<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the 11 months ended June 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
ACT
For the transition period from _____________ to _________
Commission file number 33-90344
Clariti Telecommunications International, Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware 23-2498715
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1341 North Delaware Avenue, Philadelphia, PA 19125
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (215) 425-8682
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes (X) No ( )
Check if the disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ________
The Registrant's revenues for its most recent fiscal year were: $-0-
<PAGE>
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the average closing bid and asked prices of the
Registrant's Common Stock in the over-the-counter market on September 11, 1998,
was approximately $26,232 thousand. Shares of voting stock held by each
officer and director and by each person who owns 5% or more of the outstanding
voting stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive.
As of September 11, 1998, 23,737,283 shares of Common Stock, $.001 par value
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes ( ) No (X)
2
<PAGE>
PART I
ITEM 1. BUSINESS
Business Development
- --------------------
Clariti Telecommunications International, Ltd. (the "Company") is a
telecommunications company whose strategy is to bring innovative, affordable,
wireless telecommunications products and services to markets worldwide. The
Company is currently developing a low-cost Digital Voice Paging System for use
on FM radio frequencies based on the Company's patent pending technology.
The Company was formed in February 1988 as the successor to a music and
recording studio business owned and operated by Peter Pelullo, the Company's
Chief Executive Officer and Chairman of the Board. The Company became publicly
held upon its merger in January 1991 with an inactive public company
incorporated in Nevada. The surviving corporation changed its name to "Sigma
Alpha Entertainment Group, Ltd." and was subsequently reincorporated in
Delaware. In 1995 the Company changed its name to Sigma Alpha Group, Ltd.
In early 1995, the Company was introduced to the concept of voice paging
using FM radio frequencies. Soon thereafter, the Company began shifting its
focus from the music and recording business to telecommunications. In April
1995, the Company acquired an 80% interest in Global Telecommunications of
Delaware, Inc. ("Global"), an entity that was formed to develop FM voice paging
technology. In March 1998 the Company changed its name to Clariti
Telecommunications International, Ltd. to reflect its current business focus,
and in April 1998 the Company acquired the remaining 20% of Global. The
Company no longer has any significant interest in the music and recording
business.
The Company's Telecommunications Products and Services
- ------------------------------------------------------
The Company is presently developing wireless telecommunications products
and services that utilize radio frequencies transmitted by FM radio stations.
Management believes that a need exists worldwide for telecommunications
products that communicate information in an economically feasible manner
without the need for intensive capital investment. The Company is developing a
process that utilizes FM radio frequencies to provide a wireless information
transmission network without the significant investment capital requirements of
traditional telecommunication and cellular infrastructure.
Digital Voice Paging System
The first significant application of the Company's patent pending
technology is a Digital Voice Paging System. Currently under development, the
Digital Voice Paging System will allow a designated FM radio station to
provide a service that transmits a message to the owner of a Digital Voice
Pager in the actual voice of the person generating the message. A subscriber to
the paging system must first buy a hand held Digital Voice Pager and then pay a
monthly subscription fee for the paging service. Once a subscriber's account
has been established, callers can leave voice messages for the subscriber by
calling the paging system's central phone number and entering the subscriber's
personal identification number. The calling party's message is then digitized,
compressed and transmitted by the radio station's FM transmitter to the
3
<PAGE>
specific Digital Voice Paging subscriber. The Digital Voice Paging System
provides paging that coexists with, but does not interfere with the FM radio
station's existing commercial broadcasts.
Stock Information Receiver
During 1996 while in the process of developing its technology, Global
identified an application concerning the distribution of stock market
information in the Chinese market place. As a result of the requests of several
Chinese radio stations, Global developed a stock market information receiver
("SIR"). The SIR is a radio receiver designed to receive a scrambled analog FM
radio signal transmitted by an FM radio station's transmitter over their excess
bandwidth. The SIR allows a subscriber to receive stock market information
from the stock exchange in China, which is transmitted by Chinese radio
stations.
In July 1997, the Company determined that the expected cost of continuing
Global's activities directed toward development, production and sale of the SIR
product line was higher than originally anticipated. As a result, the
Company concluded that its limited capital resources would not allow for the
funding of Global's continued development of the SIR system in parallel with
the Company's core business strategy of developing and commercializing its
Digital Voice Paging System. The Company subsequently evaluated various
alternatives for the SIR program, including joint venture arrangements and
royalty/licensing arrangements, but was unable to continue the SIR program at
an acceptable cost. In June 1998 the Company determined that the SIR program
would be terminated permanently. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations" for a
description of the special charges recorded during the 11 months ended June 30,
1998 and the 12 months ended July 31, 1997 resulting from the suspension and
termination of the SIR program.
Development of the Digital Voice Paging System
- ----------------------------------------------
The Company's Technology
The Company's technology utilizes the FM-SCA channels available on any FM
radio station. FM-SCA (Subsidiary Communication Authorization) channels, also
known as FM "subcarrier" channels, are the "sideband" of an FM radio station's
broadcasting frequencies. Each FM radio station has two FM-SCA channels.
Similar to the SAP (Secondary Audio Programming) channel in television
broadcasting, the FM-SCA spectrum is owned by the FM radio station and can be
used for broadcasting alternate services. Typical uses for FM-SCA are
commercial free music, reading services for the blind, educational services,
and data services (e.g. stock quotes, farm reports). Broadcasting
individualized digital voice paging messages over FM-SCA, however, is
significantly different than any of these alternate broadcast services.
The Company has developed patent pending technology for sending digital
voice pages over FM-SCA frequencies. A state-of-the-art voice compression
algorithm creates a compact digital representation of the original voice
message. Digital signal processing (DSP) technology creates a transmission
waveform (modulated carrier) that enables the compact digital voice messages to
4
<PAGE>
be transmitted wirelessly at high data rates over an FM-SCA channel. The
digital paging signal incorporates advanced error correction schemes to
overcome the environmental distortions found in all wireless transmissions.
FM-SCA Broadcasting
Two significant advantages of the Company's technology as compared to
conventional paging and cellular technology are (1) FM-SCA channels do not
require new radio frequency spectrum allocation and (2) the transmission
infrastructure for FM-SCA already exists in the form of the FM radio station's
equipment. As a result, the Company's Digital Voice Paging System will require
significantly less investment to establish a network and acquire the necessary
hardware (expected to be approximately $130 thousand for a city as compared to
the millions of dollars typically spent on conventional paging and cellular
systems). In addition, the existence of the FM radio station's transmission
infrastructure and the simplicity of the Company's Digital Voice Paging System
will allow for more rapid installation of the system (expected to be several
days rather than the months/years required for conventional paging and cellular
systems).
Based on discussions with foreign FM radio stations, the Company believes
that a demand exists worldwide for more efficient utilization of FM-SCA
channels. Similar to the United States, FM radio stations in most foreign
countries are granted government licenses to operate an FM radio signal within
an assigned range of frequency. A typical FM station is assigned a bandwidth
of 100 kHz. An FM station will take up to a maximum of 53 kHz for their
commercial (main channel) programming. The remaining SCA portion of the base
band signal from 54 kHz to 100 kHz, or close to 50% of the available FM channel
spectrum resource, is not required for broadcasting the main channel
programming.
FM-SCA has been used in the United States and other developed countries
for background music without commercial interruption, reading services for the
blind, stock market, sports, and weather reports, and educational and religious
applications. As a result, the use of in-place FM transmission systems to
provide a wide coverage paging application may in some instances be limited due
to previous user allocation. This does not appear to be the case, however, in
emerging growth nations. Chinese, Latin American, and other foreign FM radio
stations have actively been pursuing the use of this FM-SCA bandwidth to
generate significant revenues for operations.
System Design
The Digital Voice Paging System is comprised of 4 major components:
- FM radio transmitter (i.e. the transmission infrastructure)
- Paging Terminal
- SCA Generator
- Digital Voice Pagers
The FM radio transmitter includes the transmission tower and all support
equipment used by the FM radio station for its main channel programming. This
equipment is already in place and owned by the FM radio station. The Digital
Voice Paging System requires no additional equipment to use the FM radio
station's FM-SCA channels other than that described below. The Company
5
<PAGE>
believes that only minimal modification to existing FM radio station
transmitters is necessary to utilize the Company's Digital Voice Paging System.
The Company expects to lease the use of one or both SCA channels from the FM
radio station.
The Paging Terminal incorporates a full-featured voicemail system. It
automatically answers incoming telephone calls, prompts the caller to leave a
message, and records the message in the caller's voice. After the caller has
hung up, the voice message is digitally compressed into a compact paging
message and a pager address is added. These paging messages are then forwarded
to the SCA Generator for modulation and mixing with the FM station's main
channel programming. This combined signal is then sent through the FM radio
station's transmitter.
The Digital Voice Pager receives the signal from the FM radio station,
extracts the messages that are addressed to it, and decodes the message. An
audible or vibrating signal alerts the user that a message has been received.
Upon playback the user listens to the message in the caller's actual voice.
The user can play, fast forward, rewind, save, and delete messages, similar to
using voicemail or a home answering machine.
Status of System Development
In April 1998, the Company successfully tested its digital voice paging
"Beta System" in Philadelphia. The Beta System is comprised of multiple,
individually addressable, handheld, battery-operated voice pagers receiving
pages over the Company's Digital Voice Paging System. The pages were sent over
the FM subcarrier frequencies of WIOQ 102.1 FM, a commercial radio station in
Philadelphia. The performance of the Beta System, including the error
correction algorithms and the pagers' audio quality met or exceeded the
Company's expectations. The Company also successfully tested its Beta System in
Brazil in July 1998. There can be no assurance, however, that the successful
tests of the Beta System will result in the successful development of the
production model.
The Company is now in the process of completing development of production
equipment. This process consists mainly of miniaturizing the Digital Voice
Pager, finalizing the software on the Pager Terminal and SCA Generator, and
testing the entire system. The Company expects to complete development of the
first generation of its Digital Voice Paging System in 1999 and launch its
first commercial voice paging service in a major international city shortly
thereafter. New product development efforts are subject to all of the risks
inherent in the development of new technology and products, including
unanticipated delays, expenses, technical problems or difficulties, as well as
the possible insufficiency of funding to complete development. There can be no
assurance as to when, or whether, the Digital Voice Pager will be successfully
developed. No assurance can be given that prototypes and final products can be
developed within a reasonable development schedule, if at all. There can be no
assurance that the Company will have sufficient economic or human resources to
complete such development in a timely manner, or at all.
6
<PAGE>
Commercialization of the System
Commercialization of the Company's Digital Voice Paging System requires
access to existing FM radio stations broadcasting in those cities where the
Company plans to offer its Digital Voice Paging service. Accordingly, the
Company will be required to secure the use of FM radio subcarrier frequencies
in the markets it intends to enter. The Company does not believe, based on the
experience of its management, that the use of sub-carrier frequencies is
extensive in its targeted market areas and, accordingly, the Company does not
expect difficulty in accessing such frequencies. Thus far, the Company has
obtained access to one SCA channel in Rio de Janeiro for use in testing its
Digital Voice Paging System outside the United States. However, there can be
no assurance that FM radio station owners in targeted market areas will not
develop other uses for their subcarrier frequencies, which would have a
material adverse effect on the Company's business.
In international locations, the Company expects to use a joint venture
approach to market the Digital Voice Paging System, joining forces with local
companies that have better knowledge of local telecommunications market
conditions and are better positioned to educate radio station owners regarding
the advantages of the Company's products. The Company expects the joint
ventures to lease the use of the radio station's FM-SCA channels at a cost
competitive with other potential users of FM-SCA channels in the area.
Marketing the Digital Voice Paging System
- -----------------------------------------
Management believes the greatest opportunity to attain significant market
penetration with its Digital Voice Paging System is in emerging markets such as
China and Brazil. The number of paging subscribers in China (over 40 million
as of December 31, 1997) now exceeds that of the United States, and projections
indicate paging users in China will continue to expand at rapid rates. Similar
growth projections exist for paging subscribers in many other populous emerging
markets, including Brazil. The Company plans to be a significant part of this
growing worldwide paging market using its FM-SCA technology.
The Company believes the best approach to marketing the Digital Voice
Paging System in foreign markets is through the development of joint venture
relationships with local companies in specified target areas. The Company
intends to seek out joint venture partners who are experienced with marketing,
distribution and regulatory issues related to the paging industry and radio
station operations, as well as the economic, cultural and political
environments in their respective areas. The Company believes that a joint
venture approach will result in a rapid deployment of its products and services
in multiple areas throughout the world.
The marketing strategy of each joint venture will vary, depending on the
circumstances in each geographic area. However, several elements of the
strategy are likely to be the same. It will be important for the joint
ventures to educate radio stations regarding their ability to generate
significant additional revenues by utilizing the Company's technology with
their available FM-SCA channels. In addition, emphasis will focus on their
ability to generate these revenues without the need for significant investment
capital and highlight the advantages of the Company's Digital Voice Paging
System compared to traditional paging systems currently in use. The joint
7
<PAGE>
ventures also will be responsible to market voice pager services to local
subscribers and implement support and service personnel needed to run a paging
service. Each joint venture will determine the best method of sales and
distribution for their operation, directly to the subscriber, through retail
electronic outlets, or through the radio stations themselves.
The Company is currently researching prospective joint venture partners
for the purpose of marketing, selling and distributing the Company's Digital
Voice Paging System and other telecommunications products in various target
markets. In April 1997, the Company signed a letter of intent with the Batista
Group in Brazil providing for the formation of a Brazilian joint venture. In
September 1998, the Company and the Batista Group reached an understanding that
enables the Company to seek other joint venture partners for the territory of
Brazil. Presently, the Company does not anticipate entering into any further
agreement with the Batista Group. The Company is involved in other discussions
with the intent of negotiating a relationship with a partner that has strong
telecommunications and/or distribution experience. There can be no assurance
however that the Company will be successful in its efforts to enlist joint
venture partners in the markets it plans to target.
