<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 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
(State or other jurisdiction of incorporation or organization)
23-2498715
(IRS Employer Identification No.)
1341 North Delaware Avenue, Philadelphia, PA 19125
(Address of principal executive offices)
(X) (215) 425-8682
(Issuer's telephone number)
(Former name: Sigma Alpha Group, Ltd.)
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 ( )
Outstanding shares issued or to be issued of the registrant's common stock
$.001 par value per share as of June 5, 1998 were 23,450,426 .
<PAGE>
Clariti Telecommunications International, Ltd.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
April 30, 1998 (unaudited) and
July 31, 1997 (audited) 3-4
Consolidated Statements of Operations
for the nine months and three months
ended April 30, 1998 and 1997
(unaudited) 5
Consolidated Statement of Stockholders'
Equity for the nine months ended
April 30, 1998 (unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended April 30,
1998 and 1997 (unaudited) 7-8
Notes to Consolidated Financial
Statements (unaudited) 9-15
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 16-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Events 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
<CAPTION>
April 30, July 31,
1998 1997
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 816,000 $1,688,000
Inventory 78,000 78,000
Prepaid expenses and other current assets 331,000 20,000
--------- ---------
1,225,000 1,786,000
PROPERTY AND EQUIPMENT, NET 263,000 48,000
OTHER ASSETS
Goodwill 30,000 42,000
Patent and technology 244,000 22,000
--------- ---------
274,000 64,000
--------- ---------
TOTAL ASSETS $1,762,000 $1,898,000
========= =========
<FN>
See accompanying notes
3
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
<CAPTION>
April 30, July 31,
1998 1997
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts payable - trade $ 717,000 $ 190,000
Accrued taxes, other than income taxes 52,000 52,000
Accrued wages - officers 8,000 21,000
Accrued expenses and other current
liabilities 100,000 111,000
--------- ---------
TOTAL CURRENT LIABILITIES 877,000 374,000
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
PREFERRED STOCK
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 0 shares at April 30, 1998,
800,000 shares at July 31, 1997; issued and
outstanding, 0 shares at April 30, 1998
664,000 shares at July 31, 1997 - 1,000
ADDITIONAL PAID-IN CAPITAL - 3,321,000
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
22,450,000 shares at April 30, 1998 and
18,907,000 at July 31, 1997 22,000 19,000
ADDITIONAL PAID-IN CAPITAL 29,516,000 24,048,000
WARRANTS OUTSTANDING 2,014,000 1,540,000
ACCUMULATED DEFICIT (30,667,000) (27,405,000)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 885,000 1,524,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,762,000 $ 1,898,000
========== ==========
<FN>
See accompanying notes
4
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Rounded to Nearest Thousand)
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ - $ 348,000 $ - $ -
COST OF SALES - 314,000 - -
---------- ---------- ---------- ----------
GROSS PROFIT - 34,000 - -
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Officers' compensation 824,000 2,530,000 266,000 177,000
Other salaries and
payroll costs 172,000 86,000 56,000 46,000
Consulting fees 585,000 1,040,000 227,000 631,000
Professional fees 140,000 122,000 18,000 53,000
Research and development 990,000 268,000 188,000 215,000
Travel 267,000 351,000 48,000 159,000
Other 248,000 430,000 76,000 219,000
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 3,226,000 4,827,000 879,000 1,500,000
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (3,226,000) (4,793,000) ( 879,000) (1,500,000)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Royalties - 2,000 - -
Interest expense ( 59,000) - ( 46,000) -
Interest income 23,000 52,000 2,000 30,000
---------- ---------- ---------- ----------
( 36,000) 54,000 ( 44,000) 30,000
---------- ---------- ---------- ----------
NET LOSS $(3,262,000) $(4,739,000) $( 923,000) $(1,470,000)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 20,072,000 17,063,000 20,846,000 18,743,000
NET LOSS PER COMMON SHARE $(0.16) $(0.28) $(0.04) $(0.08)
========== ========== ========== ==========
<FN>
See accompanying notes
5
</TABLE>
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED APRIL 30, 1998
(Rounded to Nearest Thousand)
PREFERRED STOCK "SERIES B" PREFERRED STOCK "SERIES D"
---------------------------- ---------------------------
