<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from _____________ to _________
Commission file number 33-90344
Clariti Telecommunications International, Ltd.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 23-2498715
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1341 North Delaware Avenue, Philadelphia, PA 19125
--------------------------------------------------
(Address of principal executive offices)
(215) 425-8682
---------------------------
(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------
(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 February 5, 1999 were
111,950,080.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
December 31, 1998 (unaudited) and
June 30, 1998 (audited) 3
Consolidated Statements of Operations
for the six months and three months
ended December 31, 1998 and 1997
(unaudited) 4
Consolidated Statement of Stockholders'
Equity for the six months ended
December 31, 1998 (unaudited) 5
Consolidated Statements of Cash Flows
for the six months ended December 31,
1998 and 1997 (unaudited) 6
Notes to Consolidated Financial
Statements (unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18-19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Events 19
Item 6. Exhibits and Reports on Form 8-K 19-20
SIGNATURES 21
EXHIBIT INDEX 22
2
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PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Dec. 31, June 30,
1998 1998
----------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,293 $ 228
Trade accounts receivable 8,705 4,496
Other receivables 1,002 262
Refundable taxes 1,005 2,706
Prepaid expenses and other current assets 1,062 346
--------- --------
28,067 8,038
--------- --------
PROPERTY AND EQUIPMENT, NET 5,039 2,011
INTANGIBLE ASSETS, NET 138,640 -
--------- --------
TOTAL ASSETS $ 171,746 $ 10,049
========= ========
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 18,173 $ 8,629
Deferred revenue 1,063 2,069
Accrued expenses and other current liabilities 4,679 1,921
Funding from parent - 16,580
--------- --------
TOTAL LIABILITIES 23,915 29,199
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 111,950 shares at
December 31, 1998 and 23,697 at June 30, 1998 112 -
WARRANTS OUTSTANDING 1,881 -
ADDITIONAL PAID-IN-CAPITAL 183,795 -
ACCUMULATED DEFICIT ( 38,150) (19,108)
CUMULATIVE TRANSLATION ADJUSTMENTS 193 ( 42)
--------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 147,831 (19,150)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,746 $ 10,049
========= ========
See accompanying notes
3
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
REVENUE $ 20,536 $ 4,586 $ 11,797 $ 2,848
COST OF REVENUE 23,105 5,105 14,112 3,780
-------- -------- -------- --------
GROSS LOSS ( 2,569) ( 519) ( 2,315) ( 932)
Sales and marketing 1,015 818 601 573
General and administrative 11,427 1,525 7,657 911
Amortization of intangibles 4,031 - 4,031 -
-------- -------- -------- --------
NET LOSS (19,042) ( 2,862) (14,604) ( 1,484)
OTHER COMPREHENSIVE LOSS:
Foreign currency
translation adjustments 235 - 113 -
-------- -------- -------- --------
COMPREHENSIVE LOSS $(18,807) $( 2,862) $(14,491) $( 1,484)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 32,258 19,463 40,790 20,019
NET LOSS PER SHARE - BASIC
AND DILUTED $( 0.59) $( 0.15) $( 0.36) $( 0.07)
======== ======== ======== ========
[FN]
See accompanying notes
4
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
------------------- STOCK
NUMBER WARRANTS
OF OUT-
SHARES AMOUNT STANDING
-------- ------ --------
BALANCES, JUNE 30, 1998 - $ - $ -
Six months ended
December 31, 1998 (unaudited):
Acquisition of majority
interest in GlobalFirst - - -
Capitalize funding from parent - - -
Reverse acquisition of Clariti
by GlobalFirst 111,950 112 1,881
Net loss - - -
Currency translation adjustment - - -
------- ----- ------
BALANCES, DECEMBER 31, 1998 111,950 $ 112 $1,881
======= ===== ======
ADD'L. ACCUMU- CURRENCY
PAID-IN LATED TRANSLA-
CAPITAL DEFICIT TION ADJ
--------- --------- --------
BALANCES, JUNE 30, 1998 $ - $(19,108) $( 42)
Six months ended
December 31, 1998 (unaudited):
Acquisition of majority
interest in GlobalFirst 99,460 - -
Capitalize funding from
GlobalFirst parent 24,770 - -
Reverse acquisition of Clariti
by GlobalFirst 59,565 - -
Net loss - (19,042) -
Currency translation adjustment - - 235
-------- -------- -------
BALANCES, DECEMBER 31, 1998 $183,795 $(38,150) $ 193
======== ======== =======
[FN]
See accompanying notes
5
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(19,042) $( 2,862)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 4,348 159
Change in assets and liabilities which
increase (decrease) cash, net of effects
of acquisition:
Trade accounts receivable ( 4,209) ( 2,386)
Other receivables ( 740) -
Refundable taxes 1,701 -
Prepaid expenses and other current assets ( 574) ( 25)
Accounts payable 9,208 4,087
Accrued expenses and other current
liabilities 2,608 1,202
Deferred revenue ( 1,006) -
-------- --------
Net cash received from (used in)operating
Activities ( 7,706) 175
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in stock for stock reverse
acquisition 16,063 -
Purchase of equipment ( 3,017) -
-------- --------
Net cash received from (used in) investing
activities 13,046 -
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan from parent 10,490 -
Repayment of loan to parent - ( 200)
-------- --------
Net cash received from (used in) financing
activities 10,490 ( 200)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 235 -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS 16,065 ( 25)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 228 133
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 16,293 $ 108
======== ========
[FN]
See accompanying notes
6
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - BASIS OF INTERIM PRESENTATION
- --------------------------------------
The accompanying interim period financial statements of Clariti
Telecommunications International, Ltd. ("Clariti" or the "Company") are
unaudited, pursuant to certain rules and regulations of the Securities and
Exchange Commission, and include, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair statement
of the results for the periods indicated, which, however, are not necessarily
indicative of results which may be expected for the full year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial statements and the
notes thereto included in Clariti's June 30, 1998 Form 10-KSB and other
information included in Clariti's Forms 8-K and amendments thereto as filed
with the Securities and Exchange Commission.
