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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-2
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year Commission
ended JUNE 30, 1999 FILE NO. 33-90344
Clariti Telecommunications International, Ltd.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2498715
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1735 MARKET STREET
MELLON BANK CENTER, SUITE 1300
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 979-3600
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]. No [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of 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 ______
State issuer's revenues for its most recent fiscal year: $251,000
The aggregate market value of voting stock held by non-affiliates of the
registrant's common stock, as of September 16, 1999 was approximately
$84,527,000 (based on the average closing bid and asked prices of the
registrant's common stock in the over-the-counter market). The number of
shares outstanding of the registrant's common stock, as of September 16, 1999
was 125,275,080.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
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Clariti Telecommunications International, Ltd. ("Clariti" or the
"Company") is positioning itself to be a complete supplier of
telecommunications products. The integration of switched, Internet Protocol
("IP") and wireless technologies over a single managed network, will enable
Clariti to offer wholesale, retail and enhanced telecommunications products.
The single network topology supports switched and IP telephony, wireless
voicemail, fax, data, virtual private network ("VPN") services, and Internet
service provider ("ISP") services.
The Company was originally formed in February 1988 as the successor to a
music and recording studio business owned and operated by Peter Pelullo, the
Company's current Chairman of the Board and President. 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 March 1998 the Company changed its name to Clariti
Telecommunications International, Ltd.
In 1995, the Company began shifting its focus to telecommunications, and
as a result, no longer has a significant interest in the music and recording
business. Since then, the Company has taken several major steps toward
achieving its goal of becoming a complete supplier of telecommunications
products:
- In April 1995, the Company acquired its wireless voicemail technology.
- In December 1998, the Company acquired GlobalFirst Holdings, Ltd.
("GlobalFirst"), a licensed telecommunications carrier in the United
Kingdom that also sells long distance and local telephone services,
including prepaid phone cards, in the United Kingdom and France.
- In February 1999, the Company sold the group of GlobalFirst subsidiaries
that had been operating public call offices ("PCO's") in Europe.
- In March 1999, the Company acquired Mediatel Global Communications, Ltd.
("Mediatel"), a company that sells long distance and local telephone
services, including prepaid phone cards, in the United Kingdom.
- In May 1999, the Company acquired MegaHertz-NKO, Inc., a company formed
in January 1999 to succeed to the operations of MegaHertz Communications
Corp., an ISP, and NKO, Inc., a provider of enhanced telecommunications
and IP telephony services (voice, data, fax and video).
- In October 1999, the Company acquired NKA Pty, Ltd. ("NKA"), an
Australian based provider of IP telephony to corporate clients.
- As of October 11, 1999, GlobalFirst, Mediatel and their subsidiaries
filed for voluntary liquidation in the United Kingdom and all of their
operations have ceased as of that date.
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The Company's businesses have operated on the basis of three industry
segments; International Telephony Services, IP/Internet Services and Wireless
Messaging. Prior to the liquidation of GlobalFirst, Mediatel and their
subsidiaries, International Telephony Services consisted of the international
long-distance services provided by GlobalFirst and Mediatel. IP/Internet
Services consists of the IP telephony and ISP services provided by MegaHertz-
NKO and NKA. Wireless Messaging consists of the Company's efforts to develop
and commercialize its wireless voicemail technology.
International Telephony Services
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The following description of the Company's International Telephony
Services
business should be read with the understanding that on October 11, 1999, the
Company placed GlobalFirst and its subsidiary companies and Mediatel and its
subsidiary companies into voluntary liquidation under United Kingdom law.
Consequently, the description of the Company's International Telephony Services
business is presented for historical purposes only. See MD&A - Recent
Developments.
International Telephony Services was licensed to operate voice
telecommunications services nationally in the United Kingdom and to terminate
UK originated voice calls internationally. International Telephony Services'
operating subsidiaries were formed from the acquisition by Clariti of
GlobalFirst and Mediatel, two large telecom resellers formerly operating in the
UK residential, business to business and international calling card business
sectors.
Product Development
The combination of regulatory and technological changes has and is
continuing to have a dramatic effect on the telecommunications industry. The
economics of the business have been significantly changed by liberalization
permitting telecom service providers to invest in overseas infrastructure
(thereby eliminating the costly settlement rates for local overseas
termination) and by technological advances in fiber-optic and transmission
technologies.
One technology, acknowledged to have a significant effect on telecom
infrastructure, is Internet Protocol ("IP"), the dominant protocol for data-
networking throughout the internet and adapted for voice communications. The
rapid development of IP switching for voice communication has now made the
protocol a viable medium for both toll quality voice and data integrated
communications. Economic use of facilities and efficient use of bandwidth
provides for significant cost reductions over traditional circuit based
compression technologies.
Competition
The European and United Kingdom telecommunications markets are
experiencing intensive competition as a result of the on-going deregulation
that is resulting in significant downward pressure on prices and profits. Such
pressures have resulted in significant operating losses for the Company's
International Telephony Services business and, as a result, management has made
the decision to liquidate these operations.
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IP/Internet Services
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The May 1999 acquisition of MegaHertz-NKO and the September 1999
acquisition of NKA have provided the Company with an operating base upon which
it plans to build a global network using IP technology over a private managed
network. In addition, MegaHertz-NKO offers nationwide Internet access for
individuals, businesses and organizations over a network backbone architecture
delivering quality and consistency of service.
Products and Services
The Company's IP Telephony business offers prepaid phone cards,
residential and business long distance, and fax services. As a domestic ISP,
the Company offers turnkey Internet solutions including traditional dialup
access, web hosting and e-commerce services. Server co-location and managed
server services are also available. The Company's Internet services are
currently available in all 50 states.
Voice Over IP Technology
Voice Over IP ("VoIP") telephony utilizes IP technology to encode an
analog voice transmission into a digital Internet protocol transmission, which
is then sent along the Company's private managed network to a point where the
digital transmission is decoded back into an analog voice transmission. The
Company's private managed network is interconnected with circuit switched
telephone networks and provides connections to telephones worldwide. The
Company's technology provides voice quality that is comparable to conventional
switched technology, but without the high cost of conventional switching
hardware. A typical VoIP telephony switch costs approximately 80% less than a
standard telecom switch.
Voice Over IP Network
The Company's VoIP technology uses a private managed network to transmit
its calls, resulting in quality transmission. No other traffic may be
transmitted over such network without the Company's permission. By contrast,
Internet telephony companies, such as Net2Phone, use the public Internet to
transmit their calls, typically resulting in a significant reduction in
quality.
The Company is in the process of building a global network for its VoIP
telephony business. It currently has points of presence ("POP's") in Florida,
New York, Mexico, Brazil, Peru, Australia, Israel, and South Korea. The
Company also has plans to expand further into Asia.
Marketing
The Company uses a small direct sales force focused principally on
business customers and a small group of agents, resellers and retailers focused
principally on sales of prepaid calling cards. The Company's ISP services are
marketed direct to consumers through advertising via the Internet, newspapers
and other media.
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Competition
The Company's IP Telephony business competes with those of numerous well-
established companies such as AT&T, MCI, Sprint, and IDT, all of which have
substantially greater financial, technical, personnel and other resources than
the Company, and have established reputations for success in the telephony
business. 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 telephony services. Likewise, the Company's ISP
business also competes with those of numerous well-established companies such
as America-On-Line, Prodigy, and Compu-serve, all of which have substantially
greater financial, technical, personnel and other resources than the Company,
and have established reputations for success in the ISP business.
Regulation
The use of IP telephony is a recent development. The Federal
Communications Commission ("FCC") is considering whether or not to impose
surcharges or additional regulations upon providers of IP telephony. In April
1998, the FCC issued its report to Congress concerning its implementation of
the universal service provisions of the Telecommunications Act. In the report,
the FCC indicated that it would examine the question of whether certain forms
of "phone-to-phone" Internet protocol telephony are information services or
telecommunications services. It noted that the FCC did not have, as of the date
of the report, an adequate record on which to make any definitive
pronouncements, but that the record before it suggested that certain forms of
phone-to-phone Internet telephony appear to have the same functionality as non-
Internet protocol telecommunications services and lack the characteristics that
would render them information services. If the FCC were to determine that
certain services are subject to FCC regulations as telecommunications services,
the FCC noted that it may find it reasonable to require Internet service
providers to make universal service contributions, pay access charges or to be
subject to traditional common carrier regulation. If Congress, the FCC, state
regulatory agencies, foreign governments or supranational bodies begin to
regulate IP telephony, there can be no assurances that any such regulation will
not materially adversely affect the Company's business, financial condition or
results of operations.
Wireless Messaging
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The Company is presently developing wireless telecommunications products
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.
Wireless Voicemail System
The first significant application of the Company's patented technology is
a Wireless Voicemail System. Currently under development, the ClariCAST(TM)
digital Wireless Voicemail System will allow a designated FM radio station to
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provide a service that transmits a message to the owner of a handheld voicemail
player in the actual voice of the person generating the message. A subscriber
to the system must first buy a handheld voicemail player and then pay a monthly
subscription fee for the wireless voicemail service. Once a subscriber's
account has been established, callers can leave voice messages for the
subscriber by calling the 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 specific subscriber. The Wireless Voicemail System provides
messages that coexist with, but do not interfere with the FM radio station's
existing commercial broadcasts.
Wireless Voicemail Technology
The Company's technology utilizes the FM-SCA channels available on FM
radio stations throughout the world. FM-SCA (Subsidiary Communication
Authorization) channels, also known as FM "subcarrier" channels, are the
"sideband" of an FM radio station's broadcasting frequency. 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
licensed to the FM radio station and can be used for broadcasting alternate
services.
The Company has developed patent pending technology for sending digital
voice messages over FM-SCA frequencies. A state-of-the-art voice compression
algorithm creates a compact digital representation of the original voice
message. Using advanced coding technology, the ClariCAST(TM) system creates a
transmission waveform (modulated carrier) that enables the compact digital
voice messages to be transmitted wirelessly at high data rates over an FM-SCA
channel. The digital 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 Wireless Voicemail System will require
significantly less investment to establish a network and acquire the necessary
hardware (expected to be approximately $130 thousand per city as compared to
the millions of dollars typically required for paging and cellular systems).
In addition, the existence of the FM radio station's transmission
infrastructure and the simplicity of the Company's Wireless Voicemail System
will allow for more rapid installation of the system. The Company expects to be
able to install a city-wide ClariCAST(TM) system in several days rather than
the many months required for paging and cellular systems.
FM radio stations are assigned a frequency bandwidth of 100 kHz. A
typical station will use 53 kHz for their commercial (main channel)
programming. The remaining 47 kHz, which is almost half of the available FM
channel spectrum resource, is not required for broadcasting the main channel
programming.
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FM-SCA has been used in the United States for applications such as
background music without commercial interruption, reading services for the
blind, stock market quotes, sports scores, weather reports, educational
services, and religious broadcasts. As a result, the FM-SCA channels may in
some instances be limited due to these other uses. However, in most
international markets, especially emerging growth nations, there appears to be
little or no use of the FM-SCA band. Chinese, Latin American, and other
international FM radio stations have been pursuing the use of this FM-SCA
bandwidth to generate additional revenues from operations.
Wireless Voicemail System Design
The Wireless Voicemail System is comprised of 4 major components:
- - FM radio station's transmission facility (utilized by the Company
for its wireless infrastructure)
- Voicemail Terminal
- SCA Generator
- Wireless Voicemail Players
The FM radio station's transmission facility includes the antenna tower
and all the other equipment used by the FM radio station for its main channel
programming. This facility is already in place and owned by the FM radio
station. The Company expects to lease one or both of the SCA channels from the
FM radio station. The Wireless Voicemail Player must be within receiving
distance of the FM radio station's signal in order to receive the message.
The Voicemail Terminal incorporates a full-featured voicemail system. It
automatically answers incoming telephone calls with a customized greeting from
the subscriber, 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 digital packet and the appropriate Wireless
Voicemail Player address is added. These packets 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 Wireless Voicemail Player 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 Wireless Voicemail System Development
In April 1998, the Company successfully tested its digital wireless voice
messaging "Beta System" in Philadelphia. The Beta System is comprised of
multiple, individually addressable, handheld, battery-operated voicemail
players receiving pages over the Company's Wireless Voicemail 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
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Beta System in Brazil, Canada, and two other cities in the United States.
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 Wireless
Voicemail Player, finalizing the software on the Voicemail Terminal and SCA
Generator, and testing the entire system. The Company expects to launch its
commercial wireless voicemail service and roll out into multiple cities and
multiple countries during the Year 2000. New product development efforts are
subject to all of the risks inherent in the development of new technology and
products, including unanticipated delays, expenses, market acceptance,
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 Wireless Voicemail System will be successfully completed. No
assurance can be given that products can be developed within a reasonable
development schedule, if at all, nor that they can be produced at a reasonable
cost. 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.
Commercialization of the Wireless Voicemail System
For commercialization of the Company's Wireless Voicemail System, the
Company will be required to secure the use of FM radio subcarrier frequencies
in the markets it intends to enter. Based on the experience of its management,
the Company does not expect difficulty in accessing such frequencies. 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.
Marketing the Wireless Voicemail System
Management believes there is market potential for its Digital Wireless
Voicemail service in many international markets. With its large installed base
of voicemail users, plus pager users with voicemail boxes, the U.S. represents
a significant business opportunity. However, the opportunities may even be
greater in emerging markets such as China and Brazil. There are currently
approximately 170 million paging subscribers worldwide, with the vast majority
of those outside the U.S., Western Europe, and Japan. In these emerging
markets, there appears to be significant pent-up demand for communications
capabilities, yet only a small percentage of users can afford cellular phones.
The Company believes its product, with its combination of wireless
capabilities, digital voice communications, and affordability, will appeal to a
large number of potential users in these markets. In addition, the Company's
FM-SCA technology makes it possible to rapidly deploy systems in just about any
country with FM radio stations.
Within the United States, the Company plans to develop a network of
wireless messaging systems by negotiating arrangements with FM radio station
owners to utilize their FM-SCA channels. Outside the U.S., the Company plans
to develop partnerships with local companies to help market the Wireless
Voicemail service. The Company expects to seek out partners who are
experienced with marketing and distribution of wireless products in their
respective geographic areas. The Company believes this approach will provide
it with the ability to address multiple markets simultaneously.
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The marketing strategy in each location will vary, depending on the local
market environment. However, several elements of the strategy are likely to be
similar. First, the Company and its local partner(s) expect to position the
product and service relative to other popular telecommunications products and
services. Since the Company's product shares common attributes with pagers,
voicemail, and cellular phones, it is possible that Wireless Voicemail will be
positioned differently in different locations. Second, the Company and its
local partner(s) will determine the best mix of sales and distribution. In
most locations, the Company anticipates using a variety of distribution
channels, including selling directly to corporate accounts, through retail
electronic outlets, or through wireless dealers.
The Company anticipates that it will, as an ongoing activity, investigate
prospective partners for the purpose of marketing, selling and distributing the
Company's Wireless Voicemail products and services in various locations. In
April 1999, the Company signed a memorandum of understanding ("MOU") with Acme
Paging, whose subsidiary, Conectel, is the largest paging company in Latin
America. Pursuant to the terms of the MOU, the Company and Conectel plan to
form a partnership to offer Wireless Voicemail service in Brazil. The Company
is currently involved in discussions regarding partnership opportunities for
countries other than Brazil. There can be no assurance however that the Company
will be successful in its efforts to execute the terms of the MOU, nor can
there be any assurance that the Company will be successful in its efforts to
enlist strong partners in every market it plans to enter.
The Company has conducted market research indicating that users prefer its
Wireless Voicemail System over standalone voicemail accounts, numeric pagers,
and text pagers. In addition, the Company expects to be able to offer its
Wireless Voicemail service at a price much less expensive than cellular phone
service. As a result, Management believes the Company will be able to
successfully market its Wireless Voicemail System; however, there can be no
assurance that the Company will be successful in each market the Company
chooses to enter.
Competition
The Company expects its Wireless Voicemail products and services to
compete with those of numerous well-established companies which design,
manufacture or market pagers, cellular phones, wireless communications systems,
and paging and cellular services. 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, and
sale of their products and services. 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 pagers, cellular phones, and
related products.
The demand for personal telecommunications devices has increased
dramatically in the past decade worldwide, with the major market growth focused
on two product categories: cellular phones and pagers. Cellular phone networks
require extensive front-end investment for their initial implementation, and
continuous investment to maintain and expand their network. Traditional paging
systems, on the other hand, require less investment, but provide only a numeric
or text message, not a digital voice message.
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The Company believes, based upon its market research, that text paging
systems present a variety of problems with respect to cost and functionality.
First, text paging services typically employ an expensive pool of typists whose
job it is to answer phone calls and type the message into the paging system for
transmission to the text paging subscriber. Second, these typists may not
always understand the language/dialect/accent of the caller, or the terms used
by the caller. This results in many translation errors. Third, many callers
are reluctant to leave a confidential or personal message with a typist due to
the lack of message security. By contrast, the Company's Wireless Messaging
technology is entirely automated, eliminating the need for this pool of
typists. Fourth, text messages are unable to communicate the emotion of the
caller (urgent, happy, angry, sarcastic). In many instances, particularly in
certain cultures, there is as much information contained in the emotion or
nuance of the spoken message as there is in the words themselves. Fifth, the
investment required to establish a conventional text paging system, while less
than that of a cellular phone system, is still substantial, and is much greater
than the investment required to deploy the Company's Wireless Messaging
technology.
A popular add-on service for pager users is voicemail. When a traditional
pager user receives a voicemail message, their pager notifies them that a
voicemail message has arrived, but the user does not know who the message is
from, what the message is about, or its level of urgency. The individual
carrying the pager needs to call a telephone number to listen to their
voicemail message. The Company believes that its Wireless Voicemail service
will be appealing to the millions of pager users with voicemail notification
service.
Voice paging has been around for many years, but its original design
worked much like a one-way radio (i.e. a one-way walkie-talkie). However, it
was too large and was inefficient in its use of radio spectrum. More recently
there have been attempts by other companies to establish a commercial voice
paging technology. The voice paging technology that reached the greatest user
base is known as InFLEXion(TM) and was invented by Motorola. The InFLEXion(TM)
system was installed and voice paging service offered in several United States
cities by two paging carriers, PageNet and ConXus, during the late 1990's.
Although users liked the service, the system was very expensive to deploy,
similar to the cost of deploying a cellular phone system, causing both carriers
to ultimately discontinue the service. Another company, OmniVoice, began
commercial voice paging service in Mexico City in August 1999 using a different
technology. It is too early to tell whether OmniVoice's technology will be
commercially successful.
In order for a wireless technology to be commercially successful, the
Company believes it must meet user requirements for cost, device size,
performance, functionality, and in the case of a voice-based product, audio
quality. While some competing voice messaging technologies match the Company's
ClariCAST(TM) technology on one or more of these parameters, the Company is not
aware of any competing technology that can match ClariCAST(TM) technology in
all of these critical areas.
Production and Manufacturing Plans
The Company does not presently intend to establish its own manufacturing
facilities to produce its Wireless Voicemail Player, SCA Generator, or related
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components. Instead, the Company plans to contract with other companies to
manufacture such items. However, the Company may choose in the future to ship
key component parts and sub-assemblies to contract manufacturers in other
countries where its Wireless Voicemail products are being marketed in order to
minimize tariffs and to be able to respond quickly to local market demand. In
the event the Company does 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.
If such contractors are unable to meet these specifications or experience
delays in delivering products to the Company, the Company's business would be
adversely affected.
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 March 1999, the U.S. Patent and Trademark Office issued to the Company
a patent, originally filed in January 1996, dealing with FM Subcarrier Digital
Voice Paging. This patent had previously been approved by government
authorities in South Africa and Taiwan, and is still pending in 10 additional
countries.
During the past fiscal year, the Company has filed patent applications in
the United States and multiple foreign countries on a number of additional
patents. In November 1998, the Company filed a patent application for the
protection of its proprietary wireless protocol. In December 1998, the Company
filed a patent application for a unique interference-reduction technique. In
March 1999, the Company filed a patent application for the overall design of
its Wireless Voicemail Player.
There can be no assurance as to the ultimate success of the Wireless
Voicemail System patent applications in the United States or any other foreign
country. Furthermore, even if patents are issued to the Company, there can be
no assurance that such patents 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 Wireless Voicemail operations relate to conduct of
operations in the United States and 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.
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The Company's Wireless Voicemail technology utilizes FM-SCA channels
available on nearly all FM radio stations worldwide. In the United States, the
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. Regulators in most of the foreign markets the Company plans to enter
may take a similar position in their countries to that of the FCC regarding the
licensing and regulation of FM-SCA channels. There can be no assurance that
the Company will in all cases be able to obtain the use of FM-SCA channels
outside the U.S., or that foreign regulatory agencies will allow the company to
operate its service.
Research and Development
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The Company's research and development costs relate exclusively to
development of its Wireless Voicemail System and technology. Research and
development costs incurred by the Company during the years ended June 30, 1999
and 1998 were $2,465,000 and $1,321,000, respectively, all of which was
expended on development of the Wireless Voicemail System. The Company has
incurred cumulative research and development costs of $3,974,000 on the
Wireless Voicemail System through June 30, 1999. The Company expects to incur
an estimated $4,000,000 to $5,000,000 of additional research and development
costs to complete development of a production ready prototype of the first
generation of the Wireless Voicemail System. Management is aware, however,
that there can be no assurances that the Wireless Voicemail System will be
developed into a commercially viable product, or if developed, that it can be
successfully marketed.
Although the Company has created an experienced internal development team,
the Company has subcontracted certain elements of the development of its
Wireless Voicemail System to third party engineering and development firms.
Such contracts provide for payments to be made by the Company on a time and
material basis or based on the achievement of certain engineering milestones.
Costs incurred for research and development work performed by third parties was
$264,000 and $1,245,000 in the years ended June 30, 1999 and 1998,
respectively.
Management believes that significant progress has been made on the
development of the Wireless Voicemail 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 Wireless Voicemail
System during 2000. 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 Wireless Voicemail
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
- ---------
As of June 30, 1999, the Company had a total of 162 employees, 117 of whom
were employed in International Telephony Services, 15 of whom were employed in
IP/Internet Services, 19 of whom were employed in Wireless Voicemail and 11 of
whom were employed in corporate administration. Substantially all of the
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Company's employees work on a full time basis and none of the Company's
employees belong to a labor union. As a result of the Company's decision to
file for involuntary liquidation for GlobalFirst, Mediatel and their respective
subsidiaries, the International Telephony Services business has been terminated
and no longer has any employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 1735 Market Street, Mellon Bank
Center, Suite 1300, Philadelphia, Pennsylvania 19103, which the Company leases
pursuant to a written lease agreement that expires in 2006.
The Company's International Telephony Services group was headquartered in
London, England in an office building leased by Mediatel.
The Company's Internet Services group is headquartered in Jacksonville,
Florida in an office building, part of which is leased by MegaHertz-NKO
pursuant to a written lease agreement that expires in 2002.
The Company's Wireless Messaging group is headquartered in an office
building in Fort Washington, Pennsylvania, part of which the Company leases
pursuant to a written sub-lease agreement that expires in 2000. The Wireless
Messaging group also operates an engineering center in a corporate office park
in Boynton Beach, Florida, which the Company leases pursuant to a written lease
agreement that expires in 2001.
ITEM 3. LEGAL PROCEEDINGS
In March 1999 Clariti, GlobalFirst, Mediatel and CHH entered an agreement
with Frontier Corporation together with its subsidiary, Frontel Communications,
Ltd. (collectively, "Frontier") to settle costs incurred by GlobalFirst and
Mediatel for their use of Frontier's telecommunications network up to and
including March 12, 1999 (the "Frontier Settlement Agreement"). Frontier,
GlobalFirst and Mediatel are jointly analyzing the detailed records supporting
the GlobalFirst and Mediatel usage of Frontier's network to identify the
precise amount of the balance due to Frontier, if any ("Balance Due Frontier").
Pursuant to the Frontier Settlement Agreement, Clariti paid to Frontier
$3,000,000 during March 1999 against the Balance Due Frontier and issued to
Frontier 5,000,000 shares of the Company's restricted common stock valued at
$11,250,000 as security for payment of the remaining Balance Due Frontier.
Within 5 business days after the Balance Due Frontier is determined by
agreement among the parties or by arbitration, CHH must pay such amount to
Frontier, and Frontier must then transfer the 5,000,000 shares of Clariti
common stock to CHH. At any time prior to the purchase of the Clariti stock by
CHH, Clariti (or its designee) may purchase any portion or all of the stock for
an amount equal to the Balance Due Frontier. In the event of a default under
the Frontier Settlement Agreement, Frontier may, at its option, sell a
sufficient amount of the Clariti shares in order to satisfy the Balance Due
Frontier. If Frontier sells all 5,000,000 shares of Clariti common stock for
less than the Balance Due Frontier, GlobalFirst and Mediatel (but not Clariti)
are contingently liable to pay Frontier the remaining Balance Due Frontier.
Once Frontier collects the Balance Due Frontier (whether by sale of Clariti
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stock or payment made by any of the parties), Frontier must surrender any
remaining shares of the Clariti stock to Clariti. On or about June 17, 1999,
Clariti, together with GlobalFirst, Mediatel and CHH filed a demand for
arbitration with the American Arbitration Association (case no. 50 N 181
0021399) against Frontier concerning Frontier's obligations arising under the
Frontier settlement agreement.
The Company is, from time to time, during the normal course of its
business operations, subject to various other litigation claims and legal
disputes. The Company expects none to have a material adverse impact on its
operations; however, no assurance can be given that an adverse determination of
any claim or dispute would not have an adverse impact on its operations during
any given period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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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. The following table
presents data for the years ended June 30, 1999 and 1998.
Year Ended June 30, 1999
High Bid Low Bid
-------- -------
Quarter ended:
September 30, 1998 $3.34 $1.69
December 31, 1998 $2.84 $1.72
March 31, 1999 $2.47 $1.94
June 30, 1999 $3.25 $2.03
Year Ended June 30, 1998
High Bid Low Bid
-------- -------
Quarter ended:
September 30, 1997 $2.38 $1.81
December 31, 1997 $2.25 $1.41
March 31, 1998 $1.63 $1.06
June 30, 1998 $3.31 $1.22
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 16, 1999 the closing price for the Company's common stock was
$2.72 per share.
Holders
- -------
As of September 16, 1999 the Company had 176 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.
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.
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Changes in Securities and Use of Proceeds
- -----------------------------------------
The following information sets forth all shares of the Company's $.001 par
value common stock issued by the Company during the period covered by this Form
10-KSB that were not registered under the Securities Act of 1933, as amended
(the "Act") at the time of issuance and were not previously reported in a
Quarterly Report on Form 10-QSB.
Number Total
Date Name of Shares Consideration
- ------------ ------------------------------ ------------ -------------
April 1999 Epicon Asset Management 300,000 $ 375,000
May 1999 MegaHertz Communications Corp. 1,671,600(a) $4,963,000
May 1999 NKO, Inc. 1,688,400(a) $5,012,000
May 1999 Doron Nevo 140,000(a) $ 416,000
May 1999 Certain employees of
MegaHertz-NKO, Inc.(b) 980,000(a) $2,909,000
(a) These shares were issued in consideration for the Company's acquisition of
all of the outstanding common stock of MegaHertz-NKO, Inc. The value of
the consideration was based on the Company's closing stock price of
$2.96875 per share as quoted on the over the counter bulletin board on May
7, 1999, the date of the acquisition.
(b) These shares have been designated for employees of MegaHertz-NKO, Inc.;
however, the names of such individuals have not yet been determined.
The security issuances set forth above are exempt from registration with the
Securities and Exchange Commission pursuant to Regulation S as transactions
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 were 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, if any, for general corporate purposes and working capital needs of
its subsidiaries.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information included in this Annual Report may be deemed to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risk and uncertainty, such as information
relating to expected capital expenditures and expected trends in operating
losses and cash flows, as well as the Company's ability to successfully do any
or all of the following:
- Position network infrastructure investment and switch to serve the needs
of the customer and to provide Clariti with control over its cost base,
product development and quality of service
- Select the timing of the installation of a city-wide ClariCAST (TM)
system
- Lease SCA channels from FM radio stations
- Develop partnerships with local companies in foreign markets to help
market, sell and distribute the Wireless Voicemail System
- Select partners who will be used to help market, sell and distribute the
Wireless Voicemail System
- Develop marketing strategy of the Wireless Voicemail System
- Make the Wireless Voicemail System affordable and appealing to its
target markets
- Address multiple markets simultaneously to market the Wireless Voicemail
System
- Develop manufacturing and distribution channels of the Wireless
Voicemail System
- Manage the progress and costs of additional research and development of
the Wireless Voicemail System
- Manage the risks, restrictions and barriers of conducting business
internationally
- Manage the expenditure of earnings and future payment of dividends, if
any
- Reduce future operating losses and negative cash flow
- Manage the integration of acquisitions
- Achieve its goal of becoming an international integrated
telecommunications provider
- Manage the Company's growth and its effects, including the ability to
attract additional personnel
- Obtain financing for operations and expansion
- Compete effectively in the markets the Company chooses to enter
- Manage the effect on operating margins of changing long distance rates
- Manage the effect of events that interrupt delivery of services such as
equipment failures
- Develop new products and services and enhance current products and
services
- Stimulate demand for the Wireless Voicemail products and services
- Manage the effect of the liquidation of UK Group Companies
- Manage compliance with Year 2000 issues
In addition, certain statements may involve risk and uncertainty if they
are preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
17
<PAGE>
not historical facts. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks associated with the
Company's operating losses, risks relating to the Company's development and
expansion and possible inability to manage growth, risks relating to the
Company's significant capital requirements, substantial indebtedness and
possible inability to service its debt, risks relating to competition and
regulatory developments, risks relating to implementing local and enhanced
services, risks relating to its long distance business, as well as other risks
referenced from time to time in the Company's filings with the Securities and
Exchange Commission. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The
Company does not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RISK FACTORS
- ------------
Limited Operating History
The Company was formed in February 1988 as the successor to a music and
recording studio business, and became publicly held upon a merger in January
1991 with an inactive public company incorporated in Nevada. In early 1995 the
Company first entered the telecommunications industry with the concept of voice
paging using FM radio frequencies, now the Company's wireless division. It was
not until December 1998 when the Company acquired GlobalFirst that it commenced
providing wireline telecommunications services. Therefore, the Company has had
only a limited operating history in the telecommunications industry upon which
investors may base an evaluation of the Company's performance. As of October
11, 1999, GlobalFirst and all of its subsidiaries filed for voluntary
liquidation and all operations ceased at that time.
History of Losses
Since the Company's inception, it has incurred significant losses, including
net losses of $220,412,000 for the 12 months ended June 30, 1999 ("Fiscal
1999")and $4,248,000 for the eleven months ended June 30, 1998 ("Fiscal 1998").
Approximately $152,214,000 of the loss in Fiscal 1999 resulted from the write-
off of goodwill related to the acquisitions of GlobalFirst and Mediatel. Losses
from operations continued in Fiscal 1999 as a result of negative margins on the
sale of telephony services by GlobalFirst and Mediatel, as well as from
research and development costs incurred on the wireless voice messaging system.
The Company expects that it will continue to generate operating losses and
negative cash flow from operations at least through Fiscal 2000. No assurances
can be given that the Company will ever achieve, or if achieved, maintain,
profitability.
Expansion Through Acquisitions
The Company has actively pursued opportunities to expand through acquisitions,
and plans to continue to seek acquisitions that complement its services,
broaden its consumer base and improve its operating efficiencies. Acquisitions
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<PAGE>
may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a material
adverse effect on the Company's financial results. Acquisitions also involve
numerous additional risks, including difficulties in assimilation of the
operations, services, products and personnel of acquired companies, which could
result in charges to earnings or otherwise adversely affect the Company's
operating results. There can be no assurance that acquisition opportunities
will continue to be available, that the Company will have access to the capital
required to finance potential acquisitions, that it will continue to acquire
businesses or that any acquired businesses will be profitable.