The Company believes the advantages associated with its Digital Voice
Paging System as compared to tone-only pagers, numeric pagers, and text pagers
will allow the Company to successfully market its products. However, there can
be no assurance that the Company's products will be successfully received in
those market places the Company chooses to target. The Company believes the
selling price and monthly subscription rates for its Digital Voice Pager will
be competitive with existing text pagers in use around the world.
Competition
- -----------
The Company expects to market its Digital Voice Paging System in
markets where paging has become well accepted as a means of communication. As
a result, the Company's products and services will compete with those of
numerous well-established companies which design, manufacture or market
beepers, numeric pagers and text paging systems and other telecommunications
products. Most of these companies have substantially greater financial,
technical, personnel and other resources than the Company, and have established
reputations for success in the development, licensing, sale and service of
their products and technology. Certain of these competitors may also have the
financial resources necessary to enable them to withstand substantial price
competition or downturns in the market for voice pagers and related products.
The Company believes that the demand for personal telecommunications
devices has increased drastically in the past decade in China, Latin America
and other emerging markets, with the major market growth focused on two
products: cellular mobile phones and paging systems. Cellular phone networks
require extensive front end investment for their initial implementation, and
continuous investment to increase the number of cells in order to maintain an
acceptable user density level per cell, since the density level grows with the
increase in numbers of subscribers. Cellular phone networks also require a
developed telephone infrastructure network encompassing a large coverage area
which the Company believes China and other emerging markets presently lack.
8
<PAGE>
Traditional paging systems, on the other hand, require less investment,
but typically provide a one way message service in numbers or characters. The
first generation pager was a beeper-based system which "beeped" when a number
associated with a specific pager was accessed. Subsequently, numerical based
pagers were developed capable of transmitting a telephone number to a hand held
pager device. Both of these systems are "notification" based in that no actual
message is sent. The individual carrying the pager needs to call a telephone
number to receive the particular message. The Company believes that this
presents a problem to users in countries with a low per capita number of
telephones and underdeveloped telecommunication infrastructures. Accordingly,
users of beepers or numeric pagers in such regions may not have ready access to
a telephone to receive their messages.
Text or alphanumeric pagers, on the other hand, are not "notification"
based as they provide a subscriber with an actual character message. These
pagers allow subscribers to receive and store messages consisting of both
letters and numbers. The Company believes, based upon its market research,
that text paging systems present significant problems, particularly in China,
due to the number and complexity of Chinese characters (in excess of 13,000).
These problems include the need for large pools of typists who possess the
skills needed to translate different Chinese dialects with accuracy and speed
into correct Chinese characters for transmission to Chinese character pagers.
In addition, substantial investment is required in many foreign marketplaces to
establish the network and to purchase the necessary hardware to operate a
conventional paging system.
The Company believes that its Digital Voice Paging System will possess
significant advantages over existing numeric, alphanumeric and character pagers
by allowing a subscriber to receive and play on a hand held Digital Voice
Pager, a voice message from the actual party trying to reach the subscriber.
The Digital Voice Paging System will not require the subscriber to have access
to a telephone to receive a message. Moreover, the Digital Voice Paging System
does not require large pools of typists to transcribe messages. This ensures
message privacy and eliminates translation errors resulting from dialect
differences that the Company believes are currently being experienced in the
Chinese pager market. The Digital Voice Paging System also eliminates
significant investments required for establishing the network and hardware of
other pager systems.
Production and Manufacturing Plans
- ----------------------------------
The Company does not presently intend to establish its own manufacturing
facilities to produce its Digital Voice Pager and future products. Instead the
Company plans to contract manufacture custom made Application Specific
Integrated Circuits ("ASIC") and masked Central Processing Units ("CPU"). In
addition, the Company will purchase the various component parts necessary to
produce finished products from a variety of vendors. The Company intends to
ship ASIC and other component parts to contract manufacturers abroad to
assemble the Digital Voice Pager and future products. Since the Company will
not operate its own manufacturing facilities, it will be dependent upon the
ability of contract manufacturers to manufacture and assemble products in
accordance with specifications provided by the Company. In the event that the
contractors are unable to meet these specifications or experience delays in
delivering products to the Company, the Company's business would be adversely
affected.
9
<PAGE>
The Company may in the future seek to establish its own manufacturing
facilities and/or form joint ventures with manufacturers abroad in order to
manufacture and assemble the Company's products. In such event, the Company
may need further financing to implement such manufacturing plans. There can be
no assurance that financing will be available to the Company at such time, or
if available on terms acceptable to the Company.
Patents and Trade Secrets
- -------------------------
In January 1996, the Company filed a patent application for protection of
its Digital Voice Paging technology under United States patent laws. The
Company also has filed similar patent applications in numerous foreign
countries around the world. In September 1997 and August 1998, the Company was
notified that its patent application was approved by government authorities in
South Africa and Taiwan, respectively. There can be no assurance as to the
ultimate success of the Digital Voice Paging patent application in the United
States or any other foreign country. Furthermore, even if a patent is issued
to the Company, there can be no assurance that such patent will not be
circumvented and/or invalidated by competitors of the Company. Further, the
enforcement of patent rights often requires the institution of litigation
against infringers, which litigation is often costly and time consuming. The
Company also intends to rely on trade secrets, know how and continuing
technological advancement to establish a competitive position in the
marketplace. There can be no assurance that the Company will be able to
adequately protect its technology from competitors in the future.
Government Regulations
- ----------------------
The Company's proposed operations relate to conduct of operations in
foreign countries. Accordingly, the Company's operations will be
subject to the risks of conducting business internationally, including possible
instability in foreign governments, changes in regulatory requirements,
difficulties in obtaining foreign licenses, as well as other general barriers
and restrictions in relation to compliance with foreign laws.
The Company's Digital Voice Paging technology utilizes FM-SCA channels
available on all FM radio frequencies worldwide. In the United States, the
Federal Communications Commission ("FCC") considers FM-SCA channels to be part
of the total FM frequency allocated to a radio station and therefore does not
separately license or regulate FM-SCA channels. The Company believes that
regulators in the foreign markets it plans to enter take a similar position in
their countries to that of the FCC regarding the licensing and regulation of
FM-SCA channels. The Company plans to rely on its local joint venture partners
to facilitate access to and use of FM-SCA channels in the local markets. There
can be no assurance that the Company will be successful in this regard.
Research and Development
- ------------------------
Research and development costs were $1,188 thousand for the 11 months
ended June 30, 1998, all of which was expended on development of the Digital
Voice Paging System. Research and development costs were $445 thousand for the
12 months ended July 31, 1997, of which $321 thousand was for the Digital Voice
Paging System. The Company has incurred cumulative research and development
10
<PAGE>
costs of $1,509 thousand on the Digital Voice Paging System through June 30,
1998. The Company expects to incur an estimated $2 million to $3 million of
additional research and development costs to complete development of the first
generation of the Digital Voice Paging System. Management is aware, however,
that there can be no assurances that the Digital Voice Paging System will be
developed into a commercially viable product, or if developed, that it can be
successfully marketed.
Until recently, the Company has lacked substantial prior experience in the
telecommunications industry. In response to this issue, the Company hired a
new Chief Operating Officer in July 1997 and a new President in October 1997,
both of whom have substantial experience in development and marketing of new
telecommunications products. In addition, since April 1998, the Company has
hired eight new engineering employees, all of whom have substantial experience
in the development of new telecommunications products. The Company has also
engaged consultants and subcontractors from the telecommunications industry to
assist in the development of the Company's Digital Voice Paging technology.
Although the Company has created an experienced internal development team,
the Company has subcontracted certain elements of the development of its
Digital Voice Paging System to third party engineering and development firms.
Generally, such contracts provide for payments to be made by the Company on a
time and material basis. Costs incurred for research and development work
performed by third parties was $1,112 thousand in the 11 months ended June 30,
1998 and $391 thousand in the 12 months ended July 31, 1997.
Management believes that significant progress has been made on the
development of the Digital Voice Paging System. The Company has experienced
delays in past development efforts; however, management expects completion of a
production ready prototype of the first generation of the Digital Voice Paging
System during 1999. Although the Company's efforts to create an experienced
in-house development team have reduced dependence on third-party development
contractors, the ultimate success of the development of the Digital Voice
Paging System will be significantly influenced by how well third party
development contractors perform their functions. The inability of, and/or
delay by such contractors in performing such developmental services could have
a material adverse effect on the Company.
Employees
- ---------
The Company has 17 employees, all of whom are full time. Such employees
consist of five executive officers, eight research and development
professionals, and four employees responsible for marketing, finance, investor
relations and administration.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 1341 N. Delaware Avenue, Suite
408, Philadelphia, Pennsylvania 19125, which the Company leases pursuant to a
written lease expiring in 1999. The rent for the 3,233 square feet of office
space is $29 thousand per year subject to certain customary increases. In July
1998, the Company opened an engineering center at 2100 Corporate Boulevard,
Boynton Beach, Florida, which the Company leases pursuant to a written lease
expiring in 2001. The rent for the 3,300 square feet of office space is $25
thousand per year subject to certain customary increases.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As of September 11, 1998, the Company had several judgments related to
accounts payable and taxes payable, the aggregate amount of which is
approximately $130 thousand. Management has been negotiating actively and
attempting to work out settlements with respect to these judgments and tax
assessments.
In September 1997, the Company's subsidiary, Global Telecommunications of
Delaware, Inc. ("Global"), was served with a Summons and Complaint by a former
supplier of electronic parts in the U.S. District Court for the Eastern
District of Pennsylvania. The Complaint sought specific performance of a
contract and plaintiff claimed they were entitled to receive approximately $106
thousand from Global. In March 1998, the Plaintiff and Global agreed to a
voluntary dismissal of the case as the amount in controversy was reduced below
the jurisdictional limits of the U.S. District Court. Plaintiff has the right
to refile its action in State Court, but had not done so as of September 11,
1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the two months ended June 30, 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the National Association of
Securities Dealers, Inc., over-the-counter market on the OTC Bulletin Board
under the symbol "CLRI."
Market Information
- ------------------
The following table sets forth the high and low bid prices per share of
Common Stock as quoted by National Quotation Bureau, Inc. In June 1998, the
Company changed its fiscal year end from July 31 to June 30. As a result, the
following table presents data for the 11 months ended June 30, 1998 and the 12
months ended July 31, 1997.
12 Months Ended July 31, 1997
- -----------------------------
High Bid Low Bid
-------- --------
Quarter ended:
October 31, 1996 $3 1/8 $1 1/2
January 31, 1997 $2 11/16 $2 1/16
April 30, 1997 $3 $2 3/16
July 31, 1997 $2 1/2 $1 27/32
11 Months Ended June 30, 1998
- -----------------------------
High Bid Low Bid
-------- --------
Period ended
October 31, 1997 $2 3/8 $1 3/4
January 31, 1998 $1 15/16 $1
April 30, 1998 $1 5/8 $ 15/16
June 30, 1998 $3 5/16 $1 3/8
The above prices presented are bid prices, which represent prices between
broker dealers and do not include retail mark-ups, mark-downs or commissions to
the dealer. The prices also may not necessarily reflect actual transactions.
On September 11, 1998 the closing price for the Company's common stock was
$1.875 per share.
Holders
- -------
As of September 11, 1998 the Company had 202 shareholders of record of its
Common Stock. Such number of record holders was derived from the stockholder
list maintained by the Company's transfer agent, American Stock Transfer &
Trust Co., and does not include the list of beneficial owners of the Company
whose shares are held in the names of various dealers and clearing agencies.
Including non-objecting beneficial shareholders, the Company had approximately
690 record and beneficial owners of its common shares as of September 11, 1998.
13
<PAGE>
Dividends
- ---------
To date, the Company has not declared or paid any cash dividends and does
not intend to do so for the foreseeable future. The Company intends to retain
all earnings, if any, to finance the continued development of its business.
Any future payment of dividends will be determined solely by the discretion of
the Company's Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements appearing elsewhere in this report.
General Operations
- ------------------
Clariti Telecommunications International, Ltd. ("Clariti" or "the
Company") is pursuing a business strategy of bringing innovative, affordable,
wireless telecommunications products and services to markets worldwide. Clariti
is currently developing the world's first low-cost Digital Voice Paging System
for use on FM radio frequencies based on the Company's patent pending
technology.
11 Months Ended June 30, 1998
vs. 12 Months Ended July 31, 1997
- ---------------------------------
Results of Operations
In June 1998, the Company changed its fiscal year end from July 31 to June
30. As a result, the current fiscal period consists of the 11-month period
from August 1, 1997 to June 30, 1998. The following analysis of results of
operations compares activity for the 11 months ended June 30, 1998 ("Fiscal
1998") vs. the 12 months ended July 31, 1997 ("Fiscal 1997"). Period-to-period
variances that result from the existence of one additional month in Fiscal 1997
are quantified where material in the following analysis.