ADDITIONAL ADDITIONAL
NO. OF PAID-IN NO. OF PAID-IN
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL
-------- ------- ---------- ------- ------ ----------
BALANCES, JULY 31,
1997 664,000 $ 1,000 $3,321,000 - $ - $ -
Nine months ended
April 30, 1998
(unaudited):
Shares issued - - - 58,000 - 575,000
Conversion to
common stock (664,000) (1,000) (3,321,000) (58,000) - (575,000)
-------- ------ ---------- ------- ----- --------
BALANCES, APRIL 30,
1998 (unaudited) - $ - $ - - $ - $ -
======== ====== ========== ======= ===== ========
COMMON STOCK
---------------------------------------------
ADDITIONAL
NUMBER OF PAID -IN WARRANTS ACCUMULATED
SHARES AMOUNT CAPITAL OUTSTANDING DEFICIT
---------- ------- ----------- ----------- ------------
BALANCES,
JULY 31, 1997 18,907,000 $19,000 $24,048,000 $1,540,000 $(27,405,000)
Nine months ended
April 30, 1998
(unaudited):
Preferred Series
B conversion 1,328,000 1,000 3,321,000 - -
Preferred Series
D conversion 575,000 - 575,000 - -
Common shares
issued 1,630,000 2,000 1,628,000 - -
Commissions - - (58,000) - -
Warrants issued - - - 476,000 -
Warrants
exercised 10,000 - 2,000 ( 2,000) -
Net loss - - - - ( 3,262,000)
---------- ------ ---------- -------- -----------
BALANCES,
APRIL 30, 1998
(unaudited) 22,450,000 $22,000 $29,516,000 $2,014,000 $(30,667,000)
========== ====== ========== ========= ===========
See accompanying notes
6
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
NINE MONTHS ENDED
APRIL 30,
----------------------------
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,262,000) $(4,739,000)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Depreciation and amortization 41,000 32,000
Issuance of common stock for:
Officers' compensation - 2,012,000
Consulting fees 84,000 65,000
Interest expense 6,000 -
Issuance of common stock warrants for:
Consulting fees 100,000 655,000
Interest expense 33,000 -
(Increase) decrease in:
Accounts receivable - ( 191,000)
Inventory - ( 472,000)
Prepaid expenses and other current
assets 26,000 ( 17,000)
Increase (decrease) in:
Accounts payable - trade 527,000 83,000
Accrued wages - officers ( 13,000) ( 37,000)
Accrued expenses and other current
liabilities ( 11,000) ( 35,000)
---------- ----------
Net cash used in operating activities (2,463,000) (2,644,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificate of deposit - ( 50,000)
Cost of patent ( 29,000) ( 14,000)
Purchase of equipment ( 237,000) ( 51,000)
---------- ----------
Net cash used in investing activities ( 266,000) ( 115,000)
---------- ----------
<FN>
See accompanying notes
7
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
NINE MONTHS ENDED
APRIL 30,
----------------------------
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable $ 250,000 $ -
Repayment of loans payable - ( 16,000)
Proceeds from issuance of preferred stock 575,000 -
Proceeds from issuance of common stock 1,090,000 5,000,000
Commission on capital stock issuance ( 58,000) ( 510,000)
Repurchase of Preferred Series C stock - ( 487,000)
Proceeds from issuance of warrants - 3,000
---------- ----------
Net cash provided by financing activities 1,857,000 3,990,000
---------- ----------
NET CHANGE IN CASH AND EQUIVALENTS ( 872,000) 1,231,000
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,688,000 1,173,000
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $ 816,000 $ 2,404,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 1,000 $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Common stock issued for retirement
of Series B Preferred stock $ 3,322,000 $ -
Common stock issued for retirement
of Series D Preferred stock $ 575,000 $ -
Common stock issued for repayment
of loans payable $ 250,000 $ -
Common stock issued in acquisition
of minority interest of subsidiary $ 200,000 $ -
Issuance of common stock warrants
for prepaid expenses $ 337,000 $ -
Common stock issued for retirement
of Series A Preferred stock $ - $ 882,000
<FN>
See accompanying notes
8
</TABLE>
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 1 - INTERIM PERIODS
The unaudited information has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management reflects
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended July 31, 1997.
Certain amounts for the nine months ended April 30, 1997 have been
reclassified to conform to the presentation for the nine months ended April
30, 1998. However, see Note 13 regarding the restatement of the consolidated
balance sheet as of July 31, 1997 and the consolidated statements of
operations, cash flows and stockholders' equity for the nine months ended April
30, 1997.