Integration of Companies Acquired
The Company recently acquired MegaHertz-NKO and NKA. Management's strategy is
to become an international integrated telecommunications provider. The Company
has limited experience operating such businesses, individually or on an
integrated basis. Because of the inherent uncertainties associated with
integrating the assets, operations and personnel of several companies, there
can be no assurance that the Company will be able to achieve its strategic
goals or operate the business successfully, that operating efficiencies will be
realized as a result of the mergers and acquisitions or that the combination of
such businesses will be successful.
Initiation of Liquidation Proceedings for GlobalFirst and Mediatel
On October 11, 1999, the Company placed GlobalFirst, Mediatel and their
respective subsidiaries into voluntary liquidation primarily because such
companies were unable to pay their debts, including the advances received from
Clariti (see Recent Developments). There can be no assurance that the Company
will re-enter the telecommunications market in the United Kingdom. In
addition, there can be no assurance that the Company will be able to recover
all or any of such advances to GlobalFirst and Mediatel.
No Assurance of Continued Growth
Although the Company has experienced substantial growth in the last year and
intends to continue to grow rapidly, there can be no assurance that such growth
experienced will continue or that it will be able to achieve the growth
contemplated by its business strategy. The Company's ability to continue to
grow may be affected by various factors, many of which are not within its
control, including competition and federal, state and foreign regulation of the
telecommunications industry.
Management of Growth
The Company has added additional management personnel, including a new Chief
Executive Officer and a new Executive Vice President, both with extensive
experience in the telecommunications industry. The expanding nature of the
Company's business strategy has placed, and is expected to continue to place,
significant demands on all aspects of its business, including management,
financial, technical and administrative personnel and systems. Future
operating results will depend substantially upon the ability of its executive
officers to manage such anticipated growth, to attract and retain additional
19
<PAGE>
highly qualified management, financial, technical and administrative personnel
and to implement and/or improve technical, administrative, financial control
and reporting systems. There can be no assurance that difficulties will not be
encountered in expanding financial controls and reporting systems in order to
meet future needs. If the Company is unable to respond to and manage changing
business conditions, then the quality of services, ability to retain key
personnel and results of operations could be materially adversely affected.
There can be no assurance that the Company will successfully manage its
expanding operations and continued growth. Any difficulties in managing its
expanding operations and continued growth or in attracting additional personnel
could have a material adverse effect on the business, its financial condition
and results of operations.
Need for Additional Financing
To date, the Company has funded its operations principally through privately
raised equity funding. Due to operating losses and the rapid pace of
expansion, the Company remains undercapitalized. In the future, the Company
will require both short-term financing for operations and longer-term capital
to fund expected growth. To date the Company has no existing bank lines of
credit and has not established any sources for such financing. Its ability to
acquire additional operations and facilities to further accelerate growth will
be dependent upon the ability to raise longer-term capital or otherwise finance
such acquisitions. Management of the Company continues to make concerted
efforts to raise additional capital through the sale of common stock. Since
June 30, 1999, the Company has raised an additional $10,933,000 in capital
through private placement of its common stock. In addition, the Company has
received a firm commitment for an additional $16,166,000 of equity funding to
be received during October and November 1999. The Company currently has no
other arrangements with respect to, or sources of, additional financing. There
can be no assurance that additional future financing will be available, or if
available, will be available in either a timely manner or upon acceptable terms
and conditions.
Competition
The telecommunications industry is highly competitive, rapidly evolving and
subject to constant technological change. Other service providers currently
offer one or more of each of the services we offer. As a service provider in
the IP Telephony and long distance telecommunications industry, some of the
Company's principal competitors in the long distance telecommunications
industry are MCI, AT&T, Sprint and many others, all of which are substantially
larger and have: (i) greater financial, technical, engineering, personnel and
marketing resources; (ii) longer operating histories; (iii) greater name
recognition; and (iv) larger consumer bases. Although the Company's Wireless
Voice Messaging technology is unique, there are several well-established
wireless technologies against which the Wireless Voice Messaging service will
have to compete, including cellular phones and text paging. Principal
competitors in these wireless technologies include Motorola, Ericson, Pagenet,
and many others, all of which are substantially larger and have: (i) greater
financial, technical, engineering, personnel and marketing resources; (ii)
longer operating histories; (iii) greater name recognition; and (iv) larger
consumer bases. These advantages afford such competitors pricing flexibility.
Telecommunications services companies may compete for consumers based on price,
20
<PAGE>
with the dominant providers conducting extensive advertising campaigns in order
to capture market share. Competitors with greater financial resources may also
be able to provide more attractive incentive packages to retailers in order to
encourage them to carry competing products and services. In addition,
competitors with greater resources may be better situated to negotiate
favorable contracts with retailers. Existing competitors are likely to continue
to expand their service offerings to appeal to retailers and their consumers.
Moreover, because there are few, if any, substantial barriers to entry, new
competitors are likely to enter the telecommunications market and attempt to
market similar telecommunications services, which would result in greater
competition.
The Company's ability to compete effectively in the telecommunications services
industry will depend upon its continued ability to provide high quality
services at prices generally competitive with, or lower than, those charged by
competitors. Certain competitors dominate the telecommunications industry and
have the financial resources to enable them to withstand substantial price
competition, which is expected to increase significantly, and there can be no
assurance that the Company will be able to compete successfully in the future.
Moreover, there can be no assurance that some competitors will not be better
situated to negotiate contracts with suppliers of telecommunications services
which are more favorable than contracts negotiated by the Company. In addition,
there can be no assurance that competition from existing or new competitors or
a decrease in the rates charged for telecommunications services by the major
long distance carriers or other competitors would not have a material adverse
effect on the Company's business, financial condition and results of
operations.
Billing Dispute With Frontier Corporation
As further described below under "Recent Developments," GlobalFirst and
Mediatel have a potentially material contingent liability related to an
agreement with Frontier Corporation to settle costs incurred by GlobalFirst and
Mediatel for their use of Frontier's telecommunications network. In addition,
pursuant to such agreement, the Company issued to Frontier 5,000,000 shares of
Clariti common stock as security for payment of the balance, if any, that may
be due to Frontier. If pursuant to such agreement, Frontier is permitted to
sell the 5,000,000 shares of common stock on the open market, such sale could
cause a material adverse effect on the market price of the Company's common
stock.
Rapid Technological Change
The telecommunications services industry is characterized by rapid
technological change, new product introduction and evolving industry standards.
The Company's success will depend, in significant part, on its ability to make
timely and cost-effective enhancements and additions to its technology and
introduce new services that meet consumer demands. The Company expects new
products and services, and enhancements to existing products and services, to
be developed and introduced in order to compete with its services. The Company
currently is in the process of completing development of a technology that will
permit it to market and deliver a wireless voice messaging service. The
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proliferation of new telecommunications technologies may reduce demand for
wireless voice messaging. There can be no assurance that the Company will have
the financial resources to or will be successful in developing and marketing
new services or enhancements to services that respond to these or other
technological changes or evolving industry standards. In addition, there can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of its
existing services or that its new services or enhancements thereto will
adequately meet the requirements of the marketplace and achieve market
acceptance. Delay in the introduction of new services or enhancements,
inability to develop such new services or enhancements or the failure of such
services or enhancements to achieve market acceptance could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Market Acceptance of Wireless Voice Messaging Service
The wireless voice messaging segment of the telecommunications industry is an
emerging business characterized by an increasing number of new market entrants
that have introduced or are developing an array of new products and services.
As is typically the case in an emerging industry, demand and market acceptance
for newly introduced products and services are subject to a high level of
uncertainty. There can be no assurance that substantial markets will develop
for wireless voice messaging in the United States or abroad or that the Company
will be able to achieve significant market acceptance in the United States or
abroad for its wireless voice messaging system.
Dependence Upon Key Personnel
The Company's success is largely dependent upon the efforts and abilities of
some key executive officers, the loss of one or more of whom could have a
material adverse effect. Although the Company expects that it would be able to
locate suitable replacements for these executives if their services were lost,
there can be no assurance it would be able to do so. Accordingly, the loss of
services of any of these individuals could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company does not maintain "key man" life insurance on these key executive
officers.
Majority Shareholder
Chadwell Hall Holdings Limited beneficially owns approximately 88.2 million
shares (approximately 70%) of the Company's outstanding Common Stock. As a
result, this shareholder in general, is able to exercise significant influence
over all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control.
Volatile Stock Price
The Company's common stock is currently traded on the OTC Bulletin Board. The
market price of the Company's common stock has been highly volatile, relatively
illiquid and may continue to be subject to wide fluctuations in response to
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<PAGE>
business conditions, quarterly variations in operating results, or other events
or factors. In addition, the company's common stock has been thinly traded and
is not widely held. There can be no assurance that an active public trading
market for the common stock will be sustained. In addition, the U.S. stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many
telecommunications companies and that often have been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's common stock.
Potential Future Dilution
As of June 30, 1999, there were outstanding warrants and options to purchase an
aggregate of 13,198,000 shares of the Company's common stock. The exercise or
conversion of outstanding stock options or warrants will dilute the percentage
ownership of current stockholders. Further, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected
since the holders of the outstanding warrants and options can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable than those provided by the
outstanding warrants and options.
Shares Eligible for Future Sale
As of June 30, 1999, there were 124,235,000 shares of the Company's common
stock outstanding. Assuming the exercise of the outstanding warrants and
options there would be an aggregate of 137,433,000 shares of common stock
outstanding. Approximately 80% of these shares are subject restrictions on
transfer pursuant to the various agreements that transferred such shares to the
holder and/or Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"). Rule 144 provides that shares of common stock issued in
private transactions, are treated as "restricted securities" as defined under
the Securities Act and in the future may be sold in compliance with Rule 144
under the Securities Act or pursuant to a registration statement filed under
the Securities Act. Rule 144 generally provides that a person holding
restricted securities for a period of one year may sell every three months in
brokerage transactions or market-maker transactions an amount equal to the
greater of (a) one percent (1%) of the Company's issued and outstanding common
stock or (b) the average weekly trading volume of the common stock during the
four calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitation by a person
who is not an affiliate of the company and who has satisfied a two-year holding
period. The sale of substantial numbers of such shares, whether pursuant to
Rule 144 or pursuant to a registration statement, may have a depressive effect
on the market price of the Company's common stock.
ANALYSIS OF THE BUSINESS
- ------------------------
The following discussion should be read in conjunction with the
Company's consolidated financial statements appearing elsewhere in this
report.
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General Operations
- ------------------
The Company's businesses have operated on the basis of three industry segments;
International Telephony Services, Internet Services and Wireless Messaging.
International Telephony Services consisted of the international long-distance
services provided by GlobalFirst and Mediatel, which filed for voluntary
liqudation on October 11, 1999 (see Recent Developments below). Internet
Services consists of the IP telephony and ISP services provided by MegaHertz-
NKO and NKA. Wireless Messaging consists of the Company's efforts to develop
and commercialize its wireless voicemail technology. Further description of
these businesses and their operations is included under Item 1, Business,
above.
Recent Developments
- -------------------
On October 11, 1999, at the request of the Company, each of GlobalFirst,
Mediatel and their respective United Kingdom subsidiaries (the "UK Group
Companies") filed for voluntary liquidation under the laws of the United
Kingdom. This voluntary liquidation was undertaken because the Company
concluded that the UK Group Companies could not pay their debts, including the
advances made by Clariti to GlobalFirst and Mediatel. A liquidator, has been
appointed and, subject to the provisions of United Kingdom law, will endeavor
to liquidate the assets of the UK Group Companies. As of June 30, 1999, the UK
Group Companies had aggregate liabilities of $41,515,000 and aggregate assets
of $9,102,000. Such liabilities include approximately $13,688,000 of secured
indebtedness owed to the Company. Subsequent to June 30, 1999, the Company had
advanced an additional $3,360,000 to Mediatel. The loss of this amount has
been provided for in the statement of operations for Fiscal 1999. The Company
has been advised that this indebtedness will constitute a priority claim under
the voluntary liquidation process. As a result of the liquidation proceedings,
the Company has terminated operations of the UK Group Companies.
In March 1999 Clariti, GlobalFirst, Mediatel and CHH entered an agreement
with Frontier Corporation together with its subsidiary, Frontel Communications,
Ltd. (collectively, "Frontier") to settle costs incurred by GlobalFirst and
Mediatel for their use of Frontier's telecommunications network up to and
including March 12, 1999 (the "Frontier Settlement Agreement"). Frontier,
GlobalFirst and Mediatel are jointly analyzing the detailed records supporting
the GlobalFirst and Mediatel usage of Frontier's network to identify the
precise amount of the balance due to Frontier, if any ("Balance Due Frontier").
Pursuant to the Frontier Settlement Agreement, Clariti paid to Frontier
$3,000,000 during March 1999 against the Balance Due Frontier and issued to
Frontier 5,000,000 shares of the Company's restricted common stock valued at
$11,250,000 as security for payment of the remaining Balance Due Frontier.
Within 5 business days after the Balance Due Frontier is determined by
agreement among the parties or by arbitration, CHH must pay such amount to
Frontier, and Frontier must then transfer the 5,000,000 shares of Clariti
common stock to CHH. At any time prior to the purchase of the Clariti stock by
CHH, Clariti (or its designee) may purchase any portion or all of the stock for
an amount equal to the Balance Due Frontier. In the event of a default under
the Frontier Settlement Agreement, Frontier may, at its option, sell a
sufficient amount of the Clariti shares in order to satisfy the Balance Due
Frontier. If Frontier sells all 5,000,000 shares of Clariti common stock for
less than the Balance Due Frontier, GlobalFirst and Mediatel (but not Clariti)
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are contingently liable to pay Frontier the remaining Balance Due Frontier.
Once Frontier collects the Balance Due Frontier (whether by sale of Clariti
stock or payment made by any of the parties), Frontier must surrender any
remaining shares of the Clariti stock to Clariti. On or about June 17, 1999,
Clariti, together with GlobalFirst, Mediatel and CHH filed a demand for
arbitration with the American Arbitration Association (case no. 50 N 181
0021399) against Frontier concerning Frontier's obligations arising under the
Frontier settlement agreement.
Results of Operations
- ---------------------
As of June 30, 1999 and for Fiscal 1999, GlobalFirst, Mediatel and their
respective subsidiaries were accounted for under the equity method of
accounting because the Company's control was deemed to be temporary due to the
fact that the groups filed for voluntary liquidation on October 11, 1999.
Equity method accounting was also applied to Telnet and its subsidiaries
because the Company's control was temporary due to the sale of Telnet in
February 1999.
Year Ended June 30, 1999
vs. Year Ended June 30, 1998
- ----------------------------
For the year ended June 30, 1999, the Company incurred a net loss of
$202,412,000 ($2.97 per share) on revenue of $251,000 compared to a net loss of
$4,248,000 ($0.20 per share) on no revenue for Fiscal 1998". The $198,164,000
increase in net loss is primarily due to the substantial losses incurred by the
Company's unconsolidated foreign subsidiaries, including the write-off of
$152,214,000 of goodwill recognized in accounting for the acquisitions of
GlobalFirst and Mediatel. Such goodwill was written off due to the October 11,
1999 filing of voluntary liquidation of GlobalFirst, Mediatel and their
respective subsidiaries (see Recent Developments).
Fiscal 1999 revenue of $251,000 and gross profit of $91,000 both reflect
the operations of MegaHertz-NKO for the period from May 7, 1999 (acquisition
date) to June 30, 1999. Prior to the acquisition of MegaHertz-NKO, the Company
had no significant revenues from consolidated subsidiaries. The Company
anticipates revenue growth in the future as a result of the acquisition of
MegaHertz-NKO and NKA in October 1999.
General and administrative expenses increased from $4,223,000 in Fiscal
1998 to $13,698,000 in Fiscal 1999. The $9,475,000 increase is primarily due
to higher research and development expenses for work on the wireless voice
messaging system, expansion of the Company's staff as a result of the Company's
rapid growth and to general and administrative expenses incurred by MegaHertz-
NKO from May 7, 1999 (date of acquisition) to June 30, 1999.
Equity in losses of unconsolidated subsidiaries reflects the Company's
100% interest in the operating losses of the following International Telephony
Services businesses:
- GlobalFirst, from December 8, 1998 (date of acquisition)
to June 30, 1999
25
<PAGE>
- Telnet, from December 8, 1998 (date of acquisition) to February 3, 1999
(date of sale)
- Mediatel, from March 16, 1999(date of acquisition) to June 30, 1999
The high level of such operating losses reflects International Telephony
Services' strategy of gaining market share prior to building a network by
aggressively pricing its prepaid calling cards and other telecommunications
services. In addition, it reflects International Telephony Services' strategy
to change from primarily a sales and marketing focused operation to developing
a network for carrier services in the United Kingdom and Western Europe. Such
development entailed a high cost of overhead. The losses from unconsolidated
subsidiaries were a significant factor in the Company's decision to file for
voluntary liquidation of GlobalFirst, Mediatel and their respective
subsidiaries.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1999, the Company's total liabilities exceeded its total
assets by $19,660,000. This situation has resulted from the Company's decision
to place GlobalFirst and Mediatel into voluntary liquidation. This decision
precipitated the write-off of $152,214,000 in goodwill related to the
acquisitions of the respective companies. The net liabilities of GlobalFirst
and Mediatel ($32,413,000) have remained on the Company's June 30, 1999 balance
sheet because the voluntary liquidation proceedings were not initiated until
October 11, 1999. The Company expects such proceedings to discharge such
liabilities. If the net liabilities of GlobalFirst and Mediatel had been
excluded from the June 30, 1999 balance sheet, the Company would have had a
stockholders' equity balance of $12,753,000.
At June 30, 1999, the Company had a working capital deficit of $35,500,000
(including a cash balance of $3,284,000). As noted above, current liabilities
include $32,413,000 in net liabilities of GlobalFirst and Mediatel on the
Company's June 30, 1999 balance sheet because the voluntary liquidation
proceedings were not initiated until October 11, 1999. During Fiscal 1999,
improvements to consolidated working capital included the sale of 2,800,000
shares of common stock to third party investors for proceeds of $4,875,000, net
of commissions. However, this working capital improvement was more than offset
by use of cash in operations and for advances to unconsolidated foreign
subsidiaries during Fiscal 1999.
Management of the Company continues to make concerted efforts to raise
additional capital through the sale of common stock. Since June 30, 1999, the
Company has raised an additional $10,933,000 in capital through private
placement of its common stock. In addition, the Company has received firm
commitments for an additional $16,166,000 of equity funding to be received
during October and November 1999.
Management believes that these funds will enable the Company to complete
the process of developing its Digital Voice Messaging System and continue to
fund expected negative cash flows and capital expenditures related to the
growth of MegaHertz-NKO for the remainder of the current fiscal year. The
Company currently expects to attempt to re-enter the European
telecommunications market using some or all of the UK Group Companies' assets
and employees. The Company may however choose to exit the market altogether.
26
<PAGE>
Management is aware however that significant additional funding will be
required beyond its fiscal year-end to launch the Wireless Voice Messaging
System in specified target markets and to meet expected negative operating cash
flows and capital expenditure plans. There can be no assurances that such
funding will be generated or available, or if available, on terms acceptable to
the Company.
Year 2000
- ---------
In the past a number of computer software programs were written using two
digits rather than four digits to determine the applicable year. As a result,
date-sensitive computer software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem.
Management believes that all of Clariti's digital messaging systems are Year
2000 compliant. In particular, the software being developed for use in the
Digital Voice Messaging System has been designed specifically to be Year 2000
compliant.
The Company has completed its analysis of Megahertz-NKO's Year 2000
readiness. MegaHertz-NKO has substantially completed some minor modifications
at a cost of less than $50,000. It now appears that MegaHertz-NKO is Year 2000
compliant.
Clariti also plans to assess the readiness of its significant vendors and
financial institutions for the Year 2000 issue. Contingency plans will be
developed in the event that business-critical vendors and financial
institutions do not provide the Company with satisfactory evidence of their
readiness to handle Year 2000 issues.
Management does not believe the costs related to Year 2000 compliance,
including the costs relating to assessing the Year 2000 readiness of vendors
and financial institutions, will be material to its financial position or
results of operations. However, such costs are based on management's best
estimates. Unanticipated failures by critical vendors and financial
institutions as well as failure by the Company to satisfactorily execute its
own compliance could have a material adverse effect on Clariti's financial
position and results of operations. As a result, there can be no assurance
that these forward-looking estimates will be achieved and the actual cost and
vendor compliance could differ materially from those plans, resulting in
material financial risk.
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.
27
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
------------
A. Independent Auditors' report on the consolidated
financial statements for the year ended
June 30, 1999 F-1
B. Consolidated Balance Sheet at June 30, 1999 F-2
C. Consolidated Statements of Operations for the
years ended June 30, 1999 and 1998 F-3
D. Consolidated Statement of Stockholders' Equity
for the year ended June 30, 1999 F-4
G. Consolidated Statements of Cash Flows for the
years ended June 30, 1999 and 1998 F-5 to F-6
H. Notes to Consolidated Financial Statements F-7 to F-21
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Clariti Telecommunications International, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Clariti
Telecommunications International, Ltd. and subsidiaries as of June 30, 1999,
and the related consolidated statement of stockholder s' equity for the year
then ended, and the related consolidated statements of operations and cash
flows for the twelve months ended June 30, 1999 and the eleven months ended
June 30, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides 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, 1999,
and the results of their operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
s/ COGEN SKLAR LLP
------------------
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
October 8, 1999
(except for Note 13, as to
which the date is October 12, 1999
and except for Note 14, as to
which the date is November 10, 1999)
F-1
<PAGE>
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Dollars and Shares in Thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,284
Trade accounts receivable 286
Refundable taxes 408
Prepaid expenses and other current assets 112
---------
4,090
PROPERTY AND EQUIPMENT, NET 3,244
INTANGIBLE ASSETS, NET 12,596
---------
TOTAL ASSETS $ 19,930
=========
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 4,653
Accrued expenses and other current liabilities 524
Note payable to related party 2,000
Excess of net liabilities over assets of
unconsolidated subsidiaries 32,413
---------
TOTAL LIABILITIES 39,590
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 124,235 shares 124
WARRANTS OUTSTANDING 2,322
ADDITIONAL PAID-IN-CAPITAL 228,611
ACCUMULATED DEFICIT (252,065)
ACCUMULATED OTHER COMPREHENSIVE INCOME 1,348
---------
TOTAL STOCKHOLDERS' DEFICIT ( 19,660)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 19,930
=========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
(Dollars and Shares in Thousands, Except Per Share Amounts)
Fiscal Fiscal
1999 1998
--------- ---------
REVENUE $ 251 $ -
COST OF REVENUE 160 -
--------- --------
GROSS PROFIT (LOSS) 91 -
General and administrative 13,698 4,223
Loss from unconsolidated subsidiaries 54,987 -
Write-off of goodwill 152,214 -
--------- --------
LOSS FROM OPERATIONS (220,808) ( 4,223)
--------- --------
OTHER INCOME (EXPENSE)
Interest income 441 33
Interest expense ( 45) ( 58)
--------- --------
396 ( 25)
--------- --------
NET LOSS $(220,412) $( 4,248)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 1,348 -
--------- --------
COMPREHENSIVE LOSS $(219,064) $( 4,248)
========= ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 74,318 20,906
BASIC AND DILUTED LOSS PER COMMON SHARE $( 2.97) $( .20)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1999
(Dollars and Shares in Thousands)
COMMON STOCK
-------------------------------------
NUMBER WARRANTS ADD'L.
OF OUT- PAID-IN
SHARES AMOUNT STANDING CAPITAL
------- ------ -------- ---------
BALANCES, JUNE 30, 1998 23,697 $ 24 $1,843 $ 31,366
Year ended June 30, 1999:
Common stock issued for cash 13,969 14 - 25,086
Commission on sale of common stock - - - ( 967)
Exercise of common stock warrants 300 - ( 136) 511
Common stock issued for:
Acquisition of GlobalFirst 76,571 77 - 116,994
Acquisition of MegaHertz-NKO 4,480 4 - 13,296
Partial settlement of liability
to Frontier 5,000 5 - 11,245
Commission on sale of common
stock 206 - - -
Settlement with Former Chairman 7 - - 18
Accrued compensation 5 - - 12
Sale of Telnet - - - 31,050
Common stock warrants issued for
expenses - - 615 -
------- ---- ------ --------
BALANCES, JUNE 30, 1999 124,235 $124 $2,322 $228,611
======= ==== ====== ========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME
----------- -------------
BALANCES, JUNE 30, 1998 $( 31,653) $ -
Year ended June 30, 1999:
Net loss (220,412) -
Currency translation adjustment - 1,348
--------- --------
BALANCES, JUNE 30, 1999 $(252,065) $ 1,348
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
(Dollars in Thousands)
Fiscal Fiscal
1999 1998
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(220,412) $( 4,248)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Loss from unconsolidated subsidiaries 54,987 -
Write-off of goodwill 152,214 -
Depreciation and amortization 701 61
Other 645 589
Change in assets and liabilities which
increase (decrease) cash, net of effects
of acquisition:
Trade accounts receivable 21 -
Other receivables - -
Refundable taxes - -
Prepaid expenses and other current assets 238 43
Accounts payable 3,738 253
Accrued expenses and other current
liabilities 297 33
Deferred revenue ( 3) -
--------- --------
Net cash used in operating activities ( 7,574) ( 3,269)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of GlobalFirst 1,349 -
Investment in unconsolidated subsidiaries ( 15,802) -
Divestment of Telnet ( 461) -
Acquisition of Mediatel 19 -
Acquisition of MegaHertz-NKO 81 -
Investment in equipment and patent ( 227) ( 295)
--------- --------
Net cash received from (used in) investing
activities ( 15,041) ( 295)
--------- --------
F-5
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
(Dollars in Thousands)
Fiscal Fiscal
1999 1998
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment on note payable to
related party ( 1,000) -
Sale of common stock for cash 25,475 2,590
Commission on sale of common stock ( 967) ( 90)
Sale of preferred stock for cash - 575
Commission on sale of common stock - ( 58)
Proceeds from loan payable - 250
--------- --------
Net cash received from (used in) financing
activities 24,508 3,267
--------- --------
NET CHANGE IN CASH AND EQUIVALENTS 1,893 ( 297)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,391 1,688
--------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,284 $ 1,391
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ 2
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued in partial settlement of
liability to Frontier Corp. $ 11,250 $ -
Note receivable received as payment for
the sale of Telnet $ 21,000 $ -
Cancellation of note receivable as partial
consideration for acquisition of Mediatel $ 21,000 $ -
Note payable issued as partial consideration
for acquisition of Mediatel $ 3,000 $ -
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
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company") is
a diversified international telecommunications company with businesses that
cover voice, data, Internet and wireless communications.
The Company was originally formed in February 1988 as the successor to a music
and recording studio business owned and operated by the Company's current
Chairman of the Board and President. In 1995, the Company began shifting its
focus to telecommunications, and as a result, no longer has a significant
interest in the music and recording studio business. During Fiscal 1999, the
Company took several steps toward expanding its presence in the
telecommunications business, including the acquisitions of GlobalFirst Holdings
Limited ("GlobalFirst") in December 1998 and Mediatel Global Communications
Limited ("Mediatel") in March 1999 (see Note 3).GlobalFirst is incorporated in
the United Kingdom and owns a number of subsidiaries operating in both the
United Kingdom and Western Europe (together, the "GlobalFirst Group").
Mediatel is incorporated in the United Kingdom and owns a number of
subsidiaries operating therein (together, the "Mediatel Group"). At the time
of their acquisitions, both groups were telecommunications resellers operating
in the residential, commercial and international calling card business sectors.
As part of the GlobalFirst acquisition, the Company also acquired Telnet
Products and Services Limited. ("Telnet") and its subsidiaries (together, the
"Telnet Group"), which operated over 100 public call offices ("PCO's")
throughout Europe. Telnet was subsequently sold in February 1999 (see Note 3).
As of October 11, 1999, the Company filed for voluntary liquidation for
GlobalFirst, Mediatel and their respective subsidiaries and ceased operation of
its International Telephony Services business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
- ---------------
On June 30, 1998, the Company changed its fiscal year end from July 31 to June
30. As a result, the statements of operations and cash flows for the period
ended June 30, 1998 consist of activity for the eleven month period from August
1, 1997 to June 30, 1998. In these financial statements, the twelve month
period ended June 30, 1999 is referred to as Fiscal 1999, and the eleven month
period ended June 30, 1998 is referred to as Fiscal 1998.
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries where management control is not deemed to be
temporary. All significant intercompany transactions have been eliminated in
consolidation.
F-7
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of June 30, 1999 and for Fiscal 1999, the GlobalFirst Group, Mediatel Group
and Telnet Group were accounted for under the equity method of accounting. In
the case of the GlobalFirst and Mediatel Groups, equity method accounting was
required because the Company's control was deemed to be temporary due to the
fact that the groups filed for voluntary liquidation on October 11, 1999 (see
Note 14). In the case of the Telnet Group, equity method accounting was
required because the Company's control was temporary due to the sale of Telnet
in February 1999 (see Note 3).
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 major financial
institutions. Accounts with such institutions generally are insured by
government authorities and/or industry consortiums up to certain maximum
amounts. During the year the Company may have cash balances in these
institutions in excess of such limits. At June 30, 1999, cash balances of the
Company and its consolidated subsidiaries were in excess of insurable amounts
by approximately $3,095,000.
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
balance sheet as of June 30, 1999, approximate their fair value because of
their short maturities.
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 3 to 10 years.
F-8
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
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 generally relates to
acquisitions that were made during Fiscal 1999. Recoverability of such goodwill
is evaluated based on the estimated expected future cash flows from the
business operations of the companies acquired in relation to the net book value
of the goodwill. As of October 11, 1999, the Company filed for voluntary
liquidation for GlobalFirst, Mediatel and their respective subsidiaries and
ceased operation of its International Telephony Services business. As a result,
the Company wrote off all of the goodwill associated with these acquisitions
(see Note 5).
Foreign Currency Translation
- ----------------------------
Assets and liabilities of the Company's foreign unconsolidated subsidiaries are
translated at current exchange rates, while revenue and expenses are translated
at average rates prevailing during the year. Translation adjustments are
reported as a component of stockholders' equity.
Research and Development Expenses
- ---------------------------------
Research and development expenditures are expensed as incurred and totaled
approximately $2,465,000 and $1,188,000 during Fiscal 1999 and Fiscal 1998,
respectively.
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.
Comprehensive Income
- --------------------
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This
statement establishes rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net loss and foreign currency
translation adjustments and is presented in the Combined Statements of
operations and comprehensive loss. The Company had foreign currency translation
adjustments of $1,348,000 during Fiscal 1999.
F-9
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 APB 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 11.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities, "
which requires that costs of start-up activities be expensed as incurred. The
Company already complies with the accounting and disclosure requirements of SOP
98-5 with regard to its Wireless Voice Messaging development operations. The
Company has no other start-up operations.
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.
F-10
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
Acquisition of GlobalFirst
- --------------------------
On December 8, 1998 Clariti acquired 100% of the capital stock of GlobalFirst,
a privately held telecommunications firm based in the United Kingdom, from
Chadwell Hall Holdings Ltd. ("CHH") for 76,571,500 shares of Clariti's
restricted common stock valued at $134,000,000. The transaction was accounted
for using the purchase method of accounting. Although the original Clariti
shareholders had less than a majority ownership after the GlobalFirst
acquisition was completed, Clariti management has maintained management control
of the operations. The Company allocated all purchase price in excess of fair
market value of tangible net liabilities ($135,065,000) to goodwill. As of
October 11, 1999, the Company filed for voluntary liquidation for GlobalFirst,
Mediatel and their respective subsidiaries and ceased operation of its
International Telephony Services business. As a result, all of the goodwill
associated with the acquisition of GlobalFirst, except that goodwill
attributable to the acquisition of Telnet of $15,423,000, was written off in
Fiscal 1999 (see Note 5). Goodwill associated with the acquisition of Telnet
was eliminated with the sale of Telnet in February 1999 (see below). In
addition, GlobalFirst and Telnet have been accounted for under the equity
method because the Company's control was deemed to be temporary.