For Fiscal 1998, the Company incurred a net loss of $4,248 thousand on no
revenues compared to a net loss of $7,297 thousand on revenues of $348 thousand
for Fiscal 1997, a decrease in the net loss of $3,049 thousand. Factors
contributing to the decrease in the net loss were ($ in thousands):
- Lower officers' compensation $1,782
- Lower consulting fees $1,250
- Lower provision for write-down of
assets and other accruals $ 609
- Lower marketing expenses $ 123
- Lower travel expenses $ 61
- Lower other operating expenses $ 53
- Lower professional fees $ 45
- Lower other salaries and payroll costs $ 8
Factors partially offsetting the decrease in net loss were ($ in thousands):
- Higher research and development expenses $ 743
- Higher interest expense $ 58
- Lower interest income $ 47
- Lower gross profit $ 34
14
<PAGE>
Operating revenue and gross profit were recognized for the first time in
Fiscal 1997 from the telecommunications business operations of Clariti's
subsidiary, Global Telecommunications of Delaware, Inc. ("Global"). Global
sold approximately 12,500 stock information receiver ("SIR") units, generating
$348 thousand of revenue and $34 thousand of gross profit all in the first half
of Fiscal 1997. However, the Company suspended Global's SIR program and as a
result, no revenues or gross profit have been incurred since the first half of
Fiscal 1997 (see "Stock Information Receiver").
For Fiscal 1998, officers' compensation was $1,052 thousand as compared to
$2,834 thousand for Fiscal 1997, a decrease of $1,782 thousand, or 63%. The
decrease was due to higher compensation received by the Company's Chairman and
Chief Executive Officer during Fiscal 1997 in the form of (1) 1.25 million
shares of the Company's restricted common stock valued at $2 million, (2) $106
thousand of accumulated but unpaid vacation pay since the inception of the
Chairman's employment contract with the Company, and (3) $49 thousand of
compensation resulting from retirement of the Company's Series C preferred
stock. These decreases were partially offset by $359 thousand of additional
officers' compensation in Fiscal 1998 for a new President hired in October 1997
and a new Senior Vice President and Chief Operating Officer hired in July 1997.
For Fiscal 1998, consulting fees were $770 thousand as compared to
$2,020 thousand for Fiscal 1997, a decrease of $1,250 thousand, or 62%. The
decrease was due to a $1,243 thousand reduction in the fair value of common
stock warrants issued to consultants and investment bankers who assisted the
Company in raising equity capital.
In Fiscal 1997 the Company determined that the expected cost of continuing
Global's activities directed toward development, production and sale of the SIR
product line was higher than originally anticipated. As a result, the Company
temporarily suspended the SIR program at that time, concluding that its limited
capital resources would not allow for the funding of Global's continued
development of the SIR system in parallel with the Company's core business
strategy of developing and commercializing its Digital Voice Paging System.
Due to the decision to temporarily suspend the SIR program, the Company
recorded a pretax provision for loss of $687 thousand in Fiscal 1997. Global's
inventory was written down to $78 thousand, the estimated net realizable value
as of July 31, 1997, and all other SIR assets were written off entirely. The
Company subsequently evaluated various alternatives for the SIR program,
including joint venture arrangements and royalty/licensing arrangements, but
was unable to continue the SIR program at an acceptable cost. In Fiscal 1998
the Company determined that the SIR program would be terminated permanently,
and that the remaining book value of SIR inventory ($78 thousand) should be
written off. The termination of Global's SIR program is not expected to
negatively affect the development and commercialization of the Company's
Digital Voice Paging System.
For Fiscal 1998, the Company incurred no marketing expenses versus $123
thousand in marketing expenses for Global's SIR program in Fiscal 1997. For
Fiscal 1998, travel expenses were $388 thousand as compared to $449 thousand
for Fiscal 1997, a decrease of $61 thousand or 14%, which can also be
attributed to the Company's decision to suspend and then terminate Global's SIR
program.
15
<PAGE>
For Fiscal 1998, other operating expenses were $327 thousand as compared
to $380 thousand for Fiscal 1997, a decrease of $53 thousand or 14%. The
existence of one additional month in Fiscal 1997 accounted for $43 thousand of
this decrease.
For Fiscal 1998, professional fees were $185 thousand as compared to $230
thousand for Fiscal 1997, a decrease of $45 thousand or 20%. The existence of
one additional month in Fiscal 1997 accounted for all of this decrease. Fiscal
1998 professional fees included $50 thousand incurred to the Company's
securities counsel.
For Fiscal 1998, research and development expenses were $1,188 thousand as
compared to $445 thousand for Fiscal 1997, an increase of $743 thousand or
167%. During Fiscal 1998, the Company significantly accelerated development
work on its Digital Voice Paging System, including the successful completion of
alpha and beta testing of the technology. Such efforts increased R&D costs
incurred on the Digital Voice Paging System by $867 thousand compared to Fiscal
1997. If not for the existence of one additional month in Fiscal 1997, the
increase would have been approximately $1 million. Partially offsetting this
increase was the absence of $124 thousand of R&D costs incurred on the SIR
program in Fiscal 1997. Management's plans call for continued acceleration of
research and development work on the Digital Voice Paging System and related
technology, spending approximately $2 million to $4 million per year in each of
the next two fiscal years.
For Fiscal 1998, interest expense was $58 thousand as compared to none in
Fiscal 1997. The Fiscal 1998 amount largely reflects the fair value assigned
to 50 thousand warrants that were attached to short-term borrowings of $250
thousand in Fiscal 1998, as well as the interest incurred on such borrowings
while they were outstanding.
For Fiscal 1998, interest income was $33 thousand as compared to $80
thousand in Fiscal 1997, a decrease of $47 thousand or 59%. This decrease is
due to lower average cash balances available for investment during Fiscal 1998.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $1,034 thousand
(including a cash balance of $1,391 thousand) as compared to working capital of
$1,412 thousand (including a cash balance of $1,688 thousand) at July 31, 1997.
The working capital decrease of $378,000 is primarily due to a $297 thousand
decrease in cash and the write-off of inventory with a book value of $78
thousand. The decrease in cash reflects $3,269 thousand used in operations and
$295 thousand used in investing activities (primarily capital expenditures),
partially offset by proceeds from the sale of capital stock for $3,017 net of
commissions and $250 thousand from short term loans.
In April 1995, the Company entered into a Separation Agreement with Joseph
Tarsia, the former Chairman of the Board of Directors of the Company (the
"Former Chairman"). At the time of the Former Chairman's separation, he held
approximately 1,740 thousand shares of the Company's common stock and the
Company owed the Former Chairman and certain parties related to the Former
Chairman a total of $2,038 thousand ("Debt Due the Former Chairman"), the
details of which are disclosed in the following table ($ in thousands).
16
<PAGE>
Obligee Nature of the Debt Amount
- ------------------------------------------ -------------------- ------
Joseph Tarsia Accrued compensation $1,080
Joseph Tarsia Loan payable 42
Joseph and Cecelia Tarsia (H/W) Loan payable 332
Sigma Sound Services, Inc.(1) Loan payable 113
Sigma Sound Studios Profit Sharing Plan(2) Loan payable 471
------
Total Debt Due the Former Chairman $2,038
------
(1) The Former Chairman is the President and sole owner of all of the
outstanding common stock of Sigma Sound Services, Inc.
(2) The Former Chairman is Trustee of the Sigma Sound Studios Profit Sharing
Plan.
In conjunction with the Former Chairman's separation from the Company,
Kathleen Patten, a third party investor (the "Investor"), purchased all of the
Former Chairman's shares of common stock in the Company for $417 thousand. In
addition to the Former Chairman's stock, the Investor also acquired all of the
Debt Due the Former Chairman. The Investor then agreed to release the Company
of all obligations and claims under the Debt Due the Former Chairman in
consideration for payment by the Company of $61 thousand in cash and 395
thousand shares of the Company's Series B Preferred Stock. The Preferred Stock
was valued at $1,977 thousand, the difference between the total face value of
the Debt Due the Former Chairman assumed by the Investor and the $61 thousand
cash payment.
In accordance with the terms of the Former Chairman's Separation
Agreement, the Company was required to pay the Former Chairman $750 per week
until such time that the Investor completed making all payments to the Former
Chairman as required under the terms of the Investor's agreement with the
Former Chairman. Compensation paid by the Company to the Former Chairman under
the Separation Agreement was approximately $35 thousand in the 11 months ended
June 30, 1998 and approximately $18 thousand in the 12 months ended July 31,
1997.
In July 1998, the Investor completed making all required payments to the
Former Chairman, thus terminating the Company's requirement to make future
weekly payments to the Former Chairman. As of June 30, 1998 the Company owed
the Former Chairman $43 thousand reflecting a total of approximately 57 weeks
of accrued payments owed to the Former Chairman. In August 1998, the Company
and the Former Chairman agreed to settle such past due obligations for the
issuance of a promissory note to the Former Chairman in the amount of $43
thousand and the issuance of 6.6 thousand shares of the Company's restricted
common stock. The promissory note bears interest at an annual rate of 8% and
is payable in equal weekly installments of $861 over a period of 52 weeks. The
Company's June 30, 1998 consolidated balance sheet (accrued expenses and other
accrued liabilities) includes a total of $61 thousand payable to the Former
Chairman reflecting the past due balance of $43 thousand and $18 thousand for
the fair value of the restricted common stock issued in August 1998. See Note 7
to the Consolidated Financial Statements.
17
<PAGE>
In April 1998, the Company successfully tested its digital voice paging
"Beta System" in Philadelphia. The Beta System is comprised of multiple,
individually addressable, handheld, battery-operated voice pagers receiving
pages over the Company's Digital Voice Paging System. The pages were sent over
the FM subcarrier frequencies of WIOQ 102.1 FM, a commercial radio station in
Philadelphia. The performance of the Beta System, including the error
correction algorithms and the pagers' audio quality met or exceeded the
Company's expectations. The Company also successfully tested its Beta System
in Brazil in July 1998.
The Company is now in the process of completing development of production
equipment for the Digital Voice Paging System. This process consists mainly of
miniaturizing the Digital Voice Pager, finalizing the software on the Pager
Terminal and SCA Generator, and testing the entire system. New product
development efforts are subject to all of the risks inherent in the development
of new technology and products, including unanticipated delays, expenses,
technical problems or difficulties, as well as the possible insufficiency of
funding to complete development. The Company estimates that it will require
approximately $5 million to $7 million (expected to be raised through the
issuance of additional equity) to complete development of the Digital Voice
Paging System and launch the service in the first market sometime in 1999.
Management has alternative plans to reduce its cash requirements, if necessary,
and is also considering alternative sources of funding, which it anticipates
will be available, if required. Management believes these measures will be
sufficient to enable the Company to continue in existence.
The Company has been actively soliciting additional investments. In Fiscal
1998 the Company obtained convertible demand loans totaling $250 thousand, the
balance of which was converted into common stock, and raised $3,017 thousand
net of commissions through the sale of capital stock. In addition, the Company
was able to conserve its cash by using common stock and common stock warrants
to pay for $408 thousand in costs during Fiscal 1998. Efforts to raise
additional capital continued in July 1998 with the sale of 40 thousand shares
of common stock for proceeds of $100 thousand. The Company is continuing its
efforts to raise additional equity primarily through private placements to
institutional and accredited investors.
The Company plans to market its Digital Voice Paging System worldwide,
including international markets such as Brazil and China. Management is aware
that the Asian currency crisis and its after-effects have created various
degrees of economic turmoil in a number of these international economies. Even
if this economic turmoil reduces the growth rate in telecommunications products
and services in these international markets, the Company believes that
communications has become a basic necessity of any present-day economy.
Furthermore, since the Company's Digital Voice Paging technology is inherently
lower cost than other paging or cellular networks, management believes that its
voice paging service may appeal to consumers and businesses that, due to the
economic turmoil, have become more cost-conscious. However, there can be no
assurance that the economic turmoil in these international markets will not
have an adverse impact on the Company's financial results.
Management is aware that there are significant risks that will have to be
effectively managed in order to achieve its business objectives. There can be
no assurances that sufficient funding will continue to be generated or
18
<PAGE>
available, or if available, on terms acceptable to the Company. In addition,
there can be no assurance that the successful tests of the Beta System will
result in the successful development of a commercially viable Digital Voice
Paging System. Also, there can be no assurance that the Company will have
sufficient technical and human resources to complete development of its Digital
Voice Paging System in a timely manner, or at all. Finally, there can be no
assurance that the Company's Digital Voice Paging System can be developed into
a commercially successful business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1. Such consolidated financial
statements are hereby incorporated by reference into this Item 7.