The results of operations for the nine month periods ended April 30, 1998 and
1997 are not necessarily indicative of operating results for the full year.
NOTE 2 - BUSINESS ACTIVITIES
During the nine months ended April 30, 1998, Clariti Telecommunications
International, Ltd. ("Clariti" or the "Company") conducted activities directed
toward the research and development of its digital voice pager. Effective
March 4, 1998, the Company changed its name from Sigma Alpha Group, Ltd. to
Clariti Telecommunications International, Ltd. to reflect the fact that, over
the last two years, the Company has refocused its business to concentrate
solely on telecommunications.
NOTE 3 - METHOD OF ACCOUNTING
The Company prepares its financial statements on the accrual method of
accounting, recognizing income when earned and expenses when incurred.
NOTE 4 - PATENT AND TECHNOLOGY
In April 1998, Clariti acquired the remaining 20% of its then 80% owned
subsidiary Global Telecommunications of Delaware, Inc. ("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. There was no amortization
of such investment recorded during the nine months ended April 30, 1998.
9
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 5 - NOTES PAYABLE
On January 15, 1998 the Company borrowed $250,000 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 $6,000, through the issuance of approximately 256,000 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 warrants to purchase shares of the
Company's common stock (see Note 7).
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company periodically uses sub-contractors to work on the development of its
Digital Voice Pager project. As of April 30, 1998, the Company had paid an
aggregate of $905,000 against contract limits aggregating $1,529,000. Manage-
ment expects to continue to utilize sub-contractors, where appropriate, to
help develop its products.
NOTE 7 - PREFERRED STOCK
During the quarter ended April 30, 1998, the Company issued 57,500 shares of
Series D convertible preferred stock, $.001 par value, and received proceeds
of $575,000 less commissions of $57,500. 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. The Company no longer has any Series D preferred stock outstanding.
On September 2, 1997, the Company redeemed the remaining 664,000 shares of
Series B preferred stock for the Company's common stock on a two for one basis,
or an aggregate of 1,328,000 common shares. The Company no longer has any
Series B preferred stock outstanding.
NOTE 8 - COMMON STOCK
During the quarter ended April 30, 1998, the Company issued a total of
1,630,000 shares of its common stock as follows:
- 1,090,000 shares for total proceeds of $1,090,000
- 200,000 shares as consideration for purchase of remaining 20% of Global
(see Note 4)
- 256,000 shares for repayment of $256,000 of notes payable and related
accrued interest (see Note 5)
- 84,000 shares for consulting services valued at $84,000
In May 1998, the Company issued an additional 1,000,000 shares of its common
stock for total proceeds of $1,250,000.
10
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 9 - WARRANTS
From time to time, the Company may issue warrants to purchase its 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
or services rendered to the Company, or a combination of the above.
Compensation cost associated with warrants issued to other than employees is
valued based on the fair value of the warrants as 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 following
paragraphs provide a detailed list of the Company's common stock warrants
issued during the nine months ended April 30, 1998.
The Demand Notes (see Note 5) provide for the lenders to receive warrants to
purchase 50,000 shares of the Company's common stock at the market price on the
date of the loan ($1.50 per share). These warrants expire on January 15, 2003.
The Black-Scholes model valued these warrants at $51,000.
On January 26, 1998, the Company issued to a consultant, warrants to purchase
100,000 shares of the Company's common stock at an exercise price of $1.3125
per share for services to be rendered to the Company during the succeeding 12
months. Warrants representing the consultant's right to purchase the first
50,000 of such shares became exercisable immediately upon execution of the
consulting agreement and expire on January 26, 2001. The Black-Scholes model
valued these warrants at $36,000. Warrants representing the consultant's right
to purchase the remaining 50,000 share balance become exercisable commencing on
the date the Company's securities are listed on the NASDAQ Small-CAP Market and
expire three years from that date. These warrants were assigned a zero value
due to the contingent nature of their issuance.