Sale of Telnet
- --------------
On February 3, 1999, the Company completed the sale of all of the outstanding
capital stock of Telnet to CHH ("Telnet Share Purchase and Sale Agreement"). In
return, CHH issued to Clariti a demand note in the amount of $21,000,000
("$21,000,000 Note"), the estimated value of Telnet at the time it was acquired
by Clariti on December 8, 1998. The $21,000,000 Note carried a fixed interest
rate of 4.62% and was payable, including accrued interest thereon, within 10
days of demand by Clariti. The $21,000,000 Note was canceled on March 16, 1999
in connection with the Company's acquisition of Mediatel as further described
below. Clariti realized a gain of approximately $3,819,000 on the sale of
Telnet as a result of Telnet's accumulated losses from operations prior to its
sale. However, such gain was not recognized in income, but was treated as a
reduction of additional paid-in capital to reflect the fact that Telnet was
purchased from and resold to CHH, the Company's majority shareholder.
Acquisition of Mediatel
- -----------------------
On March 16, 1999, Clariti acquired all of the outstanding capital stock of
Mediatel from CHH for approximately $24,000,000. Consideration paid for
Mediatel consisted of cancellation of the $21,000,000 Note received upon the
sale of Telnet, including accrued interest, and the issuance of a promissory
note payable to CHH in the amount of $3,000,000 (the "$3,000,000 Note"). The
$3,000,000 Note carries a fixed interest rate of 6.5% and is payable, including
F-11
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 3 - ACQUISITIONS AND DISPOSITIONS (continued)
any accrued interest thereon, on March 16, 2000. On April 7, 1999 Clariti
prepaid $1 million against the principal balance of the $3,000,000 Note. As of
June 30, 1999, there was $42,000 of accrued interest on the remaining balance
of the $3,000,000 Note.
The Mediatel acquisition was accounted for using the purchase method of
accounting. The Company allocated all of the purchase price in excess of fair
market value of tangible net liabilities ($31,790,000) to goodwill. As of
October 11, 1999, the Company filed for voluntary liquidation for GlobalFirst,
Mediatel and their respective subsidiaries and ceased operation of its
International Telephony Services business. As a result, all of the goodwill
associated with the acquisition of Mediatel was written off in Fiscal 1999 (see
Note 5). In addition, Mediatel has been accounted for under the equity method
because the Company's control was deemed to be temporary.
Acquisition of MegaHertz-NKO
- ----------------------------
On May 7, 1999, the Company acquired all of the outstanding common stock of
MegaHertz-NKO for approximately $13,300,000. Consideration paid for MegaHertz-
NKO consisted of 5,500,000 shares of Clariti common stock, of which 1,020,000
shares are being held in escrow until certain revenue and gross margin targets
are achieved by MegaHertz-NKO over a 24-month period. In the case of the
MegaHertz-NKO acquisition, the Company has allocated all of the purchase price
in excess of fair market value of tangible net assets to goodwill
($12,701,000), which is being amortized on a straight-line basis over a period
of 5 years.
NOTE 4 - EQUITY IN NET LIABILITIES OF UNCONSOLIDATED SUBSIDIARIES
As further described in Note 13, the GlobalFirst Group of companies and the
Mediatel Group of companies (together, the "UK Group Companies") filed for
voluntary liquidation under the laws of the United Kingdom on October 11, 1999.
As a result, such companies have been accounted for using the equity method
during Fiscal 1999 because the Company's control of such subsidiaries was
deemed to be temporary. The net losses of these companies have been included in
income as incurred during Fiscal 1999. Summarized financial information of
these companies for Fiscal 1999 follows (dollars in thousands):
Condensed Statement of Operations
Revenues $10,061
Expenses 39,125
-------
Net loss $29,064
=======
F-12
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 4 EQUITY IN NET LIABILITIES OF UNCONSOLIDATED SUBSIDIARIES (continued)
Condensed Balance Sheet as of June 30, 1999
Current assets $ 9,056
Non-current assets 46
--------
$ 9,102
========
Current liabilities $ 41,515
Stockholders' deficit (32,413)
--------
$ 9,102
========
NOTE 5 - ASSET IMPAIRMENT
As further described in Note 13, the UK Group Companies filed for voluntary
liquidation on October 11, 1999. As a result, all goodwill related to the
acquisitions of GlobalFirst and Mediatel, a total of $152,214,000 or $2.05 per
share), was written off in Fiscal 1999. Subsequent advances to Mediatel in the
amount of $3,360,000, or $0.05 per share were also provided for in the losses
from unconsolidated subsidiaries.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment of the Company and its consolidated subsidiaries consist
of the following (dollars in thousands):
June 30
1999
---------
Computer equipment and software $ 2,964
Office equipment and furniture 1,780
-------
Total cost 4,744
Less accumulated depreciation (1,500)
-------
$ 3,244
=======
Depreciation expense was $210,000 and $32,000 for Fiscal 1999 and Fiscal 1998,
respectively.
F-13
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 7 - INCOME TAXES
There is no income tax benefit for operating losses for Fiscal 1999 and Fiscal
1998 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.
Deferred income taxes consist of the following as of June 30, 1999 (dollars in
thousands):
Loss carry-forwards $ 68,843
Other 8,000
Less valuation allowance (76,843)
--------
Net deferred tax asset $ -
========
Under FASB Statement No. 109, the Company has recorded valuation allowances
against the realization of deferred tax assets. The valuation allowances are
based on management's estimates and analysis, which include the impact of tax
laws which may limit the Company's ability to utilize such deferred tax assets.
The use of net operating loss carryforwards in the United States is limited
when there has been a substantial change in ownership (as defined) during a
three year period. Because of the recent changes in ownership of the Company's
common stock, such a change may already have occurred. 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, 1999 the Company had net operating loss carryforwards of
approximately $191,230,000 which if not used will expire primarily during the
years 2005 through 2014.
F-14
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 8 - 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.
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, 1999 (dollars in thousands):
Year Ending
June 30,
-----------
2000 $ 253
2001 206
2002 136
2003 102
2004 108
After 2004 221
------
$1,026
======
Rent expense for operating leases in Fiscal 1999 and Fiscal 1998 was $108,000
and $11,000, respectively.
Telecommunication Service Agreements
- ------------------------------------
The Company has telecommunications service agreements with its service
providers. These agreements do not contain minute volume commitments.
Employment Agreements
- ---------------------
The Company maintains employment agreements with several of its executive
officers and other key employees. 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.
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
Company of $61,000 in cash and the issuance of 395,000 shares of the
F-15
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
Company's Series B Preferred Stock valued at $1,977,000. In addition, the
Investor agreed to purchase the Former Chairman's 1,740,000 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 $43,000 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 $43,000 and the issuance of 6,600 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, 1999 consolidated balance sheet (accrued expenses and
other accrued liabilities) includes a total of $4,000 payable to the
Former Chairman reflecting the balance due on the note payable. The 6,600
shares of restricted common stock were issued in August 1998 and the balance
due under the note payable was paid off in August 1999. As a result, the
Company has no further obligations to the Former Chairman under the Separation
Agreement.
Legal Proceedings
- -----------------
In March 1999 Clariti, GlobalFirst, Mediatel and CHH entered an agreement with
Frontier Corporation together with its subsidiary, Frontel Communications, Ltd.
(collectively, "Frontier") to settle costs incurred by GlobalFirst and Mediatel
for their use of Frontier's telecommunications network up to and including
March 12, 1999 (the "Frontier Settlement Agreement"). Frontier, GlobalFirst and
Mediatel are jointly analyzing the detailed records supporting the GlobalFirst
and Mediatel usage of Frontier's network to identify the precise amount of the
balance due to Frontier, if any ("Balance Due Frontier"). Pursuant to the
Frontier Settlement Agreement, Clariti paid to Frontier $3,000,000 during March
1999 against the Balance Due Frontier and issued to Frontier 5,000,000 shares
of the Company's restricted common stock valued at $11,250,000 as security for
payment of the remaining Balance Due Frontier. Within 5 business days after the
Balance Due Frontier is determined by agreement among the parties or by
arbitration, CHH must pay such amount to Frontier, and Frontier must then
transfer the 5,000,000 shares of Clariti common stock to CHH. At any time
prior to the purchase of the Clariti stock by CHH, Clariti (or its designee)
may purchase any portion or all of the stock for an amount equal to the Balance
Due Frontier. In the event of a default under the Frontier Settlement
Agreement, Frontier may, at its option, sell a sufficient amount of the Clariti
shares in order to satisfy the Balance Due Frontier. If Frontier sells all
5,000,000 shares of Clariti common stock for less than the Balance Due
F-16
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
Frontier, GlobalFirst and Mediatel (but not Clariti) are contingently liable to
pay Frontier the remaining Balance Due Frontier. Once Frontier collects the
Balance Due Frontier (whether by sale of Clariti stock or payment made by any
of the parties), Frontier must surrender any remaining shares of the Clariti
stock to Clariti. On or about June 17, 1999, Clariti, together with
GlobalFirst, Mediatel and CHH filed a demand for arbitration with the American
Arbitration Association (case no. 50 N 181 0021399) against Frontier concerning
Frontier's obligations arising under the Frontier settlement agreement.
The Company is, from time to time, during the normal course of its business
operations, subject to various other litigation claims and legal disputes. The
Company expects none to have a material adverse impact on its operations;
however, no assurance can be given that an adverse determination of any claim
or dispute would not have an adverse impact on its operations or cash flows
during any given period.
NOTE 9 - RELATED PARTIES
In connection with the Company's acquisition of Mediatel (see Note 3), the
Company issued a promissory payable to CHH, its majority shareholder, in the
amount of $3,000,000. Such note carries a fixed interest rate of 6.5% and is
payable, including any accrued interest thereon, on March 16, 2000. On April 7,
1999 Clariti prepaid $1 million against the principal balance of the note. As
of June 30, 1999, there was $42,000 of accrued interest on the remaining
$2,000,000 balance of the note.
In the ordinary course of business, the Company's unconsolidated foreign
subsidiaries entered into various transactions with affiliates of CHH. A
summary of such transactions, all of which were at arms length, is set out
below (dollars in thousands):
Fiscal
1999
------
Revenue $3,756
Cost of revenue $1,912
Purchases of equipment $ 389
Accounts receivable at June 30 $1,560
Accounts payable at June 30 $2,238
Loans payable at June 30 $3,520
Loans receivable at June 30 $2,579
F-17
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 9 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
In connection with the Company's acquisition of GlobalFirst (see Note 3),
GlobalFirst's parent, CHH, purchased a total of 11,428,571 shares of Clariti
common stock for $1.75 per share, or $20,000,000. Commission on this
transaction consisted of $158,000 paid in cash and 206,197 shares of Clariti
stock. The Company then issued to CHH 76,571,500 shares of common stock as
consideration for GlobalFirst.
During Fiscal 1999, the Company sold a total of 2,840,000 shares of common
stock for proceeds of $4,965,000, net of commissions, to private investors
other than CHH. Of these amounts, 300,000 shares were issued for $375,000 upon
the exercise by an investor of common stock warrants at $1.25 per share.
On May 7, 1999, the Company issued 4,480,000 shares of common stock as
consideration for the acquisition of MegaHertz-NKO (see Note 3). An additional
1,020,000 shares are being held in escrow until certain revenue and gross
margin targets are achieved by MegaHertz-NKO over a 24-month period. Such
contingent shares will not be included in the Company's outstanding shares
until the performance targets have been met.
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 Fiscal 1999:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
- ----------------------------------------------------------------------------
Warrants outstanding, 6/30/98 1,611 $1.25 - $3.50 $2.11
Warrants issued 495 $1.75 - $3.50 $2.02
Warrants exercised ( 300) $1.25 $1.25
- ----------------------------------------------------------------------------
Warrants outstanding, 6/30/99 1,806 $1.50 - $3.50 $2.26
- ----------------------------------------------------------------------------
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
F-18
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
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 Fiscal 1999 at $383,000.
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, 1999. 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
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 Fiscal 1999:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
- ----------------------------------------------------------------------------
Options outstanding, 6/30/98 3,816 $1.06 - $3.88 $2.37
Options granted 7,577 $1.50 - $3.38 $2.63
- ----------------------------------------------------------------------------
Options outstanding, 6/30/99 11,393 $1.06 - $3.88 $2.51
- ----------------------------------------------------------------------------
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 Fiscal 1999 or Fiscal 1998. 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,
F-19
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
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%.
Fiscal Fiscal
1999 1998
---------- ---------
Net loss ($000) As reported $(220,412) $( 4,248)
Pro forma $(231,229) $( 7,175)
Net loss per share As reported $( 2.97) $( 0.20)
Pro forma $( 3.11) $( 0.34)
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company and its United States subsidiaries sponsor defined contribution
pension plans for their employees in the form of 401(k) plans. GlobalFirst
employees are entitled to have 5 percent of their salaries contributed to a
private pension plan. None of the Company's other foreign subsidiaries sponsor
pension plans for their employees. Company contributions to such plans are not
material.
The Company pays most of the cost of medical insurance for its United States
employees and for certain senior foreign employees, the cost of which is not
material. The Company provides no post-retirement medical benefits.
NOTE 12 - SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information." The Company has determined that
segment information is not required to be presented because International
Telephony Services has been placed into liquidation. All of the Company's
Fiscal 1999 revenues were generated by IP/Internet Services. Substantially all
of the Company's revenues and assets are located in the United States.
NOTE 13 - SUBSEQUENT EVENT
Liquidation of GlobalFirst, Mediatel and Their Subsidiaries
On October 12, 1999, at the request of the Company, each company in the UK
Group Companies filed for voluntary liquidation under the laws of the United
Kingdom. This voluntary liquidation is being undertaken because the Company
concluded that the UK Group Companies cannot pay their debts. A liquidator has
F-20
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 13 - SUBSEQUENT EVENT (continued)
been appointed and, subject to the provisions of United Kingdom law, will
endeavor to liquidate the assets and liabilities of the UK Group Companies. As
of June 30, 1999, the Company was owed approximately $14,688,000 of secured
indebtedness of the UK Group Companies. Subsequent to June 30, 1999, advances
to Mediatel in the amount of $3,360,000, or $0.04 per share were also provided
for in the losses from unconsolidated subsidiaries.
At June 30, 1999, the Company's total liabilities exceeded its total assets by
$19,660,000. This situation has resulted from the Company's decision to place
GlobalFirst and Mediatel into voluntary liquidation. This decision
precipitated the write-off of $152,214,000 in goodwill related to the
acquisitions of the respective companies. The net liabilities of GlobalFirst
and Mediatel ($32,413,000) have remained on the Company's June 30, 1999 balance
sheet because the voluntary liquidation proceedings were not initiated until
October 11, 1999. The Company expects the liquidation to discharge the
liabilities. If the net liabilities of GlobalFirst and Mediatel had been
excluded from the June 30, 1999 balance sheet, the Company would have had a
stockholders' equity balance of $12,753,000.
Since June 30, 1999, the Company has received commitments for the purchase of
additional shares of common stock and warrants in the amount of $27,000,000, of
which $10,933,000 had been received as of the report date. The balance of the
commitment will be received in October and November 1999. Management has
prepared projections which reflect cash requirements through the end of Fiscal
2000 amounting to $12,000,000 to $16,000,000. The Company anticipates that the
funds committed will be sufficient to fund its operations through June 30,
2000.
Acquisition of NKA Communications
Subsequent to the date of the report, the Company completed the acquisition of
all of the outstanding common stock of NKA Communications Pty., Ltd. ("NKA"),
an Australian IP telephony company, for consideration valued at approximately
$3,558,000. Consideration paid for NKA consisted of 1,500,000 shares of Clariti
common stock, of which 350,000 shares are being held in escrow until certain
revenue and gross margin targets are achieved by NKA over a 24-month period.
NOTE 14 - RECLASSIFICATION
A reclassification has been made to properly reflect the capitalization of
certain liabilities owed to the Company's majority shareholder. The effect of
this reclassification was to decrease current liabilities from $54,466,000 to
$39,590,000 and to decrease total stockholders' deficit from $34,536,000 to
$19,660,000. This reclassification also affects the condensed balance sheet of
unconsolidated subsidiaries as disclosed in Note 4 and certain amounts derived
from the balance sheet disclosed in Note 13.
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 18, 1998, the Company, with the approval of its board of
directors, engaged the accounting firm of PricewaterhouseCoopers LLP
("PwC") as independent accountants for the Company for the year ending
June 30, 1999. The work of Cogen Sklar LLP ("Cogen Sklar") was terminated
coincident with the engagement of PwC. During the fiscal periods
ended June 30, 1998 and July 31, 1997, and the quarter ended September 30,
1998, there were no disagreements with Cogen Sklar on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Cogen Sklar would have caused them to make reference
thereto in their report on the financial statements for such periods, or
any reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
Cogen Sklar's report on the financial statements for the last two
years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting
principles. The Company requested that Cogen Sklar furnish it with a
letter addressed to the SEC stating whether it agrees with the above
statements. A copy of Cogen Sklar's letter to the SEC, dated December 22,
1998, is included as Exhibit 16.1 to this Form 10-KSB.
On September 7, 1999 PwC resigned as the Company's independent
accountants. PwC's decision to resign was their own. Their decision to
resign was made with no prior notice given to the Company. The Company
engaged PwC on December 18, 1998 to audit its consolidated financial
statements for the year ending June 30, 1999. As a result, PwC has not
reported on the Company's consolidated financial statements. PwC has
audited the consolidated financial statements of GlobalFirst for the years
ended June 30, 1998 and 1997. GlobalFirst was acquired by the Company on
December 8, 1998 in a transaction accounted for as a reverse acquisition.
GlobalFirst's audited financial statements for the years ended June 30,
1998 and 1997, including PwC's report thereon, were filed as an exhibit to
a Form 8-K/A filed by the Company on February 22, 1999. PwC's report on
such financial statements contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope
or accounting principles. PwC also has audited the consolidated financial
statements of Mediatel for the year ended June 30, 1998. Mediatel was
acquired by the Company on March 16, 1999. Mediatel's audited financial
statements, including PwC's report thereon, were filed as an exhibit to a
Form 8-K/A filed by Registrant on June 1, 1999. PwC's report on such
financial statements contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with the incomplete audit of
the Company's consolidated financial statements for the year ended June
30, 1999, there were no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to the satisfaction of
PwC would have caused them to make reference thereto in their report on
the financial statements for such period. In connection with the audits of
GlobalFirst and Mediatel referred to above, there were no disagreements
with PwC on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of PwC would have caused them to make
29
<PAGE>
reference thereto in their report on the financial statements for such
periods. PwC informed the Company that they had resigned because, in
their opinion, internal controls necessary to develop reliable financial
statements for the year ended June 30, 1999 for its recently acquired
United Kingdom subsidiaries, GlobalFirst and Mediatel, were not adequate
at the time of their resignation. PwC expressed concern regarding the
ability of GlobalFirst and Mediatel to ensure the adequate prevention and
detection of fraud with respect to cash collections, properly allocate
cash receipts to customer accounts, properly record sales, properly record
fixed assets, and properly record compensation to employees and directors.
PwC expressed no such concerns regarding internal controls over the
Company or other subsidiary operations. The Company acquired GlobalFirst
on December 8, 1998. On February 3, 1999, Registrant sold Telnet, a
wholly owned subsidiary of GlobalFirst whose operations comprised the vast
majority of GlobalFirst's revenues and expenses for the years ended June
30, 1998 and 1997. A portion of the internal control issues cited by PwC
relate to Telnet, a business owned by the Company for a period of less
than two months. In spite of the fact that the Company had owned
GlobalFirst for only nine months at the time of PwC's resignation (seven
months as of June 30, 1999) and Mediatel for only six months at the time
of PwC's resignation (three months as of June 30, 1999), the Company has
undertaken initiatives to improve internal controls over the remaining
operations of GlobalFirst and Mediatel, including a substantial overhaul
of the senior management team. Specifically, the Company has hired a new
Managing Director for all of its European operations and has replaced the
GlobalFirst Finance Director with a Chartered Accountant. The Company
authorized PwC to respond fully to the inquiries of the successor
accountant, when engaged, concerning the internal control issues. The
Company requested that PwC furnish it with a letter addressed to
the SEC stating whether it agrees with the above statements. PwC's
response provided some clarifying comments. A copy of PwC's letter to the
SEC, dated September 22, 1999, is included as Exhibit 16.2 to this Form
10-KSB.
The Company re-engaged Cogen Sklar as its independent accountants on
September 13, 1999. Cogen Sklar engaged another independent accounting
firm based in the United Kingdom, Morison Stoneham, to assist it in the
audit of the Company's United Kingdom subsidiaries. Cogen Sklar had
previously been the Company's independent accountants for fiscal years
ended in 1992 through 1998. As such, the Company has within the last two
years consulted Cogen Sklar regarding the application of accounting
principles to transactions included in the Company's audited financial
statements for years ended prior to 1999 and the type of audit opinion to
be rendered on the Company's audited financial statements for fiscal
years ended prior to 1999. For the year ended June 30, 1999, the Company
has not consulted with Cogen Sklar regarding the application of accounting
principles to a specific completed or contemplated transaction, or the
type of audit opinion that might be rendered on the Company's June 30,
1999 financial statements, and neither written nor oral advice was
provided that was an important factor considered by the Company in
reaching a decision as to any accounting, auditing or financial reporting
issue. In a Form 8-K filed on September 13, 1999, the Company disclosed
that its previous accountants, PwC, had resigned because, in its opinion,
internal controls necessary to develop reliable financial statements for
the year ended June 30, 1999 for the Company's recently acquired United
Kingdom subsidiaries are not adequate at the time of their resignation.
30
<PAGE>
The Company advised Cogen Sklar of the internal control issues cited by
PwC. Cogen Sklar has provided the Company with no oral or written
comments regarding such issues. The Company requested Cogen Sklar to
review the disclosures made in this Form 10-KSB and provide it with a
letter addressed to the SEC containing any new information, clarification
of the Company's expression of its views, or the respects in which it does
not agree with the statements made in this Form 8-K. Cogen Sklar has
advised the Company that it will have no such comments to provide and
therefore does not plan to provide such a letter.
31
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PART III
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, current ages and positions of
all current directors (including their term of service) and executive officers
of the Company and their current positions in the Company:
Current Position(s) Director
Name Age with Company Since
- -------------------- --- ------------------------- -------------
Peter S. Pelullo 47 President, Chairman of June 1989
the Board, Chief Financial
Officer and Director
Ronald R. Grawert 50 Chief Executive Officer and October 1999
Director
Joseph A. Smith 45 Executive Vice President
and Chief Operating Executive
Daniel B. McDuffie 35 Senior Vice President
James M. Boyd, Jr. 43 Vice President of Finance
and Chief Accounting
Officer
Ernest J. Cimadamore 37 Secretary
Louis C. Golm 58 Vice Chairman of the Board April 1999
and Director
John N. D'Anastasio 51 Director June 1991
Robert J. Sannelli 54 Director June 1991
Michael H. Jordan 63 Director October 1999
Chester John Hunt 30 Director October 1999
Hans Georg Hinderling 55 Director October 1999
Abraham Carmel 66 Director October 1999
All current directors serve until their successors are duly elected and
qualified. Vacancies in the Board of Directors 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.
A brief description of the business experience during the past five years
or more of each director and executive officer of the Company is as follows:
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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. In December 1998, Mr. Pelullo was re-appointed President of
the Company when Mr. McAndrews became President of Clariti's Wireless Messaging
Division. In June 1999, Mr. Pelullo relinquished the title of Chief Executive
Officer of the Company with the appointment of Ronald R. Grawert to that
position. Mr. Pelullo remains Chairman of the Board, President and Chief
Financial Officer of the Company.
Ronald R. Grawert was appointed Chief Executive Officer of the Company in
June 1999 and was elected a director in October 1999. From 1997 to 1999, Mr.
Grawert served as President and Chief Executive Officer of Mobilemedia
Communications, Inc., one of the largest paging companies in the U.S. From 1993
to 1997, Mr. Grawert served as Executive Vice President of GTE Mobilnet, one of
the largest cellular carriers in the U.S.
Joseph A. Smith was appointed Executive Vice President of the Company in
February 1999 and was also appointed Chief Operating Executive in August 1999.
From 1994 to 1999 Mr. Smith served as Group Executive Vice President of
Metromedia International, Ltd., a worldwide telecommunications company, where
he had senior responsibility for both paging and wireless local loop operations
in a variety of foreign countries.
Daniel B. McDuffie was appointed Senior Vice President, Telecom Operations
in January 1999. From 1997 to 1998, Mr. McDuffie was Chief Executive Officer
of Interoute Telecom, the U.S. subsidiary of Interoute Communications Group,
London, a worldwide telecommunications company. From 1996 to 1997, Mr.
McDuffie was Vice President of Business Development for iTelsa, a facilities-
based prepaid telephone card firm. From 1994 to 1996, Mr. McDuffie was a
consultant to facilities-based carriers.
James M. Boyd, Jr. was appointed Vice President of Finance and Chief
Accounting Officer in February 1997. From 1981 to 1997, Mr. Boyd worked in
several financial management roles with Sun Company, Inc., a petroleum refining
and marketing company. Mr. Boyd is a certified public accountant.
Ernest J. Cimadamore has been Secretary and an employee of the Company
since 1990.
Louis C. Golm was elected a director of the Company and Vice Chairman of
the Board in April 1999. Mr. Golm retired from AirTouch International and
AirTouch Corporation in 1999, at which time he was serving as President of
AirTouch International and Vice President of AirTouch Corporation., one of
the largest cellular and paging providers in the U.S. From 1994 to 1997, Mr.
Golm was President and Chief Executive Officer of AT&T - Japan, a subsidiary of
AT&T, one of the largest communications companies in the world. Mr. Golm is
currently a director of Digital Link Corporation and has been nominated to
serve as a director of SBS Technologies, Inc.
John N. D'Anastasio has been the President of D'Anastasio Corp., a real
estate development company, since 1986.
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<PAGE>
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.
Michael H. Jordan was elected a director of the Company in October 1999.
Mr. Jordan currently serves as Chairman of Luminant Worldwide Corporation, a
provider of internet and electronic commerce professional services, and
Chairman of eOriginal, Inc., an electronic commerce company. On December 31,
1998, Mr. Jordan retired as the Chairman and Chief Executive Officer of CBS
Corporation (formerly Westinghouse Electric Corporation), positions he had held
since July 1993. Mr. Jordan currently serves on the boards of directors of Dell
Computer Corporation, Aetna Inc., MarketWatch.com, and WireBreak Networks, Inc.
In addition, he is Chairman of The College Fund/UNCF, Chairman of the Policy
Board of the Americans for the Arts, and is a member of the President's Export
Council and the U.S.-Japan Business Council.
Chester John Hunt was elected a director of the Company in October 1999.
Mr. Hunt has been a director and Chief Executive Officer of Hippo Holdings
Limited, a designer and manufacturer of golf equipment in the United Kingdom
and Europe, since 1996. From 1994 to 1996, Mr. Hunt held sales management
positions with Automotive Financial Group Limited, an automotive sales business
in the United Kingdom.
Hans Georg Hinderling was elected a director of the Company in October
1999. Mr. Hinderling has been practicing law at his own law firm in Switzerland
since 1981.
Abraham Carmel was elected a director of the Company in October 1999.
Since 1994, Mr. Carmel has been President and owner of Carmel Associates, an
investment banking firm. Mr. Carmel is Chief Operating Officer and a director
of Atlantic Communications International, Ltd., a significant shareholder in
the Company. Mr. Carmel is also a director of Datawave Systems, Inc. and Sports
Prize Entertainment, Inc.
Significant Employees
Michael McAndrews has been President of Clariti's Wireless Messaging
Division since December 1998. From October 1997 to December 1998, Mr.
McAndrews was President of the Company. Prior to joining Clariti and since
1992, Mr. McAndrews had been in several senior marketing positions in
Motorola's Two-Way Paging and Cellular Phone divisions. 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.
David Bryan has been Senior Vice President and Chief Operating Officer of
Clariti's Wireless Messaging Division since December 1998. From July 1997 to
December 1998, Mr. Bryan was the Company's Senior Vice President and Chief
Operating Officer. Prior to joining Clariti, 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.
34
<PAGE>
Frank Fernandez has been Vice President of Engineering for Clariti's
Wireless Messaging Division, managing the Florida Engineering Center since May
1998. Prior to joining Clariti, Mr. Fernandez spent 15 years with Motorola,
most recently as 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.
35
<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 12 months ended June 30, 1999 ("Fiscal 1999"), the 11 months ended June
30, 1998 ("Fiscal 1998") and the 12 months ended July 31, 1997 ("Fiscal 1997").
The following table sets forth compensation paid or accrued during Fiscal
1999, Fiscal 1998 and Fiscal 1997 to the Company's Chief Executive Officers
during Fiscal 1999, the most highly compensated executive officers whose total
annual salary and bonus earned them more than $100,000 during Fiscal 1999, and
two individuals who were among the highest paid employees for Fiscal 1999
(collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
---------------
Secur-
ities
Annual Other Restr- Under- All
Fiscal Compensation Annual icted lying Other
Name and Year -------------- Compen- Stock Options Compen-
Principal Ended Salary Bonus sation Awards /SARs sation
Position(s) In ($000) ($000) ($000) ($000) (#000) ($000)
- -------------------- ------ ------ ------ ------- ------ ------- -------
Peter S. Pelullo 1999 634(a) 85 33(d) - - -
Chairman of the 1998 506(b) - 28(d) - 200 49(e)
Board and President 1997 581(c) - 29(d) 2,500 250 -
Ronald R. Grawert 1999 12(f) 75 - - 5,000 -
Chief Executive
Officer
James M. Boyd, Jr. 1999 110(g) 1 7(g) 12 11 -
Vice President of 1998 90(h) - 6(h) - 60 -
Finance and Chief 1997 44 - 3(i) - 25 -
Accounting Officer
Michael P. McAndrews 1999 253(j) - 15(j) - 100 -
President, Clariti 1998 186(k) - 8(k) - 750 58(l)
Wireless Messaging
David C. Bryan 1999 143(m) - 7(m) - - -
Sr. Vice President 1998 116(n) - 6(n) - 150 -
and Chief Operating 1997 5 - - - 350 -
Officer, Clariti
Wireless Messaging
(a) During Fiscal 1999, Mr. Pelullo was paid a salary of $572,000, including
$24,000 representing the payment of accrued but unpaid salaries from the
prior year. In addition, Mr. Pelullo was paid $76,000 for unused vacation
pay. As of June 30, 1999, accrued but unpaid compensation due Mr. Pelullo
was $10,000.
36
<PAGE>
(b) During Fiscal 1998, Mr. Pelullo was paid a salary of $471,000, including
$17,000 representing the payment of accrued but unpaid salaries from the
prior year. In addition, Mr. Pelullo was paid $28,000 for unused vacation
pay. As of June 30, 1998, accrued but unpaid compensation due Mr. Pelullo
was $24,000.
(c) During Fiscal 1997, Mr. Pelullo was paid a salary of $480,000, including
$22,000 representing the payment of accrued but unpaid salaries from the
prior year. In addition, Mr. Pelullo was paid $106,000 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 $17,000.
(d) Other annual compensation for Mr. Pelullo consists of the following
($ in thousands):
Fiscal Fiscal Fiscal
1999 1998 1997
-------- -------- --------
Auto expense $16 $13 $16
Travel allowance 5 5 5
Health benefits 9 7 8
Insurance benefits 3 3 -
------- ------- -------
Totals $33 $28 $29
------- ------- -------
(e) During Fiscal 1997, the Company retired the remaining 97,000 shares of its
Series C preferred stock, which had been received by Mr. Pelullo in lieu of
salaries payable in preceding years. The Company redeemed such shares for
$536,000, of which $49,000 was reflected as additional compensation to Mr.
Pelullo pursuant to the terms of the Series C preferred stock agreement.
(f) During Fiscal 1999, Mr. Grawert was paid a salary of $7,000. As of June
30, 1999, accrued but unpaid compensation due Mr. Grawert was $5,000.
(g) During Fiscal 1999, Mr. Boyd was paid a salary of $109,000, including
$2,000 representing the payment of accrued but unpaid salaries from the
prior year. As of June 30, 1999, accrued but unpaid compensation due Mr.
Boyd was $4,000. Other annual compensation for Mr. Boyd during Fiscal 1999
consisted of $7,000 for health benefits.
(h) During Fiscal 1998, Mr. Boyd was paid salaries of $88,000. As of June 30,
1998, accrued but unpaid compensation due Mr. Boyd was $2,000. Other annual
compensation for Mr. Boyd during Fiscal 1998 consisted of $6,000 for health
benefits.
