-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mx2Fo4e9NRCLAJToCfrjZjZMTUHsb8eGbrIQU2Y1SaoX1o5pWzNcGcvp0IxwE1ws eCFw00bibRmDyBL9RtCk5g== /in/edgar/work/20000901/0000950147-00-001354/0000950147-00-001354.txt : 20000922 0000950147-00-001354.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950147-00-001354 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAVETECH INTERNATIONAL INC CENTRAL INDEX KEY: 0000799694 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 860916826 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-39378 FILM NUMBER: 715887 BUSINESS ADDRESS: STREET 1: 5210 E WILLIAMS CIRCLE STREET 2: STE 200 CITY: TUCSON STATE: AR ZIP: 85711 BUSINESS PHONE: 5207509093 MAIL ADDRESS: STREET 1: 5210 E WILLIAMS CIRCLE CITY: TUCSON STATE: AZ ZIP: 85711 FORMER COMPANY: FORMER CONFORMED NAME: WAVETECH INC DATE OF NAME CHANGE: 19920703 424B3 1 0001.txt FINAL PROSPECTUS OF WAVETECH INTERNATIONAL 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. 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 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 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 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 WAVETECH INTERNATIONAL, INC. Summary Financial Data The following table summarizes the financial data for our business.
Year Ended August 31 Nine Months Ended May 31 ------------------------------------------- -------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ---------- ----------- 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
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 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.
Year Ended August 31 Nine Months Ended May 31 ------------------------------------------------------------------- -------------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ 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
6
At August 31 Nine Months Ended May 31 ------------------------------------------------------------------- -------------------------- 1995 1996 1997 1998 1999 1999 2000 ---------- ----------- ------------ ----------- ----------- ----------- ------------ 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
7 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 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 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 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 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 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 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 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 * 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 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. 17 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 18 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. 19 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 20 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. 21 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. 22 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. 23 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.
Shares Beneficially Shares Beneficially Owned Prior to the Owned After the Offering Number Offering --------------------- of Shares ------------------- Name Number Percent(1) Offered Number Percent(2) ---- ------ ---------- ------- ------ ---------- 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
- ---------- (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. 24 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. 25 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 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 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 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 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 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 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 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 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 Wavetech International, Inc. Consolidated Statements of Changes in Stockholders' Equity For the years ended August 31, 1999 and 1998
Preferred Stock Common Stock Additional --------------- ------------------ Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ------ ------ ------ ------ ------- ------- ----- 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 === ==== ========= ======== ========== =========== ===========
See notes to consolidated financial statements. F-4 Wavetech International, Inc. Consolidated Statements of Cash Flows For the years ended August 31, 1999 and 1998
1999 1998 ----------- ----------- 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 =========== ===========
See notes to consolidated financial statements. F-5 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 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 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 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 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 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 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 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 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 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 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 Wavetech International, Inc. and Subsidiaries Condensed Consolidated Balance Sheets May 31, 2000 and August 31, 1999
May 31, August 31, 2000 1999 ------------ ------------ ASSETS (unaudited) (Note 1) 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 ============ ============
See Notes to Condensed Consolidated Financial Statements. F-17 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 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 Wavetech International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended May 31, 2000 and May 31, 1999
2000 1999 ----------- ----------- (unaudited) (unaudited) 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 =========== ===========
See Notes to Condensed Consolidated Financial Statements. F-20 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 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 ====================================== ====================================== 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 ====================================== ====================================== -----END PRIVACY-ENHANCED MESSAGE-----