On February 4, 1998 the Company issued to a consultant, warrants to purchase
200,000 shares of the Company's common stock at an exercise price of $1.25 per
share. These warrants were issued in consideration for services rendered in
raising equity capital for the Company. The warrants expire on February 4,
1999. The Black-Scholes model valued these warrants at $100,000.
On April 30, 1998, the Company issued to a consultant, warrants to purchase
350,000 shares of the Company's common stock at an exercise price of $1.50
per share for services to be rendered to the Company during the succeeding 12
months. These warrants expire on April 30, 2001. The Black-Scholes model valued
these warrants at $290,000 which was reflected in prepaid expenses and other
current assets on the April 30, 1998 consolidated balance sheet.
In May 1998, the Company issued to a consultant, warrants to purchase
10,000 shares of the Company's common stock at an exercise price of $2.125
per share for services to be rendered to the Company during the succeeding two
months. These warrants expire on May 23, 2001.
11
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 9 - WARRANTS (continued)
In May 1998, the Company rescinded warrants to purchase 500,000 shares of the
Company's common stock that had been issued to a consultant with an exercise
price of $2.40 per share. The warrants were rescinded due to the consultant's
failure to perform services required by contract.
NOTE 10 - STOCK OPTIONS
On February 10, 1998, the Company's Board of Directors authorized the issuance
of options to purchase 935,000 shares of the Company's common stock. These
stock options may be exercised over a period of ten years at the fair market
value on the date of the grant ($1.343 per share) and generally carry such
other terms as are outlined in the Company's Stock Option Plan. The stock
options were granted to the following officers, directors and certain employees
of the Company.
- 100,000 options to each of the two outside members of the Company's
Board of Directors
- 100,000 options to the Chairman and Chief Executive Officer of the
Company
- 250,000 options to the President of the Company
- 150,000 options to the Senior Vice President and Chief Operating Officer
of the Company
- 50,000 options to the Vice President of Finance and Chief Accounting
Officer of the Company
- 50,000 options to the Secretary of the Company
- 135,000 options to other employees of the Company
On May 15, 1998, the Company's Board of Directors authorized the issuance
of options to purchase 300,000 shares of the Company's common stock. These
stock options may be exercised over a period of ten years at the fair market
value on the date of the grant ($2.25 per share) and generally carry such
other terms as are outlined in the Company's Stock Option Plan. Each of the two
outside members of the Company's Board of Directors received 100,000 options
and a key employee of the Company also received 100,000 options.
Also in May 1998, the Company issued options to purchase a total of 122,000
shares of the Company's common stock to several new employees of the Company.
These stock options may be exercised over a period of ten years at the fair
market value on the date of the grant (weighted average price of $1.6137 per
share) and generally carry such other terms as are outlined in the Company's
Stock Option Plan.
12
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 11 - INCOME TAXES
There is no income tax benefit for operating losses for the three and nine
month periods ended April 30, 1998 and 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 required by FASB Statement 109,
"Accounting for Income Taxes." The valuation
allowance is necessary because, according to
criteria established by FASB Statement 109, it is
more likely than not that the deferred tax asset
will not be realized through future taxable income.
NOTE 12 - NET LOSS PER COMMON SHARE
In February 1997, the FASB issued Statement 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. FASB
Statement 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. In addition, FASB Statement 128 requires restatement of prior
periods' earnings per share.
The Company adopted FASB Statement 128 effective in its fiscal quarter ended
January 31, 1998. Prior period amounts for net loss per common share were
recomputed in accordance with Statement 128; however, such recomputed amounts
were unchanged from those previously reported.
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.
NOTE 13 - RESTATEMENT OF FINANCIAL STATEMENTS
In July 1998 the Company reviewed the valuation assigned to 1,250,000 shares of
restricted common stock issued to its Chairman in August 1996 ("Chairman's
Restricted Common Stock"). This review resulted in the determination that the
independent expert used by the Company to value the Chairman's Restricted
Common Stock had valued such stock too low relative to its market value.
Accordingly, the Company has restated its financial statements for the nine
months ended April 30, 1997 to reflect an increase in the value assigned to the
Chairman's Restricted Common Stock from $188,000 to $2,000,000.
13
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 13 - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
In July 1998 the Company also reviewed the calculations of fair value of common
stock warrants issued to non-employees and common stock options issued to
employees during the year ended July 31, 1997 and the nine months ended April
30, 1998. This review resulted in the determination that the 0% volatility
rate used in the Black-Scholes model calculations was not determined correctly.