(i) Other annual compensation for Mr. Boyd during Fiscal 1997 consisted of
$3,000 for health benefits.
(j) During Fiscal 1999, Mr. McAndrews was paid salaries of $257,000, including
$9,000 representing the payment of accrued but unpaid salaries from the
prior year. As of June 30, 1999, accrued but unpaid compensation due Mr.
McAndrews was $5,000. Other annual compensation for Mr. McAndrews during
Fiscal 1999 consisted of $7,000 for health benefits, $5,000 for auto
expense and $3,000 for insurance benefits.
37
<PAGE>
(k) During Fiscal 1998, Mr. McAndrews was paid salaries of $177,000. As of
June 30, 1998, accrued but unpaid compensation due Mr. McAndrews was
$9,000. Other annual compensation for Mr. McAndrews during Fiscal 1998
consisted of $5,000 for health benefits and $3,000 for insurance benefits.
(l) During Fiscal 1998, the Company paid moving and relocation expenses of
$44,000 on behalf of, or directly to, Mr. McAndrews. As of June 30, 1998,
accrued but unpaid moving and relocation costs due Mr. McAndrews were
$14,000, which were paid in Fiscal 1999.
(m) During Fiscal 1999, Mr. Bryan was paid salaries of $139,000, including
$3,000 representing the payment of accrued but unpaid salaries from the
prior year. As of June 30, 1999, accrued but unpaid compensation due Mr.
Bryan was $7,000. Other annual compensation for Mr. Bryan during Fiscal
1999 consisted of $7,000 for health benefits.
(n) During Fiscal 1998, Mr. Bryan was paid salaries of $113,000. As of June
30, 1998, accrued but unpaid compensation due Mr. Bryan was $3,000. Other
annual compensation for Mr. Bryan during Fiscal 1998 consisted of $6,000
for health benefits.
The following table provides information regarding stock options granted to
the Named Executives during Fiscal 1999:
Option/SAR Grants
Individual Grants
For the Year Ended June 30, 1999
Number of
Securities % of Total
Underlying Options/SARs
Options/SARS Granted to Exercise or
Granted(a) Employees in Base Price Expiration
Name (#000) Fiscal Year ($/Share) Date
- -------------------- ------------ ------------ ----------- -------------
Ronald R. Grawert 5,000(b) 76% $2.7813 Jun. 16, 2009
Joseph A. Smith 300(c) 5% $2.0000 Feb. 15, 2009
Daniel B. McDuffie 300(d) 5% $2.7500 Jan. 03, 2009
James M. Boyd, Jr. 10 0% $2.0938 Feb. 10, 2009
1 0% $2.1250 Feb. 24, 2009
Michael P. McAndrews 100 2% $2.1250 Oct. 01, 2008
(a) The securities underlying all options issued during Fiscal 1999 consist of
the Company's common stock.
(b) Of Mr. Grawert's options, 1,750,000 vested upon his employment by the
Company. An additional 1,750,000 options will vest on June 16, 2000 and
the remaining 1,500,000 options will vest on June 16, 2001, if Mr. Grawert
is still employed by the Company on such dates.
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<PAGE>
(c) Of Mr. Smith's options, 100,000 vested upon his employment by the Company.
An additional 100,000 options will vest on February 15, 2000 and the
remaining 100,000 options will vest on February 15, 2001, if Mr. Smith
is still employed by the Company on such dates.
(d) Of Mr. McDuffie's options, 75,000 vested upon his employment by the
Company. An additional 100,000 options will vest on January 3, 2000 and
the remaining 125,000 options will vest on January 3, 2001, if Mr. McDuffie
is still employed by the Company on such dates.
The following table provides information regarding exercised/unexercised
stock options held by the Named Executives:
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
For the Year Ended June 30, 1999
Number of
Securities
Underlying
Unexercised Value of
Options/SARs Unexercised
At Fiscal In-the-Money
Shares Year End Options/SARS
Acquired on Value Exercisable/ at Fiscal
Exercise Realized Unexercisable Year End(a)
Name (#000) ($000) (#000) ($000)
- -------------------- ----------- -------- ------------ ------------
Peter S. Pelullo 0 0 950/ 341/
0 0
Ronald R. Grawert 0 0 1,750/ 164/
3,250 305
James M. Boyd, Jr. 0 0 96/ 111/
0 0
Ernest J. Cimadamore 0 0 50/ 77/
0 0
Michael P. McAndrews 0 0 650/ 721/
200 175
David C. Bryan 0 0 300/ 361/
200/ 175
(a) Calculated on the basis of the fair market value of the Company's common
stock of $2.875 per share as of June 30, 1999, minus the exercise price.
39
<PAGE>
Compensation Plans
With the exception of compensation in the form of certain medical, dental,
disability and life insurance 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 are employed by the Company, the Company has no
plans pursuant to which cash or non-cash compensation was paid or distributed
during Fiscal 1999 and Fiscal 1998, 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.
Employment Contracts and Termination Arrangements
The Company has maintained an employment agreement with Peter S. Pelullo,
Chairman and President 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 in the Agreement, 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. Independent of his employment agreement, during
Fiscal 1999, the Company's Board of Directors authorized the payment to Mr.
Pelullo of a cash bonus of $85,000 for his work related to securing the
$20,000,000 investment in the Company by Chadwell Hall Holdings, Ltd.
Effective June 21, 1999, the Company hired Ronald R. Grawert as its Chief
Executive Officer and agreed to pay him a signing bonus of $75,000 and a base
salary of $400,000 per year increasing 8%, 9% and 10% cumulatively for each of
the next three years, plus certain fringe benefits. Mr. Grawert's employment
contract also provides for annual cash bonuses equal to 20% of his base salary
for Fiscal 2000, and 50% of his base salary in Fiscal 2001 and Fiscal 2002.
Payment of the bonuses is subject to achievement of certain performance
objectives and milestones. In addition, the Company issued to Mr. Grawert
options to purchase 5,000,000 shares of common stock at a price of $2.7812 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. Mr.
Grawert's employment contract also provides that, upon termination by the
Company without cause or Mr. Grawert's resignation for "Good Reason" as defined
in the Agreement, he will be entitled to receive his base salary for 12 months
plus a prorated bonus.
40
<PAGE>
Effective February 15, 1999, the Company hired Joseph A. Smith as
Executive Vice President and agreed to pay him a base salary of $245,000 per
year increasing 8% on the second anniversary, plus certain fringe benefits. In
addition, the Company issued to Mr. Smith options to purchase 300,000 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 two-year period and remain in effect for ten
years from the date of the grant. Mr. Smith's employment contract also provides
that, upon termination by the Company without cause or Mr. Smith's resignation
for "Good Reason" as defined in the Agreement, he will be entitled to receive
his base salary for 12 months.
Effective January 1, 1999, the Company hired Daniel B. McDuffie as Senior
Vice President and agreed to pay him a base salary of $175,000 per year
increasing 7% on the first anniversary and 8% on the second anniversary, plus
certain fringe benefits. In addition, the Company issued to Mr. McDuffie
options to purchase 200,000 shares of common stock at a price of $2.75 per
share, the market price as of the date of grant. The options vest over a two-
year period and remain in effect for ten years from the date of the grant. Mr.
McDuffie's employment contract also provides that, upon termination by the
Company without cause or Mr. Smith's resignation for "Good Reason" as defined
in the Agreement, he will be entitled to receive his base salary for 6 months.
Effective October 1, 1997, the Company hired Michael P. McAndrews as its
President. In connection with the Company's acquisition of GlobalFirst, Mr.
McAndrews resigned as President of the Company and was named President of
Clariti Wireless Messaging, Inc., a wholly owned subsidiary of the Company that
assumed operational responsibility for development of the Company's digital
voice messaging technology. Pursuant to Mr. McAndrews' employment agreement,
the Company 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. Mr. McAndrews 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. In connection with the Company's
acquisition of GlobalFirst, Mr. Bryan resigned as Senior Vice President and
Chief Operating Officer of the Company and was named Senior Vice President and
Chief Operating Officer of Clariti Wireless Messaging, Inc., a wholly owned
subsidiary of the Company that assumed operational responsibility for
development of the Company's digital voice messaging technology. Pursuant to
his employment agreement, the Company agreed to pay Mr. Bryan $125,000
per year increasing 5%, 6% and 7% cumulatively for each of the next three
years, plus certain fringe benefits. Effective October 1, 1998, the Company
authorized a 6.7% increase in the Mr. Bryan's's salary to $141,000. 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.
41
<PAGE>
Effective February 10, 1997, the Company hired James M. Boyd, Jr. as its
Vice President of Finance and Chief Accounting Officer. The Company agreed to
pay Mr. Boyd $90 thousand per 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. In
February 1999, the Company authorized a 15% increase in Mr. Boyd's salary to
$115,000. Pursuant to his employment agreement, the Company also issued to Mr.
Boyd 5,000 shares of the Company's restricted common stock in February 1999
after Mr. Boyd completed two years of service with the Company. Additionally,
the Company issued to Mr. Boyd options to purchase 25,000 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 10,000 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. Independent of his employment agreement, during Fiscal 1999,
the Company paid Mr. Boyd a cash bonus of $1,000 and issued to Mr. Boyd options
to purchase 1,000 shares of common stock at $2.125 per share, the market price
as of the date of the grant, for his work related to the acquisition of
GlobalFirst.
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.
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<PAGE>
Compensation of Directors
Outside directors receive payments of $1,000 per month plus $500 per
director's meeting attended and reasonable costs and expenses of travel and
lodging for attendance at director's meetings.
During Fiscal 1999, The Lord Simon Clanmorris was elected to the Company's
Board of Directors; however, he resigned in October 1999 for medical reasons.
Lord Clanmorris received options to purchase 100,000 shares of the Company's
common stock at a price of $2.75 per share, the market price on the date of the
grant. As a result of his resignation from the Board of Directors, such
options expire on November 6, 1999.
In connection with their election to the Company's board of directors in
Fiscal 1999, directors Golm and Jordan each received options to purchase
900,000 shares of the Company's common stock at a price of $2.13 and $2.96 per
share, respectively, the market prices on the dates of the grants. The options
vest over a three-year period and remain in effect for ten years from the date
of the grant.
In connection with their election to the Company's board of directors in
Fiscal 1999, directors Hunt, Hinderling and Carmel each received options to
purchase 100,000 shares of the Company's common stock at a price of $2.96 per
share, the market price on the date of the grant. The options remain in effect
for ten years from the date of the grant.
43
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 16, 1999, certain
information with respect to beneficial ownership of the Company's common stock
by (i) each person known to the Company to be the beneficial owner of more than
5% of the Company's common stock, (ii) each director of the Company, (iii) each
named executive officer of the Company listed in the Summary Compensation
Table, and (iv) all officers and directors of the Company as a group. Unless
otherwise specified, the Company believes that all persons listed in the table
possess sole voting and investment power with respect to all shares of the
Company's common stock beneficially owned by them.
Amount and
Nature of
Beneficial
Ownership Title of Percent of
Name and Address (#000) Class Class (a)
- ---------------------------- ---------- --------- ----------
Chadwell Hall Holdings, Ltd. 76,572(b) Common 61.1%
8-10 Lampton Road
Hounslow, Middlesex
TW3 1JL United Kingdom
Atlantic Communications 36,548(c) Common 29.2%
International, Ltd.
Suite 202 Beaumont House
Bay Street
Nassau, Bahamas
ABC Corporation 25,333(d) Common 4.7%
Apartado 87-1371
Calle Aquilino De La Guardia
No, 8 Panama
Peter S. Pelullo 5,950(e) Common 4.7%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Ronald R. Grawert 1,750(f) Common 1.4%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
James M. Boyd, Jr. 101(g) Common 0.1%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Ernest J. Cimadmore 50(h) Common 0.0%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
44
<PAGE>
Amount and
Nature of
Beneficial
Ownership Title of Percent of
Name and Address (#000) Class Class (a)
- ---------------------------- ---------- --------- ----------
Michael P. McAndrews 660(i) Common 0.5%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
David C. Bryan 404(j) Common 0.3%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Louis C. Golm 300(k) Common 0.2%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
John N. D'Anastasio 575(l) Common 0.5%
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
Robert J. Sannelli 575(m) Common 0.5%
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
Michael H. Jordan 300(n) Common 0.2%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Chester John Hunt 100(o) Common 0.1%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Hans Georg Hinderling 100(p) Common 0.1%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
Abraham Carmel 568(q) Common 0.5%
1735 Market Street
Suite 1300
Philadelphia, PA 19103
All officers and directors 12,719(r) Common 9.7%
as a group (15 persons)
45
<PAGE>
(a) Based upon shares beneficially owned as a percent of shares of common stock
of the Company outstanding as of September 16, 1999 (125,275,080 shares).
For purposes of calculating each person's beneficial ownership, any shares
subject to options exercisable within 60 days of September 16, 1999 are
deemed beneficially owned by, and outstanding with respect to, such person.
(b) Consists of shares held as nominee for approximately 113 persons, of
which only Atlantic Communications International, Ltd. beneficially owns
greater than 5% of the Company's outstanding shares (see note c below).
Includes 1,116,095 and 467,727 shares owned as nominee for Mr. McDuffie and
Mr. Carmel, respectively.
(c) Includes 24,319,072 shares of common stock held by Chadwell Hall Holdings,
Ltd. as nominee holding company, which shares Atlantic Communications
International, Ltd. has the power to vote and/or dispose of and 6,199,929
shares of common stock held by Corporate and Legal Nominees, Ltd. as
nominee holding company, which shares Atlantic Communications
International, Ltd. has the power to vote and/or dispose of.
(d) Includes (i) 6,666,666 shares of common stock (including 3,333,333 shares
issuable upon currently exercisable warrants) held by ABC Corporation and
(ii) 18,666,666 shares of common stock (including 9,333,333 shares issuable
upon currently exercisable warrants) issuable to ABC Corporation against
payment therefore pursuant to a Purchase Agreement dated September 27, 1999
(the "Purchase Agreement").
(e) Includes 950,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(f) Represents 1,750,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days.
(g) Includes 96,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(h) Represents 50,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days.
(i) Includes 650,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(j) Includes 400,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(k) Represents 300,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days.
(l) Includes 500,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(m) Includes 500,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(n) Represents 300,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days.
46
<PAGE>
(o) Represents 100,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days. Mr. Hunt
is the son of the control person of ABC Corporation and is a board designee
of ABC Corporation pursuant to the Purchase Agreement (see note d above).
(p) Represents 100,000 shares of common stock that such person has the right
to acquire pursuant to stock options exercisable within 60 days.
(q) Includes 100,000 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days. Mr.
Hinderling is a board designee of ABC Corporation pursuant to the Purchase
Agreement (see note d above).
(r) Includes 5,971,000 shares of common stock that such persons have the right
to acquire pursuant to stock options exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November and December 1998, the Company issued a total of 11,428,500
shares of its common stock to Chadwell Hall Holdings Limited and its affiliates
(together, "CHH") for $1.75 per share, or $20,000,000 cash. In December 1998,
the Company issued to CHH 76,571,500 shares of its common stock in exchange for
all of the outstanding common stock of GlobalFirst Holdings Limited
("GlobalFirst"), a wholly-owned subsidiary of CHH with telecommunications
operations in the United Kingdom and Europe. The Company obtained a fairness
opinion from an independent valuation firm regarding the acquisition of
GlobalFirst. After these transactions were completed, CHH owned approximately
88,000,000 shares, or 75%, of the Company's outstanding common stock.
As part of the GlobalFirst acquisition, the Company acquired Telnet
Products and Services Limited ("Telnet"), which operated over 100 public call
offices throughout Europe. In February 1999, the Company sold all of the
outstanding capital stock of Telnet to CHH for $21,000,000, the estimated value
of Telnet at the time it was acquired by Clariti in December 1998.
Consideration paid by CHH to Clariti consisted of a $21,000,000 note payable
with a fixed interest rate of 4.62% payable within 10 days of demand by
Clariti.
In March 1999, Clariti acquired all of the outstanding capital stock of
Mediatel Global Communications Limited ("Mediatel) from CHH for approximately
$24,000,000. Consideration paid for Mediatel consisted of cancellation of the
$21,000,000 note received upon the sale of Telnet, including accrued interest,
and the issuance of a promissory note payable to CHH in the amount of
$3,000,000 with a fixed interest rate of 6.5% payable in March 2000. In April
1999 Clariti prepaid $1,000,000 against the principal balance of the note
payable to CHH. The Company obtained a fairness opinion from an independent
valuation firm regarding the acquisition of Mediatel and sale of Telnet.
In the ordinary course of business, GlobalFirst and Mediatel entered into
various transactions with affiliates of CHH. A summary of such transactions,
all of which were at arms length, is set out in Note 9 to the Company's
consolidated financial statements for the year ended June 30, 1999 included
herein.
47
<PAGE>
On October 11, 1999, at the request of the Company, each of the United
Kingdom subsidiaries acquired from Chadwell Hall (the "UK Group Companies")
filed for voluntary liquidation under the laws of the United Kingdom. This
voluntary liquidation was undertaken because the Company concluded that the UK
Group Companies could not pay their debts, including the advances made by
Clariti to the UK Group Companies. A liquidator has been appointed and,
subject to the provisions of United Kingdom law, will endeavor to liquidate the
assets of the UK Group Companies.
During Fiscal 1999, the Company authorized the issuance of common stock
options to several of its directors and executive officers. Details of such
issuances are set out above in the table "Option/SAR Grants, Individual Grants,
for the Year Ended June 30, 1999" for executive officers and in the section
"Compensation of Directors" for directors.
In October 1997, the Company authorized the issuance of 500,000 common
stock options to Mr. McAndrews in connection with his employment by the
Company. The exercise price of such 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 February 1998,
the Company authorized the issuance of the following common stock options:
250,000 options to Mr. McAndrews; 150,000 options to Mr. Bryan; 100,000 options
to Mr.Pelullo; 100,000 options to Mr. D'Anastasio; 100,000 options to Mr.
Sannelli; 60,000 options to Mr. Boyd; and 50,000 options to Mr. Cimadamore.
These options are exercisable at a price of $1.343 per share, the market price
on the date of grant, and expire in February 2008. In May 1998, the Company
authorized the issuance of the following common stock options: 100,000 options
to Mr.Pelullo; 100,000 options to Mr. D'Anastasio; and 100,000 options to Mr.
Sannelli. These options are exercisable at a price of $2.25 per share, the
market price on the date of grant, and expire in May 2008.
48
<PAGE>
PART IV
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:
2.1 Share Exchange Agreement for the acquisition of GlobalFirst Holdings
Limited (a)
2.2 Share Purchase and Sale Agreement for the sale of Telnet Products &
Services Limited. (b)
2.3 Share Exchange Agreement for the acquisition of Mediatel Global
Communications Limited (c)
2.4 Amendment to Share Exchange Agreement for the acquisition of Mediatel
Global Communications Limited (c)
2.5 Share Exchange Agreement for the Acquisition of MegaHertz-NKO, Inc. (d)
2.6 Share Exchange Agreement for the Acquisition of NKA Communications Pty.
Ltd. *
3.1 Articles of Incorporation (e)
3.2 Bylaws (e)
10.1 Employment Agreement with James M. Boyd, Jr. (f)
10.4 Employment Agreement with David C. Bryan (f)
10.5 Employment Agreement with Michael P. McAndrews (f)
10.6 Employment agreement with Ronald R. Grawert *
10.7 Employment agreement with Joseph A. Smith *
10.8 Employment agreement with Daniel P. McDuffie *
16.1 Letter on change in certifying accountant (g)
16.2 Letter on change in certifying accountant (h)
21.1 Principal subsidiaries of the Registrant
(i) Global Telecommunications of Delaware, Inc. (100% owned -
incorporated in Delaware))
(ii) Clariti Digital Paging, Inc. (100% owned - incorporated in
Delaware)
(iii) GlobalFirst Holdings Limited (100% owned - incorporated in United
Kingdom)
(iv) Mediatel Global Communications Limited (100% owned - incorporated
in United Kingdom)
(v) MegaHertz-NKO, Inc. (100% owned - incorporated in Delaware)
27.1 Financial data schedule *
Incorporated by reference to the following documents previously filed by the
Company:
(a) Form 8-K filed December 23, 1998 (earliest event reported Dec. 8, 1998)
(b) Form 8-K filed February 18, 1999
(c) Form 8-K filed March 26, 1999
(d) Form 8-K filed May 24, 1999
(e) Annual Report on Form 10-KSB for the period ended July 31, 1990
(f) Amendment No. 2 to Annual Report on Form 10-KSB for the year ended July 31,
1997
(g) Form 8-K filed December 23, 1998 (earliest event reported Dec. 18, 1998)
(h) Amendment No. 1 to Form 8-K filed on September 23, 1999
49
<PAGE>
Reports on Form 8-K
The Company filed the following Forms 8-K during the quarter ended June 30,
1999.
(a) The Company filed a Form 8-K/A on April 19, 1999. The report amended the
Form 8-K filed on February 18, 1999 by including the required pro forma
financial information related to the sale of Telnet.
(b) The Company filed a Form 8-K on May 24, 1999. The report disclosed in
Item 2 that it had acquired MegaHertz-NKO on May 7, 1999.
(c) The Company filed a Form 8-K/A on June 1, 1999. The report amended the
Form 8-K filed on March 26, 1999 by including the required financial
statements and pro forma financial information related to the acquisition
of Mediatel.
50
<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
Chairman and President
Dated: October 13, 1999
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.
Signature Title Date
- ---------------------- -------------------------- ------------------
/s/ Peter S. Pelullo Chairman of the Board and October 13, 1999
- ---------------------- President
Peter S. Pelullo
/s/ Ronald R. Grawert Chief Executive Officer October 13, 1999
- ---------------------- and Director
Ronald R. Grawert
/s/ James M. Boyd, Jr. Vice President of Finance October 13, 1999
- ---------------------- and Chief Accounting
James M. Boyd, Jr. Officer
/s/ John N. D'Anastasio Director October 13, 1999
- ----------------------
John N. D'Anastasio
/s/ Robert J. Sannelli Director October 13, 1999
- ---------------------
Robert J. Sannelli
/s/ Abe Carmel Director October 13, 1999
- ---------------------
Abe Carmel
51
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT ("Agreement") is entered into on August 10,
1999 by and among Clariti Telecommunications International, Ltd., a Delaware
(U.S.) corporation with its principal office located at The Mellon Bank Center,
1735 Market Street, Suite 1300, Philadelphia, Pennsylvania 19103 ("Clariti");
NKA Communications Pty. Ltd. ACN 065 090 931, an Australian company with its
principal office located at 424 St. Kilda Road, Melbourne, Victoria, Australia
3004 ("Company"); Corangamite Pty. Limited ACN 057 655 679 as trustee for The
Lake Corangamite Trust, an Australian company with its principal office located
at 12 Parliament Place, Melbourne, Victoria, Australia 3002 ("Corangamite");
Consortium Communications International Pty. Ltd. ACN 005 981 813 as trustee
("Consortium International"); Doron Nevo, an individual residing in Israel
("Nevo"); and Barbara Bromilow, an individual residing at 6 Dunraven Court,
Langwarren, Victoria, Australia 3910 ("Bromilow"), as holders of all of the
issued and outstanding shares in the share capital of the Company (Corangamite,
Consortium International, Nevo and Bromilow are referred to herein collectively
as the "Sellers"); and Peter S. Cook ("Cook") and Yankel Koncepolski
("Koncepolski"), both residing in Australia.
BACKGROUND
----------
A. Company has issued and outstanding twenty-three thousand (23,000)
shares all owned by and among the Sellers, which shares represent one hundred
percent (100%) of the issued and outstanding shares in the share capital of the
Company ("Shares").
B. Company has issued and outstanding the NKA Notes (defined in Section
1) all owned by and among the NKA Noteholders (defined in Section 1).
C. Clariti wishes to acquire the Shares and the NKA Notes and the Sellers
desire to sell or cause to be sold the Shares and the NKA Notes, in accordance
with the terms and conditions of the Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual promises
herein made, and in consideration of the covenants, representations and
warranties herein contained, the parties hereby agree as follows:
1. DEFINITIONS AND CONDITION PRECEDENT.
------------------------------------
1.1 Definitions. The following terms shall have the following meanings:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Agreement" has the meaning set forth in the preamble above.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could reasonably form the basis
for any specified consequence.
"Channel Providers" means those parties who entered into certain
agreements with Company as described in Section 6.9.
"Clariti Common Stock Issued at Closing" means the following shares of
Clariti Stock issued by Clariti at Closing: (i) the 963,822 shares issued to
Sellers, (ii) the 126,744 shares issued to the NKA Noteholders and (iii) the
59,435 shares issued to or on behalf of the Channel Providers.
"Clariti Common Stock Issued in Escrow" means the 349,999 shares of
Clariti Stock issued by Clariti at Closing to the Escrow Agent.
"Closing" and "Closing Date" have the meanings set forth in Section 2.5
"Company" has the meaning set forth in the preamble above.
"Confidential Information" means any and all information concerning the
business and affairs of the Company or Clariti other than that information
which is already generally or readily obtainable by the public or is publicly
known or becomes publicly known through no fault of the Sellers.
"Disclosure Schedule" means the various disclosure schedules attached to
this Agreement as provided for in Section 3.
"Escrow Agent" has the meaning set forth in the Escrow Agreement.
"Escrow Agreement" means an escrow agreement in substantially the form set
forth as Exhibit "A" hereto.
"Escrowed Sellers" means those Sellers (i.e., Corangamite and Consortium
International) who are parties to the Escrow Agreement.
"Financial Statements" has the meaning set forth in Section 3.9.
"GAAP" means accounting standards, statements of accounting concepts, UIG
consensus views and accounting guidance releases regulated by the Australian
Accounting Standards Board and the Corporations Law.
"Indebtedness" has the meaning set forth in Section 3.10.
"Indemnified Party" has the meaning set forth in Section 9.4(a).
"Indemnifying Party" has the meaning set forth in Section 9.4(a).
"Intellectual Property" means the entire right, title and interest in and
to all proprietary rights of every kind and nature, including patents,
copyrights, Trademarks, mask works, trade secrets and proprietary information,
all applications for any of the foregoing, and any license or agreements
granting rights related to the foregoing (i) subsisting in, covering, reading
on, directly applicable to or existing in the Products; (ii) that are owned,
licensed or controlled in whole or in part by the Company and relate to the
business of the Company; or (iii) that are used in or necessary to the
development, manufacture, sales, marketing or testing of the Products.
"Knowledge" means actual knowledge after reasonable investigation.
"Laws" means all laws, rules, regulations, codes, injunctions, judgments,
decrees, rulings, interpretations, constitution, ordinance, common law, treaty,
regulations, or orders, of any federal, state, local, municipal and foreign,
international, or multinational governments or administration and all related
agencies.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, whether incurred or
consequential and whether due or to become due), including any liability for
Taxes.
"Lien" means any security interest, lien, claim, pledge, charge,
restriction on transfer or other encumbrance of any nature whatsoever.
"Losses" has the meaning set forth in Section 9.2.
"Majority Share Sellers" means Corangamite and Consortium International.
"Material Adverse Effect" means a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
"Minority Share Sellers" means Nevo and Bromilow.
"Most Recent Balance Sheet" means the balance sheet contained within the
Most Recent Financial Statements.
"Most Recent Financial Statements" means the audited Financial Statements
for the Company for the eleven (11) month period ending May 31, 1999.
"Most Recent Fiscal Year End" has the meaning set forth in Section 3.9.
"NKA Notes" means those certain convertible debentures issued by Company
to the NKA Noteholders, as described in Section 2.2.
"NKA Noteholders" means those persons who are the legal holders and
beneficial owners of the NKA Notes as described in Section 2.2.
"NKA Parties" means the Sellers, the NKA Noteholders, Cook, Koncepolski
and the Channel Providers.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" and "Parties" means the parties to this Agreement as set forth in
the preamble above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Products" means all current products and services of the Company, any
subsequent versions of such products currently being developed, any products
currently being developed by the Company which are designed to supersede,
replace or function as a component of such products, and any upgrades,
enhancements, improvements and modifications to the foregoing.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Sellers" has the meaning set forth in the preamble.
"Shares" has the meaning set forth in the preamble.
"Tax" or "Taxes" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security, unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 9.4(a).
"Trademarks" means any trademarks, service marks, trade dress, and logos,
together with all translations, adaptations, derivations, and combinations
thereof and including all goodwill associated therewith.
1.2 Condition Precedent for Agreement.
(a) This Agreement (other than this Section 1.2) has no effect unless the
condition precedent set out in subparagraph (b) below is fulfilled on or before
September 15, 1999 or such other date agreed by the Parties in writing.
(b) The condition precedent referred to in this Section 1.2 is that
pursuant to the Foreign Acquisitions and Takeovers Act 1975 (Cth) ("FATA") the
Treasurer of the Commonwealth of Australia consents to the transfer of the
Shares contemplated by this Agreement and if that consent is given subject to
conditions or requirements, those conditions or requirements are acceptable to
Clariti. For the purpose of this condition precedent, the Treasurer will be
taken to have consented to the transfer of the Shares under this Agreement if:
(i) notice is issued under FATA stating that the Commonwealth
Government does not object to the transfer of the Shares; or
(ii) notice of the sale of the Shares is given to the Treasurer under
FATA and the Treasurer is, by reason of lapse of time, not empowered to make an
order under FATA in relation to the transfer of the Shares.
(c) The condition precedent may not be waived except by a waiver in
writing signed by the Parties and will be effective only to the extent
specifically set out in that waiver.
(d) Each Party must use all reasonable efforts within its own capacity to
ensure that the aforementioned condition precedent is fulfilled before the
Closing Date.
2. AGREEMENT TO EXCHANGE AND PURCHASE SHARES.
-----------------------------------------
2.1 Transfer of Shares.
(a) Subject to and on the terms and conditions of this Agreement, each
Seller as legal owner agrees to sell to Clariti those Shares listed against
that Seller's name in Exhibit "B" hereto, which shares represent one hundred
percent (100%) of the issued and outstanding shares in the share capital of the
Company.
(b) The Sellers must transfer the Shares at the Closing:
(i) free from all Liens; and
(ii) together with all rights, including dividend and voting rights,
attached or accrued to them on or after the date of this Agreement.
(c) Clariti need not complete the purchase of any of the Shares unless the
purchase of all the Shares and the NKA Notes (as provided for in Section 2.2)
is completed simultaneously.
(d) Each Seller, by its execution of this Agreement, consents to the sale
and purchase of the Shares contemplated in this Agreement and irrevocably
waives in favor of Clariti any rights of pre-emption which that Seller has or
may have in respect of the Shares whether conferred by the constitution of the
Company or otherwise.
(e) All actions at the Closing will be treated as taking place
simultaneously and no delivery, issue or payment will be regarded as having
been made until all deliveries, issues and payments due to be made by the
Closing Date have been made.
(f) At or before the Closing the Sellers must fulfill all of the
conditions required of the Sellers listed in Section 7.1 (Conditions to
Obligation of Clariti) and must comply with the obligations of the Sellers set
out in Subparagraph (g) below.
(g) At or before the Closing the Sellers must:
(i) deliver to Clariti duly executed and completed transfers in favor
of Clariti of the Shares in registrable form (except for the impression of
stamp duty or other taxes of a similar nature) together with the relevant share
certificates;
(ii) produce to Clariti any power of attorney or other authority under
which the transfers of the Shares are executed;
(iii) deliver to Clariti duly executed instruments irrevocably waiving
in favor of Clariti all rights of pre-emption which any person has in respect
of any of the Shares;
(iv) deliver to Clariti any other documents necessary to evidence to
Clariti's satisfaction that each of the conditions required of the Sellers
listed in Section 7.1 (Conditions to Obligation of Clariti) has been and
remains fulfilled;
(v) cause the board of directors of the Company to resolve that the
transfers of the Shares (subject only to the payment of stamp duty and other
taxes of a similar nature on the transfers) be approved and registered;
(vi) cause the persons notified in writing by Clariti to the Company
before the Closing to resign as directors and officers of the Company with
effect from the Closing Date;
(vii) cause the persons notified in writing by Clariti to the Company
before the Closing to be appointed as directors and officers of the Company
with effect from the Closing Date;
(viii) deliver to Clariti a letter (in the form required by Clariti)
from each resigning officer of the Company acknowledging that he or she has no
claim against the Company for breach of contract, loss of office, redundancy,
unfair dismissal, compensation, payment or repayment of loans or otherwise
except payments properly payable to him or her as an employee for accrued and
unpaid salary, holiday pay and long service leave up to and including the
Closing Date;
(ix) ensure that all of the Company's records are complete and up to
date and complying with all statutory requirements;
(x) deliver to Clariti (or as it may direct) the common seal of the
Company; and
(xi) do all other things necessary or desirable to transfer the
Shares, to complete any other transaction contemplated by this Agreement and to
place Clariti in effective control of the Company and the business carried on
by the Company.
