<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
ACT
For the transition period from _____________ to _________
Commission file number 33-90344
Clariti Telecommunications International, Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
23-2498715
(IRS Employer Identification No.)
1341 North Delaware Avenue, Philadelphia, PA 19125
(Address of principal executive offices)
(X) (215) 425-8682
(Issuer's telephone number)
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes (X) No ( )
Outstanding shares issued or to be issued of each of the registrant's
class of common stock $.001 par value per share as of November 6, 1998 were
28,972,454.
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
September 30, 1998 (unaudited) and
June 30, 1998 (audited) 3
Consolidated Statements of Operations
for the three months ended September 30,
1998 and 1997 (unaudited) 4
Consolidated Statement of Stockholders'
Equity for the three months ended
September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended September 30,
1998 and 1997 (unaudited) 6
Notes to Consolidated Financial
Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 10-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Events 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
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<TABLE>
PART I. - FINANCIAL INFORMATION
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
Sept. 30, June 30,
1998 1998
----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 419 $ 1,391
Prepaid consulting fees 181 263
Other current assets 28 40
-------- --------
628 1,694
-------- --------
PROPERTY AND EQUIPMENT, NET 311 282
-------- --------
OTHER ASSETS
Goodwill 24 28
Patents and technology 223 236
-------- --------
247 264
-------- --------
TOTAL ASSETS $ 1,186 $ 2,240
======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable - trade $ 447 $ 443
Accrued taxes, other than income taxes 78 54
Accrued wages - officers 166 50
Accrued expenses and other current liabilities 135 113
-------- --------
TOTAL LIABILITIES 826 660
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK
$.001 par value; authorized 50,000,000
shares; issued and outstanding, 23,743,883
shares at September 30, 1998 and 23,697,283
at June 30, 1998 24 24
WARRANTS OUTSTANDING 1,881 1,843
ADDITIONAL PAID-IN-CAPITAL 31,474 31,366
ACCUMULATED DEFICIT (33,019) (31,653)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 360 1,580
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,186 $ 2,240
======== ========
<FN>
See accompanying notes
3
</TABLE>
<PAGE>
<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
SALES $ - $ -
COST OF SALES - -
------- -------
GROSS PROFIT - -
------- -------
OPERATING EXPENSES:
Officers' compensation 291 231
Other salaries and payroll costs 104 54
Consulting fees 235 177
Professional fees 56 100
Research and development 431 427
Travel 149 83
Other 112 102
------- -------
TOTAL OPERATING EXPENSES 1,378 1,174
------- -------
LOSS FROM OPERATIONS (1,378) (1,174)
------- -------
OTHER INCOME
Interest income 12 21
------- -------
NET LOSS $(1,366) $(1,153)
======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 23,734 19,128
BASIC AND DILUTED LOSS PER COMMON SHARE $( 0.06) $( 0.06)
======= =======
<FN>
See accompanying notes
4
</TABLE>
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Dollars and Shares in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------
NUMBER WARRANTS ADD'L. ACCUMU-
OF OUT- PAID-IN LATED
SHARES AMOUNT STANDING CAPITAL DEFICIT
------ ------ -------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1998 23,697 $ 24 $1,843 $ 31,366 $(31,653)
Three months ended
September 30, 1998
(unaudited):
Issuance of common stock 47 - - 118 -
Commissions - - - ( 10) -
Issuance of warrants for
services - - 38 - -
Net loss - - - - ( 1,366)
------ ---- ------ -------- --------
BALANCES, SEPT. 30, 1998 23,744 $ 24 $1,881 $ 31,474 $(33,019)
====== ==== ====== ======== ========
<FN>
See accompanying notes
5
</TABLE>
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<TABLE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,366) $(1,153)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 34 11
Issuance of common stock in settlement
of accrued liability 18 -
Issuance of common stock warrants in
settlement of accounts payable - trade 38 -
(Increase) decrease in:
Prepaid consulting fees 82 ( 2)
Other current assets 12 21
Increase (decrease) in:
Accounts payable - trade 4 128
Accrued taxes, other than income taxes 24 6
Accrued wages - officers 116 1
Accrued expenses and other current
liabilities 22 ( 5)
------- -------