Accordingly, the Company has restated its financial statements for the year
ended July 31, 1997 and the nine months ended April 30, 1998 to reflect a
volatility rate of 80%. These restatements resulted in an increase in the fair
value assigned to common stock warrants as follows:
- nine months ended April 30, 1998 - from $146,000 to $477,000
- nine months ended April 30, 1997 - from $340,000 to $1,072,000
- three months ended April 30, 1998 - from $118,000 to $390,000
- three months ended April 30, 1997 - from $3,000 to $411,000
Of the $732,000 increase for the nine months ended April 30, 1997, $655,000 was
charged to operations and $77,000 was charged to additional paid-in capital
representing legal costs of preparing a registration statement.
The Company also reclassified the $200,000 cost of acquiring the remaining 20%
of Global (see Note 4) from goodwill to patent and technology to better reflect
the nature of this investment.
The impact of these restatements on the consolidated balance sheets as of April
30, 1998 and July 31, 1997 and the consolidated statements of operations for
the nine-month and three-month periods ended April 30, 1998 and 1997 is as
follows (rounded to nearest thousand, except per share amounts):
Amounts
Previously Restated
Reported Amounts
------------- -------------
Balance Sheet as of April 30, 1998:
Total current assets $ 996,000 $ 1,225,000
Goodwill $ 230,000 $ 30,000
Patent and technology $ 44,000 $ 244,000
Total assets $ 1,533,000 $ 1,762,000
Warrants outstanding $ 572,000 $ 2,014,000
Additional paid-in capital $ 27,781,000 $ 29,516,000
Accumulated deficit $(27,719,000) $(30,667,000)
Total stockholders' equity $ 656,000 $ 885,000
Balance Sheet as of July 31, 1997:
Warrants outstanding $ 428,000 $ 1,540,000
Additional paid-in capital $ 22,313,000 $ 24,048,000
Accumulated deficit $(24,558,000) $(27,405,000)
Total stockholders' equity $ 1,524,000 $ 1,524,000
14
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 13 - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
Amounts
Previously Restated
Reported Amounts
------------- -------------
Statement of Operations for the Nine Months
Ended April 30, 1998:
Loss from operations $ (3,158,000) $ (3,226,000)
Other income (expense) $ ( 3,000) $ ( 36,000)
Net loss $ (3,161,000) $ (3,262,000)
Net loss per share $ (0.16) $ (0.16)
Statement of Operations for the Nine Months
Ended April 30, 1997:
Loss from operations $ (2,326,000) $ (4,793,000)
Net loss $ (2,272,000) $ (4,739,000)
Net loss per share $ (0.13) $ (0.28)
Statement of Operations for the Three Months
Ended April 30, 1998:
Loss from operations $ ( 811,000) $ ( 879,000)
Other income (expense) $ ( 18,000) $ ( 44,000)
Net loss $ ( 829,000) $ ( 923,000)
Net loss per share $ (0.04) $ (0.04)
Statement of Operations for the Three Months
Ended April 30, 1997:
Loss from operations $ (1,091,000) $ (1,500,000)
Net loss $ (1,061,000) $ (1,470,000)
Net loss per share $ (0.06) $ (0.08)
The impact of the restatements also resulted in changes to the consolidated
statement of stockholders equity for the nine months ended April 30, 1998, the
statements of cash flows for the nine month periods ended April 30, 1998 and
1997, and notes 4 and 9.
15
<PAGE>
PART I. ITEM 2. 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. ("the Company") is pursuing
a business strategy of bringing new telecommunications products and services to
world markets. During the nine months ended April 30, 1998, the Company
conducted activities directed toward the research and development of its
Digital Voice Paging System. Effective March 4, 1998, the Company changed its
name from Sigma Alpha Group, Ltd. to Clariti Telecommunications International,
Ltd. to reflect the fact that, over the last two years, the Company has
refocused its business to concentrate solely on telecommunications.
Recent Developments
- -------------------
The Company previously announced that it signed a letter of intent to
acquire all of the outstanding capital stock of General Atronics Corporation
and its subsidiaries ("GAC"), a privately held defense communications
subcontractor. Completion of the acquisition was contingent on negotiation of
a definitive acquisition agreement acceptable to the Company and GAC's
shareholders. On April 9, 1998, after several months of negotiations, both
parties mutually agreed to terminate acquisition discussions.