(h) If any provision of subparagraph (g) above is not complied with in any
respect on the date set for Closing, Clariti may, in its absolute discretion:
(i) waive compliance with that provision;
(ii) proceed to Closing as far as practicable (without prejudice to
any of its rights under this Agreement); or
(iii) terminate this Agreement by notice in writing to the Company.
(i) After the Closing and until the Shares are registered in the name of
Clariti, the Sellers must:
(i) convene, attend and vote at general meetings of the Company or
sign resolutions of the Company lawfully required by Clariti by written notice
to the Sellers; and
(ii) take as registered holders of the Shares (and must cause any
other registered holder of the Shares to take in that capacity) all action
lawfully required by Clariti by written notice to the Sellers.
2.2 Transfer of NKA Notes. At the Closing, Sellers shall cause the NKA
Noteholders, as described in Exhibit "C", to sell, transfer, assign, convey and
deliver to Clariti all right, title and interest in and to the NKA Notes for
the consideration set forth in Section 2.4 and in accordance with the
following:
(a) The NKA Noteholders must transfer the NKA Notes free from all Liens
and together with all rights, including conversion rights and rights to
interest, attached or accrued thereto on or after the date of this Agreement.
(b) Clariti need not complete the purchase of any of the NKA Notes unless
the purchase of all the NKA Notes and the Shares (as provided for in Section
2.1) is completed simultaneously.
(c) Each NKA Noteholder shall, at or before the Closing, deliver to
Clariti (and the Sellers shall cause the NKA Noteholders to so deliver):
(i) duly executed and completed transfers in favor of Clariti of the
NKA Notes together with the original NKA Notes and any certificates for the NKA
Notes;
(ii) any power of attorney or other authority under which the transfer
of the NKA Notes are executed; and
(iii) such other documentation as reasonably requested by Clariti
including without limitation (A) an appropriate written release by the NKA
Noteholder of any and all claims against the Company including without
limitation those arising under or pursuant to the NKA Notes and (B) appropriate
warranties, representations and covenants concerning: (i) the ownership of the
NKA Notes, (ii) the authority and ability to transfer NKA Notes in accordance
with the terms and conditions of this Section 2.2, and (iii) their investment
in the common stock of Clariti and acknowledgment and agreement with those
matters described in Section 3.31 as if each NKA Noteholder was a Seller.
2.3 Consideration for Shares. At the Closing and simultaneously with the
transfer and assignment to Clariti of the Shares, Sellers shall receive the
following consideration, representing full and complete payment by Clariti to
Sellers for the Shares, payable as described below:
(a) At the Closing, Clariti shall cause to be issued to Sellers, Nine
Hundred Sixty-Three Thousand Eight Hundred Twenty-Two (963,822) shares of
Clariti's common stock, $.001 par value, all such shares to be fully-paid, non-
assessable shares issued free and clear of Liens (other than interests, claims,
charges and restrictions imposed by this Agreement). The aforementioned shares
of Clariti's common stock shall be allocated and issued to Sellers in
accordance with Exhibit "B" hereto. At the Closing, Clariti shall deliver to
Sellers stock certificates representing the aforementioned shares of Clariti
common stock, such certificates to be duly endorsed in proper form for transfer
of such shares to Sellers upon delivery.
(b) At the Closing, Clariti shall cause to be issued in the name of the
Escrow Agent, Three Hundred Forty-Nine Thousand Nine Hundred Ninety-Nine shares
(349,999) of Clariti's common stock $.001 par value, to be held in escrow and
thereafter released pursuant to the Escrow Agreement, all such shares to be
fully-paid, non-assessable shares issued free and clear of Liens (other than
interests, claims, charges and restrictions imposed by this Agreement and the
Escrow Agreement). The Clariti Common Stock Issued in Escrow shall be held as
security for any claims asserted by Clariti in accordance with the terms and
conditions of the Escrow Agreement. Any such shares released from escrow free
of any claims of Clariti shall be divided equally between Corangamite as
trustee for The Lake Corangamite Trust and Consortium International as trustee.
At the Closing, Clariti shall deliver to Escrow Agent, stock certificates
representing the aforementioned shares of Clariti common stock, such
certificate to be duly endorsed in proper from for transfer of such shares to
Escrow Agent upon delivery.
2.4 Consideration for NKA Notes. At the Closing and simultaneously with
the transfer and assignment to Clariti of the NKA Notes, the NKA Noteholders
shall receive the following consideration, representing full and complete
payment by Clariti to the NKA Noteholders for the NKA Notes, payable as
described below:
(a) At the Closing, Clariti shall cause to be issued to the NKA
Noteholders, One Hundred Twenty-Six Thousand Seven Hundred Forty-Four (126,744)
shares of Clariti's common stock, $.001 par value, all such shares to be fully
paid, non-assessable shares issued free and clear of Liens (other than
interests, claims, charges and restrictions imposed by this Agreement). The
aforementioned shares of Clariti's common stock shall be allocated and issued
to the NKA Noteholders in accordance with Exhibit "C" hereto. At the Closing,
Clariti shall deliver to the NKA Noteholders stock certificates representing
the aforementioned shares of Clariti common stock, such certificates to be duly
endorsed in proper form for transfer of such shares to the NKA Noteholders upon
delivery.
2.5 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place subject to the satisfaction of the
conditions of Closing set forth in Section 7 below, at the offices of Eizen
Fineburg & McCarthy, LLP located at 2001 Market Street, Suite 3410,
Philadelphia, Pennsylvania, commencing at 10:00 a.m. eastern time on the date
which is five (5) business days of the date on which the Treasurer of the
Commonwealth of Australia consents or deems to have consented to the transfer
of the Shares as described in Section 1.2(b), or such other date as the Parties
may mutually determine (the "Closing" or the "Closing Date").
3. REPRESENTATIONS AND WARRANTIES OF MAJORITY SHARE SELLERS, COOK AND
KONCEPOLSKI.
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The Majority Share Sellers, Cook and Koncepolski hereby jointly and severally
represent and warrant to Clariti that the statements contained in this Section
3 are correct and complete as of the date of this Agreement and, unless a date
is specified in such representation and warranty, will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3).
3.1 Organization of the Company. The Company is duly incorporated,
registered, validly existing, and in good standing under the laws of Australia.
Copies of the constitution and bylaws of the Company as amended to date have
been heretofore delivered to Clariti and are accurate and complete. The
Company is qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which it conducts business, which such
jurisdictions are the only jurisdictions where the nature of the activities
conducted by it or the character of the property owned, leased or operated by
it make such qualification necessary or appropriate except for those
jurisdictions where the failure to be so qualified will not have a Material
Adverse Effect. The Company has full corporate power to own its properties,
assets and business and to carry on its business as now conducted. The Company
is not externally administered.
3.2 No Subsidiaries, etc. The Company does not own, control or have a
beneficial interest in any subsidiary or any shares or other securities in the
capital of another company or have any direct or indirect equity participation
or ownership interest in any other Person. The Company is not and has not
agreed to become a member of any partnership, joint venture, unincorporated
association, consortium or similar arrangement.
3.3 Capitalization and Ownership of the Company. The Shares of the Company
are held as set forth in Exhibit "B" hereto and in the respective amounts set
forth in Exhibit "B" hereto, free and clear of any Liens and comprise all of
the share capital of the Company. All of the Shares have been validly and
properly issued, are fully paid for and are non-assessable. For the purpose of
this Section 3.3, the term "non-assessable" shall mean that no calls can be
validly made on any currently issued shares by the Company and that no holder
of those shares can be made liable for the acts or omissions of the Company by
reason of being only a registered shareholder of the Company. There is no
warrant, right, option, conversion privilege, stock purchase plan, put, call or
other contractual obligation relating to the offer, issuance, purchase or
redemption, exchange, conversion, voting or transfer of any shares in or debt
of the Company or other securities convertible into or exchangeable for shares
in the Company, other than the NKA Notes (now, in the future or upon the
occurrence of any contingency) or that provides for any stock appreciation or
similar right. There are no agreements to register any securities of the
Company or sales or resales thereof under federal or state securities laws.
3.4 Authorization of Transaction. Each of the NKA Parties has the legal
capacity, power and authority (including full corporate power and authority) to
execute and deliver this Agreement and each respective agreement, document,
instrument or certificate executed by them in connection with this Agreement
(the "Transaction Documents") and to perform their respective obligations
thereunder. All corporate, trustee and other actions or proceedings to be
taken by or on the part of the NKA Parties to authorize and permit the
execution and delivery by them of the Transaction Documents to which they are a
party, the instruments required to be executed and delivered by each of them
pursuant thereto, the performance by them of their respective obligations under
the Transaction Documents, and the consummation by them of the transactions
contemplated therein, have been duly and properly taken. The Transaction
Documents have been duly executed and delivered by the NKA Parties and
constitute the legal, valid and binding obligation of each of the NKA Parties,
enforceable in accordance with their terms and conditions.
3.5 Noncontravention. Neither the execution and the delivery of any of the
Transaction Documents by the NKA Parties, nor the consummation by any of them
of the transactions described therein will (i) conflict with or result in a
breach of any provision of the constitution or by-laws of the Company, conflict
with or result in a breach of any provision of the articles of organization,
constitution , bylaws or trust deeds or agreements of any of them, (iii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify
or cancel, or require notice under any agreement, contract, lease, license,
instrument or other arrangement to which any of the NKA Parties is a party, or
(iv) violate any laws to which any of the NKA Parties is subject. Except as set
forth in Section 3.5 of the Disclosure Schedule or as provided in Section 1.2
hereof, none of the NKA Parties are required to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the Parties to consummate the
transactions contemplated by the Transaction Documents.
3.6 Brokers' Fees. Neither the Company nor the Sellers has any Liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which Clariti or
the Company could become liable or obligated.
3.7 Title to Assets. The Company has good and marketable title to, or a valid
and subsisting leasehold interest in, the properties and assets used by it,
located on its premises, or reflected on the Most Recent Balance Sheet or
acquired after the date thereof, free and clear of all Liens, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of the Most Recent Balance Sheet.
3.8 All Assets Necessary to Conduct Business. The assets, properties and
rights of the Company reflected in the Most Recent Financial Statements
comprise all of the assets, properties and rights of every type and
description, real, personal, tangible and intangible used by the Company in,
and, in the reasonable opinion of the management of the Company, necessary to,
the conduct of the Company's business as currently conducted.
3.9 Financial Statements. Attached hereto as Exhibit "D" are the following
financial statements of the Company (collectively the "Financial Statements"):
(i) unaudited consolidated balance sheet and statements of income, changes in
stockholders' equity, and cash flow as of fiscal year ended June 30, 1998 for
the Company (the "Most Recent Fiscal Year End"), (ii) an audited consolidated
balance sheet and statements of income, changes in stockholders' equity and
cash flows for the eleven-month period ended May 31, 1999 for the Company. The
Financial Statements (including, with respect to the audited financial
statements only, the notes thereto) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, are
correct and complete and present fairly the financial condition of the Company
as of such dates and the results of operations of the Company for such periods
and are consistent with the books and records of the Company, subject to normal
and recurring year end adjustments and in the case of the unaudited financial
statements, the absence of notes.
3.10 Indebtedness and Guarantees.
(a) Except as described in subparagraph (b) below, and except for amounts
stated on or properly reserved for in the Most Recent Financial Statements, the
Company does not have any Indebtedness. As used herein, the term
"Indebtedness" means any obligations for or in respect of (i) borrowed money
(including without limitation, accrued interest thereon), (ii) the deferred
purchase price of property or services (other than trade payables and other
accrued current liabilities incurred in the Ordinary Course of Business), (iii)
capital lease obligations, conditional sale or other title retention agreements
or (iv) declared and unpaid dividends. The Company is not a guarantor or
otherwise liable for any Liability or obligation of any other Person.
(b) The Company has issued and outstanding the NKA Notes which entitle the
holder thereof to convert such note into a designated number of shares of
Company's capital stock.. The number of NKA Notes and the holders thereof are
described in Exhibit "C" hereto. True and correct copies of all of the NKA
Notes have been heretofore delivered to Clariti.
3.11 Absence of Changes. Since June 30, 1998, the Company has conducted its
business only in the Ordinary Course of Business and there has not been any:
(a) sale, lease, transfer, or assignment of any of the Company's assets,
tangible or intangible, other than: (i) sales of inventory for fair value in
the Ordinary Course of Business;
(b) creation or imposition of any Lien upon any of the Company's assets,
tangible or intangible;
(c) increase in prompt payment or pre-payment rebates, most favored
pricing or other price protections or similar programs, or other material
change in the sales, pricing, cash management, billing, payment, collection or
cancellation policies or practices of the Company;
(d) delay or postponement of payment of accounts payable and other
Liabilities outside the Ordinary Course of Business;
(e) any termination (or any oral or written threat or indication of intent
to terminate) by one or more material distributors, customers, licensors or
suppliers of the Company of its respective business relationships with the
Company or any indication that any such material distributor, customer,
licensor or supplier will not (i) continue to do business with the Company on
terms and conditions at least as favorable to the Company as the terms and
conditions provided to the Company since its inception;
(f) damage, destruction, or loss (whether or not covered by insurance) to
its property;
(g) modification or change in the application of GAAP from the manner in
which it was applied in the Most Recent Financial Statements or any other
change in the Company's accounting procedures or methodologies;
(h) transaction with any of the Sellers or any of their respective
Affiliates;
(i) other occurrence, event, incident, action, failure to act, or
transaction outside the Ordinary Course of Business involving the Company; and
(j) agreement or commitment by the Company or any of the Sellers to any of
the foregoing.
3.12 Absence of Undisclosed Liabilities. The Company has no material
Liabilities except for (a) Liabilities set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto), and (b) Liabilities which
arise after the date hereof in the Ordinary Course of the Business (none of
which Liabilities results from, arises out of, relates to, is in the nature of
or is caused by any breach of contract, breach of warranty, tort, or violation
of law).
3.13 Legal and Other Compliance. The Company has complied and is in
compliance with all applicable laws and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against the Company alleging any failure so to comply. Neither the
ownership nor use of properties of the Company nor the conduct of its business
conflicts with the rights of any other Person or violates, conflicts with or
results in a default, right to accelerate or loss of rights under, any terms or
provisions of any of its charter or by-laws or any Lien, lease, license,
agreement, understanding, law, ordinance, rule or regulation, or any order,
judgment or decree to which the Company is a party or by which it is bound.
3.14 No Material Adverse Change. Since June 30, 1998, there has not been any
change which has resulted in a Material Adverse Effect and no event has
occurred or circumstance exists that may result in such a Material Adverse
Effect.
3.15 Taxes.
(a) The Company has filed on a timely basis all Tax Returns required to be
filed by the Company. All such Tax Returns were correct and complete. All
Taxes owed by the Company, whether or not shown on any Tax Return, have been
paid. The Company is not the beneficiary of any extension of time within which
to file any Tax Return. No claim has been made by an authority in a
jurisdiction where the Company does not file Tax Returns that it may be subject
to taxation by that jurisdiction. There are no Liens or other encumbrances on
any of the assets of the Company that arose in connection with any failure (or
alleged failure) to pay any Tax.
(b) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party.
(c) There is no Basis for any authority to assess any additional Taxes for
any period for which Tax Returns have been filed. There is no dispute, audit,
investigation, proceeding or claim concerning any Liability with respect to
Taxes of the Company either (i) claimed or raised by any authority in writing
or (ii) as to which any of the Sellers has knowledge based upon contact with
any such authority. The Company has not entered into or been a party to any
transaction which contravenes the anti-avoidance provision of any applicable
tax law.
(d) The unpaid Taxes of the Company did not, as of the date of the Most
Recent Balance Sheet, exceed the reserve or Tax Liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto).
(e) The Company does not have any liability for the Taxes of any other
Person, as a transferee or successor, by contract or otherwise. The Company is
not a party to any joint venture, partnership or other arrangement that could
be treated as a partnership for federal and applicable state, local and foreign
income Tax purposes.
3.16 Property, Plant and Equipment. The Company does not own any real
property. Section 3.16 of the Disclosure Schedule lists all real property
leased or subleased to the Company. The Company has delivered to Clariti
correct and complete copies of the leases and subleases listed in Section 3.16
of the Disclosure Schedule (as amended to date) which such leases and subleases
have not been amended or modified since the date thereof. No action has been
taken or omitted by the Company or the Sellers, and, to the knowledge of the
Sellers, no other event has occurred or condition exists, that constitutes, or
after notice or lapse of time or both would constitute, a default under any
Lease or that may reasonably be expected to result in a loss of rights or the
creation of any Lien thereunder or pursuant thereto. The leasehold interests
of the Company are not subject to any Lien, and the Company is in quiet
possession of the properties covered by the Leases.
3.17 Intellectual Property.
(a) The Company owns or has the right to use pursuant to license,
sublicense, agreement, or permission all Intellectual Property necessary for
the operation of the businesses of the Company as presently conducted. Each
item of Intellectual Property owned or used by the Company in the Company's
business immediately prior to the Closing hereunder will be owned or available
for use by the Company and Clariti on identical terms and conditions
immediately subsequent to the Closing hereunder. The Company has taken all
necessary action to maintain and protect each item of Intellectual Property
that the Company owns or uses.
(b) The Company has not interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any Intellectual Property rights of third
parties, and there has never been any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation, or
violation (including any claim that the Company must license or refrain from
using any Intellectual Property rights of any third party). To the Knowledge
of the Company, no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of the Company.
(c) Section 3.17(c) of the Disclosure Schedule identifies each patent or
registration which has been issued to the Company with respect to the Company's
Intellectual Property, identifies each pending patent application or
application for registration which has been made with respect to the Company's
Intellectual Property, and identifies each license, agreement, or other
permission which the Company has granted to any third party with respect to any
of the Intellectual Property (together with any exceptions).
(d) Section 3.17(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Company uses
pursuant to license, sublicense, agreement, or permission. With respect to
each item of Intellectual Property required to be identified in Section 3.17(d)
of the Disclosure Schedule, the license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and in full force and
effect.
3.18 Contracts. Section 3.18 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Company is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $50,000 in any year;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products or other personal
property, or for the furnishing or receipt of services, which could result in a
material loss to the Company (including in the event of any termination
thereof) or is likely to involve the exchange of consideration in excess of
$50,000 in any single year;
(c) any agreement (or group of related agreements) under which the Company
has created, incurred, assumed or guaranteed any Indebtedness in excess of
$50,000 or under which it has imposed a Lien on any of its assets, tangible or
intangible;
(d) any agreement concerning confidentiality or noncompetition or
otherwise creating or purporting to create any restrictions on the ability of
the Company to engage in any business or to operate in any geographic area;
(e) any agreement between or between the Company, on the one hand, and any
of the Sellers or any of their respective Affiliates, on the other hand;
(f) any profit sharing, stock option, stock purchase, stock appreciation,
phantom stock, deferred compensation, severance or other plan or arrangement
for the benefit of any current or former directors, officers and employees;
(g) any agreement providing for the employment or consultancy with any
individual on a full-time, part-time, consulting or other basis providing for
annual compensation in excess of $50,000 or providing severance or retirement
benefits;
(h) any agreement under which the Company has advanced or loaned any
amount to any of the Sellers or their respective Affiliates, any director,
officer or employee of the Company, or to any other Person in an amount in
excess of $5,000;
(i) any agreement between or among the Company with any customer of the
Company containing a most favored price or other price protection provision, or
providing any warranty that is more onerous, in any material respect, to the
Company than the Company's standard warranty;
(j) any agreement pursuant to which payments, or an acceleration of or
increase in benefits, may be required upon or after a change of control of the
Company;
(k) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect on the Company; and
(l) any other agreement (or group of related agreements), the performance
of which involves consideration in excess of $50,000.
The Sellers have delivered to Clariti a correct and complete copy of each
written agreement listed in Section 3.18 of the Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 3.18 of the Disclosure Schedule. Except
as disclosed in Section 3.18 of the Disclosure Schedule, with respect to each
such agreement: (i) the agreement is legal, valid, binding, enforceable and in
full force and effect; (ii) subject to obtaining the necessary consents
disclosed in Section 3.5 of the Disclosure Schedule, the agreement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (iii) neither the Seller, nor to the knowledge of the Seller, any other
party is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification or acceleration, under the agreement; and (iv) no party has
repudiated any provision of the agreement.
3.19 Accounts Receivable. All accounts receivable of the Company are
reflected properly on its books and records in accordance with GAAP, are valid
receivables, arose from bona fide transactions in the Ordinary Course of
Business, are subject to no setoffs or counterclaims except as recorded as
accounts payable, are current and collectible and, except as reflected as net
of allowance for bad debts on the face of the Most Recent Balance Sheet (rather
than in any notes thereto or reserve therefor) as adjusted for the passage of
time in accordance with GAAP and past practice and custom of the Company. The
Sellers have delivered to as Section 3.19 of the Disclosure Schedule a true
and correct list of all receivables which have been deemed uncollectible and
are not reflected in the Most Recent Balance Sheet.
3.20 Insurance and Risk Management. Section 3.20 of the Disclosure Schedule
sets forth a list (indicating the type, name of the insurer, coverage amounts,
period of coverage, premiums, deductibles and material nonstandard exclusions)
of all insurance policies maintained by the Company (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements). With respect to each such insurance policy: (1)
the policy is legal, valid, binding, enforceable, and in full force and effect;
(2) the transactions contemplated hereby will not result in the cancellation or
modification of such policies; (3) the Company is not in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; (4) the Sellers have delivered true and
complete copies of all policies and related indemnity or premium payment
agreements to Clariti; (5) the policy has not been amended or modified and no
riders have been issued in respect of such policies referred to in (4) above;
and (6) no party to the policy has repudiated any provision thereof. All such
policies provide adequate coverage for all normal risks incident to the
Company's assets, properties and business operations and are in character and
amount at least equivalent to that carried by Persons engaged in a business
subject to the same or similar risks, perils or hazards.
3.21 Litigation. There are no judicial or administrative actions, claims,
suits, proceedings or investigations pending or, to the Sellers' and Company's
Knowledge, threatened, which involve or are likely to involve the Company.
There are no judgments, orders, decrees, citations, fines or penalties
heretofore assessed against the Company adversely affecting any of its assets,
businesses or operations under any federal, state or local law.
3.22 Product Warranties Defects Liability. Each product manufactured, sold,
leased, or delivered by the Company has been in conformity with all applicable
federal, state, local or foreign laws and regulations, contractual commitments
and all express and implied warranties, and the Company has no Liability (and
there is no Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand giving rise to any
Liability) for replacement or repair thereof or other damages in connection
therewith, subject only to the reserve for product warranty claims set forth on
the face of the Most Recent Balance Sheet (rather than in any notes thereto)
which reserve is adequate to address all such Liabilities. No product
manufactured, sold, leased, or delivered by the Company is subject to any
guaranty, warranty, or other indemnity beyond the applicable standard terms and
conditions of sale or lease. The Company has no Liability (and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any of them giving
rise to any Liability) arising out of any injury to individuals or property as
a result of the ownership, possession, or use of any product manufactured,
sold, leased, or delivered by the Company and there has been no inquiry or
investigation made in respect thereof by any Person including any governmental
or administrative agency other than such Liability for which the Company has
obtained insurance coverage pursuant to insurance policies listed in Section
3.20 of the Disclosure Schedule which such policies will remain in full force
and effect without modification or increase in premium as a result of the
transactions contemplated hereby.
3.23 Employees.
(a) To the Knowledge of the Company and Sellers, no executive or key
employee has any plans to terminate employment with the Company. The Company
has not experienced any labor disputes or work stoppages due to labor
disagreements. The Company is in compliance with all applicable laws respecting
employment and employment practices and terms and conditions of employment.
The Company is not nor has it ever been a party to any collective bargaining
agreement nor has the Company been the subject of any organizational activity.
(b) Section 3.23(b) of the Disclosure Schedule sets forth all employment
agreements (whether written or oral) with a term of greater than thirty (30)
days. Schedule 3.23(b) lists the name of the employee, the length of the
employment term, compensation and all other material terms and conditions of
employment. True and correct copies of all such employment agreements have
been provided to Clariti. Except as disclosed on Schedule 3.23(b), all
contracts of employment to which the Company is a party can be terminated by
the Company by notice of thirty (30) days or less.
3.24 Employee Benefits.
(a) Section 3.24(a) of the Disclosure Schedule sets forth all Employee
Plans (hereinafter defined) to which the Company contributes or is obligated to
contribute, under which the Company has or may have any Liability for premiums
or benefits, or which benefits any current or former employee, director,
consultant or independent contractor of the Company or any beneficiary thereof.
For purposes of this Agreement, the term "Employee Plan" means any plan,
program, agreement, policy or arrangement (a "plan"), whether or not reduced to
writing, that is a deferred-compensation, retirement, welfare-benefit, bonus,
incentive or fringe-benefit plan whether for the benefit of a single individual
or a group of individuals. With respect to each Employee Plan listed in
Section 3.24(a) of the Disclosure Schedule, the Company has provided to the
accurate, current and complete copies of each of the following: (1) the plan
document together with all amendments; (2) where applicable, copies of any
trust agreements, custodial agreements, insurance policies, administration
agreements and similar agreements, and investment management or investment
advisory agreements; and (3) copies of any summary plan descriptions, employee
handbooks or similar employee communications and administrative forms.
(b) All required contributions to and premium payments on account of each
Employee Plan have been made. The Sellers have not received any loans from any
Employee Plan.
(c) There are no pending or threatened lawsuit, claim or other controversy
relating to an Employee Plan, other than claims for benefits in the normal
course. No circumstance exists and no event (including any action or the
failure to do any act) has occurred with respect to any plan maintained or
formerly maintained by the Company or any related entity, or to which the
Company or any related entity is or has been required to contribute (other than
an Employee Plan), that could subject Company or Clariti to Liability, or the
assets of the Business to any Lien, nor will the transactions contemplated by
this Agreement give rise to any such Liability or Lien.
3.25 Environment, Health, and Safety. The Company has complied and is in
compliance with all applicable environmental laws. There is no legal action
pending or, to the Company's knowledge, threatened against the Company in
respect of (i) noncompliance with any environmental laws, or (ii) the handling,
storage, use, transportation or disposal of any hazardous substance; except for
actions filed or threatened after the date hereof that have not had, or would
not be reasonably expected to have, a Material Adverse Effect. The Company has
not, either expressly or by operation of law, assumed, undertaken or otherwise
become subject to any Liability, including any obligation for corrective or
remedial action, of any other Person relating to environmental laws. To the
knowledge of the Sellers and the Company, no facts, events or conditions
relating to the past or present facilities, properties or operations of the
Company or its predecessors or Affiliates are reasonably likely to prevent,
hinder or limit continued compliance with environmental laws or give rise to
any investigatory, remedial or corrective obligations pursuant to environmental
laws.
3.26 Affiliated Transactions. The Company is not a party to or bound by any
contract, commitment or understanding with any of the stockholders, directors
or officers of the Company or any of their Affiliates or any member of their
family and none of the stockholders, directors or officers of the Company or
Affiliates or any member of their family owns or otherwise has any rights to or
interests in any asset, tangible or intangible, which is used in the business
of any of the Company.
3.27 Distributors, Customers, Suppliers. Section 3.27 of the Disclosure
Schedule sets forth a complete and accurate list of (i) all of the distributors
for the Company's products indicating the specific product, existing
contractual arrangements, if any, with each such distributor and the volume of
products distributed, (ii) the ten largest customers (by dollar volume) of the
Company and the Sellers during the Most Recent Fiscal Year, indicating the
existing contractual arrangements with each such customer by product and (iii)
all suppliers of significant materials or services to the Company, indicating
the contractual arrangements for continued supply from such Person.
3.28 No Illegal Payments, Etc. None of the Sellers or the Company, nor
any of the directors, officers, employees or agents of the Company, has (a)
directly or indirectly given or agreed to give any illegal gift, contribution,
payment or similar benefit to any supplier, customer, governmental official or
employee or other person who was, is or may be in a position to help or hinder
the Company (or assist in connection with any actual or proposed transaction)
or made or agreed to make any illegal contribution, or reimbursed any illegal
political gift or contribution made by any other person, to any candidate for
federal, state, local or foreign public office which might subject the Company
to any damage or penalty in any civil, criminal or governmental litigation or
proceeding or (b) established or maintained any unrecorded fund or asset or
made any false entries on any books or records for any purpose.
3.29 Year 2000 Issues. Based on a review of the operations of the Company as
they relate to the processing, storage and retrieval of data, neither the
Sellers nor the Company believe that a Material Adverse Effect is likely to
occur as a result of computer software and hardware that will not function with
respect to periods commencing January 1, 2000 at least as effectively as with
respect to periods ending on or prior to December 31, 1999.
3.30 Books and Records. The books and all corporate (including minute books
and stock record books) and financial records of the Company are complete and
correct in all material respects and have been maintained in accordance with
applicable sound business practices, laws and other requirements.
3.31 Qualification of Sellers. Each Seller represents, warrants, acknowledges
and agrees with respect to himself or itself (and its beneficiaries if such
Seller is the trustee of a trust) and not with respect to the other Sellers,
that:
(a) The Clariti common stock received or to be received from Clariti
pursuant to this Agreement or the Escrow Agreement ("Clariti Stock") (a) is
being acquired for Seller's own account and not with the present view towards
the distribution thereof without compliance with securities laws and (b) is
subject to certain restrictions on transferability as provided under the
Securities Act. Sellers agree that they will not dispose of the Clariti Stock
except (i) in accordance with Regulation S under the Securities Act, (ii)
pursuant to an effective registration statement under the Securities Act, or
(iii) in any other transaction which, in the opinion of Clariti's securities
counsel, is exempt from registration under the Securities Act, or the rules and
regulations of the Securities and Exchange Commission ("SEC") thereunder.
(b) The Clariti Stock is being offered and sold under exemptions from the
registration provisions of the Securities Act including, but not limited to
Sections 3(b), 4(2) and 4(6) of the Securities Act and/or Regulation S and/or
Regulation D promulgated thereunder; that Sellers are purchasing the Clariti
Stock without being furnished any offering literature, a prospectus or offering
memorandum; that this transaction has not been scrutinized by the SEC or by any
administrative agency charged with the administration of securities laws of any
state or of Australia; that all information, documents, records and books
pertaining to this investment and Clariti have been made available upon request
to Sellers and their respective representatives, including Seller's attorney,
accountant and/or purchaser representatives.
(c) Seller (and its beneficiaries if such Seller is a trust) has read and
considered the SEC Reports (as hereinafter defined) and understands that
investments in the Clariti Stock are accompanied by a degree of risk, and there
are substantial restrictions on the transferability of the Clariti Stock.
(d) Seller (and its beneficiaries if such Seller is a trust) is able to
(a) bear the economic risk of this investment, (b) hold the Clariti Stock
indefinitely and (c) presently afford a complete loss of this investment.
(e) Seller (and its beneficiaries if such Seller is a trust) has adequate
means of providing for current business needs and business contingencies and
has no need for liquidity in this investment.
(f) Seller (and its beneficiaries if such Seller is a trust) has such
knowledge and expertise in financial and business matters and are capable of
evaluating the merits and risk of investment in the Clariti Stock and of making
an informed investment decision. Seller confirms that in making the decision
to purchase the Clariti Stock, Seller has relied solely upon Seller's
independent investigations by Seller and/or Seller's representative, including
Seller's own professional tax, legal and other advisors and that Seller and
such representatives and advisors have been given the opportunity to ask
questions of and to receive answers from, persons acting on behalf of Clariti
concerning the terms and conditions of this offering, Clariti's business and
associated risks and to obtain any additional information, to the extent such
persons possess such information or can acquire it without unreasonable effort
or expense.
