow from operations
for the foreseeable future.
Since June 1999, substantially all of our business and financial resources
have been focused on developing a web-enabled long distance service called
Bestnetcall. Bestnetcall was first made available to the public on April 17,
2000. We are presently focusing substantially all of our resources on marketing
Bestnetcall to selected companies with international locations and/or clients.
We are licensing the technology that comprises our Bestnetcall service from
Softalk, Inc. Softalk is a technology company based in Ontario, Canada. Softalk
develops Internet-based telecommunication technologies. Softalk owns shares of
stock in one of our subsidiaries, Interpretel (Canada) Inc. These shares are
exchangeable for shares of Wavetech common stock.
Our Bestnetcall service allows people to initiate and complete long
distance telephone calls by using the Internet. Users of Bestnetcall may enroll,
place calls, pay for service and access customer service real-time on the
Internet by accessing our website at www.bestnetcall.com. Bestnetcall does not
require the purchase of special hardware or software by the customer and uses
their existing telephone equipment. Users only need access to the Internet and
an available phone line. Bestnetcall also offers real-time billing to all users
and accepts various payment methods, including pre-paid or post-paid credit card
payments and invoicing options.
3
<PAGE>
We intend to offer our Bestnetcall service through both direct sales and
indirect sales channels. Our initial target markets will include:
* Governments
* Business and Industry
* Commercial Development Companies
* Telecommunication Companies
* Companies which provide access to the internet
* Browser Based Services, such as Internet Explorer, Yahoo and Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
These marketing efforts will be targeted at international long distance
users in a number of key geographic areas in the world. Our priorities will be
focused primarily on the following geographic regions:
* Caribbean
* North America
* Asia Pacific
* Central & South America
* Europe
* Middle East
According to industry sources, telecommunication service providers' global
revenue is expected to reach US$975 billion in the year 2000. A number of
industry studies have mapped international telephone traffic patterns. Current
forecasts call for a total of 106 billion minutes of international telephone
traffic in the year 2000. Valued at a normal price of US$0.25 per minute, this
would represent a global market of approximately US$26.5 billion, although
Wavetech believes the real market value will likely be two to three times that
number. Our goal is to become a leading provider of web-enabled long distance
service and related services. We have no prior experience in providing
telecommunication services such as that contemplated by our Bestnetcall service.
Our principal executive offices are located at 5210 East Williams Circle,
Suite 200, Tucson, Arizona 85711. Our telephone number is (520) 750-9093.
Wavetech wholly owns its three subsidiaries, Interpretel, Inc., Interpretel
(Canada) Inc. and Telplex International Communications, Inc.
4
<PAGE>
WAVETECH INTERNATIONAL, INC.
Summary Financial Data
The following table summarizes the financial data for our business.
<TABLE>
<CAPTION>
Year Ended August 31 Nine Months Ended May 31
------------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 719,142 $ 157,838 $ 13,580 $ 9,173 $ 6,940
Cost of revenue 679,930 85,082 9,468 8,793 24,101
Selling, general and administration 1,584,747 794,004 691,479 501,140 1,120,626
Depreciation & Amortization 211,786 156,965 146,977 95,148 966,922
----------- ----------- ----------- ---------- -----------
Total cost and expenses 2,476,463 1,036,051 847,924 605,081 2,111,649
Loss from operations (1,757,321) (878,213) (834,344) (595,908) (2,104,709)
Other Income and Expenses:
Interest income 8,500 6,565 70,519 59,242 41,565
Rental income 0 8,833 36,000 27,000 22,500
Misc income 0 0 0 0 476
Interest expense (26,893) (45,182) (8,995) (7,472) (62,928)
License agreement termination Income 0 236,906 0 0 0
Loss on sale of investment in Switch 0 (216,165) 0 0 0
Debt conversion expense 0 (92,894) 0 0 0
Proposed merger costs 0 (236,737) (118,450) (118,500) 0
Write-off of intangibles & other assets 0 0 (36,125) 0 0
Preferred stock conversion penalty 0 0 (144,000) (108,000) (99,484)
Other misc expenses 0 0 (15,000) (15,000) (68)
----------- ----------- ----------- ---------- -----------
Total Other Income and Expenses (18,393) (338,674) (216,051) (162,730) (97,939)
----------- ----------- ----------- ---------- -----------
Net loss before preferred dividends $(1,775,714) $(1,216,887) $(1,050,395) $ (758,638) (2,202,648)
Cumulative preferred dividends declared and
preferred stock conversion benefit 0 135,994 36,500 27,300 2,412,713
----------- ----------- ----------- ---------- -----------
Net loss available to common shareholders $(1,775,714) $(1,352,881) $(1,086,895) $ (785,938) $(4,615,361)
Net loss per share, basic & diluted $ (0.12) $ (0.51) $ (0.37) $ (0.25) $ (1.45)
Weighted average shares of outstanding,
basic & diluted 14,455,167 2,663,257 2,904,693 3,082,553 3,179,863
</TABLE>
The following table is a summary of our balance sheet at May 31, 2000.
August 31, 1999 May 31, 2000
--------------- ------------
Balance Sheet Data:
Cash and equivalents $ 889,620 $ 3,012,509
Working capital $ 618,440 $ 2,721,507
Total assets $ 1,574,395 $ 14,741,951
Total liabilities $ 281,288 $ 302,106
Stockholders' equity $ 1,293,107 $ 14,439,845
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and the related notes included elsewhere
in this prospectus. The selected consolidated statement of operations data for
the years ended August 31, 1995, 1996, 1997, 1998 and 1999 are derived from our
audited financial statements not included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended August 31 Nine Months Ended May 31
------------------------------------------------------------------- --------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue $ 24,468 $ 19,895 $ 719,142 $ 157,838 $ 13,580 $ 9,173 $ 6,940
Cost of revenue 679,930 85,082 9,468 8,793 24,101
Development 201,224 297,935 0 0 0 0 0
Selling, general and
administration 855,756 1,603,356 1,584,747 794,004 691,479 501,140 1,120,626
Depreciation & Amortization 211,786 156,965 146,977 95,148 966,922
----------- ----------- ------------ ----------- ----------- ----------- ------------
Total cost and expenses 1,056,980 1,901,291 2,476,463 1,036,051 847,924 605,081 2,111,649
Loss from operations (1,032,512) (1,881,396) (1,757,321) (878,213) (834,344) (595,908) (2,104,709)
Other Income and Expenses:
Interest income 0 32,777 8,500 6,565 70,519 59,242 41,565
Rental income 0 0 0 8,833 36,000 27,000 22,500
Misc income 0 0 0 0 0 0 476
Interest expense (22,587) (11,585) (26,893) (45,182) (8,995) (7,472) (62,928)
License agreement termination
income 0 0 0 236,906 0 0 0
Loss on sale of investment in
Switch 0 0 0 (216,165) 0 0 0
Debt conversion expense 0 0 0 (92,894) 0 0 0
Proposed merger costs 0 0 0 (236,737) (118,450) (118,500) 0
Write-off of intangibles & other
assets 0 0 0 0 (36,125) 0 0
Preferred stock conversion
penalty 0 0 0 0 (144,000) (108,000) (99,484)
Other misc expenses 0 0 0 0 (15,000) (15,000) (68)
----------- ----------- ------------ ----------- ----------- ----------- ------------
Total Other Income and
Expenses (22,587) 21,192 (18,393) (338,674) (216,051) (162,730) (97,939)
----------- ----------- ------------ ----------- ----------- ----------- ------------
Net loss before
preferred dividends $(1,055,099) $(1,860,204) $(1,775,714) $(1,216,887) $(1,050,395) $ (758,638) $ (2,202,648)
Cumulative preferred dividends
declared and preferred stock
conversion benefit 0 0 0 135,994 36,500 27,300 2,412,713
----------- ----------- ------------ ----------- ----------- ----------- ------------
Net loss available to
common shareholders $(1,055,099) $(1,860,204) $(1,775,714) $(1,352,881) $(1,086,895) $ (785,938) $ (4,615,361)
Net loss per share,
basic & diluted $ (0.22) $ (0.17) $ (0.12) $ (0.51) $ (0.37) $ (0.25) $ (1.45)
Weighted average shares
of outstanding, basic &
diluted 4,830,803 11,200,401 14,455,167 2,663,257 2,904,693 3,082,553 3,179,863
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At August 31 Nine Months Ended May 31
------------------------------------------------------------------- --------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash & Cash Equivalents $ 285,793 $ 857,488 $ 13,329 $ 2,202,573 $ 889,620 $ 1,350,589 $ 3,012,509
Working Capital (362,479) 665,483 (650,761) 1,863,442 618,440 870,656 2,721,507
Total Assets 810,131 4,580,239 2,840,796 2,542,171 1,574,395 3,465,890 14,741,951
Total Liabilities 652,620 1,070,529 828,981 389,219 281,288 510,443 302,106
Accumulated Deficit (1,392,167) (3,252,371) (5,028,085) (6,380,966) (7,467,861) (7,166,902) (12,092,221)
Stockholders' Equity 157,511 3,509,710 2,011,815 2,152,952 1,293,107 2,955,447 14,439,845
</TABLE>
7
<PAGE>
THE OFFERING
Securities Offered by the
selling shareholders................ In our May 1, 2000 private placement we
issued 1,000 shares of our Series B
convertible preferred stock and warrants
to purchase 203,371 shares of our common
stock. The Series B convertible
preferred stock are convertible into
956,022 shares of our common stock,
assuming we had received notice of
conversion of the preferred stock on
June 13, 2000. A description of the
terms of the Series B convertible
preferred stock and investor and
placement warrants is included in this
prospectus under Description of
Securities.
Common Stock Outstanding............ As of May 30, 2000, there were an
aggregate of 3,318,881 shares
outstanding.
Use of Proceeds..................... We will not receive any of the proceeds
of sales of common stock by the selling
shareholders.
Risk Factors........................ The shares of common stock offered
hereby involve a high degree of risk.
See Risk Factors.
Nasdaq Bulletin Board Symbol........ ITEL
8
<PAGE>
RISK FACTORS
BEFORE BUYING ANY OF THE SHARES OF COMMON STOCK BEING OFFERED BY THIS
PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER EACH OF THE RISK FACTORS WE
HAVE DESCRIBED IN THIS SECTION.
IF WAVETECH'S BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS,
WAVETECH'S FUTURE OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
Wavetech has operated at a loss for the last six years. The Bestnetcall
service is a new product for Wavetech and therefore has no operating history
upon which an evaluation of Wavetech and its prospects can be based. Further,
Wavetech has no meaningful prior operating history in the telecommunications
industry, which could negatively impact Wavetech's ability to successfully
market its Bestnetcall service. Our Bestnetcall service may never achieve
commercial acceptance by Internet users. The failure to achieve market
acceptance could negatively impact Wavetech's ability to generate income in the
future.
AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY REDUCE
WAVETECH'S REVENUES.
Wavetech's business strategy depends on the availability of the Internet to
transmit data packets for voice and fax calls. Wavetech also relies on third
parties who provide traditional phone lines. Some of these third parties are
national telephone carriers. If any of these carriers increase their charges for
using these lines at any time, which they may do in response to increased
regulation or other external factors that increase their cost of doing business,
Wavetech's costs may increase and its revenues may decrease. Wavetech may be
unable to continue purchasing such services from these third parties on
acceptable terms, if at all. If Wavetech is unable to purchase the necessary
services to maintain and expand its network as currently configured, Wavetech's
revenues may decline.
WAVETECH DEPENDS ON ITS STRATEGIC RELATIONSHIP WITH SOFTALK, WHICH, IF
TERMINATED, WOULD HAVE A MATERIAL ADVERSE EFFECT ON WAVETECH'S BUSINESS.
Wavetech depends in large part on its joint product development efforts
with Softalk. Softalk may choose not to renew existing arrangements on
commercially acceptable terms, if at all. Wavetech's loss of this key strategic
relationship, or the failure to develop new relationships in the future, would
likely adversely impact Wavetech's future revenues.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION
AND LEGAL UNCERTAINTIES WHICH, IF INCREASED OR CHANGED, COULD REDUCE WAVETECH'S
REVENUES.
While the Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress continues to review the conclusions of the
FCC, and the FCC could impose greater or lesser regulation on Wavetech's
industry. The FCC is currently considering, for example, whether to impose
surcharges or other regulations upon certain providers of Internet telephony,
primarily those which provide Internet telephone services to end-users located
within the United States. The imposition of such surcharges or the regulation of
Internet telephony providers could increase the cost of doing business over the
Internet and decrease Wavetech's revenue.
9
<PAGE>
Aspects of Wavetech's operations may be, or become, subject to state or
federal regulations governing universal service funding, disclosure of
confidential communications, copyright and excise taxes. Government agencies may
in the future increase regulation of Internet related services. Increased
regulation of the Internet may slow its growth. Such regulation may also
negatively impact the cost of doing business over the Internet and, therefore,
increase Wavetech's expenses and decrease its revenues.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD MATERIALLY ADVERSELY AFFECT
WAVETECH'S BUSINESS.
Wavetech intends on marketing its service to international long distance
callers. Because it will be conducting business internationally, Wavetech will
be subject to certain direct or indirect risks. These risks would include
unexpected changes in regulatory requirements for the Internet and/or Internet
telephony; foreign currency fluctuations, which could increase or decrease
operating expenses and increase or decrease revenue; foreign taxation; and the
burdens of complying with a variety of foreign laws, trade standards, tariffs
and trade barriers.
WAVETECH HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING
INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE.
At February 29, 2000, Wavetech had an accumulated deficit of $8,664,216.
Wavetech believes that its future profitability and success will depend
in large part on its ability to generate sufficient revenue from Bestnetcall
revenues and websites to businesses. Revenues are also anticipated from the
licensing of its technology and business systems to partners setting up Internet
telephony services in partner-led foreign markets. The profitability and success
of Wavetech will depend on:
* its ability to maintain existing relationships and enter into new
relationships with Post Telephone & Telegraph administrations and
other carriers for which it sells Internet telephony services
* to obtain or retain for Wavetech the right to sell Internet telephony
services and related value-added telecom services online
* its ability to effectively maintain existing relationships with its
multinational partners
* its ability to successfully enter into new strategic relationships for
distribution and increased usage of the Bestnetcall and Internet
telephony services
* its ability to generate sufficient online traffic and sales volume
10
<PAGE>
Accordingly, Wavetech expects to expend significant financial and management
resources on the roll-out of the Internet telephony service, and on site and
content development on its Bestnetcall websites, integration of the Internet
telephony and Bestnetcall services, strategic relationships, technology and
operating infrastructure. As a result, Wavetech expects to incur significant
additional losses and continued negative cash flow from operations for the
foreseeable future. If such losses continue to occur, Wavetech's revenues may
not increase or even continue at their current levels. Further, Wavetech may not
achieve or maintain profitability or generate cash from operations in future
periods. In view of the rapidly evolving nature of Wavetech's business, the
limited operating history of both Internet telephony and Bestnetcall and the
risks associated with integrating these businesses, Wavetech believes that
period-to-period comparisons of operating results are not meaningful and should
not be relied upon as an indication of future performance.
CONFLICTS OF INTEREST MAY ARISE WHICH MATERIALLY ADVERSELY AFFECT WAVETECH'S
BUSINESS AND ITS REVENUE
Conflicts of interest may arise between Wavetech and its affiliates,
including Softalk, in areas relating to past, ongoing and future relationships,
including:
* the Bestnetcall license agreement, corporate opportunities, indemnity
arrangements, tax and intellectual property matters
* potential acquisitions or financing transactions
* sales of other dispositions by Wavetech principals.
These conflicts also may include disagreements regarding the Bestnetcall
license agreement, including with respect to possible amendments to, or
modifications or waivers of provisions of such agreement. Such amendments,
modifications or waivers may adversely affect Wavetech's business and its
ability to earn revenue from the sale of the Bestnetcall service. Ownership
interests of directors or officers in Wavetech common stock, or serving as both
a director/officer of Wavetech and a director/officer/employee of Softalk, could
create or appear to create potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for
Wavetech and Softalk. Two of the members of Wavetech's Board of Directors are
also directors, officers or employees of Softalk.
OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY
REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A significant aspect of our growth strategy is to expand our business
internationally, through the Internet. Such expansion will place additional
burdens upon our management, personnel and financial resources and may cause us
to incur losses. We will also face different and additional competition in these
international markets with which we have no prior experience. These risks could
impair our ability to expand internationally as well as increase our costs and
decrease our revenues.
11
<PAGE>
ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT WAVETECH.
In order to successfully provide services over the Internet, it is
necessary that we be able to ensure the secure transmission of confidential
customer information over public telecommunications networks. We employ certain
technology in order to protect such information, including customer credit card
information. However, we may be unable to ensure that such information will not
be intercepted illegally. Advances in cryptography or other developments that
could compromise the security of confidential customer information could have a
direct negative impact upon our electronic commerce business. In addition, the
perception by consumers that communicating over the Internet is not secure, even
if unfounded, means that fewer consumers are likely to make communicate through
that medium. Finally, any breach in security, whether or not a result of our
acts or omissions, may cause us to be the subject of litigation, which could be
very time-consuming and expensive to defend.
OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES
HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK.
The market price of our common stock may decrease as more shares of common
stock become available for trading due to the conversion of the Series B
convertible preferred stock into and the exercise of the warrants to purchase
common stock. The participation of the shareholders in Wavetech also may be
reduced through the issuance of new common stock.
THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY NOT COME TRUE AND ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements may include Wavetech's plans:
* to grow its Internet-based communications businesses
* to expand the range of services it offers
* to increase the number of customers and revenues using its services
and the minutes of use and price per minute of use of the traffic
booked through Wavetech's websites and network
* to otherwise expand its business activities in new cities and foreign
countries
* to retain key personnel or otherwise to implement its strategy as well
as its beliefs regarding consumer acceptance of the Internet as a
means of commerce and the use of the Internet as a source of
advertising.
These forward looking statements include statements regarding the belief or
current expectation of Wavetech's management and are necessarily based on
management's current understanding of the markets and industries in which
Wavetech operates. That understanding could change or could prove to be
inconsistent with actual developments. Wavetech's actual results could differ
materially from the results discussed in this prospectus, including those
anticipated in or implied by any forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this prospectus.
12
<PAGE>
WAVETECH INTERNATIONAL, INC.
Although Wavetech was founded in 1986, we did not begin our operations
until 1995. From 1995 until June 1999, we developed software for customized
calling card services and created an infrastructure to market and distribute our
product and services. During this period, Wavetech's efforts were primarily
focused on hiring management and other key personnel, raising capital, procuring
governmental authorizations and space in central offices, acquiring equipment
and facilities, developing, acquiring and integrating billing and database
systems. We marketed these systems to the business traveler and to large
organizations or companies with a membership base. In the late 1990's, due to
the wide scale deployment of cellular telephones with messaging capability, the
market for business related calling card services greatly diminished. In June
1999, we discontinued our calling card services. Since then, we have focused
substantially all of our efforts and resources on developing our Bestnetcall
web-enabled long distance service.
On April 23, 1999, we entered into a licensing agreement with Softalk,
Inc., a technology company based in Ontario, Canada. Softalk develops
Internet-based telecommunication technologies. Softalk's technology allows
people to initiate long distance calls from anywhere in the world by accessing a
specific Internet website. International telephone calls may be made at
substantially reduced rates from those offered by traditional long distance
carriers. This licensing agreement granted certain marketing and customer
service rights to Wavetech.
The licensing agreement was later amended and restated on July 30, 1999, to
grant us exclusive rights to:
* distribute
* market
* service
* sell, and
* sublicense
Softalk's services and products to commercial accounts and a worldwide
non-exclusive license for individual accounts. We also have the exclusive right
to provide billing and customer support services for all customer accounts.
After entering into the licensing agreement, we began building
telecommunication facilities in Toronto, Canada, including installing high-
capacity switches, Internet servers, and completion of specialized software used
for data management, billing and customer service requirements.
Our brand name for our web-enabled long distance service is Bestnetcall,
which was first made available to the public on April 17, 2000. We are presently
focusing our resources on marketing Bestnetcall to selected companies with
international locations and/or clients.
13
<PAGE>
Users of our Bestnetcall service are able to do the following by accessing
our website at www.bestnetcall.com:
* enroll
* place calls
* pay for service
* access customer service immediately on the Internet
Bestnetcall does not require the purchase of special hardware or software by the
customer and uses their existing telephone equipment. Users only need access to
the Internet and an available phone line. Bestnetcall also offers immediate
billing to all users and accepts various payment methods, including pre-paid or
post-paid credit card payments and invoicing options.
Following completion of a telephone call, the total cost for that call may
be viewed on the caller's online account. Call detail records may be printed or
copied to Word or Excel applications. The Bestnetcall service also includes
convenient speed dialing, personalized directories, client billing codes,
world-time country/city code lookup and immediate access to customer service via
the website. Account administrators may add or delete users, view users calling
activity and create reports detailing call activity.