19
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
A. Independent Auditors' Report F-1
B. Consolidated Balance Sheets at June 30, 1998
and July 31, 1997 F-2 to F-3
C. Consolidated Statements of Operations for the
11 months ended June 30, 1998 and the 12 months
ended July 31, 1997 F-4
D. Consolidated Statements of Stockholders' Equity
for the 11 months ended June 30, 1998 and the
12 months ended July 31, 1997 F-5 to F-6
E. Consolidated Statements of Cash Flows for the
11 months ended June 30, 1998 and the 12 months
ended July 31, 1997 F-7 to F-8
F. Notes to Consolidated Financial Statements F-9 to F-23
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Clariti Telecommunications International, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Clariti
Telecommunications International, Ltd. (formerly known as Sigma Alpha Group,
Ltd.) and subsidiaries as of June 30, 1998 and July 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the eleven months ended June 30, 1998 and the twelve months ended July 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Clariti
Telecommunications International, Ltd. and subsidiaries as of June 30, 1998 and
July 31, 1997, and the results of their operations and cash flows for the
eleven months ended June 30, 1998 and the twelve months ended July 31, 1997 in
conformity with generally accepted accounting principles.
s/COGEN SKLAR LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
September 3, 1998
F-1
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND JULY 31, 1997
(Dollars in Thousands)
<CAPTION>
June 30, July 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 1,391 $ 1,688
Inventory - 78
Prepaid consulting fees 263 3
Other current assets 40 17
-------- --------
1,694 1,786
-------- --------
PROPERTY AND EQUIPMENT, NET 282 48
-------- --------
OTHER ASSETS
Goodwill 28 42
Patents and technology 236 22
-------- --------
264 64
-------- --------
TOTAL ASSETS $ 2,240 $ 1,898
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND JULY 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
June 30, July 31,
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts payable - trade $ 443 $ 190
Accrued taxes, other than income taxes 54 52
Accrued wages - officers 50 21
Accrued expenses and other current
liabilities 113 111
-------- --------
TOTAL LIABILITIES 660 374
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
PREFERRED STOCK
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 0 shares at June 30, 1998, 800,000
shares at July 31, 1997; issued and
outstanding, 0 shares at June 30, 1998,
664,110 shares at July 31, 1997 - 1
ADDITIONAL PAID-IN CAPITAL - 3,321
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
23,697,283 shares at June 30, 1998 and
18,906,705 at July 31, 1997 24 19
WARRANTS OUTSTANDING 1,843 1,540
ADDITIONAL PAID-IN CAPITAL 31,366 24,048
ACCUMULATED DEFICIT (31,653) (27,405)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,580 1,524
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,240 $ 1,898
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
(Dollars and Shares in Thousands, Except Per Share Amounts)
<CAPTION>
11 Months 12 Months
Ended Ended
June 30, July 31,
1998 1997
--------- ---------
<S> <C> <C>
SALES $ - $ 348
COST OF SALES - 314
-------- --------
GROSS PROFIT - 34
-------- --------
OPERATING EXPENSES:
Officers' compensation 1,052 2,834
Other salaries and payroll costs 235 243
Consulting fees 770 2,020
Professional fees 185 230
Marketing expenses - 123
Research and development 1,188 445
Travel 388 449
Provision for write-down of assets and
other accruals 78 687
Other 327 380
-------- --------
TOTAL OPERATING EXPENSES 4,223 7,411
-------- --------
LOSS FROM OPERATIONS ( 4,223) (7,377)
-------- --------
OTHER INCOME (EXPENSE)
Interest income 33 80
Interest expense (58) -
-------- --------
(25) 80
-------- --------
NET LOSS $( 4,248) $( 7,297)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 20,906 17,519
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.20) $ (0.42)
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
</TABLE>
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
(Dollars and Shares in Thousands)
PREFERRED STOCK "SERIES A" PREFERRED STOCK "SERIES B"
-------------------------- --------------------------
NUMBER ADD'L. NUMBER ADD'L.
OF PAID-IN OF PAID-IN
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL
------ ------ ------- ------ ------ -------
BALANCES, JULY 31, 1996 178 $ - $ 882 664 $ 1 $ 3,321
Twelve months ended
July 31, 1997:
Conversion to common
stock (178) - ( 882) - - -
----- ---- ------ ----- ---- -------
BALANCES, JULY 31, 1997 - $ - $ - 664 $ 1 $ 3,321
Eleven months ended
June 30, 1998:
Conversion to common
stock - - - (664) (1) (3,321)
----- ---- ------ ----- ---- -------
BALANCES, JUNE 30, 1998 - $ - $ - - $ - $ -
===== ==== ====== ===== ==== =======
PREFERRED STOCK "SERIES C" PREFERRED STOCK "SERIES D"
-------------------------- --------------------------
NUMBER ADD'L. NUMBER ADD'L.
OF PAID-IN OF PAID-IN
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL
------ ------ ------- ------ ------ -------
BALANCES, JULY 31, 1996 97 $ - $ 487 - $ - $ -
Twelve months ended
July 31, 1997:
Repurchase of shares
for retirement ( 97) - ( 487) - - -
----- ---- ------ ----- ---- -------
BALANCES, JULY 31, 1997 - $ - $ - - $ - $ -
Eleven months ended
June 30, 1998:
Issuance of shares - - - 58 1 574
Commissions - - - - - ( 58)
Conversion to common
stock - - - ( 58) ( 1) ( 516)
----- ---- ------ ----- ---- -------
BALANCES, JUNE 30, 1998 - $ - $ - - $ - $ -
===== ==== ====== ===== ==== =======
[FN]
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
(Dollars and Shares in Thousands)
COMMON STOCK
------------------------------------
NUMBER WARRANTS ADD'L. ACCUMU-
OF OUT- PAID-IN LATED
SHARES AMOUNT STANDING CAPITAL DEFICIT
------ ------ -------- --------- ----------
BALANCES, JULY 31, 1996 14,809 $ 15 $ 2 $ 16,471 $(20,108)
Twelve months ended
July 31, 1997:
Issuance of common stock 2,625 3 - 5,247 -
Commissions - - - ( 525) -
Officer's compensation 1,255 1 - 2,011 -
Consulting fees 32 - - 65 -
Preferred Series A
conversion 178 - - 882 -
Settlement of lawsuit 8 - - 18 -
Warrants issued for cash - - 3 - -
Warrants issued for
services - - 1,535 ( 121) -
Net loss - - - - ( 7,297)
------ ---- ------ -------- --------
BALANCES, JULY 31, 1997 18,907 $ 19 $1,540 $ 24,048 $(27,405)
Eleven months ended
June 30, 1998:
Preferred Series B
conversion 1,328 1 - 3,321 -
Preferred Series D
conversion 575 1 - 516 -
Issuance of common stock 2,877 3 - 3,385 -
Commissions - - - ( 90) -
Warrants issued for:
Services - - 113 - -
Interest expense - - 50 - -
Prepaid consulting fees - - 326 - -
Commissions - - 156 ( 156) -
Warrants exercised 10 - (2) 2 -
Warrants rescinded - - ( 326) 326 -
Warrants expired - - ( 14) 14 -
Net loss - - - - ( 4,248)
------ ---- ------ -------- --------
BALANCES, JUNE 30, 1998 23,697 $ 24 $1,843 $ 31,366 $(31,653)
====== ==== ====== ======== ========
[FN]
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
(Dollars in Thousands)
<CAPTION>
11 Months 12 Months
Ended Ended
June 30, July 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,248) $(7,297)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Provision for write-down of assets
and other accruals 78 687
Depreciation and amortization 61 46
Issuance of common stock for:
Services 342 65
Interest expense 6 -
Officer compensation - 2,012
Settlement of lawsuit - 18
Issuance of common stock warrants for:
Services 113 1,414
Interest expense 50 -
(Increase) decrease in:
Accounts receivable - ( 143)
Inventory - ( 472)
Prepaid consulting fees 66 ( 3)
Prepaid expenses and other current assets ( 23) ( 23)
Increase (decrease) in:
Accounts payable - trade 253 65
Accrued taxes, other than income taxes 2 45
Accrued wages - officers 29 ( 19)
Accrued expenses and other current
liabilities 2 ( 23)
------- -------
Net cash used in operating activities (3,269) (3,628)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of patent and technology (29) ( 16)
Purchase of equipment ( 266) ( 66)
------- -------
Net cash used in investing activities ( 295) ( 82)
------- -------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
(Dollars in Thousands)
<CAPTION>
11 Months 12 Months
Ended Ended
June 30, July 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable $ 250 $ -
Repayment of loans payable - ( 16)
Proceeds from issuance of Series D
Preferred Stock 575 -
Commission on issuance of Series D
Preferred Stock ( 58) -
Proceeds from issuance of common stock 2,590 5,250
Commission on issuance of common stock ( 90) ( 525)
Repurchase of Series C Preferred Stock - ( 487)
Proceeds from issuance of warrants - 3
------- -------
Net cash provided by financing activities 3,267 4,225
------- -------
NET CHANGE IN CASH AND EQUIVALENTS ( 297) 515
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,688 1,173
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,391 $ 1,688
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 2 $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Common stock issued for retirement
of Series B Preferred stock $ 3,322 $ -
Common stock issued for retirement
of Series D Preferred stock $ 517 $ -
Common stock issued for repayment
of loans payable $ 250 $ -
Common stock issued in acquisition
of minority interest of subsidiary $ 200 $ -
Issuance of common stock warrants
for prepaid consulting fees $ 326 $ -
Common stock issued for retirement
of Series A Preferred stock $ - $ 882
Common stock warrants issued for
legal costs of preparing
registration statement $ - $ 121
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
</TABLE>
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company"), a
Delaware corporation, began operations in the music recording business in 1988.
Through its music recording operations and related activities with FM radio
stations, in 1995 the Company was introduced to the concept of using FM radio
frequencies to transmit digital voice messages to a handheld receiver. As a
result, in April 1995 the Company acquired an 80% interest in Global
Telecommunications of Delaware, Inc. ("Global"), an entity formed to develop a
digital voice paging technology using FM radio frequencies. In April 1998, the
remaining 20% of Global was acquired, making it a wholly owned subsidiary of
the Company.
In 1996, the Company exited the music recording business entirely, and has
since focused exclusively on the development and commercialization of wireless
telecommunication products that utilize radio frequencies transmitted by FM
radio stations. In March 1998 the Company changed its name to Clariti
Telecommunications International, Ltd. to reflect this focus. Previously, the
Company had been known as Sigma Alpha Group, Ltd.
The Company's current plan of operations largely consists of the development of
its Digital Voice Paging technology and the subsequent marketing of Digital
Voice Paging Systems worldwide. Completion of the first generation of the
Digital Voice Paging System and the related launch of its Digital Voice Paging
Service are expected to occur in 1999. The Company will require additional
funds to carry out this plan of operations. Management believes that the
Company will be able to raise the necessary funds from available sources to
carry out its plan of operations and to meet its operating expenses during the
year ended June 30, 1999. Management has alternative plans to reduce its cash
requirements, if necessary, and is also considering alternative sources of
funding, which it anticipates will be available, if required. Management
believes these measures will be sufficient to enable the Company to continue
in existence.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
- -----------
In June 1998, the Company changed its fiscal year end to June 30 from July 31.
As a result, these consolidated financial statements present the Company's
balance sheets as of June 30, 1998 and July 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the 11 months ended June 30, 1998 and the 12 months ended July 31, 1997.
Unaudited financial data for the 11 months ended June 30, 1997 are not
presented herein because such data are not materially different than comparable
data for the 12 months ended July 31, 1997.
F-9
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned and majority-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Cash Equivalents
- ----------------
The Company considers certificates of deposit, money market funds and all other
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Concentration of Credit Risk
- ----------------------------
The Company maintains its cash balances in several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Company or the Securities Investor Protection Corporation up to $100 thousand.
During the year the Company may have cash balances in these institutions in
excess of these limits. At June 30, 1998, balances were in excess of insurable
amounts by approximately $1,316 thousand.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly actual results may differ from those
estimates.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist primarily of cash and equivalents,
accounts payable, and accrued expenses. These balances, as presented in the
financial statements as of June 30, 1998 and July 31, 1997, approximate their
fair value because of their short maturities.
Inventory
- ---------
As of July 31, 1997, inventory consisted of component parts for the Stock
Information Receiver ("SIR"), a niche product sold by Global to Chinese radio
stations for a brief period in 1996-1997. The Company wrote off most of the SIR
inventory in the 12 months ended July 31, 1997, and the remainder of such
inventory was written off in the 11 months ended June 30, 1998 (see Note 3).
Property and Equipment
- ----------------------
Property and equipment are recorded at cost, and are depreciated primarily
using the declining balance and straight line methods over estimated useful
lives of 5 to 10 years.
F-10
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
- --------
The Company amortizes goodwill on a straight-line basis over a 5-year period.
Goodwill in the consolidated financial statements relates to the Company's
1995 acquisition of an 80% interest in Global. Recoverability of such goodwill
is evaluated based on the estimated expected future cash flows from the future
commercialization of Global's technology in relation to the net book value of
the goodwill. Amortization recorded was $14 thousand in the 11 months ended
June 30, 1998 and $16 thousand in the 12 months ended July 31, 1997.
Accumulated amortization was $52 thousand and $38 thousand at June 30, 1998 and
July 31, 1997, respectively.
Minority Interest
- -----------------
At the time the Company acquired the remaining 20% of Global on April 25, 1998,
Global had incurred cumulative net losses aggregating $2,008 thousand in excess
of its equity capital, including net losses of $8 thousand incurred between
July 31, 1997 and April 25, 1998 and $1,197 thousand incurred during the 12
months ended July 31, 1997. In accordance with generally accepted accounting
principles, the Company recognized 100% of Global's cumulative net losses,
including $402 thousand of such net losses applicable to the 20% minority
interest while it was outstanding.
Patents and Technology
- ---------------------
The Company has filed patent applications for its digital voice paging
technology in the United States and numerous foreign countries. The costs of
its patent applications are amortized on a straight-line basis over a 5-year
period. Amortization recorded was $8 thousand in the 11 months ended June 30,
1998 and $3 thousand in the 12 months ended July 31, 1997. Accumulated
amortization was $12 thousand at June 30, 1998 and $4 thousand at July 31,
1997.
On April 25, 1998, the Company acquired the remaining 20% of Global for total
consideration, including consulting fees, of 200,000 shares of the Company's
common stock valued at $1.00 per share. The total consideration of $200,000
was capitalized as an investment in Global's technology and will be amortized
on a straight-line basis over a period of 5 years. Amortization recorded was $7
thousand in the 11 months ended June 30, 1998. Accumulated amortization was
also $7 thousand at June 30, 1998.
Research and Development Expenses
- ---------------------------------
Research and development expenditures are expensed as incurred and totaled
approximately $1,188 thousand for the 11 months ended June 30, 1998 and $445
thousand for the 12 months ended July 31, 1997.
F-11
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
- ------------
The Company has adopted FASB Statement No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for temporary differences between financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Net Loss Per Common Share
- -------------------------
The Company has adopted FASB Statement 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. Under
FASB Statement 128, net loss per common share is based upon the weighted
average number of common shares outstanding during the period. Net loss per
common share after the assumed conversion of potential common shares (warrants,
stock options and convertible debt) was not presented because the effect of
such conversions would be antidilutive. Prior period amounts for net loss per
common share were recomputed in accordance with FASB Statement 128; however,
such recomputed amounts were unchanged from those previously reported.