(g) Seller (and its beneficiaries if such Seller is a trust) confirms
that: (i) the Clariti Stock is being acquired by Seller in good faith solely
for Seller's own account and investment purposes only and is not being
purchased for resale, resyndication, distribution, subdivision or
fractionalization thereof and (ii) Seller has no contract or arrangement with
any person to sell, transfer or pledge to any person the Clariti Stock or any
part thereof, any interest therein or any rights thereto. Seller has no
present plans to enter into any such contract or arrangement, or to engage in
any hedging transaction with respect to the Clariti Stock unless in compliance
with the Securities Act.
(h) Seller (and its beneficiaries if such Seller is a trust) understands
that neither the SEC nor any other federal or state agency has passed upon or
made any recommendation or endorsement of the Clariti Stock. Seller (and its
beneficiaries if such Seller is a trust) further acknowledges that the Clariti
Stock has not been registered under the Securities Act or under any state
securities laws. Seller (and its beneficiaries if such Seller is a trust)
therefore acknowledges that the Clariti Stock cannot be sold unless such stock
is subsequently registered under the Securities Act and applicable state laws
or unless an exemption from such registration is available. Seller (and its
beneficiaries if such Seller is a trust) further understands that Clariti is
relying upon the truth and accuracy of Seller's representations, warranties and
acknowledgments made herein by offering the Clariti Stock for sale to Seller
without having first registered same under the Securities Act.
(i) Neither Seller nor its beneficiaries are United States persons (as
defined in Regulation S under the Securities Act) and are not acquiring the
Clariti Stock for the account of or benefit of any United States person or is a
United States person that purchased the Clariti Stock in a transaction that
does not require registration under the Act.
(j) Seller (and its beneficiaries if such Seller is a trust) consents to
stop transfer instructions being placed with the transfer agent for the Clariti
Stock and the placement of a legend on all certificates evidencing the purchase
of the Clariti Stock, which legend shall be in form substantially as follows:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE SALE OR OTHER
DISPOSITION OF THESE SHARES IS RESTRICTED AND IN ANY EVENT IS PROHIBITED EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT; (ii) REGULATION S UNDER
THE ACT OR (iii) ANOTHER AVAILABLE EXEMPTION, AND TRANSFERRED OTHER THAN
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT. THE HOLDER OF THIS CERTIFICATE
SHALL HAVE DELIVERED TO CLARITI AN OPINION OF COUNSEL, WHICH OPINION IS
SATISFACTORY TO CLARITI AND ITS COUNSEL, THAT SUCH SALE OR OTHER DISPOSITION
CAN BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY STATE
SECURITIES LAWS. NO HEDGING TRANSACTIONS MAY BE CONDUCTED WITH RESPECT TO THE
SHARES REPRESENTED HEREBY UNLESS IN COMPLIANCE WITH THE SECURITIES ACT OF 1933.
The Clariti Common Stock Issued at Closing shall also contain the
following legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HEREBY ARE SUBJECT TO
A LOCK-UP AGREEMENT DATED [INSERT DATE OF CLOSING] IN FAVOR OF CLARITI PURSUANT
TO WHICH THE HOLDER OF THESE SHARES HAS AGREED THAT SUCH HOLDER WILL NOT
DIRECTLY OR INDIRECTLY OFFER, PLEDGE, SELL, CONTRACT TO SELL, GRANT ANY OPTION,
RIGHT OR WARRANT TO PURCHASE, HYPOTHECATE, ENCUMBER OR OTHERWISE TRANSFER OR
DISPOSE OF (ALL OF THE ABOVE ARE COLLECTIVELY REFERRED TO AS "DISPOSITION")
THESE SHARES WITHOUT THE PRIOR WRITTEN CONSENT OF CLARITI UNTIL [INSERT ONE (1)
YEAR FROM DATE OF CLOSING]. IN THE EVENT CLARITI CONSENTS TO ANY SUCH
DISPOSITION, THE ABOVE RESTRICTIONS WILL CONTINUE TO APPLY TO ANY TRANSFEREE
AND CLARITI SHALL INCLUDE A LEGEND ON ANY STOCK CERTIFICATE ISSUED TO ANY SUCH
TRANSFEREE.
(k) Seller (and its beneficiaries if such Seller is a trust) is an
"accredited investor" as such term is defined in Rule 502 of Regulation D
promulgated under the Securities Act of 1933, as amended.
(l) No Person has, in Australia, offered for subscription, or issued
invitations to subscribe for, the Clariti Stock.
3.32 Disclosure. The representations and warranties contained in this Section
3 (including the Disclosure Schedule and any other schedules and exhibits
required to be delivered by Sellers to Clariti pursuant to this Agreement) and
any certificate furnished or to be furnished by Sellers to do not contain and
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and information
contained in this Section 3 not misleading.
4. REPRESENTATIONS AND WARRANTIES OF MINORITY SHARE SELLERS.
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Each Minority Share Seller, severally, but not jointly, with respect to
himself only, and not with respect to the other Minority Share Seller,
represents and warrants that the statements contained in this Section 4 are
correct and complete as of the date of the Agreement and, unless a date is
specified in such representation and warranty, will be correct and complete as
of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 4).
4.1 Ownership of Shares. Such Minority Share Seller is the holder and
beneficial owner of the Shares as set out in Exhibit "B" hereto and there are
no Liens or claims of any person affecting such shares.
4.2 Legal Due Exception. Such Minority Share Seller has the legal capacity,
power and authority to execute and deliver this Agreement and to perform his
respective obligations hereunder. The obligations of such Minority Share Seller
arising under or pursuant to this Agreement are valid, binding and enforceable
against him in accordance with these terms.
4.3 Authorization. Such Minority Share Seller has taken all necessary action
to authorize his entry into and performance of this Agreement and to carry out
the transactions contemplated by this Agreement.
4.4 Securities Matters. Such Minority Share Seller represents, warrants,
acknowledges, and agrees with each one of the provisions of Section 3.31(a)
through (l) as if such provisions were set forth herein in their entirety and
that the term "Seller" was replaced with the term "Minority Share Seller."
5. REPRESENTATIONS AND WARRANTIES OF CLARITI.
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Clariti represents and warrants to the Sellers that the statements
contained in this Section 5 are correct and complete as of the date of this
Agreement and, unless a date is specified in such representation and warranty,
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 5).
5.1 Organization of Clariti. Clariti is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
5.2 Authority for Agreement. Clariti has full power and authority (including
full corporate power and authority) to execute and deliver this Agreement and
to perform its obligations hereunder. This Agreement constitutes the valid and
legally binding obligation of Clariti, enforceable against them in accordance
with its terms and conditions.
5.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Clariti is subject or any provision of
its charter or bylaws or (ii) conflict with, result in a breach of, constitute
a default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Clariti is a party or by which it is bound or to which any of its assets is
subject. Clariti does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
5.4 Due Authorization. Clariti has full requisite power and authority to
execute, deliver and perform this Agreement, all documents executed in
connection with this Agreement, and to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance by Clariti of this
Agreement, all documents executed in connection with this Agreement, and the
consummation by Clariti of the transactions contemplated hereby and thereby
have been duly and validly approved by the board of directors (or its executive
committee) of Clariti, and no other actions or proceedings on the part of
Clariti are necessary to authorize the execution, delivery and performance by
Clariti of this Agreement, all documents executed in connection with this
Agreement, or the transactions contemplated hereby and thereby. Clariti has
duly and validly executed and delivered this Agreement and has duly and validly
executed and delivered (or prior to or at the Closing will duly and validly
execute and deliver) all documents executed in connection with this Agreement.
This Agreement constitutes and all documents executed in connection with this
Agreement upon their execution and delivery will constitute, legal, valid and
binding obligations of Clariti enforceable in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect which affect
the enforcement of creditors' rights generally, by equitable limitations on the
availability of specific remedies and by principles of equity.
5.5 Common Stock. Clariti has taken all action necessary to authorize and
approve the issuance of the Clariti Stock at the Closing Date. The Clariti
Stock will, when issued in accordance with this Agreement, be validly issued,
fully paid and non-assessable. There are no statutory or contractual
shareholders' preemptive rights or rights of refusal with respect to the
issuance of the Clariti Stock upon execution of this Agreement or consummation
of the transactions contemplated hereby.
5.6 SEC Filings. Clariti has filed and made available to the Sellers all
reports required to be filed by Clariti with the SEC (the "SEC Reports") for
the past two (2) years. The SEC Reports at the time filed, as may have been
amended, complied as to form in all material respects with the applicable
requirements of the Securities Exchange Act. As of their respective dates, as
may have been amended the financial statements of Clariti included in the SEC
Reports ("Clariti Financial Statements") complied when filed as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, and present
fairly the consolidated financial position and the consolidated results of
operations, changes in stockholders' equity and cash flows of Clariti and its
subsidiaries as of the dates and for the periods indicated, in accordance with
GAAP, subject in the case of interim financial statements to normal year-end
adjustments and the absence of certain footnote information.
6. COVENANTS.
---------
The Parties agree as follows:
6.1 General. Each of the Parties will use its best efforts to take all action
and to do all things necessary, proper, or advisable in order to consummate and
make effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in Section 7
below).
6.2 Notices and Consents. The Company and Sellers have given any notices to
third parties, and will each use their best efforts to obtain any third party
consents, that are required in connection with the transactions contemplated by
this Agreement, as set forth in Section 3.5 to the Disclosure Schedule.
6.3 Operation of Business. Neither the Company nor the Seller will engage in
any practice, take any action, or enter into any transaction outside the
Ordinary Course of Business. Without limiting the generality of the foregoing,
the Company (i) will not (A) issue, sell or otherwise dispose of any of its
capital stock or grant any options, warrants or other rights to purchase or
obtain (including upon conversion, exchange or exercise) any of its capital
stock, declare, set aside, or pay any dividend or make any distribution with
respect to its capital stock or redeem, purchase, or otherwise acquire any of
its capital stock, (B) will not pay any amount to any third party with respect
to any Liability or obligation (including any costs and expenses the Company
has incurred or may incur in connection with this Agreement and the
transactions contemplated hereby) outside the Ordinary Course of Business or
(C) otherwise engage in any practice, take any action, or enter into any
transaction of the sort described in Section 3.11 above and (ii) will use its
best efforts to (A) keep available to Clariti the services of the Company's
present officer's, employees, agents and independent contractors, (B) preserve
for the benefit of Clariti the goodwill of Sellers' customers, suppliers,
landlords and others having business relations with it.
6.4 Full Access. The Company will permit representatives of Clariti to have
full access, at all reasonable times, and in a manner so as not to interfere
with the normal business operations of the Company, to all premises,
properties, personnel, books, records (including Tax records), contacts, and
documents of or pertaining to each of the Company.
6.5 Notice of Developments. Each Party will give prompt written notice to the
other Party of any development causing a breach of any of its own
representations and warranties in Sections 3, 4 and/or 5 above. No disclosure
by any Party pursuant to this Section 6.5, however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any
misrepresentations, breach of warranty, or breach of covenant.
6.6 Exclusivity. The Sellers and the Company will not (i) solicit, initiate,
or encourage the submission of any proposal or offer from any Person relating
or enter into or consummate any transaction relating to the acquisition of any
capital stock or other voting securities, or any portion of the Company's
Assets (other than sales of inventory in the Ordinary Course of Business), or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. The Company and Sellers will notify Clariti immediately if any
Person makes any proposal, offer, inquiry, or contact with respect to any of
the foregoing.
6.7 Payment of Indebtedness. Sellers will cause all Indebtedness owed to the
Company by any Seller or any Affiliate of any Seller to be paid in full prior
to Closing.
6.8 Access to Records after Closing. For a period of five years after the
Closing Date, the Sellers and their representatives shall have reasonable
access to all of the books and records of the Company to the extent that such
access may reasonably be required by the Sellers in connection with matters
relating to or affected by the operations of the Company prior to the Closing
Date. Such access shall be afforded by Clariti upon receipt of reasonable
advance notice and during normal business hours. The Sellers shall be solely
responsible for any costs or expenses incurred by them pursuant to this Section
6.8. If Clariti shall desire to dispose of any of such books and records prior
to the expiration of such five-year period, Clariti shall, prior to such
disposition, give the Sellers a reasonable opportunity, at Sellers' expense, to
segregate and remove such books and records as Sellers may select.
6.9 Channel Provider Agreements. The Company is a party to certain Agreements
pursuant to which it has agreed to pay the Channel Providers a commission in
respect of certain sales to customers referred to the Company by them and, in
the event of a sale of the Company, to pay the Channel Providers a termination
payment in the same form as the consideration received by the shareholders of
the Company and in the quantum described in the Channel Provider Agreements
(hereinafter collectively referred to as the "Channel Provider Agreements").
Sellers and Company hereby represent and warrant that true and correct copies
of the Channel Provider Agreements have been provided to Clariti. At or prior
to Closing, Sellers and the Company shall cause all of the Channel Provider
Agreements to be terminated and for the parties thereto (other than the
Company) to provide Company with a written release, in a form and substance
acceptable to Clariti, releasing Company from any and all claims including
without limitation those arising under or pursuant to the Channel Provider
Agreements. In consideration of the termination of the Channel Provider
Agreements and the release, Clariti and the Company shall cause to be issued
Fifty-Nine Thousand Four Hundred Thirty-Five (59,435) shares of Clariti's
common stock to those parties listed on Schedule 6.9 provided, however, that
such recipients execute and deliver to Clariti appropriate warranties,
representations and covenants similar to those provided in Section 3.31.
6.10 Registration of Clariti Stock.
(a) Clariti, at no cost to Sellers, shall include all of the Clariti
Common Stock Issued at Closing in a certain registration statement that Clariti
will use its reasonable efforts to cause to be prepared and filed under the
Securities Act within ninety (90) days after Closing and Clariti hereby agrees
to use its reasonable efforts to cause such registration statement to be
declared effective by the SEC.
(b) If at any time, and from time to time, after the date(s) on which the
Clariti Common Stock Issued in Escrow is released from escrow to the Escrowed
Sellers in accordance with the terms of the Escrow Agreement ("Released
Stock"), Clariti proposes to register any of its securities under the
Securities Act except with respect to registration statements on Forms S-4 or
S-8 (or their then equivalents relating to equity securities to be issued
solely in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock options or other employee plans),
Clariti shall each time give prompt written notice to the Escrowed Sellers of
its intention to do so and shall offer Escrowed Sellers the right to request
inclusion in the proposed registration of their shares of Released Stock. Any
such Escrowed Seller may, by written response delivered to Clariti within
twenty (20) days after the delivery of such notice, request that all or a
specified part of the Released Stock held by Escrowed Seller be included in
such registration. Clariti thereupon, at no cost to Escrowed Sellers, will use
its reasonable commercial efforts to cause to be included in such registration
statement all Released Stock which Clariti has been so requested to register by
such Escrowed Seller. In the event that any registration pursuant to this
Section 6.10 shall be, in whole or in part, an underwritten public offering of
the common stock of Clariti, the number of shares of Released Stock to be
included in such an underwriting may be reduced pro rata among the requesting
Escrowed Sellers if and to the extent that the managing underwriter or
underwriter shall be of the opinion (a written copy of which, if available,
shall be delivered to Escrowed Sellers) that such inclusion would materially
adversely effect the marketing of the securities to be distributed by such
underwriter under such registration statement; provided, however, that only to
the extent permitted by other agreements of existing Clariti shareholders (in
such case a copy of which shall be provided to Escrowed Seller) if any shares
are to be included in such an underwriting for the account of any Person other
than Clariti or requesting Escrowed Sellers of Released Stock, then any
reduction in the number of shares of Released Stock to be included in such an
underwriting shall be made pro rata among the requesting Escrowed Sellers and
all such Persons. Clariti shall have the right to abandon any registration it
initiates under this Section 6.10.
(c) Whenever required to effect the registration of any Clariti Stock
("Registrable Securities") under this Agreement, Clariti shall:
(i) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use reasonable commercial efforts to
keep such registration statement effective for up to ninety (90) days;
provided, however, that, if Clariti qualifies to use Form S-3 and such
registration shall be made by use of such form, Clariti shall keep such
registration statement effective until the earlier of (i) six (6) months have
elapsed from the effective date of such registration statement or (ii) the
date, in the opinion of counsel to Clariti, all the Registrable Securities
proposed to be sold thereunder may be sold in a three-month period without
registration under the Securities Act pursuant to Rule 144 promulgated by the
SEC, provided that this shall not apply once the shares can be sold under Rule
144 and that this can be delayed for ninety (90) days if disclosure of such
transaction shall be adverse to the Company.
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement.
(iii) Furnish to the Sellers participating in the registration such
number of copies of the prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents as they may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by them that are included in such
registration.
(iv) Use reasonable commercial efforts to register and qualify the
securities covered by such registration statement, provided that Clariti shall
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, which shall be reasonably satisfactory to Clariti with the managing
underwriter(s) of such offering.
6.11 Lock-Up Agreement. Notwithstanding anything in this Agreement to the
contrary, the Sellers shall execute and deliver, and shall use reasonable
efforts to cause the NKA Noteholders and Channel Providers to execute and
deliver, to Clariti, at or prior to the Closing, a lock-up agreement
restricting the transferability or other disposition of the Clariti Common
Stock Issued at Closing. Such agreement shall be in the form attached hereto
as Exhibit "E" ("Lock-Up Agreement").
6.12 Future Assurances. At any time and from time to time after the Closing,
at the request of Clariti and without further consideration, Sellers will
execute and deliver such other instruments of sale, transfer, conveyance,
assignment and confirmation and take such action as Clariti may reasonably
determine is necessary to transfer, convey and assign to Clariti, and to
confirm Clariti's title to or interest in the Company, to put Clariti in actual
possession and operating control thereof and to assist Clariti in exercising
all rights with respect thereto. The Sellers hereby constitute and appoint
Clariti and its successors and assigns as their true and lawful attorney in
fact in connection with the transactions contemplated by this instrument, with
full power of substitution, in the name and stead of the Sellers but on behalf
of and for the benefit of Clariti and its successors and assigns, to demand and
receive any and all of the assets, properties, rights and business hereby
conveyed, assigned, and transferred or intended so to be, and to give receipt
and releases for and in respect of the same and any part thereof, and from time
to time to institute and prosecute, in the name of the Sellers or otherwise,
for the benefit of Clariti or its successors and assigns, proceedings at law,
in equity, or otherwise, which Clariti or its successors or assigns reasonably
deem proper in order to collect or reduce to possession or any of the assets of
the Company to do all acts and things in relation to the assets which Clariti
or its successors or assigns reasonably deem desirable.
7. CONDITIONS TO OBLIGATION TO CLOSE.
---------------------------------
7.1 Conditions to Obligation of Clariti. The obligation of Clariti to
consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of each of the following conditions:
(a) The representations and warranties set forth in Sections 3 and 4 above
shall be true and correct when made and shall be true and correct in all
material respects as of the Closing Date;
(b) The Sellers and the Company shall have performed and complied with all
of their covenants, agreements and obligations hereunder through the Closing;
(c) The Sellers shall have procured all of the governmental approvals,
consents or authorizations and third party consents necessary or appropriate to
close the transaction contemplated by this Agreement;
(d) No action, suit, or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction wherein an unfavorable injunction, judgment,
order, decree, ruling, or charge would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, (iii)
affect adversely the right of Clariti to own the Shares or to operate the
businesses of the Company (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
(e) Each of the Sellers shall have executed and delivered to Clariti the
Lock-Up Agreements as provided for in Section 6.11;
(f) Each of Cook and Koncepolski shall have entered into an Employment
Agreement substantially in the form of Exhibit "F" and Exhibit "G" hereto and
the same shall be in full force and effect;
(g) There shall not have been any change which has resulted in a Material
Adverse Effect and no event has occurred or circumstance exists that may result
in such a Material Adverse Effect;
(h) The Company shall have at Closing Six Hundred Thousand Australian
Dollars (AUD$600,000) of additional capital (in the form of cash) over and
above the approximate Seventy-Five Thousand Australian Dollars (AUD$75,000) of
cash reported on the Most Recent Financial Statements Further, the Company's
liabilities, including without limitation, its current, long-term and accrued
liabilities, shall not exceed at Closing the sum of One Hundred Seventy-Five
Thousand Australian Dollars (AUD$175,000) and shall consist only of trade
payables and accrued expenses all incurred in the Ordinary Course of Business.
Sellers shall provide Clariti with such documentation as may be requested by
Clariti evidencing same;
(i) The NKA Noteholders shall have transferred the NKA Notes and provided
and delivered appropriate documentation in accordance with the provisions of
Section 2.2;
(j) The Channel Provider Agreements shall have been terminated in
accordance with the provisions of Section 6.9 and the recipients shall have
provided and delivered appropriate documentation in accordance with the
provisions of Section 6.9;
(k) The Sellers shall have delivered to Clariti a certificate to the
effect that each of the conditions specified above in Section 6.1(a)-(h) are
satisfied in all respects;
(l) The Escrow Agreement shall have been duly executed and delivered to
Clariti;
(m) The Sellers and Company shall have delivered to Clariti the favorable
written opinion of Sellers' counsel, Hall & Wilcox, or such other reasonable
law firm selected by Sellers and Company, dated as of the Closing Date and
addressed to Clariti, in a form acceptable to Clariti;
(n) Cook and Koncepolski shall each have contributed to the capital of
the Company any loans or other Indebtedness due any one or both of them by the
Company. Neither Cook nor Koncepolski shall directly or indirectly receive any
additional shares of the Company in return for such capital contribution.
Accordingly, as of Closing, the Company shall have no further Indebtedness due
Cook and/or Koncepolski. Cook and Koncepolski shall provide and deliver
appropriate Cook and Koncepolski release and acknowledgement regarding no
further Indebtedness same;
(o) The condition precedent referred to in Section 1.2 is fulfilled; and
(p) All actions to be taken by the Company and the Sellers in connection
with the consummation of the transactions contemplated hereby and all
certificates, opinions, instruments and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form and
substance to Clariti.
Clariti may waive any one, more or all of the conditions specified in this
Section 7.1 (except the condition set forth in subparagraph (o) above) if it
executes a writing so stating at or prior to the Closing and such waiver shall
not be considered a waiver of any other provision in this Agreement unless the
writing specifically so states.
Provided that the Sellers and Company shall have used reasonable efforts to
satisfy the condition set forth in Section 7.1(m) above, if: (a) the Sellers
and Company shall not have satisfied the condition set forth in Section 7.1(m)
above and (b) Clariti shall not have waived such condition and (c) the Closing
shall not occur, then the Sellers and Company shall not be legally liable in
any manner whatsoever, including, without limitation, in contract or in tort,
to Clariti for and upon the nonoccurrence of the Closing.
7.2 Conditions to Obligations of the Sellers. The obligation of the Sellers
to consummate the transactions to be performed by them in connection with the
Closing is subject to satisfaction of the following conditions:
(a) The representations and warranties set forth in Section 5 above shall
be true and correct at and as of the Closing Date;
(b) Clariti shall have performed and complied with all of its covenants
hereunder through the Closing;
(c) No action, suit, or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction wherein an unfavorable injunction, judgment,
order, decree, ruling, or charge would (i) prevent consummation of any of the
transactions contemplated by this Agreement or (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge shall be in effect);
(d) Clariti shall have delivered to the Company a certificate to the
effect that each of the conditions specified above in Section 6.2(a)-(c) is
satisfied in all respects;
(e) Clariti shall have delivered to Sellers and the Company the favorable
written opinion of Clariti's counsel, Eizen Fineburg & McCarthy, LLP, dated as
of the Closing Date and addressed to Sellers and the Company in the form
attached hereto as Exhibit "H" hereto;
(f) The condition precedent referred to in Section 1.2 is satisfied; and
(g) All actions to be taken by Clariti in connection with the consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
the Seller.
The Sellers may waive any one, more or all of the conditions specified in this
Section 7.2 (except the condition set forth in subparagraph (f) above) if they
execute a writing so stating at or prior to the Closing and such waiver shall
not be considered a waiver of any other provision in this Agreement unless the
writing specifically so states.
8. NONCOMPETITION.
--------------
8.1 Noncompetition. Sellers jointly and severally, agree that, in
consideration of the purchase by Clariti hereunder, Sellers shall not anywhere
in Australia, on or prior to the date which is three (3) years after the
Closing Date, directly or indirectly, (i) run, own, manage, operate, control,
be employed by, provide consulting services to, be an officer or director of,
participate in, lend his, her or its name to, invest in or be connected in any
manner with the management, ownership, operation or control of any business,
venture or activity which competes with the business being conducted at the
Closing Date by the Company, or (ii) solicit any customer, supplier or
distributor of the Company for the purpose of entering into a business
relationship with such Person or attempt to persuade any such Person to
discontinue its relationship with the Company. Further, Sellers, Cook and
Koncepolski, jointly and severally agree and covenant that Cook and Koncepolski
shall abide by the restrictive covenant provisions and confidentiality
provisions (Sections 11 and 12) of each of their respective Employment
Agreements executed by them in connection with the Closing.
8.2 Nonsolicitation. Each of the Sellers further agrees that for a period of
three (3) years after the Closing Date such Seller will not directly or
indirectly without the prior written consent of Clariti, recruit, offer
employment, employ, engage as a consultant, lure or entice away or in any other
manner persuade or attempt to persuade any person who is an employee of the
Company, to leave the employ of Company unless such person has been terminated
by Company.
8.3 Reasonableness of Restrictions. Sellers acknowledge and agree that the
limitations set forth above are reasonable in time and geographic scope, and if
any provision hereof is held invalid or unenforceable, the remainder shall
nevertheless remain in full force and effect. In particular, Sellers agree that
if any court of competent jurisdiction shall determine that the duration or
geographical limit of the foregoing non-competition covenant is invalid or
unenforceable, it is the intention of the Parties that it shall not be
terminated thereby but shall be deemed to have been amended to the extent
required to render it valid and enforceable, such amendment to apply only with
respect to the jurisdiction of the court making such adjudication. Sellers
further agree not to disclose to any Person any Confidential Information or
trade secrets of Company unless already in the public domain through no act or
omission of Sellers. Sellers further acknowledge and agree that any violation
of any of the covenants in this Section would cause substantial and irreparable
injury to Clariti, whereupon Sellers, and their respective shareholders,
directors, officers and employees jointly and severally may be enjoined from
any breach or threatened breach thereof in addition to, but not in limitation
of any of the rights or remedies to which Clariti is or may be entitled
hereunder, at law or in equity.
9. INDEMNIFICATION.
---------------
9.1 Survival of Representations and Warranties. All of the representations
and warranties contained herein [except for those contained in Sections 3.1
(Organization of the Company), 3.2 (No Subsidiaries), 3.3 Capitalization and
Ownership of the Company), 3.4 (Authorization of Transaction), 3.6 (Brokers'
Fees - Sellers), 3.7 (Title to Assets), 3.15 (Taxes), 3.24 (Employee Benefits),
3.25 (Environment, Health and Safety), 3.26 (Affiliated Transactions), 4.1
(Ownership of Shares), 4.2 (Due Execution), 4.3 (Authorization); 5.1
(Organization of Clariti), 5.2 (Authority for Agreement), and 5.4 (Brokers'
Fees - Clariti)] or contained in any document, certificate or other instrument
required to be delivered hereunder shall survive the Closing and continue in
full force and effect for a period of five (5) years thereafter. The
representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4, 3.6,
3.7, 3.15, 3.24, 3.25, 3.26, 4.1, 4.2 , 4.3, 5.1, 5.2, and 5.4 shall survive
the Closing and shall continue in full force and effect without limit as to
time (subject to any applicable statutes of limitations and any extensions or
waivers thereof). The termination of any such representations and warranties,
however, shall not affect any claim for breaches of representations or
warranties if written notice thereof is given to the breaching party or parties
prior to such termination date. All covenants and indemnities of the Sellers
and Clariti in this Agreement or in any document or certificate delivered
hereunder shall, unless otherwise specifically provided therein, remain in full
force and effect forever (or to the maximum extent permitted by applicable
law).
9.2 Indemnity by Sellers. The Sellers, Cook and Koncepolski (collectively,
the "NKA Indemnitors") hereby jointly and severally indemnify, and agree to
defend and hold harmless Clariti and each of its Affiliates from, against and
in respect of all Liabilities, obligations, judgments, Liens, injunctions,
charges, orders, decrees, rulings, damages, dues, assessments, Taxes, losses,
fines, penalties, injuries, deficiencies, demands, expenses, fees, costs,
amounts paid in settlement (including reasonable attorneys' and expert witness
fees and disbursements in connection with investigating, defending or settling
any action or threatened action) (collectively, the "Losses") that arise out
of, result from or relate to any of the following:
(a) the inaccuracy of any representation or warranty made by the Company
or any of the NKA Parties (or any of them) herein, including as a result of any
misrepresentation in or omission from any schedule, document, certificate or
other instrument required to be furnished by the Company or any of the NKA
Parties hereunder (in each case, as such representations and warranties would
read if all references to materiality and Material Adverse Effect were deleted
therefrom); provided, however, that the NKA Indemnitors shall be liable under
this Section 9.2(a) in respect of Losses only to the extent that the aggregate
amount of such Losses exceeds $100,000; provided, further, that the threshold
shall not apply to any Losses that result from the inaccuracy of any
representation or warranty contained in Sections 3.1, 3.2, 3.3, 3.4, 3.6, 3.7,
3.15, 3.24, 3.25 or 3.26 hereof or to any claim based upon fraud.
(b) the breach or nonfulfillment of any agreement or covenant of the
Company or any one of the NKA Parties contained herein or in any agreement or
instrument required to be entered into in connection herewith.
In the event that the NKA Indemnitors may be obliged to indemnify under both
subsection (a) and subsection (b) of this Section 9.2, their obligations under
subsection (b) shall be controlling and the time and dollar limitations (if
any) provided in Sections 9.1 and 9.2(a) hereof relating to their obligations
in respect of Losses resulting from the inaccuracy of any representation and
warranty, or any misrepresentation, breach of warranty as described in
Section 9.2(a), shall not apply. Clariti shall provide Sellers written notice
for any claim made in respect of the indemnification provided in this
Section 9.2, whether or not arising out of a claim by a third party.
9.3 Indemnity by Clariti. Clariti hereby indemnifies, and agrees to defend
and hold harmless the Sellers and each of their respective Affiliates from,
against and in respect of all Liabilities, obligations, judgments, Liens,
injunctions, charges, orders, decrees, rulings, damages, dues, assessments,
Taxes, losses, fines, penalties, injuries, deficiencies, demands, expenses,
fees, costs, amounts paid in settlement (including reasonable attorneys' and
expert witness fees and disbursements in connection with investigating,
defending or settling any action or threatened action) (collectively, the
"Losses") that arise out of, result from or relate to any of the following:
(a) the inaccuracy of any representation or warranty made by Clariti
herein, including as a result of any misrepresentation in or omission from any
schedule, document, certificate or other instrument required to be furnished by
Clariti (in each case, as such representations and warranties would read if all
references to materiality and Material Adverse Effect were deleted therefrom);
provided, however, that Clariti shall be liable under this Section 9.3(a) in
respect of Losses only to the extent that the aggregate amount of such Losses
exceeds $100,000; provided, further, that the threshold shall not apply to any
Losses that result from the inaccuracy of any representation or warranty
contained in Sections 5.1, 5.2 or 5.4 hereof or to any claim based upon fraud.
(b) the breach or nonfulfillment of any agreement or covenant of Clariti
contained herein or in any agreement or instrument required to be entered into
in connection herewith.
In the event Clariti may be obliged to indemnify under both subsection (a) and
subsection (b) of this Section 9.3, its obligations under subsection (b) shall
be controlling and the time and dollar limitations (if any) provided in
Sections 8.1 and 8.3(a) hereof relating to their obligations in respect of
Losses resulting from the inaccuracy of any representation and warranty, or any
misrepresentation, breach of warranty as described in Section 9.3(a), shall
not apply. Sellers shall provide Clariti written notice for any claim made in
respect of the indemnification provided in this Section 9.3, whether or not
arising out of a claim by a third party.