MARKETING AND SALES STRATEGY
We intend to offer our Bestnetcall service through both direct sales and
indirect sales channels. Our initial target markets will include:
* Governments
* Business and Industry
* Commercial Development Companies
* Telecom Carriers
* Companies that provide access to the internet, such as America Online
* Browser Based Services, such as Internet Explorer, Yahoo and
Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
These marketing efforts will be targeted at international long distance
users in a number of key geographic areas in the world. Our marketing priorities
will be focused primarily on the following geographic regions:
* Caribbean
* North America
* Asia Pacific
* Central & South America
* Europe
* Middle East
14
<PAGE>
DIRECT SALES
We intend to utilize the following marketing and sales strategy to generate
revenue and obtain and increase customer usage:
* Direct Mail and E-mail Solicitations - We intend to send testimonial
advertisements to prequalified potential users. These advertisements
will refer or link the potential user to www.bestnetcall.com and
offer a subscription to our Bestnetcall service. Recipients will be
invited to use the service or request more information. These direct
mail or e-mail solicitations will be carried out on a continuous basis
by an in-house staff of direct marketing specialists located in our
Tucson, Arizona office.
* Telemarketing - Telemarketing operations will be initiated out of our
Tucson, Arizona office targeted at specific market segments. We
believe Tucson is an ideal center for customer service and
telemarketing due to its relatively low wages and inexpensive space.
There also is an abundance of experienced telemarketing personnel. The
40,000 student University of Arizona located in Tucson, gives us
access to individuals who speak many different languages and who can
place calls to areas outside the United States.
* Media Advertising and Promotion - We intend to place advertisements in
key print and electronic media targeted at specific market segments.
These advertisements will be designed to elicit direct responses
and/or activations. Incentives will be included in the advertisements.
Testimonials by key customers representing different market segments
will be used to advocate the use of our service and encourage a visit
to our Bestnetcall web site.
* Public Relations Activities - We intend to hire an experienced
corporate communications and public relations specialist to work with
an international public relations firm and the media. The specialist
will be responsible for developing a comprehensive global
communications program. This communications program will likely
feature print articles in industry and trade specific publications,
local print media and feature editorial support.
INDIRECT SALES
Indirect sales efforts will be centered around the following four types of
organizations:
* Carriers - Our Bestnetcall services will be made available to other
telecommunication carriers for resale to their clients. These types of
indirect sales organizations will be solicited through direct mail,
e-mail, telemarketing initiatives, fax and direct sales calls by
Wavetech personnel.
* Professional Service Firms - Accounting firms, consultants, and legal
firms will be solicited to use our Bestnetcall service and to provide
this service to their clients as a means of saving money on
international long distance calls.
* Retailers - We intend to approach large retailers to offer our
services to their credit card holders as a value-added service. These
relationships are revenue sharing initiatives with the retail
organization receiving a negotiated percentage of gross revenue
generated by our services.
15
<PAGE>
* Agent/Distributors - Organizations with large client or member bases
who may be a user of our services will also be encouraged to offer the
services to their clients or members, including the following
companies:
* computer companies
* commercial property development companies
* banks
* associations
* affinity groups
Such companies will be offered the ability to participate in a revenue
sharing program with us by offering Bestnetcall to their customers or
members. Revenue sharing is expected to be between 5% and 10% of net
revenue.
PROJECT MANAGERS
We intend to hire four project managers to sell, maintain and service major
accounts. The managers will primarily focus their efforts on encouraging use and
sales by carrier groups, professional organization retailers and agent
distributors.
INDUSTRY BACKGROUND AND MARKET DEMAND
According to industry sources, telecommunication service providers' global
revenue is expected to reach US$975 billion in the year 2000. A number of
industry studies have mapped international telephone traffic patterns. Current
forecasts project a total of 106 billion minutes of international telephone
traffic in the year 2000. Valued at a normal price of US$0.25 per minute, this
would represent a global market of approximately US$26.5 billion, although we
believe the real market value will likely be significantly higher.
The primary reasons for the continued use of telephone company lines versus
the alternatives found in satellite, Internet and cable systems include:
* Speed of communication
* Quality of communication
* Reliability of communication
* Ease of operation
The global telecommunications industry has been highly regulated. However,
over the past several years, North America has enjoyed significant deregulation,
which has resulted in a highly competitive long distance service industry. The
U.S. and Canada have among the lowest telephone rates in the world and the U.S.
has emerged as the lowest cost supplier of long distance rates. U.S.
deregulation has resulted in sizeable reductions in the wholesale cost of long
distance services available to long distance resellers.
16
<PAGE>
Although declining rates have been symbolic in the U.S. and Canadian long
distance markets, we believe international rates from and to other countries
have been slow to decline for two major reasons:
* Management of foreign telephone companies have been reluctant
to reduce their rates given their monopoly-like status.
* Foreign governments appear to be reluctant to take on the strong
foreign telephone company unions.
In the long term, Wavetech believes it is unlikely that these high rates
can be maintained as new technologies render the foreign telephone company
monopolies ineffective.
Many new technologies have evolved around the emergence of the Internet as
a mass communications and commerce medium. As a result, the Internet has emerged
as an attractive medium for advertising and e-commerce. Jupiter Communications,
a provider of research on Internet commerce, estimates that Internet advertising
will grow from $1.9 billion in 1998 to $7.7 billion in 2002. Forrester Research,
Inc., an independent Internet research firm that analyzes the impact of the
Internet and emerging technologies on business strategy, projects that
business-to-business Internet advertising will expand from $290 million in 1998
to $2.6 billion in 2002.
Business-to-business commerce is also growing rapidly. This growth is the
result of businesses utilizing the Internet's ability to reach targeted
audiences globally, deliver personalized content and open new distribution
channels. Forrester forecasts that business-to-business e-commerce will grow to
$17 billion in 2002.
Traditionally, companies have employed a variety of well-recognized media
in business-to-business advertising, information delivery and communications to
identify, qualify and facilitate commerce opportunities. A number of companies
have started Internet telephony operations in the last few years to serve the
business-to-business market segment. The intense competition in the
telecommunications market and the growth of e-commerce has contributed to the
movement to lower costs. Accordingly, competition and e-commerce has contributed
to the creation of Internet telephony.
According to Frost & Sullivan, an international marketing and consulting
company that monitors information and telecommunications markets, the new
international standards are expected to result in significant growth in the
Internet telephony market in the near future. Frost & Sullivan projects that the
Pacific Rim, Europe and so-called Rest-of the-World markets will account for 73%
of the total Internet telephony market by 2002. We believe these projections
support Wavetech's market strategy of targeting businesses outside of North
America or North American businesses with offices worldwide.
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<PAGE>
WAVETECH'S SOLUTION
Under its licenses from Softalk, Wavetech intends to provide commercial
voice quality Internet-based long distance services to corporate and residential
subscribers. Our web-based solution offers subscribers access to low cost long
distance rates by using the Internet as the means to launch calls and to view
billing within seconds after completing a call.
This technology blends the best of current telecommunication systems by
using commercial telephone networks for voice quality and the Internet for
control and access. Bestnetcall provides a user anywhere in the world access to
the U.S. telecom infrastructure while not infringing upon international telecom
agreements.
Users making calls from the Caribbean to the U.S. would operate over the
same network as users from the U.S. making calls to the Caribbean. As a result,
middle retailers of telecommunication services are eliminated. This ensures the
lowest pricing structure on a long-term basis.
Wavetech provides customers access to its network through its switches
located in Toronto, Canada. Additional switch locations are planned for
deployment in major cities in North America, Asia and Europe.
BESTNETCALL
Our Bestnetcall service allows users to initiate telephone calls over the
Internet. This service, which provides users with toll quality long distance and
call management service, is targeted primarily to businesses. Using a web
browser, subscribers may place calls by entering their location telephone number
and the destination telephone number on a Web page. This information is
transmitted over the Internet to our web server, which in turn communicates with
a switching matrix. The switching matrix launches a call through the public
switch telephone network back to the subscriber's telephone and then launches a
call to the destination number. Both calls are then bridged and the two calls
are connected.
By using our Bestnetcall service, North American subscribers can save an
average of 50 - 75% over traditional international long distance costs.
Subscribers outside North America can save an average of 75 - 90% over
traditional long distance costs charged by their local carriers. Set forth below
is a diagram which illustates how Bestnetcall works.
[BESTNETCALL.COM LOGO]
Toronto Switch
Web Switch
Server ----------- Matrix
(UUNet) (Leased Line)
| |
| |
Internet Public Switch Telephone Network
(data) (voice)
| | |
| | |
| | |
www.bestnetcall.com Origination Call Destination Call
(US) (UK)
Figure 1: Bestnetcall - Call Infrastructure
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<PAGE>
BESTNETCALL - VERSION 1.5
The current version of Bestnetcall was specifically designed for corporate
users to make and manage international and long-distance calls. Bestnetcall
provides a comprehensive array of call management features. These features
reside on a user's personal computer. Current active features include:
* Custom directories - Users are given two directories, one for storing
origination numbers and the second for storing destination numbers.
There is no limit to the number of telephone numbers that can be
created and stored in the two directories. Wavetech is currently
developing a customized directory that can be automatically created by
linking to company/department-wide directories, such as from Lotus
Notes, Microsoft Outlook and other contact management applications.
* Personal speed dial - To simplify dialing frequently called numbers,
the subscriber may create a speed dial which provides one click
dialing.
* Billing codes - Each telephone call may be charged to specific client
or accounting codes defined by the subscriber. This allows easy
segregation of calls by business, department, client or personal use.
All billing codes are tagged to call detail that is viewable in
real-time statements from the Bestnetcall web site.
* Real-time statements - The subscriber may, at any time, view online,
and up-to-the-second call detail record for the current day, current
month and previous month. Each call detail record includes time, date,
duration, rate, total cost, destination number and origination number
of the calls. Call records may be viewed by billing codes. Statements
may be printed or exported to standard office applications including
Word and Excel. Account administrators can view, print and export call
detail records for all users tied to their account.
* World time - The subscriber may view, on demand, the current local
time for cities worldwide.
* Worldwide city and country codes - To aid dialing international
telephone numbers, the subscriber may check for a list of city and
country codes worldwide.
* Rates - The subscriber may, at anytime, look-up Bestnetcall's current
rates on a worldwide basis.
* Account editing - Subscribers may edit their account online, including
changing payment options or adding additional users.
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<PAGE>
BESTNETCALL - ENHANCEMENTS
We are currently developing enhancements to our Bestnetcall service which
will be offered to subscribers on a scheduled basis. These include enhancements
to both our website and product features. Product enhancements under development
include the following:
* Conference calling - This feature will give users the ability to
connect up to 64 parties on a single call, using their personal
computer to initiate the calls. Conference calls may be launched
immediately or they can be scheduled in advance. Scheduled calls will
automatically be placed at the specified time and date. All conference
calls will display their status to the conference administrator via
the Bestnetcall website and offer substantial rate reductions compared
to conventional conference call services provided by the major long
distance providers.
* An improved graphical user interface - This feature will give the user
access to more information, as well as provide much quicker load
times, which is critical where Internet connections are slow.