Net cash used in operating activities (1,016) ( 993)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of patent and technology - ( 11)
Purchase of equipment ( 46) ( 9)
------- -------
Net cash used in investing activities ( 46) ( 20)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 100 -
Commission on common stock issuance ( 10) -
------- -------
Net cash provided by financing activities 90 -
------- -------
NET CHANGE IN CASH AND EQUIVALENTS ( 972) (1,013)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,391 2,075
------- -------
CASH AND EQUIVALENTS, END OF PERIOD $ 419 $ 1,062
======= =======
<FN>
See accompanying notes
6
</TABLE>
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - CHANGE IN FISCAL YEAR-END/INTERIM PERIODS
- --------------------------------------------------
In June 1998, Clariti Telecommunications International, Ltd. (the "Company")
changed its fiscal year-end from July 31 to June 30. Therefore, the unaudited
consolidated financial statements for the prior period have been conformed to
the fiscal quarter ended September 30, 1997.
The unaudited information has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management reflects
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the period ended June 30, 1998.
The results of operations for the three-month periods ended September 30, 1998
and 1997 are not necessarily indicative of operating results for the full year.
NOTE 2 - BUSINESS ACTIVITIES
- ----------------------------
During the three months ended September 30, 1998, Clariti Telecommunications
International, Ltd. conducted activities directed toward the research and
development of its Digital Voice Paging System.
NOTE 3 - METHOD OF ACCOUNTING
- -----------------------------
The Company prepares its financial statements on the accrual method of
accounting, recognizing income when earned and expenses when incurred.
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
The Company adopted FASB Statement 130, "Comprehensive Income", beginning in
the quarter ended September 30, 1998. However, the Company has no items of
comprehensive income that are excluded from net loss for either of the three
month periods ended September 30, 1998 or 1997.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company subcontracts certain elements of the development of its Digital
Voice Paging System to third party engineering and development firms.
Generally, such contracts provide for payments to be made by the Company on a
time and material basis. As of September 30, 1998 the Company maintained only
7
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (continued)
- --------------------------------------------------
one significant development contract with a firm fixed price of $600 thousand.
Under the terms of the contract, the Company is required to make progress
payments based on the achievement of specific milestones. As of September 30,
1998, the Company had paid $264 thousand in progress payments against such
contract.
NOTE 6 - INCOME TAXES
- ---------------------
There is no income tax benefit for operating losses for the three months ended
September 30, 1998 and 1997 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance required by FASB Statement 109,
"Accounting for Income Taxes." The valuation
allowance is necessary because, according to
criteria established by FASB Statement 109, it is
more likely than not that the deferred tax asset
will not be realized through future taxable income.
NOTE 7 - COMMON STOCK
- ---------------------
During the quarter ended September 30, 1998, the Company issued 46,600 shares
of its common stock as follows:
- 40,000 shares for gross proceeds of $100 thousand less a $10 thousand
commission
- 6,600 shares valued at $18 thousand in partial settlement of obligations
due to the former chairman of the Company (Such amount was included on
the Company's June 30, 1998 consolidated balance sheet as accrued
expenses and other current liabilities.)
NOTE 8 - WARRANTS
- -----------------
From time to time, the Company may issue warrants to purchase its common stock
to parties other than employees and directors. Warrants may be issued as an
incentive to help the Company achieve its goals, or in consideration for cash
or services rendered to the Company, or a combination of the above.
Compensation cost associated with warrants issued to other than employees is
valued based on the fair value of the warrants as estimated using the Black-
Scholes model with the following assumptions: no dividend yield, expected
volatility of 80%, and a risk-free interest rate of 5.5%.