Accounting for Stock-Based Compensation
- ---------------------------------------
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of the grant over the amount the employee is required to pay to
acquire the stock (the intrinsic value method under Accounting Principles Board
Opinion 25). Such amount, if any, is accrued over the related vesting period,
as appropriate.
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation," which encourages employers to account for stock-based
compensation awards based on their fair value on their date of grant. The fair
value method was used to value common stock warrants issued in transactions
with other than employees during the periods presented. Entities may choose
not to apply the new accounting method for options issued to employees but
instead, disclose in the notes to the financial statements the pro forma
effects on net income and earnings per share as if the new method had been
applied. The Company has adopted the disclosure-only approach to FASB
Statement 123 for options issued to employees. See Note 9.
F-12
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and disclosure of comprehensive
income and its components in a full set of general purpose financial
statements. The reporting and disclosure requirements of Statement 130 are
effective for fiscal years beginning after December 15, 1997. As this
statement only requires additional disclosures in the consolidated financial
statements, its adoption will not have a material impact on the Company's
consolidated financial position or results of operations. The Company intends
to comply with this statement for its year ended June 30, 1999.
In June 1997, the FASB issued Statement 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and related disclosures about products and
services, geographic areas and major customers. The reporting and disclosure
requirements of FASB Statement 131 are effective for periods beginning after
December 15, 1997. The Company does not expect adoption of this statement to
result in significant changes to its presentation of data. The Company intends
to comply with this statement for its year ended June 30, 1999.
In February 1998, the FASB issued Statement 132,"Employers' Disclosures About
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits. The reporting and
disclosure requirements of FASB Statement 132 are effective for periods
beginning after December 15, 1997. FASB Statement 132 is not currently
applicable to the Company as it provides no pension or postretirement benefits
to its employees.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. The reporting and
disclosure requirements of FASB Statement 133 are effective for periods
beginning after June 15, 1999. FASB Statement 133 is not currently applicable
to the Company as it does not use derivative instruments, nor does it engage in
hedging activities.
Reclassifications
- -----------------
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
F-13
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 3 - PROVISION FOR WRITE-DOWN OF ASSETS AND OTHER ACCRUALS
During the 12 months ended July 31, 1997, the Company determined that the
expected cost of continuing Global's activities directed toward development,
production and sale of the SIR product line was higher than originally
anticipated. As a result, the Company temporarily suspended the SIR program,
concluding that its limited capital resources would not allow for the funding
of Global's continued development of the SIR system in parallel with the
Company's core business strategy of developing and commercializing its Digital
Voice Paging System.
Due to the decision to temporarily suspend the SIR program, the Company
recorded a pretax provision for loss of $687 thousand in the quarter ended July
31, 1997. Global's inventory was written down to estimated net realizable value
as of July 31, 1997 ($78 thousand), and all other SIR assets were written off
entirely.
The Company subsequently evaluated various alternatives for the SIR program,
including joint venture arrangements and royalty/licensing arrangements, but
was unable to continue the SIR program at an acceptable cost. In June 1998 the
Company determined that the SIR program would be terminated permanently, and
that the remaining book value of SIR inventory ($78 thousand) should be written
off.
The components of the provisions were as follows (dollars in thousands):
11 Months 12 Months
Ended Ended
June 30, July 31,
1998 1997
--------- ---------
Write-down of assets:
Inventory $ 78 $ 513
Accounts receivable (net) - 37
Fixed assets (net) - 73
Prepaid expenses and other
current assets - 26
Accrual for loss on purchase commitments - 38
---- -----
Total provision $ 78 $ 687
---- -----
F-14
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (dollars in thousands):
June 30 July 31
1998 1997
------- -------
Research and development equipment $ 250 $ 23
Other equipment 51 109
Office furniture and fixtures 37 48
----- -----
338 180
Less accumulated depreciation 56 132
----- -----
$ 282 $ 48
===== =====
Depreciation expense was $32 thousand for the 11 months ended June 30, 1998 and
$26 thousand for the 12 months ended July 31, 1997.
NOTE 5 - NOTES PAYABLE
On January 15, 1998 the Company borrowed $250 thousand on a short-term basis
(the "Demand Notes"). The principal balance accrued interest at the rate of
prime plus 1% (9.5%) during the period the Demand Notes were outstanding. On
April 22, 1998, the Company repaid the Demand Notes, including accrued interest
of approximately $6 thousand, through the issuance of approximately 256
thousand shares of the Company's common stock at a price of $1.00 per share.
The Demand Notes also provided for the lenders to receive 50 thousand warrants
to purchase shares of the Company's common stock (see Note 9).
NOTE 6 - INCOME TAXES
There is no income tax benefit for operating losses for the 11 months ended
June 30, 1998 and the 12 months ended July 31, 1997 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance. Management believes that a valuation
allowance is considered necessary since it is more
likely than not that the deferred tax asset will
not be realized through future taxable income.
F-15
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 6 - INCOME TAXES (continued)
The components of the net deferred tax assets are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, July 31,
1998 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 9,993 $ 8,725
Research and development costs 713 275
Contribution carryforwards 6 6
Valuation allowance (10,712) (9,006)
-------- -------
$ - $ -
======== =======
</TABLE>
The use of net operating loss carryforwards is limited when there has been a
substantial change in ownership (as defined) during a three year period.
Because of the recent and contemplated changes in common stock, options and
warrants, such a change may occur in the future. In this event, the use of net
operating losses each year would be restricted to the value of the Company on
the date of such change multiplied by the federal long-term rate ("annual
limitation"); unused annual limitations may then be carried forward without
this limitation. Also, in the event the business enterprise of the loss
corporation is not continued for the two year period commencing on the change
date, the net operating loss carryforwards may no longer be available.
At June 30, 1998 the Company had net operating loss carryforwards of
approximately $27,758 thousand, which if not used will expire primarily during
the years 2005 through 2013. The Company also has a research and development
credit carryforward of $119 thousand and a contribution carryforward of $16
thousand as of June 30, 1998.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
- ------
Some of the Company's operations use leased facilities and equipment consisting
of administrative offices, office equipment and automobiles. Some of the
leases contain provisions for lease renewal, and also require payment of taxes,
maintenance, insurance and other occupancy expenses.
F-16
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Leases (continued)
- ------------------
The following is a schedule of future minimum rental payments for all non-
cancelable operating leases that have initial or remaining lease terms in
excess of one year at June 30, 1998 (dollars in thousands):
Year Ending
June 30,
-----------
1999 $ 39
2000 7
----
$ 46
====
Rent expense for operating leases in the 11 months ended June 30, 1998 and the
12 months ended July 31, 1997 was $48 thousand and $49 thousand, respectively.
Employment Agreements
- ---------------------
The Company maintains employment agreements with five of its executive
officers. Such employment agreements generally obligate the Company to pay
such executives' salaries and provide them with certain fringe benefits until
the expiration of the agreements, or until the executive resigns voluntarily or
is terminated for cause. The following is a schedule of total salary payments
required under all executive employment agreements at June 30, 1998 (dollars in
thousands):
Year Ending
June 30,
-----------
1999 $ 1,207
2000 1,270
2001 924
2002 767
2003 843
2004 - 2008 5,343
-------
$10,354
=======
Separation Agreement
- --------------------
As of April 27, 1995, the Company entered into a Separation Agreement with
Joseph Tarsia, the former Chairman of the Board of Directors of the Company
(the "Former Chairman"). In accordance with the terms of the Separation
Agreement, the Company was released of all obligations, claims and debts due
the Former Chairman. These obligations, claims and debts were assumed by a
third party investor (the "Investor") in consideration for payment by the
F-17
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Separation Agreement (continued)
- --------------------------------
Company of $61 thousand in cash and the issuance of 395 thousand shares of the
Company's Series B Preferred Stock valued at $1,977 thousand. In addition, the
Investor agreed to purchase the Former Chairman's 1,740 thousand shares of the
Company's common stock. The Separation Agreement required the Company to pay
to the Former Chairman $750 per week until such time as the Investor satisfied
all related obligations due to the Former Chairman.
In July 1998, the Investor completed making all required payments to the Former
Chairman, thus terminating the Company's requirement to make future weekly
payments to the Former Chairman. As of June 30, 1998 the Company owed the
Former Chairman $43 thousand reflecting a total of approximately 57 weeks
during which the Company had failed to make the required payments. In August
1998, the Company and the Former Chairman agreed to settle such past due
obligations for the issuance of a promissory note to the Former Chairman in the
amount of $43 thousand and the issuance of 6.6 thousand shares of the Company's
restricted common stock. The promissory note bears interest at an annual rate
of 8% and is payable in equal weekly installments of $861 over a period of 52
weeks.
The Company's June 30, 1998 consolidated balance sheet (accrued expenses and
other accrued liabilities) includes a total of $61 thousand payable to the
Former Chairman reflecting the past due balance of $43 thousand and $18
thousand for the fair value of the restricted common stock issued in August
1998. Compensation paid by the Company to the Former Chairman under the
Separation Agreement was approximately $35 thousand in the 11 months ended June
30, 1998 and approximately $18 thousand in the 12 months ended July 31, 1997.
Development Agreements
- ----------------------
The Company subcontracts certain elements of the development of its Digital
Voice Paging System to third party engineering and development firms.
Generally, such contracts provide for payments to be made by the Company on a
time and material basis. As of June 30, 1998 the Company maintained only one
significant development contract with a firm fixed price of $600 thousand.
Under the terms of the contract, the Company is required to make progress
payments based on the achievement of specific milestones. As of June 30, 1998,
the Company had paid $196 thousand in progress payments against such contract.
Legal Proceedings
- -----------------
As of June 30, 1998, the Company had several judgments outstanding against it
related to accounts payable and taxes payable, the aggregate amount of which is
approximately $130 thousand. Management has been negotiating actively and
attempting to work out settlements with respect to these judgments and tax
assessments. As of June 30, 1998, $65 thousand had been accrued on the balance
sheet (accrued expenses and other current liabilities) as the probable amount
to be paid against such judgments and tax assessments.
F-18
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Legal Proceedings (continued)
- -----------------------------
In August 1996, the Company was served with a Summons and Complaint. The
Complaint sought specific performance of a contract and entitled the plaintiff
to receive 15 thousand shares of the Company's common stock or alternatively
$66 thousand. In May 1997, the Company's Board of Directors authorized the
issuance of 7.5 thousand shares of its restricted common stock valued at $18
thousand to the Plaintiff in settlement of this complaint. These shares were
subsequently registered in the Company's registration statement dated August
18, 1997.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company's Chairman and CEO is the largest single stockholder of the
Company, with 5 million shares or 21% of the Company's outstanding common stock
as of June 30, 1998. Since 1991, the Company has maintained an employment
agreement with the Chairman and CEO that provides him with a base salary, an
annual bonus equal to 10% of the Company's pretax income and certain fringe
benefits. Pursuant to the terms of his employment agreement, the Company paid
the Chairman and CEO total compensation (excluding fringe benefits) of $510
thousand in the 11 months ended June 30, 1998 and $587 thousand in the 12
months ended July 31, 1997. The Chairman and CEO's employment agreement with
the Company expires in 2008.
In August 1996, the Board of Directors issued 1.25 million shares of restricted
common stock to the Chairman and CEO for his equity financing efforts. The
Company valued the shares at $2 million, or $1.60 per share. The valuation
discount of 20% compared to market value of approximately $2.00 per share
principally reflects the significant restrictions placed on the Chairman's
ability to resell the shares.
In addition, the Company issued to the Chairman and CEO options to purchase a
total of 200 thousand shares of the Company's common stock during the 11 months
ended June 30, 1998 and 250 thousand shares of the Company's common stock
during the 12 months ended July 31, 1997. These stock options may be exercised
at the fair market value of the common stock on the date of the grant and
generally carry such other terms as are outlined in the Company's stock option
plan (see Note 9).
Since 1993, the Company has maintained a consulting agreement with a
significant stockholder of the Company. The consultant was paid fees of $235
thousand in the 11 months ended June 30, 1998 and $235 thousand in the 12
months ended July 31, 1997. In addition, the Company issued to the consultant
options to purchase a total of 200 thousand shares of the Company's common
stock during the 11 months ended June 30, 1998. These stock options may be
exercised at the fair market value of the common stock on the date of the grant
and generally carry such other terms as are outlined in the Company's stock
option plan (see Note 9).
F-19
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 9 - STOCKHOLDERS' EQUITY
Preferred Stock
- ---------------
The Company is authorized to issue 2 million shares of preferred stock, $.001
par value, in one or more series.
On August 17, 1993, the Board of Directors designated 750 thousand shares as
Series A, $5 convertible preferred stock with preferences over common as to
dividends and liquidation. The Company issued 178 thousand of such shares in
consideration for professional services and conversion of debt. On August 31,
1996, each share of Series A preferred stock was converted into one share of
common stock. The Company's Series A preferred stock has since been retired.
On March 16, 1995, the Board of Directors designated 800 thousand shares of
Series B, $5 convertible preferred stock to have preference over common
stock and Series A preferred stock as to dividends and liquidation. The
Company issued to one investor 741 thousand shares of the Series B preferred
stock in consideration for the investor assuming debt of the Company. During
the year ended July 31, 1996, the Company repurchased approximately 77 thousand
shares of Series B preferred stock. On September 2, 1997, the Company redeemed
the remaining 664 thousand shares of Series B preferred stock for the Company's
common stock on a two for one basis, or an aggregate of 1,328 thousand common
shares. The Company's Series B preferred stock has since been retired.