* A desktop application - This feature is designed for networked office
users without a dedicated Internet connection, or where Internet
connections are very slow. The desktop application resides on the
user's personal computer and uses small-packet transmission to quickly
initiate calls. This feature further saves time by not requiring
launch of a browser, website navigation or log-in.
BESTNETCALL - FUTURE PRODUCT STRATEGY
According to industry sources, approximately 22 million personal computers
are in use in North America for Internet access. These sources predict that
within two years, an additional 23 million non-personal computer devices will be
used to access the Internet. Recognizing this trend, our product team is
presently working on developing variations of Bestnetcall that use alternative
methods for accessing our service, including the following:
* Two Way Paging - We are developing applications for two-way paging to
launch calls transmitting packets from paging networks to our web
server and switching matrix.
* Wireless Hand Held Computing Devices - Designed for micro-web
browsers, such as employed by the Palm VII, we are developing
applications where users can launch Bestnetcall telephone calls or
conference calls at any time using their wireless device.
* Internet Devices - Bestnetcall services will be designed for
non-personal computer Internet devices, such as the following:
- Set-top boxes, such as WebTV
- Smart phones, such as iPhone
- Appliances, such as I-Opener
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<PAGE>
Any device that can access the Internet can be enabled by Wavetech to provide
access to Bestnetcall services. We cannot guarantee that we will be able to
successfully develop or, if developed, commercially exploit any of the above-
referenced devices.
NETWORK STRUCTURE
PHASE I - INITIAL DEPLOYMENT
Wavetech's network equipment is currently located in a telephone company
facility located in Toronto, Canada. The system is designed to initially support
20 million minutes of voice traffic per month. The system can be increased as
support needs increase. Full network monitoring and diagnostics are employed on
a 24 hours per day, seven days a week basis.
Wavetech's web server is hosted by UUNet. UUNet has one of the largest
telecommunications infrastructures in North America. Our current network
structure will support 25,000 simultaneous hits and may be easily expanded.
UUNet has support 24 hours per day, seven days a week and backup power supplied
by on site battery and off site generators to ensure system survivability.
Wavetech's network equipment is connected via switches to the wholesale
public switch telephone network. The initial deployment of 1,000 ports is
configured for rapid expansion of up to 10,000 ports. We work closely with the
Softalk telecom and network engineers and their software development team to
monitor and maintain the system in Toronto, Canada.
PHASE II - EXPANDING POINTS OF PRESENCE
We are planning on expanding our network worldwide. Additional locations
will be deployed in key strategic locations to facilitate web, voice and data
traffic. These additional locations will provide network redundancy and least
cost routing for voice traffic.
Our second location is currently being set up in New York at 60 Hudson
Street, as the East Coast's principal gateway for international
telecommunication traffic. Our New York location will initially contain a
switching matrix similar to the one deployed in Toronto that can be expanded up
to 10,000 ports.
The New York switching matrix will be inter-connected to several
international public switch telephone network carriers, where Wavetech will
offer least cost routing for all voice calls originating in North America.
Following New York, we intend to expand to Los Angeles at 1 Wilshire
Boulevard, as the West Coast's gateway for international telecommunication
traffic. The equipment and facility will be similar to that of our Toronto and
New York offices.
We are currently working with UUNet's network engineering team to deploy
another web host server in Europe to provide website access redundancy.
Additional server deployment also is planned for other major Asian and European
gateways.
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<PAGE>
PHASE III - VIRTUAL PRIVATE NETWORK
As voice traffic increases, we plan on deploying gateway servers to better
facilitate growing international traffic between certain locations. This
strategy will allow us to install a virtual private network along these
high-traffic routes to reduce costs for voice traffic. Employing dedicated data
circuits between these gateways, the voice calls will be compressed and
transmitted using data packets significantly reducing the cost of routing over
normal telephone network channels.
TRANSACTIONS WITH SOFTALK
LICENSE AGREEMENT. On October 25, 1999, Wavetech and Softalk amended their
license agreement to grant Wavetech and its subsidiaries a worldwide exclusive
license to distribute, market, service, sell and sublicense Softalk's services
and products to commercial accounts. This agreement also grants Wavetech a
worldwide nonexclusive license to distribute, market, service, sell and
sublicense Softalk's services and products to individual customer accounts. In
exchange for the license amendments, Wavetech issued to Softalk five-year
warrants to purchase up to 5,246,753 shares of Wavetech common stock; 3,246,753
of which have an exercise price of $3.25 per share, 1,000,000 have an exercise
price of $5.00 per share, and the remaining 1,000,000 have an exercise price of
$10.00 per share.
PURCHASE AGREEMENT. On November 13, 1999, Wavetech, through its subsidiary
Interpretel (Canada) Inc., purchased all existing products and accounts of
Softalk in exchange for 4,329,004 shares of Class A non-voting preferred stock
of Interpretel (Canada) Inc. Under this agreement, Softalk granted Wavetech a
right of first refusal with respect to purchasing Softalk, its intellectual
property, software and/or patents. The shares issued under this agreement are
exchangeable on a one-for-one basis for shares of Wavetech's common stock at any
time by the holder thereof. The issuance of the shares of Interpretel (Canada)
Inc. was valued at $10,000,000, the value of Wavetech's common shares into which
the Interpretel (Canada) Inc. shares can be converted. As of the date of this
prospectus, the Interpretel (Canada) Inc. preferred shares are exchangeable for
approximately 56% of the issued and outstanding shares of Wavetech common stock.
LOCK-UP AGREEMENT. Softalk holds 4,329,004 shares of Class A non-voting
preferred stock of Interpretel (Canada) Inc. On May 1, 2000, as part of the
private placement of Series B convertible preferred stock, Softalk agreed not to
sell, offer, transfer or exchange the Interpretel shares until May 1, 2001,
unless Softalk is given consent to do so by the investor involved in the private
placement.
CROSS CORPORATE CONTROL. Softalk has the right to designate two directors
to the Board of Directors of Wavetech. As of the date of this prospectus,
Softalk has designated Rosnani Atan and Alexander Christopher Lang to serve on
Wavetech's five person Board of Directors. Wavetech also has been granted the
right to appoint one director to the three person Board of Directors of Softalk.
Wavetech has appointed Gerald I. Quinn, Wavetech's Chief Executive Officer, to
Softalk's board.
LOAN FACILITY. On August 6, 1999, Wavetech agreed to loan Softalk up to $2
million at a prime interest rate plus 1%. As of May 31, 2000, the outstanding
balance of the loan was $1,384,000. Under the terms of this loan, Softalk may
pay back the loan principle plus interest on or before August 6, 2000, or
convert any amounts outstanding, plus interest, on the loan into shares of
Softalk common stock in full satisfaction of money owed to Wavetech under the
loan.
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<PAGE>
USE OF PROCEEDS
The selling shareholders will receive the net proceeds from the sale of
their shares of common stock. However, we will receive up to $351,600 upon
payment of the exercise price for the common stock underlying the warrants if
all of the warrants are exercised. We will use all of these proceeds for working
capital for our operations.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Wavetech's common stock was quoted on the Nasdaq SmallCap Market until May
4, 1999, and then on the OTC:BB from June 28, 1999 to the present. The high and
low bid prices of Wavetech's common stock as reported from September 1, 1997
through August 31, 1999 by fiscal quarters (i.e., 1st Quarter = September 1
through November 30) were as follows, as adjusted for a one-for-six reverse
split effective December 18, 1998:
HIGH LOW
FISCAL YEAR ENDED: ---- ---
August 31, 1998
First Quarter 3.625 2.25
Second Quarter 2.8125 2.4375
Third Quarter 4.125 3.375
Fourth Quarter 4.3125 1.3125
FISCAL YEAR ENDED:
August 31, 1999
First Quarter 3.5625 1.5
Second Quarter 3.5625 2.0
Third Quarter 2.9375 0.125
Fourth Quarter 2.625 0.5
FISCAL YEAR ENDING:
August 31,2000
First Quarter 4.25 1.46875
Second Quarter 10.25 4.125
Third Quarter 9.50 5.0
(through May 31, 2000)
The bid and the asked price of Wavetech's common stock on June 12, 2000,
were $6.625 and $6.8125, respectively.
As of June 30, 2000, Wavetech had 76 shareholders of record of its common
stock. Of the 76 shareholders, there are 4 brokers that beneficially own the
stock in a nominee or street name.
Wavetech has never declared any cash dividends and currently plans to
retain future earnings, if any, for its business operations.
NASDAQ DELISTING. Wavetech's common stock was delisted from the NASDAQ
Small Cap Market on May 4, 1999, due to the fact that Wavetech was not in
compliance with Nasdaq's $1.00 minimum bid price requirement. Since June 28,
1999, Wavetech's common stock has been traded on the OTC Bulletin Board under
the symbol ITEL.
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<PAGE>
SELLING SHAREHOLDERS
The shares being offered by the selling shareholders were issued under a
securities purchase agreement. We are registering the shares in order to permit
the selling shareholders to offer these shares for resale from time to time.
The following table provides information as of May 30, 2000, with respect
to the common stock beneficially owned by each selling shareholder. None of
these selling shareholders has a material relationship with us. We believe that
the selling shareholders named in the following table have sole voting and
investment power with respect to the respective shares of common stock set forth
opposite their names. The shares of common stock offered by this prospectus may
be offered from time to time by the selling shareholders named below or their
nominees.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Owned After the
Offering Number Offering
--------------------- of Shares -------------------
Name Number Percent(1) Offered Number Percent(2)
---- ------ ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Ceder Avenue LLC (3) 1,160,000 35 1,160,000 0 0
Corporate Center
Windward One, West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
Thomson Kernaghan & Co. Limited (4) 43,371 1 43,371 0 0
365 Bay Street, Tenth Floor
Toronto, Ontario
Canada M5H 2V2
Roth Capital Partners, Inc.
600 California Street, 14th Floor
San Francisco, CA 94108 20,000 1 20,000 0 0
</TABLE>
----------
(1) Percentages are based upon 3,318,881 shares of Wavetech's common stock
outstanding as of May 30, 2000.
(2) Because the selling stockholder may offer all or some of the shares under
this offering, we can not estimate the number of shares that will be held
by the selling stockholder after completion of the offering. For purposes
of this table, we have assumed that, after the completion of the offering,
none of the shares covered by this prospectus will be held by the selling
stockholder.
(3) Includes (i) 1,000,000 shares of commons stock initially issuable upon
conversion of the preferred stock, assuming Wavetech received a written
notice of conversion on May 1, 2000 and (ii) 160,000 shares of common stock
issuable upon exercise of the warrant issued to Cedar Avenue LLC.
(4) Thomson Kernaghan & Co. Limited acted as a placement agent in connection
with the May 1, 2000, private placement of Wavetech. The number of shares
beneficially owned by Thomson Kernaghan & Co. Limited includes 43,371
shares of common stock issuable upon exercise of the warrant issued to
Thomson Kernaghan & Co. Limited.