On May 20, 1998, the Company signed an engagement letter with a major
investment banking firm to assist the Company in raising the additional equity
capital necessary to achieve the Company's objectives. On July 10, 1998, the
Company and the investment banking firm mutually agreed to terminate the
engagement because the investment banking firm was unable to devote the
resources necessary to raise the required equity capital within the timeframe
required to complete development of the Company's Digital Voice Paging System.
The Company plans to continue its efforts to raise the necessary equity capital
without the assistance of such investment banking firm. There can be no
assurance that the Company will be successful in this regard.
On April 28, 1998, the Company announced that its digital voice paging
"Beta system" was successfully operating in Philadelphia. The Beta system is
comprised of multiple handheld, battery-operated voice pagers receiving pages
over Clariti's FM paging system. The pages were sent over the SCA subcarrier
frequencies of WIOQ 102.1 FM, a commercial radio station in Philadelphia.
Nine Months Ended April 30, 1998
vs. Nine Months Ended April 30, 1997
- -------------------------------------
Results of Operations
For the nine months ended April 30, 1998, the Company incurred a net loss
of $3,262,000, or $.16 per share of common stock, on no revenue compared to a
net loss of $4,739,000, or $.28 per share of common stock, on revenues of
$348,000 for the nine months ended April 30, 1997.
16
<PAGE>
During the nine months ended April 30, 1997, Global Telecommunications
of Delaware, Inc. ("Global"), the Company's 80-percent owned subsidiary,
recognized $348,000 of revenue from the sale of approximately 12,400 of its
stock information receiver ("SIR") units. However, in August 1997 the Company
suspended Global's SIR program after concluding that its limited capital
resources would not allow for the continued development of the SIR system in
parallel with the Company's core business strategy of developing and
commercializing its Digital Voice Paging technology. Since no SIR units were
sold in the nine months ended April 30, 1998 and since the Digital Voice Paging
System is still under development, the Company had no operating revenues in the
nine months ended April 30, 1998.
The $1,477,000 decrease in net loss was primarily due to lower officers'
compensation, consulting fees, travel expenses and other operating expenses
partially offset by higher research and development expenses, higher other
salaries and payroll costs, lower interest income and higher interest expense.
Partially offsetting the decrease in net loss was the absence of gross profit
of $34,000 incurred on the sale of SIR units during the nine months ended April
30, 1997.
Officers' compensation decreased $1,706,000 for the nine months ended
April 30, 1998 primarily due to the absence of the issuance of 1,250,000 shares
of common stock valued at $2,000,000 to the Chairman during the nine months
ended April 30, 1997, partially offset by the hiring of a new Senior Vice
President and Chief Operating Officer in July 1997 and a new President in
October 1997. Other salaries and payroll costs increased $86,000 for the nine
months ended April 30, 1998 due to higher salaries, payroll taxes and medical
benefits attributable to the addition of new employees. Consulting fees
decreased $455,000 for the nine months ended April 30, 1998 primarily due to a
reduction in common stock warrants issued to consultants partially offset by
higher fees paid to investment bankers and other consultants who assisted the
Company in raising equity capital, developing strategic alliances and
negotiating contracts. Research and development costs increased $722,000 due to
costs incurred during the nine months ended April 30, 1998 on developing the
Digital Voice Paging System. Travel and other operating expenses declined
$84,000 and $182,000, respectively, for the nine months ended April 30, 1998
largely due to the suspension of Global's SIR program in China in 1997. Lower
filing fees also contributed to the decline in other operating expenses.
Interest expense increased $59,000 for the nine months ended April 30, 1998 due
to the issuance of $250,000 of notes payable (including 50,000 common stock
warrants attached to the notes) in January 1998, while interest income
decreased $29,000 for the same period due to lower cash balances available for
investment.
Three Months Ended April 30, 1998
vs. Three Months Ended April 30, 1997
- ---------------------------------------
Results of Operations
For the three months ended April 30, 1998 ("Fiscal 3Q98"), the Company
incurred a net loss of $923,000, or $.04 per share, on no sales compared to a
net loss of $1,470,000, or $.08 per share, on no sales for the three months
ended April 30, 1997 ("Fiscal 3Q97").
17
<PAGE>
The $547,000 decrease in net loss in Fiscal 3Q98 is primarily due to lower
consulting and professional fees, travel and other operating expenses.
Partially offsetting these increases were higher officers' compensation, higher
interest expense and lower interest income.