8
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 8 - WARRANTS (continued)
- -----------------------------
On July 2, 1998, the Company issued to its corporate counsel warrants to
purchase 25 thousand shares of the Company's common stock at an exercise price
of $3.25 per share, the market price on the date of grant. The warrants were
issued for services rendered and expire on July 1, 2000. The Black-Scholes
model valued these warrants at $38 thousand, which had been accrued as accounts
payable on the Company's balance sheet as of June 30, 1998.
NOTE 9 - STOCK OPTIONS
- ----------------------
During the quarter ended September 30, 1998, the Company issued options to
purchase a total of 90 thousand shares of the Company's common stock to several
new employees of the Company. These stock options may be exercised over a
period of ten years at the fair market value on the date of the grant (weighted
average price of $3.0586 per share) and generally carry such other terms as are
outlined in the Company's Stock Option Plan.
NOTE 10 - NET LOSS PER SHARE
- ----------------------------
The Company utilizes FASB Statement 128, "Earnings Per Share," which
prescribes standards for computing and presenting earnings per share. Under
FASB Statement 128, basic loss per common share is based upon the weighted
average number of common shares outstanding during the period. Diluted loss
per common share after the assumed conversion of potential common shares
(warrants, stock options and convertible debt) was not presented because the
effect of such conversions would be antidilutive. Prior period amounts for net
loss per common share were recomputed in accordance with FASB Statement 128.
9
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements appearing elsewhere in this
report.
General Operations
- ------------------
Clariti Telecommunications International, Ltd. ("Clariti" or "the
Company") is pursuing a business strategy of bringing innovative, affordable,
wireless telecommunications products and services to markets worldwide. Clariti
is currently developing the world's first low-cost Digital Voice Paging System
for use on FM radio frequencies based on the Company's patent pending
technology.
Recent Developments
- -------------------
On November 6, 1998, the Company entered into a Share Exchange Agreement
with GlobalFirst Holdings, Ltd. ("GlobalFirst") and a group of international
investors represented by Chadwell Hall Holdings, Ltd. ("CHH"). Under the terms
of the Share Exchange Agreement, the Company will acquire 100% of the
outstanding capital stock of GlobalFirst from shareholders of GlobalFirst, and
in return the Company will issue to such shareholders or their designees
76,571,500 shares of the Company's restricted common stock. Pursuant to the
terms of the Share Exchange Agreement, the Company's board of directors elected
the Lord Simon Clanmorris to serve as a director on the Company's board of
directors. The Lord Clanmorris is president of GlobalFirst and a former
chairman of Interoute Telecommunications Group UK, a major European telecom
provider. In connection with the Share Exchange Agreement, the Company will be
required to obtain consent from a majority of its shares to increase the number
of the Company's authorized shares of common stock.
GlobalFirst has operating subsidiaries and businesses located throughout
Europe involved with business and residential telecom services including
transatlantic fiber optic voice and data transmission (through its virtual
private telecom network), prepaid mobile phones, prepaid phone cards and
personal communication offices ("PCO's"). GlobalFirst's current operations are
generating revenue at an annualized rate of approximately $100 million. The
combined companies will continue to be known as Clariti Telecommunications
International, Ltd. Closing of the Share Exchange Agreement is scheduled for
December 15, 1998. Financial statements for GlobalFirst are not currently
available. However, the Company expects to file a Form 8-K with required
financial statements and pro forma financial information within time
constraints stipulated by the Securities and Exchange Commission.
The Share Exchange Agreement also provides that CHH or its designees will
purchase an additional 11,428,500 shares of the Company's restricted common
stock for $20 million cash. As of November 6, 1998, the Company had received
$9.15 million of this amount. The terms of the Share Exchange Agreement
require the remaining $10.85 million to be received by the Company upon
closing of the Share Exchange Agreement.
10
<PAGE>
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 Company systems are Year 2000 compliant. In
particular, the software being developed for use in the Company's Digital Voice
Paging System has been designed specifically to be Year 2000 compliant.