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DETERMINATION OF OFFERING PRICE
Because this prospectus relates only to the resale of common stock issuable
upon conversion of the Series B convertible preferred stock and upon exercise of
the warrants, we did not determine an offering price. The selling shareholders
will individually determine the offering price of the common stock. The selling
shareholders may use this prospectus from time to time to sell their common
stock. The price at which the common stock is sold may be based on market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices.
PLAN OF DISTRIBUTION
In connection with our issuance to the selling shareholders of Series B
convertible preferred stock and warrants, we provided to them certain
registration rights and have subsequently filed a registration statement on Form
S-2 with the SEC. That registration statement covers the resale of the common
stock from time to time on the Nasdaq Over the Counter Bulletin Board or other
national securities exchange or automated quotation system upon which our common
stock is then traded or in privately negotiated transactions. This prospectus
forms part of that registration statement. We have also agreed to prepare and
file any amendments and supplements to the registration statement as may be
necessary to keep it effective until this prospectus is no longer required for
the selling shareholders to sell their shares of common stock. We have also
agreed to indemnify and hold the selling shareholders harmless against certain
liabilities under the Securities Act that could arise in connection with the
selling shareholders' sale of their shares. We have agreed to pay all reasonable
fees and expenses incident to the filing of the registration statement.
The selling shareholders may sell the shares of common stock described in
this prospectus directly or through underwriters, broker-dealers or agents. The
selling shareholders may also transfer, devise or gift their shares by other
means not described in this prospectus. As a result, pledgees, donees,
transferees or other successors in interest that receive such shares as a gift,
partnership distribution or other non-sale related transfer may offer shares of
common stock. In addition, if any shares covered by this prospectus qualify for
sale under Rule 144 under the Securities Act, the selling shareholders may sell
such shares under Rule 144 rather than under this prospectus.
The selling shareholders may sell shares of common stock from time to time
in one or more transactions:
* at fixed prices that may be changed,
* at market prices prevailing at the time of sale, or
* at prices related to such prevailing market prices or at negotiated
prices.
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The selling shareholders may offer their shares of common stock in one or
more of the following transactions:
* on any national securities exchange or quotation service on which the
common stock may be listed or quoted at the time of sale, including
the Nasdaq Over the Counter Bulletin Board,
* in the over-the-counter market,
* in privately negotiated transactions,
* through options,
* by pledge to secure debts and other obligations,
* by a combination of the above methods of sale, or
* to cover short sales made under this prospectus.
In effecting sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate in the resales. The
selling shareholders may enter into hedging transactions with broker-dealers,
and in connection with those transactions, broker-dealers may engage in short
sales of the shares. The selling shareholders also may sell shares short and
deliver the shares to close out such short positions. The selling shareholders
also may enter into option or other transactions with broker-dealers that
require the delivery to the broker-dealer of the shares, which the broker-dealer
may resell under this prospectus. The selling shareholders also may pledge the
shares to a broker or dealer, and upon a default, the broker or dealer may
effect sales of the pledged shares under this prospectus.
In order to comply with the securities laws of certain states, the selling
shareholders must offer or sell the shares only through registered or licensed
brokers or dealers. In addition, in certain states, the selling shareholders
cannot offer or sell the shares unless the shares have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
The SEC may deem the selling shareholders and any underwriters, broker-
dealers or agents that participate in the distribution of the shares of common
stock to be underwriters within the meaning of the Securities Act. The SEC may
deem any profits on the resale of the shares of common stock and any
compensation received by any underwriter, broker-dealer or agent to be
underwriting discounts and commission under the Securities Act.
Under the Exchange Act, any person engaged in the distribution of the
shares of common stock may not simultaneously engage in market-making activities
with respect to the common stock for five business days prior to the start of
the distribution. In addition, each selling shareholder and any other person
participating in a distribution will be subject to the Exchange Act, which may
limit the timing of purchases and sales of common stock by the selling
shareholder or any such other person.
26
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
For a description of our common stock see our Registration Statement on
Form 8-A filed with the SEC on March 11, 1987.
SERIES B CONVERTIBLE PREFERRED STOCK
On May 1, 2000, we issued 1,000 shares of Series B convertible preferred
stock to the investor in the private placement. This transaction was completed
in accordance with the terms of a securities purchase agreement. Each share of
Series B convertible preferred stock is convertible by the holder into shares of
common stock. The number of shares of common stock issuable upon conversion is
determined in accordance with the following formula: $5,000 divided by the
lesser of
* 110% of the average of the last closing bid price for the common stock
as reported by Bloomberg, L.P., for the five trading days before May
1, 2000, or
* 80% of the average of the last closing bid price for the common stock
as reported by Bloomberg, L.P., for the three lowest trading days out
of the 10 consecutive trading days before the selling shareholder
provides written notice of its desire to convert its shares.
The preferred stock automatically converts into shares of common stock on
May 1, 2002 if not converted prior to that time. One hundred ten percent of the
average closing bid price for the common stock for the five trading days prior
to May 1, 2000 is $8.074. Assuming Wavetech received a written notice of
conversion from the selling shareholder on May 1, 2000, 80% of the average
closing bid price for the three lowest trading days of the 10 trading days prior
to May 1, 2000, would be $5.00. The lower of the two prices is $5.00, which,
divided into $5,000, will result in the issuance of 1,000 shares of common stock
for every one share of Series B preferred stock.
Holders of Series B preferred stock may receive cumulative dividends at an
annual rate per share equal to 6% of the liquidation preference of the preferred
stock. The liquidation preference for each share of preferred stock is $5,000,
plus accrued and unpaid dividends. Shares of Series B preferred stock have a
priority over a payment of any dividend on any other class or series of stock of
Wavetech except for Wavetech's Series A preferred stock. The dividends accrue
daily regardless of whether they are earned or declared.
Except as required by law, the holders of Series B preferred stock will
not be entitled to vote on any matter relating to the business or affairs of
Wavetech or for any other purpose.
27
<PAGE>
If Wavetech liquidates or dissolves, the holders of Series B preferred
shares will be paid in cash out of the surplus funds or of Wavetech's assets. If
the cash is insufficient to pay the holders of Series B preferred stock in full,
then the assets will be given first to the holders of the Series B preferred
shareholders.
If Wavetech does not timely deliver the shares of common stock issuable
upon conversion of the Series B preferred stock, Wavetech must pay, on demand,
liquidated damages for failing to timely deliver the converted shares. The
liquidated damages begin to accrue on the 6th business day after Wavetech
receives the written conversion notice from the selling shareholder. The
following is the schedule for liquidated damages.
Late Payment for Each $10,000 of
Preferred Stock Liquidation
No. of Business Days Late Being Converted
------------------------- ---------------
1 $100
2 $200
3 $300
4 $400
5 $500
>5 $500 + $200 for each Business Day late
beyond 5 Business Days from
the delivery date
WARRANTS
INVESTMENT WARRANT
Wavetech also issued warrants to the investor in this private placement.
The warrants expire on May 1, 2003.
EXERCISE OF WARRANT
The warrant may be exercised at any time after issuance.
EXERCISE PRICE
The exercise price of the warrant is one-cent for all 160,000 shares of
common stock represented by the warrant.
PLACEMENT AGENT WARRANT
In connection with services performed as a placement agent in the private
placement on May 1, 2000, we issued a warrant to the placement agent. The
warrant expires on May 1, 2003.
28
<PAGE>
EXERCISE OF WARRANT.
The placement agent warrant may be exercised at any time after issuance.
EXERCISE PRICE.
The exercise price of the warrant is 110% of the average closing bid price
as reported by Bloomberg, L.P. of the common stock for the five trading days
before May 1, 2000.
CASHLESS EXERCISE OPTION.
The placement agent is entitled to a cashless exercise option. This option
allows the agent to receive fewer shares of common stock without paying the
exercise price. The amount of shares to be issued is determined by a formula
based on the number of shares to which the agent is entitled under the warrant,
the current market value of the common stock and the exercise price of the
warrant.
REGISTRATION RIGHTS OF THE SELLING SHAREHOLDERS
Wavetech has agreed to file with the SEC a shelf registration statement (of
which this prospectus is a part) covering resales by holders of the common stock
issuable upon conversion of the Series B convertible preferred stock and the
common stock issuable upon exercise of the warrants within 45 days after the
date of original issuance of the Series B convertible preferred Stock. Wavetech
has agreed to use reasonable efforts to cause the shelf registration statement
to become effective as promptly as is practicable and to keep the shelf
registration statement effective until the earlier of:
* the sale under the shelf registration statement of all the securities
registered thereunder and
* the expiration of the holding period applicable to such securities
under Rule 144(k) under the Securities Act or any successor provision.
29
<PAGE>
Wavetech has agreed to pay predetermined liquidated damages to those
holders of common stock issuable upon conversion of the preferred stock or upon
exercise of the warrants if the registration statement was not timely filed or
if the prospectus is unavailable. A holder who sells the common stock issued
upon conversion of the preferred stock or upon exercise of the warrants under
the shelf registration statement generally will be required to:
* be named as a selling stockholder in the related prospectus
* deliver a prospectus to purchasers
* be bound by those provisions of the registration rights agreement that
are applicable to the holder, including certain indemnification
provisions. Wavetech will pay all expenses of the shelf registration
statement, provide to each registered holder copies of the prospectus,
notify each registered holder when the shelf registration statement
has become effective and take certain other actions as are required to
permit, subject to the foregoing, unrestricted resales of the
preferred stock or the common stock.
LEGAL MATTERS
Certain legal matters have been passed upon for us by Squire, Sanders &
Dempsey L.L.P., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of Wavetech International, Inc.
included in Wavetech International, Inc.'s Annual Report (Form 10-KSB) for the
year ended August 31, 1999, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements have been incorporated herein by
reference and included herein, respectively, in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
INFORMATION WITH RESPECT TO THE REGISTRANT
This prospectus is being delivered with a copy of our Form 10-KSB for the
fiscal year ended August 31, 1999 and our Forms 10-QSB for the quarterly periods
ended November 30, 1999, February 29, 2000 and May 31, 2000.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the small business issuer according to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable.
30
<PAGE>
Wavetech International, Inc.
Financial Statements
Year ended August 31, 1999 and the three and nine months ended May 31, 2000
CONTENTS
Report of Independent Auditors............................................. F-1
Consolidated Balance Sheet................................................. F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Changes in Stockholders' Equity................. F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
Unaudited Balance Sheet.................................................... F-17
Unaudited Consolidated Statements of Operations (Nine Month Period)........ F-18
Unaudited Consolidated Statements of Operations (Three Month Period)....... F-19
Unaudited Consolidated Statements of Cash Flows............................ F-20
Notes to Unaudited Consolidated Financial Statements....................... F-21
<PAGE>
Report of Independent Auditors
Board of Directors
Wavetech International, Inc.