Consulting fees decreased $404,000 in Fiscal 3Q98 primarily due to a
reduction in common stock warrants issued to consultants and lower fees paid to
investment bankers who assisted the Company in raising equity capital. Travel
expenses and other operating expenses decreased $111,000 and $143,000,
respectively, in Fiscal 3Q98 largely due to the suspension of Global's SIR
program in China in 1997. Lower filing fees also contributed to the decline in
other operating expenses. Professional fees decreased $35,000 in Fiscal 3Q98
primarily due to lower fees paid to attorneys who assisted the Company in
raising equity capital and negotiating contracts. Officers' compensation
increased $89,000 in Fiscal 3Q98 due to the hiring of a new Senior Vice
President and Chief Operating Officer in July 1997 and a new President in
October 1997. Interest expense increased $46,000 in Fiscal 3Q98 due to the
issuance of $250,000 of notes payable (including 50,000 common stock warrants
attached to the notes) in January 1998, while interest income decreased $28,000
for the same period due to lower cash balances available for investment.
Liquidity and Capital Resources
At April 30, 1998, the Company had working capital of $348,000 as compared
to working capital of $1,412,000 at July 31, 1997. The working capital
decrease of $1,064,000 largely reflects the use of cash in operations
during the nine months ended April 30, 1998, partially offset by proceeds from
the sale of capital stock and loans payable, as well as the issuance of common
stock warrants for prepaid expenses.
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 plans to continue its Beta testing in Brazil in July
1998. There can be no assurance, however, that the successful test 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. 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 $8.4 million (expected to
be raised through the issuance of additional equity capital) to complete
development of the Digital Voice Paging System and launch the service in the
first market sometime in 1999. There can be no assurance as to when, or
whether, the Digital Voice Pager will be successfully developed. No assurance
18
<PAGE>
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.
Management is aware that significant additional funding will be required
in order to achieve its business objectives. Management has been actively
soliciting additional equity investments. In January 1998 the Company obtained
convertible demand loans totaling $250,000, the balance of which was converted
into common stock in April 1998. During the quarter ended April 30, 1998, the
Company raised $575,000 (less $57,500 of commissions) through the sale of
57,500 shares of Series D convertible preferred stock and $1,090,000 through
the sale of 1,090,000 shares of the Company's common stock. In addition, the
Company was able to conserve its cash by using common stock and common stock
warrants to pay for $408,000 in costs during the quarter ended April 30, 1998.
Efforts to raise additional equity capital continued in May and June 1998 with
the sale of an additional 1,000,000 shares of common stock for proceeds of
$1,250,000.
There can be no assurances, however, that sufficient funding will continue
to be generated or available, or if available, on terms acceptable to the
Company. In addition, management is aware that there can be no assurances that
its Digital Voice Paging System will be developed into a commercially viable
business.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Registrant's Annual Report on
Form 10-KSB for the year ended July 31, 1997.
Item 2. Recent Sales of Unregistered Securities
The following information sets forth all shares of the Company's $.001 par
value common stock, $.001 par value preferred stock, and warrants to purchase
the Company's $.001 par value common stock issued by the Company since July 31,
1997, none of which were registered under the Securities Act of 1933, as
amended (the "Act") at the time of issuance.
COMMON STOCK ISSUANCES
----------------------
Number Total
Date Name of Shares Consideration
-------- ------------------------------- ------------ -------------
Oct-97 John Patten 1,328,220 $ 0(a)
Nov-97 Joseph Fannelli 10,000 100(b)
Apr-98 Karen Eidiloth 200,000 200,000
Apr-98 Stuart Gimbel 100,000 100,000
Apr-98 Alfred Sussman 25,000 25,000
Apr-98 Bernard Kobrovsky, Trustee 30,000 30,000
Apr-98 Harry Berman 35,000 35,000
Apr-98 FMS profit Sharing Plan 200,000 200,000
Apr-98 George Parlby 50,000 50,000
Apr-98 Marjorie K. Hansen 50,000 50,000
Apr-98 Fred C. Applegate/Fred C.