On June 7, 1995, the Board of Directors designated 109 thousand shares of
Series C, $5 Convertible Preferred Stock to have preference over common stock
and Series A and Series B preferred stocks for dividends and liquidation. The
Company issued to the Chairman of the Company all 109 thousand shares of Series
C preferred stock in consideration for deferred compensation. During
the year ended July 31, 1996, the Company retired approximately 12 thousand
shares of Series C preferred stock. During the 12 months ended July 31, 1997,
the Company retired the remaining 97 thousand shares of Series C preferred
stock for $536 thousand, of which $49 thousand was reflected as additional
compensation to the Chairman pursuant to the terms of the Series C preferred
stock agreement. The Company's Series C preferred stock has since been retired.
On October 15, 1997 the Board of Directors designated 1 million shares of
Series D, $10 Convertible Preferred Stock to have preference over common stock
for dividends and liquidation. During the 11 months ended June 30, 1998, the
Company issued 57.5 thousand shares of Series D preferred stock and received
proceeds of $575 thousand less commissions of $57.5 thousand. During the same
period, the Series D preferred shareholders converted all of their Series D
preferred shares into the Company's common stock on a basis of 1 preferred
share for 10 common shares, or a total of 575 thousand shares of common stock.
The Company no longer has any Series D preferred stock outstanding.
F-20
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
Common Stock
- ------------
Pursuant to a registration statement dated September 6, 1996 the Company sold
2,500 thousand shares of common stock for $4,490 thousand, net of cash
commissions during the 12 months ended July 31, 1997. The Company also sold
125 thousand unregistered shares of its common stock for $235 thousand, net of
cash commissions. These shares were subsequently registered in the Company's
registration statement dated August 18, 1997.
During the 11 months ended June 30, 1998 the Company sold 2,190 thousand
unregistered shares of common stock for $2,500 thousand, net of cash
commissions. These shares were subsequently registered in the Company's
registration statement dated August 6, 1998.
During the 11 months ended June 30, 1998 the Company also issued a total of 687
thousand shares of common stock for consideration other than cash, as described
below:
- 200 thousand shares valued at $200 thousand were issued in connection
with the purchase of the remaining 20% of Global's outstanding common
stock (see Note 2),
- 256 thousand shares were issued for repayment of $256 thousand of notes
payable and related accrued interest (see Note 5), and
- 231 thousand shares were issued for consulting services and engineering
and development services valued at a total of $342 thousand.
All of these 687 thousand common shares were subsequently registered in the
Company's registration statement dated August 6, 1998.
Warrants
- --------
From time to time, the Board of Directors of the Company may issue warrants to
purchase the Company's common stock to parties other than employees and
directors. Warrants may be issued as an incentive to help the Company achieve
its goals, or in consideration for cash, financing costs or services rendered
to the Company, or a combination of the above, and generally expire within 1 to
5 years from the date of issuance. The following table summarizes activity for
common stock warrants outstanding during the 11 months ended June 30, 1998 and
the 12 months ended July 31, 1997:
F-21
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
Warrants (continued)
- --------------------
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
- ----------------------------------------------------------------------------
Warrants Outstanding, 7/31/96 10 $ .01 $ .01
Warrants issued 1,075 $2.00 - $3.50 $2.50
- ----------------------------------------------------------------------------
Warrants outstanding, 7/31/97 1,085 $ .01 - $3.50 $2.48
Warrants issued 811 $1.25 - $3.50 $1.72
Warrants exercised ( 10) $ .01 $ .01
Warrants canceled ( 275) $2.40 - $3.50 $2.50
- ----------------------------------------------------------------------------
Warrants outstanding, 6/30/98 1,611 $1.25 - $3.50 $2.11
- ----------------------------------------------------------------------------
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation," which requires compensation cost associated with warrants issued
to other than employees to be valued based on the fair value of the warrants.
Such fair value was estimated using the Black-Scholes model with the following
assumptions: no dividend yield, expected volatility of 80%, and a risk-free
interest rate of 5.5%. The Black-Scholes model valued the warrants issued
during the 11 months ended June 30, 1998 at $645 thousand and valued the
warrants issued during the 12 months ended July 31, 1997 at $1,535 thousand.
Stock Option Plan
- -----------------
The Company, with stockholder approval, has adopted a Stock Option Plan (the
"Plan") which provides for the granting of options to officers, key employees,
certain consultants and others. Options to purchase the Company's common stock
may be made for a term of up to ten years at the fair market value at the time
of the grant. Incentive options granted to a ten percent or more stockholder
may not be for less than 110% of fair market value nor for a term of more than
five years.
The aggregate fair market value of the stock for which an employee may be
granted incentive options which are first exercisable in any calendar year
shall not exceed $100 thousand. The Company has reserved a total of 5 million
shares for issuance under the Plan. No options have been granted under this
plan through June 30, 1998. The Plan terminates in November 2001, unless
terminated earlier by the Board of Directors.
Stock Options
- -------------
The Company's Board of Directors periodically authorizes the issuance of
options to purchase the Company's common stock to employees and members of the
Board of Directors. These options may be exercised at the fair market value of
F-22
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED JULY 31, 1997
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
Stock Options continued)
- ------------------------
the common stock on the date of the grant and generally carry such other terms
as are outlined in the Company's stock option plan. The following table
summarizes activity for stock options outstanding during the 11 months ended
June 30, 1998 and during the 12 months ended July 31, 1997:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
- ----------------------------------------------------------------------------
Options Outstanding, 7/31/96 1,042 $3.88 - $15.00 $4.10
Options granted 740 $2.00 - $ 2.75 $2.20
Options canceled ( 47) $2.75 - $15.00 $8.73
- ----------------------------------------------------------------------------
Options outstanding, 7/31/97 1,735 $2.00 - $ 3.88 $3.16
Options granted 2,091 $1.06 - $ 3.09 $1.71
Options canceled ( 10) $2.38 $2.38
- ----------------------------------------------------------------------------
Options outstanding, 6/30/98 3,816 $1.06 - $ 3.88 $2.37
- ----------------------------------------------------------------------------
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for the issuance of its stock
options. Accordingly, no compensation cost has been recognized for its stock
options issued during the 11 months ended June 30, 1998 and the 12 months ended
July 31, 1997. Had compensation cost for the Company's issuance of stock
options been determined based on the fair value at grant dates for options
consistent with the method of FASB Statement 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts indicated
below. Fair value amounts were estimated using the Black-Scholes model with
the following assumptions: no dividend yield, expected volatility of 80%, and a
risk-free interest rate of 5.5%.
11 Months 12 Months
Ended Ended
June 30, July 31,
1998 1997
--------- ---------
Net loss ($000) As reported $(4,248) $(7,297)
Pro forma $(7,175) $(8,124)
Net loss per share As reported $( 0.20) $( 0.42)
Pro forma $( 0.34) $( 0.46)
F-23
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names and ages of all directors and
executive officers of the Company and their positions in the Company:
Position(s) Director
Name Age with Company Since
- -------------------- --- ------------------------- -------------
Peter S. Pelullo 46 Chief Executive Officer, June 1989
Chairman of the Board, (Class Two)
Chief Financial Officer
and Director
Michael P. McAndrews 37 President
David C. Bryan 43 Senior Vice President and
Chief Operating Officer
James M. Boyd, Jr. 42 Vice President of Finance
and Chief Accounting
Officer
Ernest J. Cimadamore 36 Secretary
John N. D'Anastasio 50 Director June 1991
(Class Three)
Robert J. Sannelli 53 Director June 1991
(Class Three)
The Board of Directors is divided into three classes; first class, second
class and third class, with the term of one class expiring each year. The term
of each class is three years. The term of each class has expired. Therefore,
all current directors serve until their successors are duly elected and
qualified. Vacancies in the board are filled by majority vote of the remaining
directors. The executive officers of the Company are elected by, and serve at
the discretion of, the Board of Directors.
The business experience during the past five years or more of each
director and executive officer of the Company is as follows:
Peter S. Pelullo became President, Chief Executive Officer and Chief
Financial Officer of the Company in 1991, and was appointed the Company's
Chairman of the Board in 1995. In October 1997, Mr. Pelullo
relinquished the title of President of the Company with the appointment of
Michael P. McAndrews to that position. Since becoming the Company's Chairman,
21
<PAGE>
Mr. Pelullo has been instrumental in shifting the Company's focus away from the
music and recording industry and spearheading its entry into the
telecommunications field, while liquidating substantially all of the Company's
debt. After identifying the Company's patent pending technology, Mr. Pelullo
raised the seed capital to develop the concept.
Michael P. McAndrews was appointed President of the Company effective
October 1, 1997. Prior to joining the Company, Mr. McAndrews had been in
several senior marketing positions in Motorola's Two-Way Paging and Cellular
Phone divisions since 1992. During his tenure at Motorola, Mr. McAndrews helped
conceive and develop a number of wireless communications products, including
the StarTAC TM cellular phone and the PageWriter TM 2000 two-way pager. Mr.
McAndrews also spent several years in charge of Motorola's cellular phone
marketing activities for Japan. In addition to Motorola, Mr. McAndrews has held
positions at DuPont and General Electric. Mr. McAndrews holds a bachelors
degree in electrical engineering from Princeton University and an MBA from
Harvard Business School.
David C. Bryan was appointed Senior Vice President and Chief Operating
Officer of the Company in July 1997. Prior to joining the Company, Mr Bryan
spent 18 years with General Atronics Corporation ("GAC"), a company engaged in
the development and manufacturing of military RF communication and
telecommunication systems and products. In his most recent position, Mr. Bryan
was GAC's Director of Business Development. From 1993 to 1997, Mr. Bryan was
GAC's Director of Advanced Systems and from 1990 to 1993, he was General
Manager of GAC's Electron Tube Operation. Mr. Bryan holds a bachelors degree
in electrical engineering from Bucknell University, a masters degree in
electrical engineering from Villanova University and an MBA from Temple
University.
James M. Boyd, Jr. was appointed Vice President of Finance and Chief
Accounting Officer in February 1997. Prior to joining the Company, Mr. Boyd
spent 15 years with Sun Company, Inc. ("Sun") a public company engaged in
petroleum refining and marketing. Mr. Boyd has extensive experience in
financial and external reporting areas including the preparation of annual,
quarterly and current reports required to be filed with the Securities and
Exchange Commission. In his most recent position, Mr. Boyd managed Sun's Credit
Department and, from 1991 to 1996, he managed Sun's worldwide accounting for
petroleum inventories. Mr. Boyd was formerly a senior accountant with Price
Waterhouse. Mr. Boyd is a certified public accountant in Pennsylvania. He
holds a bachelors degree in accounting from the University of Delaware and an
MBA from Drexel University.
Ernest J. Cimadamore became secretary of the Company in 1990. Mr.
Cimadamore was employed by Alpha International from 1981 to 1993, where he
oversaw marketing sales and promotions of the Company's music products. Mr.
Cimadamore attended Temple University, where he studied business.
John N. D'Anastasio has been the President of D'Anastasio Corp., a real
estate development company, since 1986. Mr. D'Anastasio received a Bachelor of
Arts Degree in Economics and Accounting from Villanova University.
Robert J. Sannelli has served since 1986 as director of operations and
Vice President of D'Anastasio Corp., a real estate development company of which
John D'Anastasio is President. Mr. Sannelli holds a Bachelor of Science Degree
in Accounting from Rutgers University.
22
<PAGE>
Significant Employees
Frank Fernandez joined the Company in May 1998 as Vice President of the
Company's Florida Engineering Center. Prior to joining the Company, Mr.
Fernandez was a senior engineering manager in Motorola's paging division where
he was responsible for technology programs with Microsoft, the Palm Computing
Division of 3Com, and a number of other Silicon Valley firms. He also directed
Motorola's initiatives into a variety of new wireless applications, including
in-vehicle solutions such as "CreataLink" and was the engineering program
manager for the PageWriter TM 2-way pager development team, a product that won
numerous industry awards. Mr. Fernandez has worked on a number of domestic and
international pager programs. Mr. Fernandez, who is fluent in Spanish, has both
a bachelors degree and a masters degree in Electrical Engineering from the
University of Florida.
Ying Dong was hired on October 9, 1995 as Controller of the Company. Miss
Dong has experience with the Bank of Communication, New York Branch and China
National Textile Import and Export Corporation. Miss Dong received a Bachelor
of Arts in International Business from Shanghai International Business College
in Shanghai, China in 1991. Miss Dong has completed her Masters of Business
Administration in Finance from Temple University. Miss Dong is fluent in
Mandarin and Shanghainese as native languages.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
In June 1998, the Company changed its fiscal year end from July 31 to June
30. As a result, all data presented under Item 10, Executive Compensation, are
for the 11 months ended June 30, 1998 and the 12 months ended July 31, 1997 and
1996.
The following table sets forth cash compensation paid or accrued to the
Company's most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000 during the most recent fiscal period.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
------------------------
Awards Payouts
--------------- -------
(A) (B) (C) (D) (E) (F) (G) (H)
Other Restr-
Annual icted Common
Name and Period Compen- Stock Stock LTIP
Principal Ended Salary Bonus sation Awards Options Payouts
Position In ($000) ($000) ($000) ($000) (#000) ($000)
- -------------------- ------ ------ ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter S. Pelullo 1998 506(1) - 28(4) - 200 -
Chief Executive 1997 581(2) - 29(4) 2,500 250 -
Officer, Chairman 1996 389(3) - 51(4) 625 500 -
of the Board
Michael P. McAndrews 1998 186(5) - 8(6) - 750 -
President
David C. Bryan 1998 116(7) - 6(8) - 150 -
Sr. Vice President, 1997 5 - - - 350 -
Chief Operating
Officer
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
(A) (B) (I)
All
Other
Name and Period Compen-
Principal Ended sation
Position In ($000)
- -------------------- ------ ------
<S> <C> <C>
Peter S. Pelullo 1998 -
Chief Executive 1997 49(9)
Officer, Chairman 1996 -
of the Board
Michael P. McAndrews 1998 58(10)
President
David C. Bryan 1998 -
Sr. Vice President, 1997 -
Chief Operating
Officer
</TABLE>
(1) During the 11 months ended June 30, 1998, Mr. Pelullo was paid salaries
of $471 thousand, including $17 thousand representing the payment of
accrued but unpaid salaries from the prior year. In addition, Mr.