We have audited the accompanying consolidated balance sheet of Wavetech
International, Inc. as of August 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Wavetech
International, Inc. for the year ended August 31, 1998 were audited by other
auditors whose report dated November 6, 1998, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wavetech
International, Inc. as of August 31, 1999, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Tucson, Arizona
October 18, 1999,
except for Note 11, as to which the date is
November 13, 1999
F-1
<PAGE>
Wavetech International, Inc.
Consolidated Balance Sheet
August 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 889,620
Prepaid expenses and other assets 8,529
-----------
Total current assets 898,149
Property and equipment, net 363,559
License fee, net of amortization of $9,524 190,476
Note receivable from affiliate 100,000
Deposits and other assets 22,211
-----------
Total assets $ 1,574,395
===========
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses $ 243,029
Notes payable to officer 13,000
Capital lease obligations, current portion 23,680
-----------
Total current liabilities 279,709
Capital lease obligation, net of current portion 1,579
Commitments
Stockholders' equity:
Series A preferred stock, 6% cumulative, par value $.001
per share; 10,000,000 shares authorized, 600 shares issued
and outstanding (liquidation value $600,000) 1
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 3,021,288 shares issued and outstanding 3,021
Additional paid-in capital 8,757,946
Accumulated deficit (7,467,861)
-----------
Total stockholders' equity 1,293,107
-----------
Total liabilities and stockholders' equity $ 1,574,395
===========
See notes to consolidated financial statements.
F-2
<PAGE>
Wavetech International, Inc.
Consolidated Statements of Operations
For the years ended August 31, 1999 and 1998
1999 1998
----------- -----------
Revenues $ 13,580 $ 157,838
Expenses:
Cost of sales (exclusive of depreciation
and amortization shown separately below) 9,468 85,082
General and administrative 691,479 794,004
Depreciation and amortization expense 146,977 156,965
----------- -----------
Total expenses 847,924 1,036,051
----------- -----------
Net loss from operations (834,344) (878,213)
Other income (expense):
Interest income 70,519 6,565
Rental income 36,000 8,833
Interest expense (8,995) (45,182)
License agreement termination income -- 236,906
Loss on sale of investment in Switch -- (216,165)
Debt conversion expense -- (92,894)
Costs incurred in connection with
unconsummated merger (118,450) (236,737)
Write-off of intangible and other assets (36,125) --
Preferred stock conversion penalty (144,000) --
Other expenses (15,000) --
----------- -----------
Total other income (expense) (216,051) (338,674)
Net loss before preferred dividends (1,050,395) (1,216,887)
Cumulative preferred dividends declared and
preferred stock conversion benefit 36,500 135,994
----------- -----------
Net loss available to common shareholders $(1,086,895) $(1,352,881)
=========== ===========
Net loss per common share, basic and diluted $ (.37) $ (.51)
Weighted average number of shares outstanding,
basic and diluted 2,904,693 2,663,257
See notes to consolidated financial statements.
F-3
<PAGE>
Wavetech International, Inc.
Consolidated Statements of Changes in Stockholders' Equity For the
years ended August 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 1, 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 600 1 -- -- 527,923 -- 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 600 1 16,994,887 16,995 8,516,922 (6,380,966) 2,152,952
Net loss -- -- -- -- -- (1,050,395) (1,050,395)
Conversion of debt into common stock -- -- 156,250 156 49,844 -- 50,000
Reverse 1-for-6 stock split -- -- (14,292,473) (14,292) 14,292 -- --
Preferred stock dividends -- -- 27,798 28 24,272 (36,500) (12,200)
Preferred stock conversion penalty -- -- 128,993 129 143,871 -- 144,000
Stock options exercised -- -- 5,833 5 8,745 -- 8,750
--- ---- --------- -------- ---------- ----------- -----------
Balances, August 31, 1999 600 $ 1 3,021,288 $ 3,021 $8,757,946 $(7,467,861) $ 1,293,107
=== ==== ========= ======== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Wavetech International, Inc.
Consolidated Statements of Cash Flows
For the years ended August 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,050,395) $(1,216,887)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 146,977 156,965
Common stock issued for services and accrued interest -- 168,732
Debt conversion expense -- 92,894
Loss on disposition of Switch shares -- 216,165
Bad debt provision 18,276 --
Write-off of intangible and other assets 36,125 --
Preferred stock conversion penalty 144,000 --
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and other
current assets (1,983) 11,175
Decrease in deposits and other assets 7,872 --
Decrease in accounts payable and accrued expenses (12,216) (151,426)
Decrease in unearned revenue -- (146,429)
----------- -----------
Net cash used in operating activities (711,344) (868,811)
Investing activities:
Purchase of property and equipment (252,445) (1,985)
Decrease in other assets -- 5,550
Issuance of notes receivable (100,000) --
Purchase of licensing agreements (200,000) --
Proceeds from sale of investment in Switch -- 2,100,000
----------- -----------
Net cash (used in) provided by investing
activities (552,445) 2,103,565
Financing activities:
Proceeds from notes payable -- 580,000
Payments on notes payable -- (330,000)
Payments on capital lease obligations (45,714) (39,037)
Proceeds from common stock issued 8,750 222,503
Proceeds from preferred stock issued -- 527,924
Dividends paid in cash on preferred stock (12,200) (6,900)
----------- -----------
Net cash (used in) provided by financing activities (49,164) 954,490
Net (decrease) increase in cash and cash equivalents (1,312,953) 2,189,244
Cash and cash equivalents, beginning of year 2,202,573 13,329
----------- -----------
Cash and cash equivalents, end of year $ 889,620 $ 2,202,573
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Wavetech International, Inc.
Notes to Consolidated Financial Statements
August 31, 1999
1. ORGANIZATION
Wavetech International, Inc. (the Company) is currently conducting minimal
operations while actively pursuing to implement its business strategy of
providing Internet telephony services. The Company has recorded net operating
losses in each of the previous six years and does not anticipate realization of
full operations until its strategy is fully implemented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Interpretel, Inc. (Interpretel), Interpretel
Canada Inc. and Telplex International Communications, Inc. All significant
intercompany accounts and transactions have been eliminated.
On March 8, 1995, the Company entered into an agreement with Interpretel
pursuant to which the Company agreed to issue 6,000,000 (pre-split) 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 was 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased (money market accounts and certificates of
deposit) to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated over the estimated
useful lives of the related assets, as follows:
Furniture and fixtures 7 years
Computer equipment 5 years
Software 5 years
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LICENSE FEES
Fees to license certain communications software are recorded at cost and
amortized over the seven year life of the underlying agreement.
INCOME TAXES
Income taxes are determined using the liability method. This method gives
consideration to the future tax consequences associated with temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1999, the Company maintained the majority of its cash balances in
bank accounts insured by the FDIC.
The carrying amounts for cash and cash equivalents, notes 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.
REVENUE RECOGNITION
Revenue from the sale of licensing agreements 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 related to the
operation and maintenance of the telephony platform. Depreciation and
amortization expense is separately stated.
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.
Stock Options are granted to employees and directors under its Stock Option Plan
with an exercise price equal to fair value at the date of grant and accordingly
recognizes no compensation expense in connection with such grants.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Diluted loss per share is equal to basic loss per share for all periods
presented as the effect of all applicable securities (preferred stock, stock
options and warrants; see Note 6) is anti-dilutive (decrease the loss per share
amount). References to share and per share amounts have been restated to reflect
a one-for-six stock split effective December 18, 1998 unless otherwise noted.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATIONS
The 1998 financial statements have been reclassified to conform to the 1999
presentations.
3. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 1999:
Furniture and fixtures $ 170,415
Computer equipment 618,807
Software 218,108
-----------
Total property and equipment, at cost 1,007,330
Less: accumulated depreciation and amortization (643,771)
-----------
$ 363,559
===========
Amortization expense related to assets held under capital leases was $23,847 and
$36,139 in 1999 and 1998 respectively.
4. NOTE PAYABLE
Note payable to officer at August 31, 1999 consists of an unsecured note payable
to an officer and shareholder of the Company, due on demand, interest payable at
15%.
On October 12, 1998, a note payable for $50,000, plus accrued interest, to an
unrelated entity was converted into 156,250 (pre-split) shares of Common Stock.
The conversion price was based on the average of the high and low price on the
date of the letter of agreement for repayment of this note payable. Interest
paid on notes payable and capital lease obligations amounted to $6,317 and
$30,282 in 1999 and 1998, respectively.
F-8
<PAGE>
5. LEASES
The Company has entered into capital lease arrangements for office furniture and
equipment and operating lease arrangements for office space.
Future lease commitments at August 31, 1999 are as follows:
Capital Operating
Leases Leases
--------- --------
2000 $ 24,874 $110,659
2001 1,615 116,262
2002 -- 29,416
--------- --------
26,489 $256,337
========
Less amounts representing interest 1,230
---------
Present value of net minimum lease payments $ 25,259
Less current portion (23,680)
---------
$ 1,579
=========
Total rent expense under operating leases in 1999 and 1998 was $128,270 and
$121,000, respectively.
6. STOCKHOLDERS EQUITY
PREFERRED STOCK: The Company issued 600 shares of Series A Convertible Preferred
Stock in 1998 at $1,000 per share. The 6% Preferred stockholders are entitled to
receive annual cumulative 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. In 1999, a portion of these dividends were
settled by the issuance of common shares. Series A Preferred stockholders do not
have any voting rights.
The Preferred Stock is convertible at the option of the Company at any time on
at least ten days advance notice once the shares issuable upon conversion are
registered for resale by an effective registration statement. The conversion
price is the lesser of five dollars and twenty-five cents ($5.25) or
eighty-three percent (83%) of the average of the closing bid prices of the
Common Stock as reported by NASDAQ during the five (5) consecutive trading days
preceding the conversion date (but not including such date). However, all
outstanding shares of Preferred Stock shall be automatically converted into
common stock in April 2000 at the conversion price as set forth in the
subscription agreement. A beneficial conversion feature of $122,894 resulted in
a charge to retained earnings in 1998.
F-9
<PAGE>
6. STOCKHOLDERS EQUITY (CONTINUED)
The Preferred stock 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.
The holder of Preferred Stock may elect to convert such shares into Common
Stock, at the conversion price described above, upon written notice to the
Company. Such common shares are to be converted pursuant to an effective
registration statement. Should the Company fail to register such common shares
to allow for conversion as noted above, the Company is required to pay monthly
liquidated damages to the Preferred Stock holder equal to 2% of the purchase
price of the Preferred Stock. The Company expensed $144,000 and issued 128,993
shares of Common Stock in 1999 in liquidated damage payments.