The Company 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.
The Company 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 the Company'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.
Three Months Ended September 30, 1998
v. Three Months Ended September 30, 1997
- ----------------------------------------
Results of Operations
For the three months ended September 30, 1998 ("Fiscal 1Q99"), the Company
incurred a net loss of $1,366 thousand on no revenues compared to a net loss of
$1,153 thousand on no revenues for the three months ended September 30, 1997
("Fiscal 1Q98"), an increase in the net loss of $213 thousand. Factors
contributing to the increase in the net loss are described in the following
paragraphs.
For Fiscal 1Q99, officers' compensation was $291 thousand as compared to
$231 thousand for Fiscal 1Q98, an increase of $60 thousand, or 26%. The
increase was due to the addition of a President of the Company who was hired in
October 1997 and regularly scheduled salary increases for existing officers.
Other salaries and payroll costs increased $50 thousand, or 93%, from $54
thousand in Fiscal 1Q98 to $104 thousand in Fiscal 1Q99. This increase was due
to the addition of several new employees in support of the Company's
development of its Digital Voice Paging System.
For Fiscal 1Q99, consulting fees were $235 thousand as compared to
$177 thousand for Fiscal 1Q98, an increase of $58 thousand, or 33%. The
increase was primarily due to amortization of prepaid consulting fees incurred
during Fiscal 1Q99 partially offset by lower fees paid to consultants and
investment bankers who assisted the Company in raising equity capital. Travel
11
<PAGE>
expenses increased $66 thousand, or 80%, from $83 thousand in Fiscal 1Q98 to
$149 thousand in Fiscal 1Q99. This increase was largely due to greater
overseas travel for the purpose of developing joint venture relationships with
local companies in specified target areas. Interest income decreased $9
thousand, or 43%, from $21 thousand in Fiscal 1Q98 to $12 thousand in Fiscal
1Q99. This decrease is due to lower average cash balances available for
investment during Fiscal 1Q99.
The expense increases described above were partially offset by lower
professional fees. For Fiscal 1Q99, professional fees were $56 thousand as
compared to $100 thousand for Fiscal 1Q98, a decrease of $44 thousand or 44%.
The decrease resulted from lower legal fees incurred to the Company's
securities counsel and corporate counsel.
Liquidity and Capital Resources
At September 30, 1998, the Company had a working capital deficit of $198
thousand (including a cash balance of $419 thousand) as compared to working
capital of $1,034 thousand (including a cash balance of $1,391 thousand) at
June 30, 1998. The working capital decrease of $1,232 thousand largely
reflects the use of cash in operations during Fiscal 1Q99.
As of November 6, 1998, the Company maintained a cash balance of $8,241
thousand. The increase of $7,822 thousand since September 30, 1998 is due to
the receipt of $9,150 thousand in connection with the Share Exchange Agreement
described above. Management believes that these funds will enable the Company
to complete the process of developing of its Digital Voice Paging System.
Management is aware however that additional funding will be required to launch
the Digital Voice Paging System in specified target markets. There can be no
assurances that such funding will be generated or available, or if available,
on terms acceptable to the Company. In addition, management is aware that
there can be no assurances that the Digital Voice Paging System will be
developed into a commercially successful business. Finally, there can be no
assurance that the Company will complete its acquisition of GlobalFirst or, if
the acquisition is completed that the Company will be able to successfully
integrate the operations of the Company and GlobalFirst.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Registrant's Annual Report on
Form 10-KSB for the period ended June 30, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit - 27. Financial Data Schedule
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 2, 1999
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 419,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 628,000
<PP&E> 384,000
<DEPRECIATION> 73,000
<TOTAL-ASSETS> 1,186,000
<CURRENT-LIABILITIES> 826,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 336,000
<TOTAL-LIABILITY-AND-EQUITY> 1,186,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,378,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,000)
<INCOME-PRETAX> (1,366,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,366,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,366,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