Pelullo was paid $28 thousand for unused vacation pay. As of June 30,
1998, accrued but unpaid compensation due Mr. Pelullo was $24 thousand.
(2) During the 12 months ended July 31, 1997, Mr. Pelullo was paid salaries
of $480 thousand, including $22 thousand representing the payment of
accrued but unpaid salaries from the prior year. In addition, Mr.
Pelullo was paid $106 thousand for his accumulated but unpaid vacation
pay since the inception of his employment contract with the Company.
As of July 31, 1997, accrued but unpaid compensation due Mr. Pelullo
was $17 thousand.
(3) During the 12 months ended July 31, 1996, Mr. Pelullo was paid salaries
of $365,000. As of July 31, 1996, accrued but unpaid compensation due
Mr. Pelullo was $24,000.
(4) Other annual compensation for Mr. Pelullo consists of the following
($ in thousands):
11
Months 12 Months
Ended Ended July 31,
June 30, ------------------
1998 1997 1996
------- ------- -------
Auto expense $13 $16 $38
Travel allowance 5 5 5
Health benefits 7 8 8
Insurance benefits 3 - -
------- ------- -------
Totals $28 $29 $51
------- ------- -------
25
<PAGE>
(5) During the 11 months ended June 30, 1998, Mr. McAndrews was paid
salaries of $177 thousand. As of June 30, 1998, accrued but unpaid
compensation due Mr. McAndrews was $9 thousand.
(6) Other annual compensation for Mr. McAndrews during the 11 months ended
June 30, 1998 consists of $5 thousand for health benefits and $3
thousand for insurance benefits.
(7) During the 11 months ended June 30, 1998, Mr. Bryan was paid salaries
of $113 thousand. As of June 30, 1998, accrued but unpaid compensation
due Mr. Bryan was $3 thousand.
(8) Other annual compensation for Mr. Bryan during the 11 months ended
June 30, 1998 consists of $6 thousand for health benefits.
(9) During the 12 months ended July 31, 1997, the Company retired the
remaining 97 thousand shares of Series C preferred stock for $536
thousand, of which $49 thousand was reflected as additional
compensation to the Chairman pursuant to the terms of the Series C
preferred stock agreement.
(10) During the 11 months ended June 30, 1998, the Company paid moving and
relocation expenses of $44 thousand on behalf of, or directly to, Mr.
McAndrews. As of June 30, 1998, accrued but unpaid moving and
relocation costs due Mr. McAndrews were $14 thousand.
<TABLE>
Option/SAR Grants
Individual Grants
For the 11 Months Ended June 30, 1998
<CAPTION>
(A) (B) (C) (D) (E)
Number of
Securities % of Total
Underlying Options/SARs
Options/SARS Granted to Exercise or
Granted(1) Employees in Base Price Expiration
Name (#000) Fiscal Year ($/Share) Date
- -------------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Peter S. Pelullo 100 5% $1.3430 Feb. 10, 2008
100 5% $2.2500 May 15, 2008
Michael P. McAndrews 500(2) 24% $2.0000 Sep. 02, 2007
250 12% $1.3430 Feb. 10, 2008
David C. Bryan 150 7% $1.3430 Feb. 10, 2008
James M. Boyd, Jr. 60(3) 3% $1.3430 Feb. 10, 2008
Ernest J. Cimadamore 50 2% $1.3430 Feb. 10, 2008
(1) The securities underlying all options issued during the 11 months ended
June 30, 1998 consist of the Company's common stock.
26
<PAGE>
(2) Of Mr. McAndrews' options, 125 thousand vested upon his employment by
the Company. An additional 175 thousand options vested on September 3,
1998 and the remaining 200 thousand options vest on September 3, 1999,
if Mr. McAndrews is still employed by the Company on that date.
(3) In addition to the 60 thousand new options granted to Mr. Boyd during
the 11 months ended June 30, 1998, the expiration date of 25 thousand
options that had been granted to Mr. Boyd in February 1997 was extended
from February 10, 1999 to February 10, 2007.
</TABLE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
For the 11 Months Ended June 30, 1998
<CAPTION>
(A) (B) (C) (D) (E)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARS Options/SARS
Acquired on Value at Fiscal at Fiscal
Exercise Realized Year End Year End
Name (#000) ($000) (#000) ($000)
- -------------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Peter S. Pelullo 0 0 950(1) 538(1)
Michael P. McAndrews 0 0 375(1) 656(1)
375(2) 492(2)
David C. Bryan 0 0 200(1) 361(1)
300(2) 394(2)
James M. Boyd, Jr. 0 0 85(1) 140(1)
Ernest J. Cimadamore 0 0 50(1) 98(1)
(1) exercisable
(2) unexercisable
</TABLE>
Compensation Plans
With the exception of compensation in the form of certain health, medical
and similar benefits paid pursuant to plans that do not discriminate in favor
of officers or directors of the Company and are available generally to all
employees who have been employed by the Company for three months, the Company
has no plans pursuant to which cash or non-cash compensation was paid or
distributed during the 11 months ended June 30, 1998 and the 12 months ended
July 31, 1997, or is proposed to be paid or distributed in the future, to the
individuals and group specified under "Cash Compensation" above, except as
noted below.
27
<PAGE>
Employment Arrangements
The Company has maintained an employment agreement with Peter S. Pelullo,
Chief Executive Officer and Chairman of the Company (the "Chairman"), since
April 1991. The Chairman's employment agreement, as periodically amended (the
"Agreement"), expires in May 2008 unless earlier terminated. In accordance
with the terms of the Agreement, the Executive is entitled to an initial base
salary of $250 thousand per year, increasing 10% per year cumulatively.
Effective July 22, 1996, the Company's Board of Directors authorized a 15%
increase in the Chairman's salary. In addition, the Agreement provides for an
annual bonus to be paid to the Chairman equal to 10% of pretax income, an
automobile allowance, health insurance and other benefits generally available
to the Company's executives. The Agreement also provides that, upon
termination of the Chairman by the Company without cause or the Chairman's
resignation for "Good Reason" as defined below, the Chairman will be entitled
to receive his base salary plus executive bonuses prescribed by the Agreement
for the longer of four years or the remaining term of the Agreement. In
addition, the Company shall maintain in full force and effect, for the longer
of four years or the remaining term of the Agreement, all employee benefit
plans and programs in which the Chairman was entitled to participate
immediately prior to termination or resignation for Good Reason. For purposes
of this provision, "Good Reason" is defined to include (i) a material change in
the nature or scope of the Chairman's responsibilities, duties or authority,
(ii) failure by the Company to comply with the Agreement or to obtain the
assumption of the Agreement by any successor to the Company, (iii) the removal
of the Chairman as director of the Company (iv) ill health of the Chairman or a
member of his family, or any other compelling circumstance, which in the sole
discretion of the Chairman makes his continued employment impossible or
inappropriate; and (v) a change in control of the Company.
Effective October 1, 1997, the Company hired Michael P. McAndrews as its
President and agreed to pay him $240 thousand per year increasing 9%, 10% and
10% cumulatively for each of the next three years, plus certain fringe
benefits. In addition, the Company issued to Mr. McAndrews options to purchase
500 thousand shares of common stock at a price of $2.00 per share, the market
price as of the date of grant. The options vest over a three-year period and
remain in effect for ten years from the date of the grant. The President also
is entitled to annual bonus options to purchase a minimum of 100 thousand
shares of common stock at the market price on or around the anniversary date of
the agreement. The bonus options vest immediately upon grant and remain in
effect for ten years from the date of the grant.
Effective July 14, 1997, the Company hired David C. Bryan as its Senior
Vice President and Chief Operating Officer and agreed to pay Mr. Bryan $125
thousand per year increasing 5%, 6% and 7% cumulatively for each of the next
three years, plus certain fringe benefits. In addition, the Company issued Mr.
Bryan options to purchase 350 thousand shares of common stock at a price of
$2.00 per share, the market price as of the date of the commencement of his
employment. The options vest over a three-year period and remain in effect for
ten years from the date of the grant.
Effective February 10, 1997, the Company hired James M. Boyd, Jr. as its
Vice President of Finance and Chief Accounting Officer to replace the former
Chief Accounting Officer. The Company agreed to pay Mr. Boyd $90 thousand per
28
<PAGE>
year for three months increasing to $95 thousand per year after the three
months and increasing 5%, 6% and 7% cumulatively and respectively for each of
the three years, plus certain fringe benefits. As consideration for entering
into the agreement the Company will issue to Mr. Boyd 5 thousand shares of the
Company's restricted common stock two years from the date of the agreement,
provided that Mr. Boyd has not terminated employment prior to that time.
Additionally, the Company issued to Mr. Boyd options to purchase 25 thousand
shares of common stock at $2.4375 per share, the market price as of the date of
the commencement of his employment, and minimum options after each year of
employment to purchase 10 thousand shares of common stock at the market price
on the anniversary date of the agreement. The options remain in effect for ten
years from the date of the grant, except upon termination, in which case Mr.
Boyd will have 30 days to exercise the options before they are canceled.
Stock Option Plan
The Company's Stock Option Plan (the "Stock Option Plan") was approved by
a majority of the Company's stockholders in November 1991. The Stock
Option Plan is intended to qualify, in part, as an incentive stock option plan
under Section 422 of the Internal Revenue Code (the "Code") and in part as a
non-qualified stock option plan, and to provide an incentive to those
directors, key employees of the Company and its subsidiaries and certain other
persons who are contributing materially to the Company's progress. As of
June 30, 1998, no options have been issued under the Stock Option Plan.
The Stock Option Plan is administered by a committee of the Board of
Directors, none of whom has received a discretionary grant or award under any
stock plan of the Company, during one year prior to serving on the committee.
The Stock Option Plan terminates November 2001, unless terminated sooner
by the Board of Directors. A total of 5 million shares of common stock have
been reserved for issuance under the Stock Option Plan. The Board of Directors
may terminate, modify or suspend the Stock Option Plan. The Board of Directors
may not, however, without the approval of the stockholders of the Company, (i)
increase the maximum number of shares of common stock which may be issued under
the Stock Option Plan, except pursuant to a stock split, stock dividend, or
similar transaction; (ii) change the provisions of the Stock Option Plan
relating to the establishment of the option exercise price; (iii) extend the
period during which the options may be granted under the Stock Option Plan,
except for non-qualified options; (iv) materially modify the benefits accruing
to employees participating under the Stock Option Plan; or (v) materially
modify the requirements as to eligibility for participation in the Stock Option
Plan. Since the adoption of the Stock Option Plan, no options have been
granted thereunder.
Committees of the Board
The Board of Directors has established separate compensation, audit and
nominating committees. However, there have been no meetings of such committees
as of June 30, 1998.
29
<PAGE>
Compensation of Directors
Outside directors receive payments of $1 thousand per month plus
reasonable costs and expenses of travel and lodging for attendance at
director's meetings. On February 10, 1998, directors D'Anastasio and Sannelli
each received options to purchase 100 thousand shares of the Company's common
stock at a price of $1.343 per share, the market price on the date of the
grant. On May 15, 1998, directors D'Anastasio and Sannelli each received
options to purchase 100 thousand shares of the Company's common stock at a
price of $2.25 per share, the market price on the date of the grant.
Limitations of Liability and Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, the Company's
Articles of Incorporation and the Company's Bylaws contain provisions for
indemnification of officers, directors, employees and agents of the Company.
The Company's Bylaws require the Company to indemnify such persons to the full
extent permitted by Delaware law. Each person will be indemnified in any
proceeding if he acted in good faith and in a manner which he reasonable
believed to be in, or not opposed to the best interests of the Company.
Indemnification would cover expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement.
The Company's Bylaws also provide that the Company may purchase and
maintain insurance on behalf of any present or past director or officer
insuring against any liability asserted against such person incurred in the
capacity of director or officer or arising out of such status, whether or not
the Company would have the power to indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with registered
securities, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such court.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 11, 1998, certain
information with respect to ownership of the Company's common stock by the
record and beneficial ownership by each person known to the Company to be the
beneficial owner of more than 5% of the Company's common stock, and each of the
Company's directors and named executive officers, and by all officers and
directors as a group. Unless otherwise specified, the individuals listed
possess sole voting and investment power with respect to the shares indicated
as owned by them.
30
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial
Ownership Title of Percent of
Name and Address Position (#000) Class (1) Class
- ---------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Peter S. Pelullo Director, 5,950(2) Common 24.1%
1341 N. Delaware Ave. Chairman,
Philadelphia, PA 19125 and Chief
Executive
Officer
Kathleen Patten 2,082(3) Common 8.8%
John Patten
5 Saddlehill Road
Far Hills, NJ 07931
Jacob Der Hagopian 1,500 Common 7.1%
1341 N. Delaware Ave.
Philadelphia, PA 19125
John N. D'Anastasio Director 575(4) Common 2.4%
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
Robert J. Sannelli Director 575(5) Common 2.4%
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
Michael P. McAndrews President 560(6) Common 2.3%
1341 N. Delaware Ave.
Philadelphia, PA 19125
David C. Bryan Senior Vice 305(7) Common 1.3%
1341 N. Delaware Ave. President and
Philadelphia, PA 19125 Chief Operating
Officer
James M. Boyd, Jr. Vice President 85(8) Common 0.4%
1341 N. Delaware Ave. of Finance and
Philadelphia, PA 19125 Chief Accounting
Officer
Ernest J. Cimadmore Secretary 50(9) Common 0.2%
1341 N. Delaware Ave.
Philadelphia, PA 19125
All officers and 8,100(10) Common 30.4%
directors as a group
(8 persons)
</TABLE>
31
<PAGE>
(1) Based upon an aggregate of 23,744 thousand shares of common stock
outstanding plus options to purchase common stock exercisable within 60
days.