COMMON STOCK: The Company issued in 1998 348,187 (pre-split) 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.
The Company issued 54,557 (pre-split) deferred shares of common stock under the
1997 Stock Incentive Plan in 1998 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.
The Company issued 73,325 (pre-split) shares of common stock in 1998 in
satisfaction for services valued at $29,000 performed in 1997. The value
assigned to the common stock was charged to expense in 1997 based on the fair
market values of the common stock.
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
(pre-split) per share, the following option: for a specific eleven day period,
the right to exercise their warrants for $0.585 (pre-split) 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
F-10
<PAGE>
6. STOCKHOLDERS EQUITY (CONTINUED)
August 31, 1996 and were converted into common shares at the face value of the
notes plus accrued interest. A total of 380,280 (pre-split) out of 784,781
(pre-split) warrants were exercised under this offer and the balance of 404,501
(pre-split) 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 (pre-split) 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 (pre-split) 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, 1997, $200,000 in notes payable along with accrued interest of
$2,067 were converted into 577,424 (pre-split) 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 payable at August 31, 1998 was converted
into 156,250 (pre-split) shares in 1999 (Note 4). An aggregate of $100,000 of
these notes payable was held by the wife and son of a director of the Company,
who received 288,096 (pre-split) shares of the Company's common stock upon
conversion.
On November 30, 1997, the Company converted $165,335 in existing notes payable
plus accrued interest of $4,171 to 484,307 (pre-split) shares of common stock.
The conversion price was based on the fair market value of the common stock on
the date of the conversion.
The following summarizes warrant activity in 1999:
Exercise
Number Price
-------- --------------
Outstanding, September 1, 1998 382,500 $2.64 - $10.50
Expired (34,167) $2.64 - $10.50
-------- --------------
Outstanding, August 31, 1999 348,333 $2.76 - $ 9.00
======== ==============
F-11
<PAGE>
6. STOCKHOLDERS EQUITY (CONTINUED)
STOCK INCENTIVE PLAN: The Company is authorized to issue up to 766,667 shares of
common stock under its 1997 Stock Incentive Plan. Shares may be issued as
incentive stock options, deferred shares or restricted shares. The options are
granted at the fair market value of the common stock on the date of the grant;
options have terms of up to ten years. The Company also grants non-statutory
options.
The fair value of 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 2.334, 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.
SFAS No. 123 requires the Company to present pro forma disclosure for options
granted subsequent to 1995. These disclosures are not indicative of future
amounts, as options granted prior to 1995 have not been included as provided by
SFAS No. 123. For purposes of pro forma disclosure, the estimated fair value of
stock options was amortized to expense over the vesting period. Pro forma net
loss and loss per share are as follows:
1999 1998
----------- -----------
Net loss available to common
stockholders, as reported $(1,086,895) $(1,352,881)
Pro forma compensation expense for
stock options (249,557) (17,000)
----------- -----------
Pro forma net loss available to
common stockholders (1,336,452) (1,369,881)
----------- -----------
Pro forma loss per share available
to common stockholders $ (.43) $ (.51)
=========== ===========
F-12
<PAGE>
6. STOCKHOLDERS EQUITY (CONTINUED)
A summary of the Company's stock option activity (including non-statutory
options) is as follows:
Weighted
Number of Option Exercise
Options Price Price
Granted Per Share Per Share
---------- ------------ ---------
Outstanding, September 1, 1997 375,000 $2.25 - 6.00 $ 4.17
Granted 11,667 2.40 2.40
Canceled (100,000) 3.96 3.96
---------- ------------ ------
Outstanding, August 31, 1998 286,667 $2.25 - 6.00 $ 4.17
Granted 1,896,667 1.00 - 3.00 1.06
Exercised (5,833) 1.5 1.5
Canceled (133,333) 1.00 - 3.96 2.14
---------- ------------ ------
Outstanding, August 31, 1999 2,044,168 $1.00 - 6.00 $ 1.43
========== ============ ======
The remaining contractual life of options outstanding at August 31, 1999 was 9.6
years. Options for the purchase of 266,667 and 360,833 shares were immediately
exercisable at August 31, 1999 and 1998 with a weighted-average price of $3.33
and $4.31 per share.
The weighted average fair values of stock options granted during 1999 and 1998
for which the exercise price was equal to the fair market value of the stock
were $.96 and $0.40 per share, respectively.
7. INCOME TAXES
At August 31, 1999, the Company has federal net operating loss carryforwards
totaling approximately $11,000,000 and state net operating loss carryforwards of
approximately $7,100,000. The federal and state net operating loss carryforwards
expire in various amounts beginning in 2011 for federal purposes and 2000 for
state purposes. Certain of the Company's net operating loss carryforwards may be
subject to annual restrictions limiting their utilization in accordance with
Internal Revenue Code Section 382, which include limitations based on changes in
control. In addition, approximately $3,200,000 of net operating loss
carryforwards are further limited to activities in a trade or business in which
the Company is not presently involved. Additionally, the Company has capital
loss carryforwards of approximately $216,000 which will expire in 2004 unless
offset by capital gains. No tax benefit has been recorded in the financial
statements since realization of these loss carryforwards does not appear likely.
F-13
<PAGE>
7. INCOME TAXES (CONTINUED)
The income tax benefit for the years ended August 31 is comprised of the
following amounts:
1999 1998
--------- ---------
Current $ -- $ --
Deferred:
Federal (359,000) (453,000)
State (55,000) (19,000)
--------- ---------
(414,000) (472,000)
Valuation allowance 414,000 472,000
--------- ---------
$ -- $ --
========= =========
The Company's tax benefit differs from the benefit calculated using the federal
statutory income tax rate for the following reasons:
1999 1998
---- ----
Statutory tax rate 34.0% 35.0%
State income taxes 5.3% 9.0%
Amortization of organization costs -- (7.0%)
Change in valuation allowance (39.3%) (37.0%)
---- ----
Effective tax rate 0.0% 0.0%
==== ====
The components of the net deferred tax asset are as follows:
1999 1998
----------- -----------
Deferred tax asset:
Amortization of Intangibles $ 33,000 $ 70,000
Net Capital Loss 85,000 --
Net operating loss carryforward 3,756,000 3,390,000
----------- -----------
3,874,000 3,460,000
Valuation allowance (3,874,000) (3,460,000)
----------- -----------
$ -- $ --
=========== ===========
Income taxes of $50 and $200 were paid in 1999 and 1998, respectively.
F-14
<PAGE>
7. INCOME TAXES (CONTINUED)
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires a valuation allowance to reduce the deferred tax assets if,
based on the weight of the evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined that a
$3,874,000 valuation allowance at August 31, 1999 is necessary to reduce the
deferred tax assets to the amount that will more likely than not be realized.
The change in the valuation allowance for the current year is $414,000.
8. 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 257,352 shares of the Company's stock. On June 30,
1998, an agreement was reached between the Company and Switch which set 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 333,333 shares of the
Company's common stock at a price of $9 per share. The warrants expire January
17, 2000. Consideration of $20,000 was received for the warrants.
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 was 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. The Company received $200,000 of the
licensing fee during the year ended August 31, 1997. 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
F-15
<PAGE>
8. INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED (CONTINUED)
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.
9. RELATED PARTY TRANSACTIONS
The Company executed a loan agreement on August 6, 1999 with a company owned by
certain of the Company's board members. The agreement, under which $100,000 was
advanced at August 31, 1999 in the form of a note receivable, gives the borrower
the option to convert the outstanding principal into shares of such company in a
specified amount. Borrowings under the loan agreement bear interest at prime
plus 1%.
10. LOSS ON ASSET IMPAIRMENT
The Company determined in the fourth quarter of fiscal 1999 that certain fixed
and intangible assets no longer were of value to the Company. Accordingly, such
assets and the related accumulated depreciation and amortization (net book value
of $36,125) were written off.
11. SUBSEQUENT EVENTS
The Company amended its license agreement with Softalk, Inc. (Softalk) on
October 25, 1999. The amended agreement is a worldwide, exclusive license to
distribute, market, service, sell and sublicense any and all of Softalk's
services and products to commercial accounts and a worldwide non-exclusive
license for individual accounts. The Company issued five-year warrants to
purchase the Company's common stock in connection with this amendment as
follows: 3,246,753 exercisable at $3.25; 1,000,000 at $5.00; and 1,000,000 at
$10.00.
On November 13, 1999, the Company purchased certain assets (products and
accounts) from Softalk in exchange for 4,329,004 shares of Class A voting
preferred stock of Interpretel Canada Inc. (the Class A shares). The Class A
shares are exchangeable on a one-for-one basis into the Company's common shares
at any time. The Class A shares must at all times represent at least 15% of the
voting shares and 15% of the fair market value of Interpretel Canada.