9.4 Matters Involving Third Parties.
(a) If any third party shall notify any Party (the "Indemnified Party")
with respect to any matter (a "Third Party Claim") which may give rise to a
claim for indemnification against any other Party (the "Indemnifying Party")
under this Section 9 then the Indemnified Party shall promptly notify each
Indemnifying Party thereof in writing; provided, however, that no delay on the
part of the Indemnified Party in notifying any Indemnifying Party shall relieve
the Indemnifying Party from any obligation hereunder unless (and then solely to
the extent) the Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party will have the right to defend against the Third
Party Claim with counsel of its choice reasonably satisfactory to the
Indemnified Party so long as (i) the Indemnifying Party notifies the
Indemnified Party in writing within 15 days after the Indemnified Party has
given notice of the Third Party Claim that the Indemnifying Party will
indemnify the Indemnified Party from and against the entirety of any Losses the
Indemnified Party may suffer resulting from, arising out of, relating to, in
the nature of, or caused by the Third Party Claim, (ii) the Indemnifying Party
provides the Indemnified Party with evidence acceptable to the Indemnified
Party that the Indemnifying Party will have the financial resources to defend
against the Third Party Claim and fulfill its indemnification obligations
hereunder, (iii) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief, (iv) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good faith
judgment of the Indemnified Party, likely to establish a precedential custom or
practice adverse to the continuing business interests of the Indemnified Party,
and (v) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 9.4(b) above, (i) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim, (ii) the Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnifying Party (which consent shall not unreasonably be withheld), and
(iii) the Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim unless written
agreement is obtained releasing the Indemnified Party from all liability
thereunder.
(d) In the event any of the conditions in Section 9.4(b) above is or
becomes unsatisfied, however, (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it may deem appropriate (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including attorneys' fees and
expenses), and (iii) the Indemnifying Parties will remain responsible for any
Losses the Indemnified Party may suffer resulting from, arising out of,
relating to, in the nature of, or caused by the Third Party Claim to the
fullest extent provided in this Section 9.
10. TERMINATION.
-----------
10.1 Termination of Agreement. Certain of the Parties may terminate this
Agreement as provided below:
(a) The Parties may terminate this Agreement by mutual written consent at
any time prior to the Closing;
(b) Clariti may terminate this Agreement by giving written notice to the
Sellers at any time prior to the Closing (i) in the event the Company or the
Sellers have breached any representation, warranty, or covenant contained in
this Agreement in any material respect, Clariti has notified the Sellers of the
breach, and the breach has continued without cure for a period of 30 days after
the notice of breach, (ii) Clariti is not satisfied with the result of its due
diligence of the Company which the Sellers cannot rectify following 14 days
written notice thereof, (iii) if Clariti is permitted to do so under Section
2.1(h)(iii) of this Agreement or (iv) if the Closing shall not have occurred on
or before September 15, 1999 by reason of the failure of any condition
precedent under Section 7.1 hereof (unless the failure results primarily from
Clariti itself breaching any representation, warranty, or covenant contained in
this Agreement); and
(c) The Sellers or Company may terminate this Agreement by giving written
notice to Clariti at any time prior to the Closing (i) in the event Clariti has
breached any representation, warranty, or covenant contained in this Agreement
in any material respect, the Sellers or Company have notified Clariti of the
breach, and the breach has continued without cure for a period of 30 days after
the notice of breach or (ii) if the Closing shall not have occurred on or
before September 15, 1999 by reason of the failure of any condition precedent
under Section 7.2 hereof (unless the failure results primarily from the Sellers
or the Company itself breaching any representation, warranty, or covenant
contained in this Agreement).
10.2 Effect of Termination. If any Party terminates this Agreement pursuant
to Section 10.1 above, all rights and obligations of the Parties hereunder
shall terminate without any Liability of any Party to any other Party (except
for any Liability of any Party then in breach).
11. MISCELLANEOUS.
-------------
11.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior approval of the other Party.
11.2 No Third Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
11.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes
any prior understandings, agreements, or representations by or between the
Parties, written or oral, to the extent they related in any way to the subject
matter hereof.
11.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of the other Party; provided, however, that Clariti may (i)
assign any or all of its rights and interests hereunder to one or more of its
Affiliates and (ii) designate one or more of its Affiliates to perform its
obligations hereunder.
11.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) upon
confirmation of facsimile, (ii) one business day following the date sent when
sent by overnight delivery and (iii) five business days following the date
mailed when mailed by registered or certified mail return receipt requested and
postage prepaid at the following address:
If to Clariti:
The Mellon Bank Center
1735 Market Street, Suite 1300
Philadelphia, Pennsylvania 19103
Attention: Peter S. Pelullo, President
With a copy to:
Eizen Fineburg & McCarthy, LLP
2001 Market Street, Suite 3410
Philadelphia, PA 19103
Attention: Gary J. McCarthy, Esquire
If to Sellers and/or Company:
424 St. Kilda Road
Melbourne, VIC 3004
Attention: Peter Cook, Managing Director
With a Copy to:
Hall & Wilcox
Level 19, 600 Bourke Street
Melbourne, Victoria 3000
Attention: Anne Griegg, Solicitor
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually is received by the intended recipient.
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Party notice in the manner herein set forth.
11.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the Commonwealth of Pennsylvania without
giving effect to any choice or conflict of law provision or rule (whether of
the Commonwealth of Pennsylvania or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the Commonwealth of
Pennsylvania. Any and all legal proceedings concerning the infringement,
breach or contemplated breach of this Agreement shall be filed in federal or
state court situate in the Commonwealth of Pennsylvania, Philadelphia County
only, and the parties hereto consent to such jurisdiction and venue.
11.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by each of the
Parties. No waiver by any Party of any default, misrepresentation, or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
11.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.11 Expenses. Each of the Sellers, Company and Clariti will bear his or its
own costs and expenses (including legal and accounting fees and expenses) and
the Sellers and the Company will bear all of the costs and expenses (including
legal and accounting fees and expenses) of the Company incurred in connection
with this Agreement and the transactions contemplated hereby. Despite the
foregoing, Clariti shall pay all stamp duty taxes on this Agreement and on any
document executed to give effect to this Agreement.
11.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the Disclosure Schedule
identifies the exception with particularity and describes the relevant facts in
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party
has breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty, or covenant.
11.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
11.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Party would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this. Agreement
and the terms and provisions hereof in any action instituted in any court of
the United States or any state thereof having jurisdiction over the Parties and
the matter in addition to any other remedy to which it may be entitled, at law
or in equity.
11.15 Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, THE SELLERS HEREBY WAIVE, AND COVENANT THAT THEY WILL
NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL
BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION ARISING OUT OF OR PASSED UPON THIS AGREEMENT OR THE SUBJECT MATTER
HEREOF, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN TORT
OR CONTRACT OR OTHERWISE.
IN WITNESS WHEREOF, the parties have caused this Share Exchange Agreement
to be duly executed and delivered as of the day and year first above written.
Clariti Telecommunications International, Ltd.,
a Delaware (U.S.) corporation
By: s/Peter S. Pelullo
------------------
Peter S. Pelullo
President
NKA Communications Pty. Ltd.
an Australian company
By: s/Peter S. Cook
---------------
Peter S. Cook
Managing Director
and By: s/Yankel Koncepolski
--------------------
Yankel Koncepolski
Director/Secretary
Corangamite Pty. Limited, as
Trustee for The Lake Corangamite Trust
By: s/Peter S. Cook
-------------
Peter S. Cook
Director and Director/Secretary
Consortium Communications International Pty.
Ltd., as Trustee
By: s/Yankel Koncepolski
------------------
Yankel Koncepolski
Director and Director/Secretary
Doron Nevo, Individually
By: s/Doron Nevo
----------
Doron Nevo
Barbara Bromilow, Individually
By: s/Barbara Bomilow
---------------
Barbara Bomilow
Peter S. Cook, Individually
By: s/Peter S. Cook
-------------
Peter S. Cook
Yankel Koncepolski, Individually
By: s/Yankel Koncepolski
------------------
Yankel Koncepolski
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 16th
day of June, 1999 by and between Clariti Telecommunications International Ltd.,
a Delaware corporation ("Company"), and Ronald R. Grawert ("Executive").
WHEREAS, Company desires to employ Executive as its Chief Executive
Officer and Executive desires to be employed by Company, upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment and Term.
Company hereby employs Executive and Executive hereby accepts employment for a
term commencing on June 21, 1999 and continuing until June 20, 2002, unless
sooner terminated as provided for in this Agreement. Company and Executive
have the option to renegotiate this Agreement beyond the three-year period.
Executive hereby warrants and represents to Company that he is free to enter
into this Agreement and is not a party to any agreement, written or otherwise,
or bound by any restrictions, which limit or restrict him from entering into
this Agreement or performing the services, duties and responsibilities called
for hereunder. The Company acknowledges that the Executive has made the Company
aware of a non-compete provision from his prior employment which has been
reviewed by the Executive and Company's respective counsels and the parties
mutually agree that the employment of Executive by the Company does not violate
the provisions of Executive's prior non-compete agreement.
2. Duties.
2.1 Executive shall perform the duties of the Chief Executive Officer of the
Company and such additional executive duties of Company and its affiliates as
may be, from time to time, requested of him by the Company's Board of Directors
and/or the Chairman of the Company. As Chief Executive Officer of the Company,
the Executive shall report to the Chairman of the Company and the Company Board
of Directors. The Company shall indemnify the Executive for all acts performed
as an officer of the Company to the maximum extent permitted by law. The
Company shall maintain Directors & Officers liability insurance in such amounts
as are determined by the Board of Directors, which shall include coverage of
the Executive.
2.1.1 The duties as Chief Executive Officer of the Company shall include
but not be limited to (i) having general and active management of the business
of the Company (ii) seeing that all orders and resolutions of the Board are
carried into effect, subject however, to the right of the directors to delegate
any specific powers, except such as may be by statute exclusively conferred on
any other officer or officers of the Company (iii) executing bonds, mortgages
and other contracts requiring a seal, under the seal of the Company (iv) be Ex-
Offico a member of all committees (v) have the general powers and duties of
supervision and management usually vested in the office of Chief Executive
Officer of a Company (vi) assist the Board of Directors and Chairman in
formulating the business plan, goals and objectives for the Company's future
growth.
2.2 Executive shall devote his full professional time and best efforts to the
performance of his duties and responsibilities hereunder to advance the
interests of the Company and shall not during the term of this Agreement (as
defined in Section 1 hereof) be employed, involved or otherwise engaged in,
either directly or indirectly, any other employment for gain, profit or other
pecuniary advantage, without prior written consent of Company. At no time
shall Executive engage in any activity that conflicts with the business of the
Company or its affiliates. Nothing set forth in this section 2.2 shall be
construed to prevent Executive from (i) acting as a member of Board of Trustees
or a member of Board of Directors of any other corporation, or as a member of
the Board of Trustees of any organization or entity which is not a competitor
of the Company or (ii) devoting of such of Executive's time and attention to
philanthropic, charitable, civic, community or other activities or endeavors as
Executive shall reasonably determine but only to the extent that Executive's
pursuance of any activities or endeavors described in subparagraph (i) and (ii)
above does not materially and adversely effect the Executive's ability to
perform and discharge Executive's duties and objectives to the Company
hereunder.
2.3 Except for required travel on Company business or unless Company agrees
otherwise, Executive shall perform his duties and responsibilities at the
Company's principal executive offices located in the greater Philadelphia area.
The Company shall furnish Executive with office space, parking, secretarial
assistance, personal computer, and such other facilities and services as shall
be suitable to Executive's position and adequate for the performance of his
duties hereunder. Company shall pay for all usage, maintenance, and reasonable
upgrades of such equipment mentioned in this Section.
2.4 Within 30 days of commencement of the Executive's employment with the
Company, the Company shall submit Executive's name for consideration to be
appointed to the Board of Directors of the Company; and support Executive's
nomination for a Board of Directors position at the next scheduled annual
meeting of Company shareholders.
3. Compensation.
3.1 For all duties and responsibilities to be performed and/or assumed by
Executive hereunder, Executive shall be entitled to receive an annual salary as
set forth below ("Base Salary"). The Base Salary, less any sums required to be
withheld by law, shall be payable in equal monthly installments or such other
more frequent regular installments as the Company may, from time to time,
determine. For purposes hereof, Base Salary shall be:
3.1.1 For the twelve-month period commencing with the date hereof, the
Base Salary shall be Four Hundred Thousand Dollars ($400,000).
3.1.2 For each year thereafter, the Base Salary shall be increased by an
amount determined by the Board of Directors but in no event less than (i) eight
percent (8%) after the first year, nine percent (9%) after the second year and
ten percent (10%) each year thereafter upon mutual agreement to extend the
term. Each percentage increase for a particular year shall be based on the
Base Salary for the immediately preceding year.
3.2 Company shall provide to Executive an annual bonus as an incentive to meet
certain performance objectives and milestones. The Board of Directors shall
determine the bonus amount at the conclusion of each of the Company's fiscal
years during the term of this Agreement, and payable 90 days thereafter. The
bonus can take the form of cash, grants of the Company's common stock, and/or
grants of options to purchase shares of the Company's common stock.
3.2.1 The amount of the bonus will be at the discretion of the Board of
Directors. At a minimum, however, Executive shall receive annually a cash
bonus based on a fiscal year end on the following general terms: (i) at the
Company fiscal year end (June 30, 2000) the Executive shall be entitled to a
cash bonus of twenty percent (20%) of the Base Salary provided the Company has
met the milestones and objectives which the Executive and Board of Directors
shall agree to establish on or before September 30, 1999 (ii) at the end the
second and third fiscal years a cash bonus equivalent to fifty percent (50%) of
the Base Salary provided the Executive has met the performance objectives and
milestones which shall be established by the Compensation Committee of the
Company Board of Directors and agreed upon by the Executive at least three
months prior to the start of the respective fiscal years.
4. Fringe Benefits.
Company shall pay for and/or provide for the Executive's participation with the
following benefits:
4.1 For the remainder of 1999, Executive shall be entitled to three (3) weeks
paid vacation to be used at the Executive's discretion. Thereafter, Executive
shall be entitled to four (4) weeks paid vacation during each full calendar
year of this Agreement to be used at the Executives discretion. Vacation time
shall accrue on a pro-rata basis during each year of this Agreement. Any
unused vacation shall be cumulative from year to year unless otherwise agreed
upon by the parties and shall be paid to Executive upon his separation of
employment from the Company.
Executive shall be entitled to paid time off for all Company Holidays. Such
time shall be taken on all Holidays on which the Company's Philadelphia office
is closed due to a Holiday.
Executive shall be entitled to take a reasonable amount of paid time off for
sick days.
4.2 The Executive and his immediate family shall be entitled to participate in
the Company benefits program which includes medical insurance (vision care &
prescription plan included) and dental insurance. In addition, the Executive
shall participate in the Company's benefits program for long-term disability
insurance, short-term disability insurance and life insurance. Until such time
as Executive's family is relocated to the Philadelphia area, the Company shall
reimburse Executive for or pay all COBRA premiums to Executive's previous
employer for health and hospitalization coverage for Executive and his family
for as long as Executive may purchase such COBRA coverage in accordance with
the terms, conditions and restrictions of COBRA.
4.3 Such other employee benefits maintained by the Company for its senior
executives and key management employees, including, all 401k, pension, profit
sharing, retirement, stock bonus and stock option plans, to the extent
Executive is eligible to participate pursuant to the terms and conditions of
such plans.
4.4 Executive shall be reimbursed in a timely manner for all items of travel,
entertainment and miscellaneous expenses which Executive reasonably incurs in
connection with the performance of his duties hereunder, provided that the
Executive submits to the Company such statements and other evidence supporting
said expenses as the Company may reasonably require. Until such a time as
Executive relocates to the Philadelphia area, Company shall reimburse Executive
for air travel to and from Executive's permanent residence in Dunwoody, Georgia
and reasonable living expenses while away from his residence provided Executive
properly accounts for such expenses in accordance with the Company's practices.
4.5 Executive shall be reimbursed in a timely manner for all reasonable moving
expenses actually incurred by Executive in relocating the Executive and his
family to the Philadelphia area ("Relocation Expenses"). The Relocation
Expenses shall include the cost of temporary residence, a moving company and
related expenses. The total Relocation Expenses for which Executive shall be
reimbursed shall not exceed sixty thousand dollars ($60,000.) and shall be
approved in writing, in advance, by the Company. In addition to the Relocation
Expenses, the Company will pay the cost of a furnished 2-bedroom apartment in
Philadelphia area (Korman Suites) for a period of time prior to Executive
establishing a Philadelphia area residence. When determining which Relocation
Expenses are reimbursable, the overriding philosophy is that the Executive
shall not experience any financial gain from the move, nor should the Executive
suffer any financial penalty. Any relocation expenses not specifically
mentioned above shall be reimbursed (subject to the sixty thousand dollar
($60,000.) limit) if they conform to this overriding philosophy. The Company
shall approve all Relocation Expenses in writing, in advance.
4.6 The Company shall pay Executive a signing bonus of seventy five thousand
dollars ($75,000.) which shall be considered earned by the Executive upon the
first day of his employment with the Company. The signing bonus shall be
treated as income to the Executive and taxed accordingly.
4.7 Company shall pay Executive's premium for an existing term life insurance
policy in an amount equal to $1,000,000, payable to any beneficiary designated
by Executive, provided that the amount of such insurance to be so provided
shall be offset by any other life insurance coverage provided to Executive
under any other group or their life insurance programs provided by Company to
Executive and other similarly situated employees. The Executive shall assume
the right to the policy in the event of his termination of employment.
5. Stock Options.
5.1 As part of Executive's compensation for services to be rendered hereunder,
Executive shall have the right and option to purchase from Company voting
Common Stock in Company ("Option"). The total number of shares available to
Executive under this Option is Five Million Shares (5,000,000) at a purchase
price per share based on the closing price of the Company shares on the date of
this Agreement (Option Shares"). The Option Shares are available for purchase
in installments as listed in Column A below and each installment shall become
vested on the corresponding date listed in Column B, as follows:
Column A Column B
Number of Shares Date Option Shares
Available for Purchase Become Vested
---------------------- -----------------------------------------
1,750,000 Upon the commencement of Executive's
employment pursuant to the terms of
this Agreement
1,750,000 First anniversary date of this agreement
1,500,000 Second anniversary date of this agreement
In order for the Option Shares to become vested as provided for above,
Executive must be employed by the Company under the terms of this Agreement as
of the vesting date set forth in Column B above.
5.2 Except as otherwise provided for below, the term of the Option granted
shall remain in effect for ten (10) years from the date on which such Option
Shares become vested.
5.3 If the Executive's employment with the Company terminates (as defined in
Section 6), the Options will be treated as follows:
5.3.1 If the Executive's employment with the Company is terminated by the
Company for Cause (as defined herein) or the Executive resigns, the Executive's
right to exercise vested Option Shares shall cease and become null and void
within thirty (30) days of the date employment terminated, except as otherwise
provided in Section 5.3 hereof. All unvested Option Shares will terminate
immediately as of the date of such termination of employment. In the event the
Company receives, accepts and consummates a tender offer for all of its
outstanding common stock prior to the vesting of the Option Shares, the vesting
rights shall be accelerated so as to allow Executive to exercise the Option to
purchase all of the Option Shares immediately prior to the consummation of such
tender offer.
5.3.2 If the Executive's employment is terminated (i) Without Cause (as
provided for in Section 6.4), (ii) due to his Long Term Disability (as provided
for in Section 6.2) or (iii) as a result of Executive's death, then vesting
rights shall be accelerated such that all unvested Options vest immediately.
In these circumstances, the Executive (or Executive's estate) shall have the
full ten years to exercise the Options, as specified in Section 5.
5.3.3 If the Executive resigns for Good Reason (as provided for in
Section 6.4), all unvested Options will vest immediately on a pro-rated basis,
based upon the number of days worked by Executive in such year, and will also
be subject to the 30-day exercise window.
5.4 The purchase price of the Option Shares shall be paid in full upon the
exercise of the Option, and Company shall not be required to deliver
certificates for such Option Shares until payment has been made. In addition
to, and at the time of payment of the exercise price for such Option Shares,
Executive shall be responsible for all federal and state withholding or other
employment taxes applicable to the taxable income of such Executive and any
other fees resulting from the exercise of the Executive.
5.5 Each share of Common Stock purchased pursuant to the terms hereof shall
carry all appropriate registration and/or restrictions on sale and notices as
determined from time to time by Company's securities counsel. Executive shall
cooperate with Company and Company's counsel in complying with all applicable
securities laws. Company agrees to register with the Securities and Exchange
Commission for resale the shares of Common Stock issuable upon the exercise of
the Options. Registration will occur at the same time as other Company
Executives' options.
6. Termination of Employment.
The employment of Executive and Company's liability and obligations hereunder
shall terminate as follows:
6.1 Death. This Agreement shall terminate immediately upon the death of
Executive. In such event, Executive's estate or the person he designates in
writing shall be paid for all of Executive's unpaid, accrued vacation time.
The Company also shall pay the health insurance premiums (COBRA or equivalent)
for Executive's dependents for a period of 12 months if such coverage is
desired by Executive's dependents. Executive's Options shall accelerate on his
Death.
6.2 Disability. This Agreement shall terminate immediately upon the Long-Term
Disability of Executive. The Long-Term Disability of Executive shall exist
based on the terms as defined in the Company benefits program for it's senior
executives. In the event Executive qualifies for Long-Term Disability
benefits, the vesting rights of the Options shall be accelerated so as to allow
Executive to exercise the Option to purchase all of the Option Shares
immediately.
6.3 The Company may discharge the Executive for Cause and thereby immediately
terminate his employment under this Agreement. For purposes of this Agreement,
Company shall have "Cause" to terminate the Executive's employment if the
Executive, in the reasonable judgment of the Board of Directors:
6.3.1 Willfully fails to perform any reasonable and lawful directive of
the Company's Board of Directors or the Chairman after Executive is given
written notice of his failure and continues 30 days after Executive's receipt
of such notice to cure such failure.
6.3.2 Materially breaches any of the agreements, duties, responsibilities
or obligations under this Agreement after Executive is given written notice of
his breach and continues 30 days after Executive's receipt of such notice to
cure such breach.
6.3.3 If the Executive engages in misconduct injurious to the Company as
determined in good faith by the Board of Directors.
6.3.4 Is convicted of a felony or any crime involving larceny,
embezzlement or moral turpitude.
6.3.5 If Executive is terminated for Cause, Executive will be paid for
all unpaid, accrued vacation time.
6.4 Good Reason/Without Cause. In the event that Executive's employment is
terminated by the Company without Cause for a reason other than death or
Disability, or Executive shall resign for "Good Reason", as defined below,
then, in such event:
6.4.1 Executive's Base Salary, as defined in Section 3 as then in effect,
shall continue to be paid for a period of twelve (12) months ("Payment Period")
or balance of Agreement whichever is longer. In addition to the above, the
Company shall pay Executive within five (5) business days of termination,
pursuant to paragraph 6.4 herein, a pro-rated portion (for purposes herein pro-
rated portion shall be on the basis of the number of days elapsed in the
Company's fiscal year) of the annual incentive bonus as referred to in
paragraph 3.2.1 which the Executive would have been entitled to for the fiscal
year of termination (as determined in good faith by the Board of Directors of
the Company).
6.4.2 Company shall maintain in effect during the Payment Period, for the
continued benefit of the Executive, all of the employee benefit plans and
programs in which the Executive was entitled to participate immediately prior
to the Executive's termination provided same is possible under the general
terms and provisions of such benefit plans and programs. Moreover, during the
Payment Period the Company shall provide the Executive with such reasonable
administrative and secretarial support services as may be necessary or
appropriate in order to assist Executive in finding new employment or Executive
may select an out-placement service to be paid for by the Company at a cost not
to exceed Five Thousand Dollars ($5,000).
For purposes of this Section 6.4, "Good Reason" shall mean:
(i) An assignment to the Executive of any duties inconsistent with, or a
material change in the nature or scope of, Executive's responsibilities,
authority or duties hereunder. For purposes herein, since the Executive shall
report to the Chairman of the Company, and the communications and work
environment related to the Executive and Chairman is critical thereto, a change
from the existing Chairman of the Company to someone other than Executive shall
be deemed Good Reason for purposes of this Agreement
(ii) Materially breaches any of the agreements, responsibilities or
obligations under this Agreement after the Company is given written notice of
it's breach and continues 30 days after Company's receipt of such notice to
cure such breach.
(iii) Ill health of Executive or a member of his family, or any other
compelling personal circumstance, which, in the mutual discretion of the
Executive and the Chairman of the Company, makes the Executive's continued
employment hereunder impossible, or inappropriate.
6.5 Executive may voluntarily terminate his employment under this Agreement
without Good Reason, as defined in Section 6.4 above, by giving the Company
ninety (90) days prior written notice thereof, and upon the expiration of such
ninety (90) day period, Executive's employment under this Agreement shall
terminate, and Company shall have no further obligation or liabilities under
this Agreement except to pay the Executive the portion, if any, that remains
unpaid of the Base Salary and unpaid accrued prorated vacation for the period
up to the date of termination. Resignation as defined herein must be in
written form to the Board, witnessed and signed by the Executive.
7. Surrender of Books and Records/Confidentiality.
7.1 Executive acknowledges that all lists, books, records, literature,
products and any other materials owned by Company or its affiliates or used by
them in connection with the conduct of their business, shall at all times
remain the property of Company and its affiliates and that upon termination of
employment hereunder, irrespective of the time, manner or cause of said
termination, Executive will surrender to Company and its affiliates all such
lists, books, records, literature, products and other materials.
7.2 Confidential Information and Property. The Executive acknowledges that
Company owns, directly or through its affiliates and subsidiaries, a variety of
proprietary information which is confidential, valuable and essential to the
ongoing conduct of Company's business. The Executive further recognizes that
this proprietary information may include, but is not limited to, source codes,
identities of new products, planned product enhancements, research and
development projects, profits, profit margins, technical specifications,
manufacturing techniques, test procedures, bid strategies and information
concerning current, former or prospective customers. The Executive further
recognizes that Company's proprietary information may appear in written form or
in other tangible media which are not labeled or otherwise identified as being
"confidential" or "proprietary" ("Confidential Property"). Confidential
Property, however, shall not include any information, which (i) is already
known to the general public or (ii) is approved for release by written
authorization of the Company. With respect to Confidential Property,
Executive, during the course of his employment and following the termination of
his employment for any reason, shall:
7.2.1 Retain such information in confidence and refrain from publishing,
making available or otherwise disclosing such information to any third party
except with the prior written consent of an authorized representative of the
Company.
7.2.2 Use all reasonable precautions to assure that such information is
properly protected and disclosed only to other authorized personnel within the
Company for proper use thereby; and
7.2.3 Refrain from making copies of written material or tangible objects
embodying such information, except as (and only to the extent that) such copies
are required in the performance of Executive's duties for the Company.
Executive further acknowledges that all such Confidential Property is
owned solely by Company, shall remain the exclusive property of Company and
that the unauthorized disclosure or use of such Confidential Property by
Executive will cause irreparable harm to Company. Executive agrees to use or
cause such Confidential Property to be used only in a manner consistent with
the terms and conditions of this Agreement, and not otherwise for the use or
advantage of Executive or others, and Executive shall not communicate or
disclose any Confidential Property to any third persons, except to the extent
required by law, to enforce the Agreement or to obtain confidential legal, tax,
or financial advice with respect thereto.
Upon termination of Executive's engagement; for any reason whatsoever,
Executive must deliver to Company all written and/or tangible materials,
including all copies thereof, embodying any Confidential Property, in
Executive's possession or control, including, but not limited to, source codes,
letters, memoranda, reports, notes, notebooks, lists, books of accounts, data,
disks, drawings, prints, plans, specifications, tapes, and other data storage
media and the like.
8. Miscellaneous.
8.1 Any notice, demand or communication required or permitted under this
Agreement shall be in writing and shall be sufficient when delivered
personally, or three (3) days after mailing by registered or certified mail,
return receipt requested, or the next day if sent by nationally recognized
overnight courier with proof of delivery, in each case postage prepaid,
addressed as follows:
If to the Company:
Clariti Telecommunications International, Ltd.
1341 N. Delaware Avenue
Philadelphia, PA 19125
Attn.: Peter S. Pelullo, Chairman
If to the Executive:
Ronald R. Grawert
5162 Brooke Farm Drive
Dunwoody, GA 30338
The foregoing addressees may be changed at any time by notice given in the
manner herein provided.
8.2 This Agreement constitutes the entire understanding and agreement between
Company and Executive regarding its subject matter and supersedes all prior
negotiations and agreements, whether oral or written, between them with respect
to its subject matter. This Agreement may not be modified except by a written
agreement signed by the Executive and the Company.
8.3 This Agreement shall be binding upon and inure to the benefit of the
parties and their respective heirs, executors, successors and assigns, except
that this Agreement may not be assigned by the Executive.
8.4 No waiver by either party of any condition or of the breach by the other
of any term or covenant contained in this Agreement, whether by conduct or
otherwise, in any one or more instances shall be deemed or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition, or the breach of any other term or covenant set forth in this
Agreement. Moreover, the failure of either party to exercise any right
hereunder shall not bar the later exercise thereof.
8.5 This Agreement shall be governed by the statutes and common laws of the
Commonwealth of Pennsylvania, excluding it's choice of law statutes or common
law.
8.6 The headings of the various sections and paragraphs have been included
herein for convenience only and shall not be construed in interpreting this
Agreement.
8.7 If any provision of this Agreement shall be held invalid or unenforceable,
the remainder of this Agreement shall, nevertheless, remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall, nevertheless, remain in full force and
effect in all other circumstances.
8.8 This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
9. Arbitration.
9.1 In the event a dispute cannot be resolved amicably, the parties mutually
recognize and agree that it will be to their best interests that their
differences be solved with a minimum of time and money being expended,
commensurate with a due process hearing. To this end, the parties agree that
they will not file any lawsuits, charges or claims against each other without
first submitting their grievances to mandatory and binding arbitration. Any
controversy arising out of, or relating to, this Agreement or any modification
or extension thereof, including any claim for damages or rescission, or both,
shall be settled by arbitration as provided by the Pennsylvania Uniform
Arbitration Act and/or the United States Arbitration Act, in Philadelphia,
Pennsylvania, in accordance with the rules, regulations and precepts then
existing of the American Arbitration Association (AAA) in connection with
commercial arbitration. (Nothing contained in this Section shall prevent
either party from seeking from a Court of competent jurisdiction a Temporary
Restraining Order and/or a Preliminary Injunction where such Order of
Injunction is necessary to the protection of such parties' interest).
9.2 Judgment upon the award rendered by the arbitrator(s) may be entered in
any state or Federal court having jurisdiction thereof. The parties further
agree that all costs, including the AAA administrative fee as well as the
arbitrator's fees, if any, stenographic records and all other expenses of the
arbitration shall be borne equally by the parties. Further, as part of the
award, the prevailing party shall be awarded reasonable attorney's fees against
the losing party.
9.3 In case of such dispute, difference, or question, the party seeking
resolution shall send to the other party a registered letter asking for
arbitration and appointing its arbitrator. Within thirty (30) days, the other
party shall indicate the name of its own arbitrator, failing which, the
American Arbitration Association or any successor shall appoint such arbitrator
thereof.
9.4 The two arbitrators so appointed shall meet within fifteen (15) days after
appointment of the last arbitrator, and they shall choose a third arbitrator,
and if they do not agree within one (1) month on the choice of such third
arbitrator, such third arbitrator shall be appointed by the American
Arbitration Association or any successor thereof.
9.5 The majority of the arbitrators shall make the decision. The seat of the
arbitration shall be in Philadelphia, Pennsylvania.
9.6 The parties mutually agree that the Arbitrators shall, upon the
application of either party, permit reasonable discovery in accordance with the
Rules of Court which demand for discovery may be enforced by a party of the
Arbitration upon application to the Court for aid in arbitration. The location
of depositions of parties themselves and their employees shall be at their
respective principal places of business.
9.7 The parties consent to the jurisdiction of the state courts of
Pennsylvania and/or the United States District Court of the Eastern District of
Pennsylvania for all purposes in connection with arbitration and enforcement.