(2) Gives effect to options to purchase 950 thousand shares of common stock
exercisable within 60 days.
(3) Reflects Kathleen Patten's ownership of 1,740 thousand shares of common
stock and John Patten's ownership of 339 thousand shares of common
stock. Mr. and Mrs. Patten disclaim beneficial ownership of each others
shares in the Company.
(4) Gives effect to options to purchase 500 thousand shares of common stock
exercisable within 60 days.
(5) Gives effect to options to purchase 500 thousand shares of common stock
exercisable within 60 days.
(6) Gives effect to options to purchase 550 thousand shares of common stock
exercisable within 60 days.
(7) Gives effect to options to purchase 300 thousand shares of common stock
exercisable within 60 days.
(8) Gives effect to options to purchase 85 thousand shares of common stock
exercisable within 60 days.
(9) Gives effect to options to purchase 50 thousand shares of common stock
exercisable within 60 days.
(10) Gives effect to options to purchase 2,935 thousand shares of common
stock exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1998, the Company authorized the issuance of 250 thousand
common stock options to Michael P. McAndrews, President of the Company; 150
thousand common stock options to David C. Bryan, the Senior Vice President and
Chief Operating Officer of the Company; 100 thousand common stock options to
Peter S. Pelullo, the Company's Chairman and Chief Executive Officer; 100
thousand common stock options to John N. D'Anastasio, a director of the
Company; 100 thousand options to Robert J. Sannelli, a director of the Company;
100 thousand common stock options to Jacob Der Hagopian, a consultant to and
significant shareholder in the Company; 60 thousand common stock options to
James M. Boyd, Jr., the Vice President of Finance and Chief Accounting Officer
of the Company; and 50 thousand common stock options to Ernest J. Cimadamore,
the Secretary of the Company. These options are exercisable at a price of
$1.343 per share and expire in February 2008.
In May 1998, the Company authorized the issuance of 100 thousand common
stock options to Peter S. Pelullo, the Company's Chairman and Chief Executive
Officer; 100 thousand common stock options to John N. D'Anastasio, a director
of the Company; and 100 thousand options to Robert J. Sannelli, a director of
the Company. These options are exercisable at a price of $2.25 per share and
expire in May 2008.
32
<PAGE>
In October 1997, 500 thousand options were granted to Michael P.
McAndrews, the Company's newly hired President. The exercise price of the
options is $2.00 per share, the market price on the date of grant. The options
vest over a three year period and remain in effect for ten years from the date
of the grant.
In July 1997, 350,000 options were granted to David C. Bryan, the
Company's newly hired Senior Vice President and Chief Operating Officer. The
exercise price of the options is $2.00 per share, the market price on the date
the COO's employment with the Company commenced. The options vest over a three
year period and remain in effect for ten years from the date of the grant.
In February 1997, the Company authorized the issuance of 250,000 stock
options to Peter S. Pelullo, the Company's Chairman and Chief Executive
Officer, 50,000 options to John N. D'Anastasio, a director of the Company, and
50,000 options to Robert J. Sannelli, a director of the Company. These options
are exercisable at a price of $2.375 per share and expire in February 2007.
In August 1996, the Company authorized the issuance of 1,250,000 shares
of restricted common stock to Peter S. Pelullo, the Company's Chairman and
Chief Executive Officer.
Since 1993, the Company has maintained a consulting agreement ("Consulting
Agreement") with Jacob Der Hagopian (the "Consultant"), a significant
shareholder in the Company. The Consulting Agreement, as amended, expires in
August 1999. The Consultant provides consulting services to the Company in the
areas of general corporate finance, business plan development, corporate
reorganization, communication, and negotiations. The Consulting Agreement
requires the Company to pay a weekly retainer of $5 thousand. The Company has
also agreed to reimburse the Consultant for any out of pocket expenses. The
Consulting Agreement may be terminated for cause or amended upon the mutual
written consent of both parties. If the Company elects to terminate the
Agreement, any money due or required to be paid shall be accelerated and
payable upon termination. Total consulting fees paid to Mr. Der Hagopian were
$235 thousand during the 11 months ended June 30, 1998 and $55 thousand during
the period from July 1, 1998 to September 11, 1998.
33
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits marked with an * are filed herewith. All other
exhibits were previously filed by the Company:
3(i) Articles of Incorporation (a)
3(ii) Bylaws (a)
10.1 Amendment to Employment Agreement between Registrant and Joseph
Tarsia (b)
10.2 Form of Agreement between Global Telecommunications of Delaware, Inc.
and Guangdong Radio Station - Pearl River Stock Market Radio (c)
10.3 Employment Agreement with James M. Boyd, Jr. (d)
10.4 Employment Agreement with David C. Bryan (d)
10.5 Employment Agreement with Michael P. McAndrews (d)
10.6 Separation Agreement between the Registrant and Joseph Tarsia (a)
10.7 Payment Agreement between the Registrant and Joseph Tarsia *
21.1 Subsidiaries of the Registrant
(i) Global Telecommunications of Delaware, Inc. (100% owned -
incorporated in Delaware))
27.1 Financial data schedule *
Incorporated by reference from the Company's (a) Form S-18 Registration
Statement on Form S-18 (File No. 32881-NY), (b) Form S-1 Registration Statement
on Form S-1 (File No. 33-90344), (c) Reports on Form 8-K dated June 12, 1996,
and July 9, 1996, (d) Amendment No. 2 to Annual Report on Form 10-KSB for the
year ended July 31, 1997.
Reports on Form 8-K
(a) The Company filed a Form 8-K on March 4, 1998. The report
disclosed in Item 5 that the Company had changed its name from Sigma Alpha
Group, Ltd. to Clariti Telecommunications International, Ltd.
(b) The Company filed a Form 8-K on April 24, 1998. The report disclosed in
Item 5 that the Company had terminated acquisition discussions with General
Atronics Corporation, a privately held defense communications
subcontractor.
(c) The Company filed a Form 8-K on August 7, 1998. The report disclosed in
Item 8 that it had changed its fiscal year end from July 31 to June 30.
34
<PAGE>
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
By: s/Peter S. Pelullo
------------------
Peter S. Pelullo
Chief Executive Officer
Dated: September 28, 1998
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following person on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------------------- -------------------------- ------------------
s/Peter S. Pelullo Chief Executive Officer September 28, 1998
- ------------------ and Chairman of the Board
Peter S. Pelullo
s/James M. Boyd, Jr. Vice President of Finance September 28, 1998
- -------------------- and Chief Accounting
James M. Boyd, Jr. Officer
s/John N. D'Anastasio Director September 28, 1998
- ---------------------
John N. D'Anastasio
s/Robert J. Sannelli Director September 28, 1998
- --------------------
Robert J. Sannelli
</TABLE>
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Aug-01-1997
<PERIOD-END> Jun-30-1998
<CASH> 1,391,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,694,000
<PP&E> 338,000
<DEPRECIATION> 56,000
<TOTAL-ASSETS> 2,240,000
<CURRENT-LIABILITIES> 660,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 1,556,000
<TOTAL-LIABILITY-AND-EQUITY> 2,240,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,223,000
<OTHER-EXPENSES> (33,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,000
<INCOME-PRETAX> (4,248,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,248,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,248,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
PAYMENT AGREEMENT
This Agreement is made this 1st day of August, 1998, by and between Clariti
Telecommunications International, Ltd., a Delaware corporation ("Clariti") and
Joseph D. Tarsia, an individual residing in the state of New Jersey ("Tarsia").
BACKGROUND
A. Tarsia and Clariti are parties to a separation agreement dated April 27,
1995 ("Separation Agreement").
B. Pursuant to the Separation Agreement, Tarsia is entitled to payments
outlined in paragraph 3 of the Separation Agreement.
C. Clariti has failed to pay and/or provide to Tarsia certain of the payments
that he is entitled to under the Separation Agreement, which the parties
estimate to be approximately forty three thousand dollars ($43,000.00)
("Separation Agreement Obligation").
D. Tarsia has received final payment of the Patten Obligation as that term is
defined in the Separation Agreement.
E. Tarsia has agreed to forbearance of any further collection activities
related to the Separation Agreement Obligation and to extend the term of
repayment of the Separation Agreement Obligation by one year.
F. The parties wish to take certain actions regarding the aforementioned
matters, including without limitation, the Separation Agreement, as provided
for under the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants herein contained the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby, agree as
follows:
1. OBLIGATIONS DUE TARSIA
1.1 Subject to Section 1.2, Tarsia, on behalf of himself, heirs and personal
representatives, does hereby remise, release and forever discharge Clariti,
its affiliates, directors, officers, employees, successors and assigns from
any and all obligations, liabilities, claims and debts, whether or not
asserted, with respect to or arising under the Separation Agreement
including, but not limited to, any and all unpaid obligations due Tarsia
under the Separation Agreement, which the parties estimate to be
approximately $43,000.
1.2 In consideration of Tarsia releasing Clariti from past due obligations
under the Separation Agreement, as provided for in Section 1.1 above,
Clariti shall make the following payments to Tarsia:
(a) issue 6,600 shares of Clariti common stock, which shall carry a
restrictive legend pursuant to Rule 144 of the Securities Act of 1933.
Tarsia hereby acknowledges that the securities carry risk and hereby
accepts all risk related thereto. Clariti makes no representations as
to the value of same.
(b) issue a promissory note in amount of $43,000 payable to Tarsia in the
form of and carrying such terms and conditions as EXHIBIT A attached
hereto.
<PAGE>
2. Miscellaneous
2.1 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the Commonwealth of
Pennsylvania.
2.2 No Assignment. This Agreement shall not be assignable by either party
without the prior written approval of the other party and shall be
binding upon and inured to the benefit of the parties hereto and their
respective heirs, executors, administrators and personal
representatives.
2.3 Counterparts. This Agreement may be executed in counterparts, each of
which will constitute an original and taken together shall constitute
one in the same instrument.
2.4 Entire Agreement. This Agreement sets forth the entire agreement and
understanding between the parties with respect to the subject matter
herein and supersedes all prior, contemporaneous agreements,
understanding, representations and warranties, whether oral or written.
This Agreement may not be amended, modified or altered or any of its
provisions waived except for in writing and signed by all parties
hereto.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
By: s/Peter S. Pelullo
-----------------------
Peter S. Pelullo, CEO
s/Joseph D. Tarsia
-----------------------
Joseph D. Tarsia
<PAGE>
EXHIBIT A
Promissory Note
$ 43,000.00 Date: August 1, 1998
FOR VALUE RECEIVED and intending to be legally bound, Clariti
Telecommunications International, Ltd. ("Maker"), promises to pay to the order
of Joseph D. Tarsia ("Payee"), at 117 Mews, Haddonfield, NJ 08033, in lawful
money of the United States of America, the sum of Forty Three Thousand Dollars
($43,000.00), together with interest at the rate of eight percent (8%) per
annum payable weekly per attached Schedule A.
Any Amount Paid hereunder shall be applied against interest and principal
pursuant to Schedule A attached hereto.
Maker may prepay all or any portion of the unpaid principal balance of
this Note, without penalty or premium.
The term "Indebtedness" as used herein shall mean the indebtedness
evidenced by this note, including all reasonable costs and expenses incurred by
Payee (including reasonable attorney's fees) in the collection of all amounts
due from Maker to Payee under this note.
The Indebtedness shall immediately become due and payable without notice
or demand, upon: (1) Clariti's failure to make timely payments as put forth
in Schedule A (failure is defined as missing any three (3) payments); (2) the
voluntary appointment of receiver, custodian, or liquidator for MAKER or for
any MAKER'S property; (3) the filing by MAKER of any proceeding under any
state or federal insolvency, bankruptcy, or other law for the relief of
debtors; (4) the continuation for 60 days without dismissal of any
involuntary appointment of a receiver, custodian, or liquidator for MAKER or
any MAKER'S property or of an involuntary proceeding against MAKER under any
federal or state insolvency, bankruptcy, or other law for the relief of
debtors.
Should any default be made in the payment of any sum due hereunder on the
date on which it is due, the Payee may recover all costs of collection and
attempts to collect (whether or not suit is brought) and all costs of suit and
other expenses in connection therewith, together with interest on any judgement
obtained by Payee at the rate set forth above, including interest at such rate
from and after the date of any execution or judicial sale until actual payment
is made to Payee of the full amount due Payee.
None of the rights, remedies, privileges, or powers of PAYEE, or any other
holder hereof, under this Note are exclusive, but each of them shall be
cumulative with and in addition to every other right, remedy, privilege, and
power now or hereafter existing in favor of PAYEE or such holder, whether at
law, in equity, or by statute, or otherwise.
Any notice or writing required or permitted to be given hereunder shall be
sufficient if sent by certified mail, return receipt requested, to MAKER.
Pennsylvania law shall govern the validity, construction, interpretation,
and effect of this Note.
<PAGE>
MAKER
Clariti Telecommunications International, Ltd
By: s/Peter S. Pelullo
------------------------
Peter S. Pelullo
Chairman & CEO