F-16
<PAGE>
Wavetech International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
May 31, 2000 and August 31, 1999
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
------------ ------------
ASSETS (unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,012,509 $ 889,620
Prepaid expenses and other assets 9,733 8,529
Accounts receivable 1,371 0
------------ ------------
Total current assets 3,023,613 898,149
Property and equipment, net accumulated
depreciation $ 799,700 and $ 643,771 1,435,062 363,559
License fee, net of amortization of $820,518 and $9,524 8,854,250 190,476
Note receivable from affiliate 1,384,000 100,000
Note receivable from shareholder/director 32,000
Deposits and other assets 13,026 22,211
------------ ------------
Total assets $ 14,741,951 $ 1,574,395
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 272,736 $ 243,029
Notes payable, current portion 0 13,000
Capital lease obligation 3,130 23,680
Dividends payable 25,479 0
Unearned revenue 761 0
------------ ------------
Total current liabilities 302,106 279,709
Capital lease obligation, net of current portion 0 1,579
Stockholders' equity:
Series A preferred stock, 6 % cumulative, par value $.001 per share; 10,000,000
shares authorized, zero and 600 shares issued and outstanding (liquidation
value zero and $600,000) 0 1
Series B preferred stock, 6% cumulative, par value $.001
per share; 10,000,000 shares authorized, 1000 shares issued
and outstanding (liquidation value $5,000,000) 5 0
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 3,318,881 and 3,021,288 shares issued and
outstanding 3,319 3,021
Additional paid in capital 26,528,742 8,757,946
Accumulated deficit (12,092,221) (7,467,861)
------------ ------------
Total stockholders' equity 14,439,845 1,293,107
------------ ------------
Total liabilities and stockholders' equity $ 14,741,951 $ 1,574,395
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-17
<PAGE>
Wavetech International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Nine Month Periods Ended May 31, 2000 and May 31, 1999
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenues $ 6,940 $ 9,173
Expenses:
Cost of sales (exclusive of depreciation
and amortization shown separately below) 24,101 8,793
General and administrative 1,120,626 501,140
Depreciation and amortization 966,922 95,148
----------- -----------
Total expenses 2,111,649 605,081
Net loss from operations (2,104,709) (595,908)
Other income (expense):
Interest income 41,565 59,242
Interest expense (62,928) (7,472)
Merger expenses 0 (118,500)
Miscellaneous income 476 0
Rental income 22,500 27,000
Preferred stock conversion penalty (99,484) (108,000)
Settlement costs 0 (15,000)
Exchange loss (68) 0
----------- -----------
Total other income (expense) (97,939) (162,730)
Net loss before preferred dividends (2,202,648) (758,638)
Cumulative preferred dividends declared and
beneficial conversion deemed dividend 2,412,713 27,300
----------- -----------
Net loss available to common shareholders $(4,615,361) $ (785,938)
=========== ===========
Net loss per common share, basic and diluted $ (1.45) $ (0.25)
=========== ===========
Weighted average number of shares outstanding,
basic and diluted 3,179,863 3,082,553
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-18
<PAGE>
Wavetech International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Month Periods Ended May 31, 2000 and May 31, 1999
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenues $ 6,479 $ 3,683
Expenses:
Cost of sales (exclusive of depreciation
and amortization shown separately below) 16,735 1,454
General and administrative 576,014 165,839
Depreciation and amortization 405,511 42,541
----------- -----------
Total expenses 998,260 209,834
Net loss from operations (991,781) (206,151)
Other income (expense):
Interest income 21,450 15,808
Interest expense (28,687) (2,020)
Merger expenses 0 (17,274)
Miscellaneous income 6 0
Rental income 4,500 9,000
Preferred stock conversion penalty (27,484) (36,000)
Exchange loss (68)
----------- -----------
Total other income (expense) (30,283) (30,486)
Net loss before preferred dividends (1,022,064) (236,637)
Cumulative preferred dividends declared 2,405,940 9,200
----------- -----------
Net loss available to common shareholders $(3,428,004) $ (245,837)
=========== ===========
Net loss per common share, basic and diluted $ (1.04) $ (0.10)
=========== ===========
Weighted average number of shares outstanding,
basic and diluted 3,306,120 2,574,777
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-19
<PAGE>
Wavetech International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine-Month Periods Ended May 31, 2000 and May 31, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net Loss $(2,202,648) $ (758,638)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 966,922 95,148
Preferred stock conversion penalty 99,484 108,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and other assets 7,815 (1,722)
Increase (decrease) in accounts payable and accrued expenses 37,968 200,592
(Increase) decrease in prepaid expenses (1,204) 0
(Decrease) in accrued interest payable 0 (4,538)
----------- -----------
Net cash used in operating activities (1,091,663) (361,158)
Investing activities:
Purchase of property and equipment (548,200) (252,444)
Advances to affiliate (1,284,000) 0
Payment for acquisition of licensing rights 0 (200,000)
Decrease (increase) in other long term assets 0 5,000
(Increase) decrease in notes receivable
to shareholder/director (32,000) 0
----------- -----------
Net cash used in investing activities (1,864,200) (447,444)
Financing activities:
Increase (decrease) in notes payable (13,000) 0
Principal payments on capital lease obligation (22,129) (33,732)
Dividends paid in cash on preferred stock 0 (18,400)
Sale of Common Stock 5,113,881 8,750
----------- -----------
Net cash used in financing activities 5,078,752 (43,382)
Net increase (decrease) in cash 2,122,889 (851,984)
Cash and cash equivalents, beginning of period 889,620 2,202,573
----------- -----------
Cash and cash equivalents, end of period $ 3,012,509 $ 1,350,589
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-20
<PAGE>
Wavetech International, Inc and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
May 31, 2000
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended May 31,
2000, are not necessarily indicative of the results that may be expected for the
fiscal year ending August 31, 2000. The balance sheet at August 31, 1999, has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the Company's financial statements for the year ended
August 31, 1999, included in its Form 10-KSB for such fiscal period.
The consolidated financial statements include the accounts of Wavetech
International, Inc. ("the Company") and its wholly owned subsidiaries,
Interpretel, Inc. ("Interpretel") and Telplex International Communications, Inc.
("Telplex"). All material intercompany balances and transactions have been
eliminated. The Statement of Operations for the nine-month period ended May 31,
1999, has been reclassified to conform to the presentation used for the
nine-month period ended May 31, 2000.
NOTE 2 -- PER SHARE DATA
Basic earnings (loss) per common share equals diluted earnings (loss) per common
share for all periods presented as the effect of all potentially dilutive
securities (preferred stock, stock options and warrants) is anti-dilutive
(decreases the loss per share amount). On December 18, 1998, the Company
effected a one-for-six reverse stock split; all share and per share information
have been restated retroactively to show the effect of this stock split.
NOTE 3 -- TRANSACTIONS WITH SOFTALK, INC.
The Company amended its license with Softalk, Inc. ("Softalk"), an Ontario
corporation, on October 25, 1999. As amended, the license agreement grants to
the Company a worldwide, exclusive license to distribute, market, service, sell
and sublicense any and all of Softalk's services and products to commercial
accounts and a worldwide non-exclusive license for individual accounts. In
connection with the license amendment, the Company issued five-year warrants to
purchase the Company's common stock ("the Common Stock") as follows: 3,246,753
exercisable at $3.25 per share; 1,000,000 at $5.00 per share; and 1,000,000 at
$10.00 per share (collectively, the "Warrants"). The issuance of the Warrants
was recorded at an estimated fair value of $154,000 as of the date of the
license amendment.
On November 13, 1999, the Company, through its subsidiary Interpretel (Canada)
Inc. ("Interpretel (Canada)"), entered into an agreement with Softalk with
respect to the purchase of certain Softalk assets (products and accounts) in
exchange for 4,329,004 shares of Class A non-voting preferred stock of
Interpretel (Canada) (the "Class A shares"). Under the terms of the agreement,
Softalk also granted Interpretel (Canada) a right-of-first-refusal with respect
to the sale of Softalk or any of its intellectual property, software and
patents. The Class A shares are exchangeable on a one-for-one basis for shares
of the Company's Common Stock at any time. The issuance of the Class A shares
was recorded at $10,000,000, the fair value of the Company's Common Shares (into
which the Class A shares can be converted), as of the transaction date.
F-21
<PAGE>
On August 6, 1999 the Company established a loan facility in favor of Softalk,
Inc. Under this facility, the Company has agreed to loan Softalk up to $2
million, bearing an interest rate of prime (as announced by Citibank in New
York, New York) plus one percent (1%). As of May 31, 2000, the outstanding
principal balance on this credit facility was $1,384,000. Softalk may, at its
option and at any time, convert any amount of outstanding principal plus
interest accrued thereon into shares of Softalk capital stock in lieu of and in
full satisfaction of repayment of the principal and interest owed to Wavetech.
The number of shares of Softalk capital stock which may be issued to the Company
for repayment of the full $2 million would be equal to ten percent (10%) of the
value of Softalk, at the time of repayment. If the outstanding principal balance
is less than $2 million, then the number of shares of Softalk capital stock
issued to the Company would be calculated on a pro-rated basis.
Management believes that its $1,384,000 of advances to Softalk are recoverable,
if not repaid, through conversion of such advances into equity of Softalk.
Should such a conversion occur, the Company would own 6.92% of Softalk (based
upon the $1,384,000) advances through May 31, 2000). Management believes that as
of May 31, 2000, Softalk as a whole is worth at least $20,000,000 given that
their equity holding in Wavetech is currently valued in excess of $30 million
and combined with their intellectual property, code, new products and patents
pending, their value would increase on a minimum basis to over $40 million. The
Company believes the real value in Softalk is in its intellectual property,
code, patents pending and the revenue potential of the products it has
commercialized over the past year through royalties from Wavetech and other
potential licensees. Within the last year, Softalk was offered $10 million for a
fifty percent (50%) interest in the company, which was turned down.
On March 1, 2000, the Company executed a promissory note for $32,000 payable to
Rosnani Atan, a director, officer and shareholder of Softalk, and a contract
employee and member of the Board of Directors of the Company. The note is
payable in equal installments of $4,356.55 on each of June 1, September 1,
December 1 and March 1 over the next two years. The note bears interest at the
rate of seven and three quarters percent (7.75%), which is prime less one
percent, as adjusted June 1, September 1, December 1 and March 1 of each year in
advance.
NOTE 4 -- SERIES B PREFERRED STOCK ISSUANCE
On May 1, 2000, the Company completed a $5,000,000 private placement of Series B
Preferred Stock and common stock purchase warrants (the "Warrant") with an
accredited investor. The financing consisted of 1,000 shares of Series B
Preferred Stock and a Warrant to purchase 160,000 shares of common stock. The
Series B Preferred Stock carries a dividend of 6% and a conversion price equal
to the lower of 80% of the average closing bid prices of the Company's common
stock for the three lowest trading days of the 10 consecutive trading days
immediately preceding the conversion date or 110% of the average closing bid
prices of the Company's common stock for the five trading days prior to the date
of issuance of the Series B Preferred Stock. The Warrant has a term of three
years and is exercisable at a price of $0.01 for all 160,000 shares of common
stock. The Company also issued a warrant to purchase 43,371 shares of common
stock to the placement agent in the private placement (the "Agent Warrant"). The
Agent Warrant has a term of three years and a per share exercise price of $8.07.
F-22
<PAGE>
====================================== ======================================
WE HAVE NOT AUTHORIZED ANY PERSON TO
MAKE A STATEMENT THAT DIFFERS FROM
WHAT IS IN THIS PROSPECTUS. IF ANY
PERSON DOES MAKE A STATEMENT THAT
DIFFERS FROM WHAT IS IN THIS
PROSPECTUS, YOU SHOULD NOT RELY ON IT. WAVETECH INTERNATIONAL, INC.
THIS PROSPECTUS IS NOT AN OFFER TO
SELL, NOR IS IT SEEKING AN OFFER TO
BUY, THESE SECURITIES IN ANY STATE IN
WHICH THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION IN THIS
PROSPECTUS IS COMPLETE AND ACCURATE AS
OF ITS DATE, BUT THE INFORMATION MAY
CHANGE AFTER THAT DATE.
Table of Contents
2,318,786 SHARES OF
Where You Can Find More COMMON STOCK
Information ...................... 2
Incorporation of Documents by
Reference ........................ 2
Summary ........................... 3
The Offering ...................... 8
Risk Factors ...................... 9
Use of Proceeds ................... 23
Market for Common Equity and
Related Stockholder Matters ...... 23
Selling Shareholders .............. 24
Determination of Offering Price ... 25 August 31, 2000
Plan of Distribution .............. 25
Description of Securities ......... 27
Legal Matters ..................... 30
Experts ........................... 30
Information with Respect to the
Registrant ....................... 30
Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities ....... 30
====================================== ======================================