Applegate Trust 50,000 50,000
Apr-98 Tanya Christopher 50,000 50,000
Apr-98 PMG Eagle Fund 300,000 300,000
Apr-98 Richard Hansen 200,000(c) 200,000(c)
Apr-98 Pennsylvania Merchant Group 280,721(d) 280,721(d)
Apr-98 James Saltzman 59,781(d) 59,781(d)
May-98 Royal Bank of Scotland 50,000 62,500
May-98 Bank of New York 150,000 187,500
Jun-98 Stephen Garafolo 800,000 1,000,000
SERIES D PREFERRED STOCK ISSUANCES
----------------------------------
Number Total
Date Name of Shares Consideration
-------- ------------------------------- --------- -------------
Feb-98 LGT Bank in Liechtenstein Vaduz 20,000(e) $200,000
Mar-98 Erste Bank 10,000(e) 100,000
Apr-98 Bank of Scotland Isle of Man 7,500(e) 75,000
Apr-98 Bank of Scotland Isle of Man 2,000(e) 20,000
Apr-98 Sigler c/o Chase Manhattan Bank 16,600(e) 166,000
Apr-98 Bath Street Nominees 1,400(e) 14,000
20
<PAGE>
COMMON STOCK WARRANTS ISSUED
----------------------------
Number Fair
Date Name of Shares Value
-------- ------------------------------- ---------- -------
Jan-98 Pennsylvania Merchant Group 40,000(f) $14,426
Jan-98 James Saltzman 10,000(f) 3,606
Jan-98 Epicon Asset Management 100,000(g) 9,982
Feb-98 Epicon Asset Management 200,000(g) 38,379
Apr-98 Stuart Kobrovsky 350,000(g) 79,856
May-98 Michael Lurie 10,000(g) 3,232
(a) Common shares issued in exchange for conversion of 664,110 shares of
Series B Preferred Stock.
(b) Common shares issued upon exercise of a common stock purchase warrant at
an exercise price of $.01 per share.
(c) Common shares valued at $1.00 per share issued as consulting fees related
to purchase of remaining 20% of Global Telecommunications of Delaware,
Inc., a subsidiary of the Company.
(d) Common stock valued at $1.00 per share issued for consulting fees and in
payment of accrued interest and principal due on loans payable.
(e) Series D Preferred Stock issued for $10.00 per share was immediately
converted into shares of the Company's common stock on a basis of 1
Series D Preferred share for 10 shares of common stock.
(f) Warrants to purchase a total of 50,000 shares of the Company's common
stock were issued in connection with its short-term borrowing of $250,000
in January 1998. These warrants may be exercised at $1.50 per share and
expire on January 15, 2003.
(g) Warrants to purchase a total of 660,000 shares of the Company's common
stock were issued in exchange for consulting services performed or to be
performed in the future. The terms of such warrants are as follows:
- In January 1998, 100,000 warrants were issued, 50,000 of which are
exercisable at $1.3125 per share and expire on January 26, 2001, and
50,000 of which become exercisable commencing on the date the Company's
securities are listed on the NASDAQ Small-CAP Market and expire three
years from that date.
- In February 1998, the Company issued 200,000 warrants that are
exercisable at $1.25 per share and expire on February 4, 1999.
- In April 1998, the Company issued 350,000 warrants that are exercisable
at $1.50 per share and expire on April 30, 2001.
- In May 1998, the Company issued 10,000 warrants that are exercisable
at $2.125 per share and expire on May 26, 2001.
The security issuances set forth above are exempt from registration with the
Securities and Exchange Commission pursuant to Regulation S as transactions
21
<PAGE>
with non-U.S. persons or Section 4(2) as transactions by an issuer not
involving any public offering in that said transactions involved the issuance
by the Company of shares of its common stock to financially sophisticated
individuals who are fully aware of the Company's activities, as well as its
business and financial condition, and acquired said securities for investment
purposes. The Company plans to use proceeds from the issuance of these
securities for general corporate purposes, including the development of its
Digital Voice Paging technology.
The Company has placed a restrictive legend on all of the stock
certificates representing the shares issued above and will give appropriate
"stop transfer" instructions to its transfer agent, until such time as those
shares are registered pursuant to the Act, or a valid exemption from
registration exists under the Act. The Company intends to register
substantially all of the common stock described above by filing a registration
statement with the Securities and Exchange Commission in the near future.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K:
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.
The Company filed a Form 8-K on April 24, 1998. The report
disclosed in Item 5 that the Company had terminated negoti-
ations with General Atronics Corporation ("GAC") regarding
the possible acquisition of GAC by the Company.
Exhibit - 27. Financial Data Schedule
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 23, 1998
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
23
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