The parties further consent that any process or notice of motion or other
application of either of said courts, and any paper in connection with
arbitration, may be served by certified mail, return receipt requested, or by
personal service or in such other manner as may be permissible under the rules
of the applicable court or arbitration tribunal, provided a reasonable time for
appearance is allowed.
10. No Right to Set Off.
The Company shall not be entitled to set off against the amounts payable
to the Executive under this Agreement any amounts earned by the Executive in
other employment after termination of his employment with the Company or any
amounts which might have been earned by the Executive in other employment had
he sought such other employment. The amounts payable to the Executive under
this Agreement shall not be treated as damages but as severance compensation to
which the Executive is entitled by reason of termination of his employment in
the circumstances contemplated by this Agreement. The Executive shall not be
required to seek other employment in order to mitigate or reduce the amounts
payable to him pursuant to this Agreement. In consideration of the foregoing,
provided that and for so long as the Company shall not be in default of any of
its obligations to pay to the Executive any amounts payable hereunder, the
Executive hereby waives and releases the Company from any and all claims and
damages that the Executive may have against the Company hereunder.
Notwithstanding anything herein to the contrary, in the event of any claim by
the Executive for damages hereunder, the Executive shall not be entitled to any
damages which, in the aggregate for all such claims, exceed the sum of any and
all amounts remaining payable hereunder at such time and in no circumstance
shall the Company be liable to the Executive for any indirect, unforeseeable,
special or punitive damages.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officer on the date first above
written.
ATTEST: Clariti Telecommunications International Ltd.
By: s/Ernest J. Cimadamore By: s/Peter S. Pelullo
---------------------- ------------------
Ernest J. Cimadamore Peter S. Pelullo,
Secretary Chairman
By: s/Ronald R. Grawert
-------------------
Ronald R. Grawert
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 15th
day of February, 1999 by and between Clariti Telecommunications International,
Ltd., a Delaware corporation ("Company"), and Joseph A. Smith ("Executive").
Company desires to employ Executive, and Executive desires to be employed
by Company, upon the terms and conditions outlined in this Agreement.
The Company and the Executive agree as follows:
1. Employment and Term.
Company hereby employs Executive and Executive hereby accepts employment
for a three- (3) year term commencing on February 15, 1999 ("Start Date") and
continuing until February 14, 2002 unless sooner terminated as provided for in
this Agreement ("Term of Employment"). Company and Executive have the option
to renegotiate this Agreement beyond the three-year period. Executive hereby
warrants and represents to Company that he is free to enter into this Agreement
and is not a party to any agreement, written or otherwise, or bound by any
restrictions, which limit or restrict him from entering into this Agreement or
performing the services, duties and responsibilities called for hereunder.
2. Duties.
2.1 Executive shall perform the duties of Executive Vice President of Telecom
Ventures and/or such executive duties of Company and its affiliates as may be,
from time to time, requested of him by the Company's Board of Directors or
President of the Company. The Executive shall report to the President of the
Company or such executive officer as the President shall designate.
2.2 Executive shall devote his full professional time and best efforts to the
performance of his duties and responsibilities to advance the interests of the
Company. During the term of this Agreement (as defined in Section 1 hereof),
Executive shall not be employed, involved or otherwise engaged in, either
directly or indirectly, any other employment for gain, profit or other
pecuniary advantage, without the prior written consent of the Company. At no
time shall Executive engage in any activity that conflicts with the business of
the Company or its subsidiaries and/or its affiliates. Nothing set forth in
this section 2.2 shall prevent Executive from devoting of such Executive's time
and attention to charitable or community activities, but only to the extent
that Executive's pursuance of any outside activities does not adversely effect
the Executive's ability to perform Executive's duties to the Company.
2.3 Except for required travel on Company business or unless Company agrees
otherwise, Executive shall perform his duties and responsibilities at the
Company's principal executive offices located in the greater Philadelphia area
and such locations as are mutually agreed upon by the Executive and the Company
in order to carry out the Executive's duties hereunder.
3. Compensation.
3.1 For all duties and responsibilities to be performed by Executive
hereunder, Executive shall be entitled to receive an annual salary as set forth
below ("Base Salary"). The Base Salary, less any sums required to be withheld
by law, shall be payable in equal monthly installments or such other more
frequent regular installments as the Company may, from time to time, determine.
For purposes hereof, Base Salary shall be:
3.1.1 For the twelve-month period commencing on the Start Date, the Base
Salary shall be Two Hundred and Forty Five Thousand Dollars ($245,000).
3.1.2 Thereafter, the Base Salary shall be increased by an amount
determined by the Board of Directors or their designee, but in no event less
than eight percent (8%) after the second year. Each percentage increase for a
particular year shall be based on the Base Salary for the immediately preceding
year.
4. Fringe Benefits.
Company shall pay for or provide Executive with the following benefits:
4.1 For the first year, Executive shall be entitled to three (3) weeks paid
vacation to be used at the Executive's discretion. Thereafter, Executive shall
be entitled to four (4) weeks paid vacation during each full year of this
Agreement to be used at the Executive's discretion. Vacation time shall accrue
on a pro-rata basis during each year of this Agreement. Up to 4 weeks of
unused vacation time may be carried over to the following calendar year.
Unused vacation time in excess of 4 weeks will be forfeited at the conclusion
of each calendar year.
4.2 Health and hospitalization insurance established and maintained by the
Company for its employees. Company shall either secure and maintain health and
hospitalization insurance for Executive and his dependents on the Company
health and hospitalization insurance program, or reimburse Executive for
coverage comparable to the health and hospitalization insurance coverage
afforded to other comparable Company executives and their immediate family.
4.3 Such other employee benefits maintained by the Company for its senior
executives and key management employees, including all 401k, pension, profit
sharing, retirement, stock bonus and stock option plans, to the extent
Executive is eligible to participate pursuant to the terms and conditions of
such plans.
5. Stock Options.
5.1 As part of Executive's compensation for services to be rendered hereunder,
Executive shall have the right and option to purchase from Company voting
common stock in the Company ("Option"). The total number of shares available
to Executive under this Option is Three Hundred Thousand Shares (300,000) at a
purchase price equal to Two Dollars ($2.00) per share for the Company common
stock. The Option Shares are available for purchase in installments as listed
in Column A below and each installment shall become vested on the corresponding
date listed in Column B, as follows:
Column A Column B
Number of Shares Date Option Shares
Available for Purchase Become Vested
---------------------- ------------------------
i) 100,000 First day of Executive's
employment ("Start Date")
ii) 100,000 February 15, 2000
iii) 100,000 February 15, 2001
In order for the Option Shares to become vested as provided for above,
Executive must be employed by the Company under the terms of this Agreement as
of the vesting date set forth in Column B above.
5.2 Except as otherwise provided for below, the term of the Option granted
shall remain in effect for ten (10) years from the Start Date. If the
Executive's employment with the Company is terminated by the Company for Cause,
or if Executive resigns without Good Reason, (as defined in this Agreement),
the Executive's right to exercise vested Option Shares shall cease and become
null and void thirty (30) days after the date employment is terminated.
Further, the Executive's rights to exercise the Options granted herein or
vesting of such Options are reflected on an Option form attached hereto as
Exhibit "A". All unvested Option Shares will terminate immediately as of the
date of such termination of employment.
5.3 In the event the Company receives, accepts and consummates a tender offer
for all of its outstanding common stock or a significant portion so as to
materially change control of the Company prior to the vesting of the Option
Shares, the vesting rights shall be accelerated so as to allow Executive to
exercise the Option to purchase all of the Option Shares immediately prior to
the consummation of such tender offer.
5.4 The purchase price of the Option Shares shall be paid in full upon the
exercise of the Option, and Company shall not be required to deliver
certificates for such Option Shares until payment has been made. In addition,
at the time of payment of the purchase price for such Option Shares, Executive
shall be responsible for all applicable federal and state withholding or other
employment taxes, and any other fees resulting from the exercise of the
Executive.
5.5 Each share of Option Stock purchased pursuant to the terms hereof shall
carry all appropriate registration and/or restrictions on sale and notices as
determined from time to time by Company's securities counsel. Executive shall
cooperate with Company and Company's counsel in complying with all applicable
securities laws. Company agrees to register the common stock issuable upon
exercise of the Stock Options at the same time as other Company Executives'
options, which will be as soon as reasonably practicable.
5.6 The exercise price and the number of shares of Common Stock issuable upon
the exercise of Options are subject to equitable adjustment to take into
account stock dividends, stock splits, recapitalizations and other dilutive
events, all as reasonably determined in good faith by the Board of Directors.
6. Termination of Employment.
The employment of Executive and Company's liability and obligations
hereunder shall terminate as follows:
6.1 This Agreement shall terminate immediately upon the death of Executive.
In such event, Company shall pay to such person as Executive may designate in a
written notice filed with the Company, or if no such person shall be
designated, to Executive's estate, a lump sum death benefit pursuant to the
Company's benefit plan.
6.2 This Agreement shall terminate immediately upon the Executive meeting the
requirements for coverage of long term disability under the Company disability
program. Executive will participate in the Company's Group disability
insurance program ("Disability").
6.3 The Company may discharge the Executive for Cause and thereby immediately
terminate his employment under this Agreement. For purposes of this Agreement,
Company shall have "Cause" to terminate the Executive's employment if the
Executive, in the reasonable and prudent judgement of the Company:
6.3.1 Willfully fails to perform any reasonable directive of the
Company's Board of Directors, Chief Executive Officer, or President.
6.3.2 Materially breaches any of the agreements, duties, responsibilities
or obligations under this Agreement.
6.3.3 Embezzles or converts to his own use any funds or property of the
Company or any client or customer of the Company.
6.3.4 Is convicted of a felony or any crime involving larceny,
embezzlement or moral turpitude.
6.4 In the event that Executive's employment is terminated by the Company
without Cause, as defined in Section 6.3, above, for a reason other than death
or Disability, then, in such event:
6.4.1 Executive's Base Salary shall continue to be paid for a period of
up to twelve (12) months ("Payment Period"):
6.4.2 Company shall maintain in effect during the Payment Period, for the
continued benefit of the Executive, all of the employee benefit plans and
programs in which the Executive was entitled to participate immediately prior
to the Executive's termination as long as continued eligibility is possible
under the general terms and provisions of such benefit plans and programs.
6.5 Executive may voluntarily terminate his employment under this Agreement
without Good Reason by giving the Company ninety (90) days prior written
notice. Upon the expiration of such ninety (90) day period, Executive's
employment under this Agreement shall terminate, and Company shall have no
further obligation or liabilities under this Agreement except to pay the
Executive the portion, if any, that remains unpaid of the Base Salary and
unpaid accrued prorated vacation for the period up to the date of termination.
Resignation as defined herein must be in written form to the President, signed
by the Executive.
For purposes of this Section 6.5, "Good Reason" shall mean failure by the
Company to comply with the provisions of this Agreement.
7. Proprietary Information.
7.1 Executive acknowledges that all lists, books, records, literature,
products and any other materials owned by Company or its subsidiaries and/or
affiliates or used by them in connection with the conduct of their businesses,
shall at all times remain the property of Company and its subsidiaries and/or
affiliates. Upon termination of employment hereunder, irrespective of the
time, manner or cause of termination, Executive will surrender to Company all
such lists, books, records, literature, products and other materials in his
possession and/or control.
7.2 Executive acknowledges that Company and its subsidiaries own a variety of
proprietary information, which is confidential, valuable, and essential to the
ongoing conduct of the Company and its subsidiaries businesses. The Executive
further recognizes that this proprietary information may include, but is not
limited to, product plans, source codes, identities of new products, planned
product enhancements, profits, profit margins, research and development
projects, pricing, technical specifications, manufacturing techniques, test
procedures, bid strategies, business strategies, and information concerning
current, former, or prospective customers, business plans, merger and
acquisition targets and strategies, business and financial software, financial
and business contacts or relationships and the Executive recognizes that
Company and its subsidiaries proprietary information may appear in written form
or in other tangible media which are not labeled or otherwise identified as
being "confidential" or "proprietary" (the above proprietary information is
hereinafter referred to as "Confidential Property"). Confidential Property,
however, shall not include any information that is approved for release by
written authorization of the Company. With respect to Confidential Property,
Executive, during the course of his employment and following the termination of
his employment for any reason, shall:
7.2.1 Retain such information in confidence and refrain from publishing,
making available or otherwise disclosing such information to any third party
except with the prior written consent of the Chairman, CEO or President of the
Company. This obligation will survive Executive's employment with the Company.
7.2.2 Will use all reasonable precautions to assure that Company's
proprietary information is properly protected and disclosed only to other
authorized personnel within the Company for proper use thereby. Executive
understands that the Company and its subsidiary operations are required to
adhere to federal securities laws as they relate to disclosure of Company
information to the public and agrees to abide by the requirements related
thereto.
7.2.3 Refrain from making any copies of written material or tangible
objects embodying such information, except as (and only to the extent that)
such copies are required in the performance of Executive's duties for the
Company.
7.3 During the term of this Agreement, Company has an ownership right to all
of Executive's patents, ideas, inventions, discoveries, and enhancements which
relate to the Business of the Company (defined below) or which are derived from
the Company's property or proprietary information.
7.3.1 The "Business of the Company" referred to in this Agreement shall
mean all businesses of Company and its subsidiaries and/or its affiliates,
whether presently conducted or hereafter engaged in or reasonably contemplated
or envisioned by Company. The Business of the Company includes, but is not
limited to, the business of developing and marketing communication products and
services.
7.3.2 Executive further acknowledges that all such Confidential Property
is owned solely by Company, shall remain the exclusive property of Company and
that the unauthorized disclosure or use of such Confidential Property by
Executive will cause irreparable harm to Company. Executive agrees to use or
cause such Confidential Property to be used only in a manner consistent with
the terms and conditions of this Agreement, and not otherwise for the use or
advantage of Executive or others. Executive shall not communicate or disclose
any Confidential Property to any third persons, except to the extent required
by law, to enforce the terms of this Agreement.
8. Miscellaneous.
8.1 Any notice, demand or communication required or permitted under this
Agreement shall be in writing and shall be sufficient when delivered
personally, or three (3) days after mailing by registered or certified mail,
return receipt requested, or the next day if sent by nationally recognized
overnight courier with proof of delivery, in each case postage prepaid,
addressed as follows:
If to the Company:
Clariti Telecommunications International, Ltd.
1341 N. Delaware Avenue
Philadelphia, PA 19125
Attn.: Peter S. Pelullo, Chairman/CEO
If to the Executive:
Joseph A. Smith
503 Golden Gate Drive
Richboro, PA 18954
The foregoing addressees may be changed at any time so long as notice is
provided.
8.2 This Agreement constitutes the entire understanding and agreement between
Company and Executive regarding its subject matter and supersedes all prior
negotiations and agreements, whether oral or written, between them with respect
to its subject matter. This Agreement may not be modified except by a written
agreement signed by the Executive and the Company.
8.3 This Agreement shall be binding upon and inure to the benefit of the
parties and their respective heirs, executors, successors and assigns, except
that the Executive may not assign this Agreement.
8.4 No waiver by either party of any condition or of the breach by the other
of any term or covenant contained in this Agreement, whether by conduct or
otherwise, in any one or more instances shall be deemed or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition, or the breach of any other term or covenant set forth in this
Agreement. Moreover, the failure of either party to exercise any right
hereunder shall not bar the later exercise thereof.
8.5 This Agreement shall be governed by the statutes and common laws of the
Commonwealth of Pennsylvania, excluding its choice of law statutes or common
law.
8.6 The headings of the various sections and paragraphs have been included
herein for convenience only and shall not be construed in interpreting this
Agreement.
8.7 If any provision of this Agreement shall be held invalid or unenforceable,
the remainder of this Agreement shall, nevertheless, remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall, nevertheless, remain in full force and
effect in all other circumstances.
8.8 This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officer on the date first above
written.
ATTEST:
By: s/Ernest Cimadamore Date: February 15, 1999
------------------- -----------------
Ernest Cimadamore
Secretary, Clariti Telecommunications
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.:
By: s/ Peter S. Pelullo Date: February 15, 1999
------------------- -----------------
Peter S. Pelullo
Chairman/CEO, Clariti Telecommunications
EXECUTIVE:
By: s/Joseph A. Smith Date: February 15, 1999
------------------- -----------------
Joseph A. Smith
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 21st
day of December, 1998 by and between Clariti Telecommunications International,
Ltd., a Delaware corporation ("Company"), and Daniel McDuffie ("Executive").
Company desires to employ Executive, and Executive desires to be employed
by Company, upon the terms and conditions outlined in this Agreement.
The Company and the Executive agree as follows:
1. Employment and Term.
Company hereby employs Executive and Executive hereby accepts employment
for a three- (3) year term commencing on January 4, 1999 ("Start Date") and
continuing until January 3, 2002 unless sooner terminated as provided for in
this Agreement ("Term of Employment"). Company and Executive have the option
to renegotiate this Agreement beyond the three-year period. Executive hereby
warrants and represents to Company that he is free to enter into this Agreement
and is not a party to any agreement, written or otherwise, or bound by any
restrictions, which limit or restrict him from entering into this Agreement or
performing the services, duties and responsibilities called for hereunder.
2. Duties.
2.1 Executive shall perform the duties of Senior Vice President of Telecom
Operations and/or such executive duties of Company and its affiliates as may
be, from time to time, requested of him by the Company's Board of Directors,
Chief Executive Officer, or President of the Company.
2.2 Executive shall devote his full professional time and best efforts to the
performance of his duties and responsibilities to advance the interests of the
Company. During the term of this Agreement (as defined in Section 1 hereof),
Executive shall not be employed, involved or otherwise engaged in, either
directly or indirectly, any other employment for gain, profit or other
pecuniary advantage, without the prior written consent of the Company. At no
time shall Executive engage in any activity that conflicts with the business of
the Company or its subsidiaries and/or its affiliates. Nothing set forth in
this section 2.2 shall prevent Executive from devoting of such Executive's time
and attention to charitable or community activities, but only to the extent
that Executive's pursuance of any outside activities does not adversely effect
the Executive's ability to perform Executive's duties to the Company.
2.3 Except for required travel on Company business or unless Company agrees
otherwise, Executive shall perform his duties and responsibilities at the
Company's principal executive offices located in the greater Philadelphia area
and such locations as are mutually agreed upon by the Executive and the Company
in order to carry out the Executive's duties hereunder.
3. Compensation.
3.1 For all duties and responsibilities to be performed by Executive
hereunder, Executive shall be entitled to receive an annual salary as set forth
below ("Base Salary"). The Base Salary, less any sums required to be withheld
by law, shall be payable in equal monthly installments or such other more
frequent regular installments as the Company may, from time to time, determine.
For purposes hereof, Base Salary shall be:
3.1.1 For the twelve-month period commencing on the Start Date, the Base
Salary shall be One Hundred and Seventy Five Thousand Dollars ($175,000).
3.1.2 For each year thereafter, the Base Salary shall be increased by an
amount determined by the Board of Directors or their designee, but in no event
less than seven percent (7%) after the first year, and eight percent (8%) after
the second year. Each percentage increase for a particular year shall be based
on the Base Salary for the immediately preceding year.
4. Fringe Benefits.
Company shall pay for or provide Executive with the following benefits:
4.1 For the first year, Executive shall be entitled to three (3) weeks paid
vacation to be used at the Executive's discretion. Thereafter, Executive shall
be entitled to four (4) weeks paid vacation during each full year of this
Agreement to be used at the Executive's discretion. Vacation time shall accrue
on a pro-rata basis during each year of this Agreement. Up to 4 weeks of
unused vacation time may be carried over to the following calendar year.
Unused vacation time in excess of 4 weeks will be forfeited at the conclusion
of each calendar year.
4.2 Health and hospitalization insurance established and maintained by the
Company for its employees. Since the Company presently does not have a health
and hospitalization insurance plan in effect, Company shall reimburse Executive
for all COBRA payments made by Executive to his previous employer for health
and hospitalization coverage for Executive and his family. Thereafter, Company
shall either secure and maintain health and hospitalization insurance for
Executive and his dependents, or reimburse Executive for coverage comparable to
the health and hospitalization insurance coverage afforded to other comparable
Company executives and their immediate family.
4.3 Such other employee benefits maintained by the Company for its senior
executives and key management employees, including all pension, profit sharing,
retirement, stock bonus and stock option plans, to the extent Executive is
eligible to participate pursuant to the terms and conditions of such plans.
4.4 The Company will select and pay the cost of temporary housing and travel
expenses for Executive in and to the Philadelphia area during the term of this
Agreement.
5. Stock Options.
5.1 As part of Executive's compensation for services to be rendered hereunder,
Executive shall have the right and option to purchase from Company voting
common stock in the Company ("Option"). The total number of shares available
to Executive under this Option is Three Hundred Thousand Shares (300,000) at a
purchase price of Two Dollars and Seventy Five Cents ($2.75) per share. The
Option Shares are available for purchase in installments as listed in Column A
below and each installment shall become vested on the corresponding date listed
in Column B, as follows:
Column A Column B
Number of Shares Date Option Shares
Available for Purchase Become Vested
---------------------- ------------------------
i) 75,000 First day of Executive's
employment ("Start Date")
ii) 100,000 January 3, 2000
iii) 125,000 January 3, 2001
In order for the Option Shares to become vested as provided for above,
Executive must be employed by the Company under the terms of this Agreement as
of the vesting date set forth in Column B above.
5.2 Except as otherwise provided for below, the term of the Option granted
shall remain in effect for ten (10) years from the Start Date. If the
Executive's employment with the Company is terminated by the Company for Cause,
or if Executive resigns without Good Reason, (as defined in this Agreement),
the Executive's right to exercise vested Option Shares shall cease and become
null and void thirty (30) days after the date employment is terminated.
Further, the Executive's rights to exercise the Options granted herein or
vesting of such Options are reflected on an Option form attached hereto as
Exhibit "A". All unvested Option Shares will terminate immediately as of the
date of such termination of employment.
5.3 In the event the Company receives, accepts and consummates a tender offer
for all of its outstanding common stock or a significant portion so as to
materially change control of the Company prior to the vesting of the Option
Shares, the vesting rights shall be accelerated so as to allow Executive to
exercise the Option to purchase all of the Option Shares immediately prior to
the consummation of such tender offer.
5.4 The purchase price of the Option Shares shall be paid in full upon the
exercise of the Option, and Company shall not be required to deliver
certificates for such Option Shares until payment has been made. In addition,
at the time of payment of the purchase price for such Option Shares, Executive
shall be responsible for all applicable federal and state withholding or other
employment taxes, and any other fees resulting from the exercise of the
Executive.
5.5 Each share of Option Stock purchased pursuant to the terms hereof shall
carry all appropriate registration and/or restrictions on sale and notices as
determined from time to time by Company's securities counsel. Executive shall
cooperate with Company and Company's counsel in complying with all applicable
securities laws. Company agrees to register the common stock issuable upon
exercise of the Stock Options at the same time as other Company Executives'
options, which will be as soon as reasonably practicable.
5.6 The exercise price and the number of shares of Common Stock issuable upon
the exercise of Options are subject to equitable adjustment to take into
account stock dividends, stock splits, recapitalizations and other dilutive
events, all as reasonably determined in good faith by the Board of Directors.
6. Termination of Employment.
The employment of Executive and Company's liability and obligations
hereunder shall terminate as follows:
6.1 This Agreement shall terminate immediately upon the death of Executive.
In such event, Company shall pay to such person as Executive may designate in a
written notice filed with the Company, or if no such person shall be
designated, to Executive's estate, a lump sum death benefit in an amount equal
to twelve (12) months of Executive's Base Salary as in effect on the date of
Executive's death.
6.2 This Agreement shall terminate immediately upon the Disability of
Executive. Disability shall exist if, due to a mental or physical condition,
Executive is determined to be unable to perform his duties and responsibilities
hereunder for a continuous period of two (2) months. Disability shall be
conclusively established by written certification by two (2) licensed,
disinterested physicians selected as mutually agreed upon between Company and
Executive. In the event the two (2) physicians disagree, a third physician
shall be selected by the two physicians to break such impasse. The costs
associated with the determination of Disability shall be borne equally between
Company and Executive. In the event of Disability, Executive shall be entitled
to receive his Base Salary in accordance with Section 3 for a period of six (6)
months following the onset of Disability.
6.3 The Company may discharge the Executive for Cause and thereby immediately
terminate his employment under this Agreement. For purposes of this Agreement,
Company shall have "Cause" to terminate the Executive's employment if the
Executive, in the reasonable and prudent judgement of the Company:
6.3.1 Willfully fails to perform any reasonable directive of the
Company's Board of Directors, Chief Executive Officer, or President.
6.3.2 Materially breaches any of the agreements, duties, responsibilities
or obligations under this Agreement.
6.3.3 Embezzles or converts to his own use any funds or property of the
Company or any client or customer of the Company.
6.3.4 Is convicted of a felony or any crime involving larceny,
embezzlement or moral turpitude.
6.4 In the event that Executive's employment is terminated by the Company
without Cause, as defined in Section 6.3, above, for a reason other than death
or Disability, or Executive shall resign for "Good Reason", as defined below,
then, in such event:
6.4.1 Executive's Base Salary shall continue to be paid for a period of
up to six (6) months, based on the following formula ("Payment Period"):
6.4.1.1 If there is more than six (6) months remaining on the
Agreement at the time of employment termination, then Executive's Base Salary
shall continue to be paid for exactly six (6) months.
6.4.1.2 If there is six (6) months or less than six (6) months
remaining on the Agreement at the time of employment termination, then
Executive's Base Salary shall continue to be paid for the balance of the
Agreement.
6.4.2 Company shall maintain in effect during the Payment Period, for the
continued benefit of the Executive, all of the employee benefit plans and
programs in which the Executive was entitled to participate immediately prior
to the Executive's termination as long as continued eligibility is possible
under the general terms and provisions of such benefit plans and programs.
For purposes of this Section 6.4, "Good Reason" shall mean:
(i) Failure by the Company to comply with the provisions of this
Agreement.
(ii) Any compelling personal circumstance, which, in the mutual
discretion of the Executive and the Board of Directors, makes the Executive's
continued employment hereunder impossible, or inappropriate. Any material
change of executive's duties or responsibilities within the Company shall be
considered a compelling personal circumstance.
6.5 Executive may voluntarily terminate his employment under this Agreement
without Good Reason, as defined in Section 6.4 above, by giving the Company
ninety (90) days prior written notice. Upon the expiration of such ninety (90)
day period, Executive's employment under this Agreement shall terminate, and
Company shall have no further obligation or liabilities under this Agreement
except to pay the Executive the portion, if any, that remains unpaid of the
Base Salary and unpaid accrued prorated vacation for the period up to the date
of termination. Resignation as defined herein must be in written form to the
President, signed by the Executive.
7. Proprietary Information.
7.1 Executive acknowledges that all lists, books, records, literature,
products and any other materials owned by Company or its subsidiaries and/or
affiliates or used by them in connection with the conduct of their businesses,
shall at all times remain the property of Company and its subsidiaries and/or
affiliates. Upon termination of employment hereunder, irrespective of the
time, manner or cause of termination, Executive will surrender to Company all
such lists, books, records, literature, products and other materials in his
possession and/or control.
7.2 Executive acknowledges that Company and its subsidiaries own a variety of
proprietary information, which is confidential, valuable, and essential to the
ongoing conduct of the Company and its subsidiaries businesses. The Executive
further recognizes that this proprietary information may include, but is not
limited to, product plans, source codes, identities of new products, planned
product enhancements, profits, profit margins, research and development
projects, pricing, technical specifications, manufacturing techniques, test
procedures, bid strategies, business strategies, and information concerning
current, former, or prospective customers, business plans, merger and
acquisition targets and strategies, business and financial software, financial
and business contacts or relationships and the Executive recognizes that
Company and its subsidiaries proprietary information may appear in written form
or in other tangible media which are not labeled or otherwise identified as
being "confidential" or "proprietary" (the above proprietary information is
hereinafter referred to as "Confidential Property"). Confidential Property,
however, shall not include any information which is approved for release by
written authorization of the Company. With respect to Confidential Property,
Executive, during the course of his employment and following the termination of
his employment for any reason, shall:
7.2.1 Retain such information in confidence and refrain from publishing,
making available or otherwise disclosing such information to any third party
except with the prior written consent of the Chairman, CEO or President of the
Company. This obligation will survive Executive's employment with the Company.
7.2.2 Will use all reasonable precautions to assure that Company's
proprietary information is properly protected and disclosed only to other
authorized personnel within the Company for proper use thereby. Executive
understands that the Company and its subsidiary operations are required to
adhere to federal securities laws as they relate to disclosure of Company
information to the public and agrees to abide by the requirements related
thereto.
7.2.3 Refrain from making any copies of written material or tangible
objects embodying such information, except as (and only to the extent that)
such copies are required in the performance of Executive's duties for the
Company.
7.3 During the term of this Agreement, Company has an ownership right to all
of Executive's patents, ideas, inventions, discoveries, and enhancements which
relate to the Business of the Company (defined below) or which are derived from
the Company's property or proprietary information.
7.3.1 The "Business of the Company" referred to in this Agreement shall
mean all businesses of Company and its subsidiaries and/or its affiliates,
whether presently conducted or hereafter engaged in or reasonably contemplated
or envisioned by Company. The Business of the Company includes, but is not
limited to, the business of developing and marketing communication products and
services.
7.3.2 Executive further acknowledges that all such Confidential Property
is owned solely by Company, shall remain the exclusive property of Company and
that the unauthorized disclosure or use of such Confidential Property by
Executive will cause irreparable harm to Company. Executive agrees to use or
cause such Confidential Property to be used only in a manner consistent with
the terms and conditions of this Agreement, and not otherwise for the use or
advantage of Executive or others. Executive shall not communicate or disclose
any Confidential Property to any third persons, except to the extent required
by law, to enforce the terms of this Agreement.
8.Miscellaneous.
8.1 Any notice, demand or communication required or permitted under this
Agreement shall be in writing and shall be sufficient when delivered
personally, or three (3) days after mailing by registered or certified mail,
return receipt requested, or the next day if sent by nationally recognized
overnight courier with proof of delivery, in each case postage prepaid,
addressed as follows:
If to the Company:
Clariti Telecommunications International, Ltd.
1341 N. Delaware Avenue
Philadelphia, PA 19125
Attn.: Peter S. Pelullo, Chairman/CEO
If to the Executive:
Dan McDuffie
101 Spring Hill Rd.
North Andover, MA 01845
The foregoing addressees may be changed at any time so long as notice is
provided.
8.2 This Agreement constitutes the entire understanding and agreement between
Company and Executive regarding its subject matter and supersedes all prior
negotiations and agreements, whether oral or written, between them with respect
to its subject matter. This Agreement may not be modified except by a written
agreement signed by the Executive and the Company.
8.3 This Agreement shall be binding upon and inure to the benefit of the
parties and their respective heirs, executors, successors and assigns, except
that the Executive may not assign this Agreement.
8.4 No waiver by either party of any condition or of the breach by the other
of any term or covenant contained in this Agreement, whether by conduct or
otherwise, in any one or more instances shall be deemed or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition, or the breach of any other term or covenant set forth in this
Agreement. Moreover, the failure of either party to exercise any right
hereunder shall not bar the later exercise thereof.
8.5 This Agreement shall be governed by the statutes and common laws of the
Commonwealth of Pennsylvania, excluding its choice of law statutes or common
law.
8.6 The headings of the various sections and paragraphs have been included
herein for convenience only and shall not be construed in interpreting this
Agreement.
8.7 If any provision of this Agreement shall be held invalid or unenforceable,
the remainder of this Agreement shall, nevertheless, remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall, nevertheless, remain in full force and
effect in all other circumstances.
8.8 This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officer on the date first above
written.
ATTEST:
By: s/Ernest Cimadamore Date: January 3, 1999
------------------- ---------------
Ernest Cimadamore
Secretary, Clariti Telecommunications
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.:
By: s/ Peter S. Pelullo Date: January 3, 1999
------------------- ---------------
Peter S. Pelullo
Chairman/CEO, Clariti Telecommunications
EXECUTIVE:
By: s/ Dan McDuffie Date: January 3, 1999
------------------- ---------------
Dan McDuffie
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