NOTE 2 - DESCRIPTION OF THE BUSINESS
- ------------------------------------
The operations of Clariti consist of international telecommunications services
and development of its digital voice paging technology.
GlobalFirst Holdings, Ltd. and its subsidiaries ("GlobalFirst") operate the
Company's international telecommunications services division. GlobalFirst is a
licensed telecommunications carrier in the United Kingdom and sells long
distance and local telephone services, including prepaid phone cards, through
franchise and agent distribution channels in the United Kingdom and France.
Prior to February 1999, GlobalFirst also operated public call offices ("PCO's")
in Europe, through which it offered other telecommunications products and
services including phone cards. However, the group of subsidiaries comprising
GlobalFirst's PCO business was sold in February 1999 (see Note 11 - Subsequent
Events).
Clariti Digital Paging operates the Company's digital voice paging division and
is pursuing a business strategy of bringing innovative, affordable, wireless
telecommunications products and services to markets worldwide. Clariti Digital
Paging is currently developing the world's first low-cost Digital Voice Paging
System for use on FM radio frequencies based on the Company's ClariCAST(TM)
technology.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Revenue Recognition and Deferred Revenue
- ----------------------------------------
The Company's revenue is generated principally through three sources, prepaid
calling cards, PCO's and franchise fees.
7
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------
The Company sells prepaid phone cards to the franchised retailer at a fixed
price with normal credit terms. When the retailer is invoiced, deferred revenue
is recognized. The Company recognizes revenue and reduces the deferred revenue
account as the end user utilizes calling time and upon expiration of cards
containing unused calling time.
Substantially all prepaid phone cards sold by the Company have expiration dates
of 60 - 90 days after first use.
Revenues from PCO's are recognized as the services are provided.
Franchise revenue includes initial franchise fees which are recorded as revenue
when cash is received, provided no significant obligations to the franchisee
exist.
Income Taxes
- ------------
There is no income tax benefit for operating losses for the six months and
three months ended December 31, 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.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of the Company's foreign 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.
Fair Value of Financial Instruments
- -----------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments" requires the determination of fair
value for certain of the Company's assets and liabilities. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate the fair value:
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------
Current assets and liabilities: The carrying value of cash and cash
equivalents, receivables, payables, deferred revenue and accrued liabilities
approximates fair value due to their short maturity.
NOTE 4 - ACQUISITIONS
- ---------------------
On December 8, 1998 Clariti acquired 100% of the capital stock of GlobalFirst
Holdings Ltd., a privately held telecommunications firm with operations in the
United Kingdom and several other countries in Western Europe, from Chadwell
Hall Holdings, Ltd. ("CHH") for 76,571,500 restricted shares of Clariti's
common stock. The combined entity will continue to conduct business as Clariti
Telecommunications International, Ltd. The transaction has been accounted for
using the purchase method of accounting as a reverse acquisition in which
GlobalFirst is considered the accounting acquiror and Clariti is considered the
acquired company. Consistent with such reverse accounting treatment, the
consolidated financial statements for the three and six month periods ended
December 31, 1998, include the results of GlobalFirst for the full reporting
periods and the results of Clariti from the acquisition date through the end of
the period, except for stockholder's equity which has been adjusted for the
shares of Clariti common stock issued and outstanding as of December 31, 1998.
Because of the accounting treatment described herein, the financial statements
differ from those previously reported by the Company.
Additionally, CHH and an affiliated company, Corporate and Legal Nominees,
Ltd., combined to purchase a total of 11,428,500 shares of Clariti's restricted
common stock for $20,000,000, or $1.75 per share.
In November 1998, CHH acquired the 75% of the capital stock of GlobalFirst it
did not already own from Intercom Global Ventures, a privately held
telecommunications firm based in the United Kingdom, for consideration valued
at approximately $100 million. This transaction has been accounted for as a
purchase business combination under APB #16.
In the case of both acquisitions, management has not yet allocated any of the
purchase price in excess of fair market value of tangible net assets to
identifiable intangible assets such as intellectual property, in-process
research and development, or goodwill as final valuations of any potential
intangible assets are not currently available. When management identifies such
assets, the useful life of any individual asset may differ from the intangible
asset amortization period of 5 years currently reflected in the Consolidated
Statements of Operations.
Pro forma financial information for the transactions described above has been
included in a Form 8-K/A the Company has filed with the SEC on the date hereof.
In addition, a pro forma statement of operations for the six months ended
December 31, 1998 is attached hereto as Exhibit 99.2.
9
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - COMPREHENSIVE INCOME
- -----------------------------
The Company adopted FASB Statement 130, "Comprehensive Income", beginning in
the quarter ended September 30, 1998. The Company's only item of comprehensive
income that is excluded from net loss for the quarter ended December 31, 1998,
is the cumulative translation adjustment associated with the Company's foreign
subsidiaries.
NOTE 6 - 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 December 31, 1998 the Company maintained only
one significant development contract with a firm fixed price of $600,000.
Under the terms of the contract, the Company is required to make progress
payments based on the achievement of specific milestones. As of December 31,
1998, the Company had paid $332,000 in progress payments against such contract.
The Company is a party to certain legal proceedings occurring in the ordinary
course of business. Based upon information presently available, the Company
does not believe that the final outcome of any of these matters will have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.
NOTE 7 - COMMON STOCK
- ---------------------
In addition to the stock issued in connection with the acquisition described
above, the Company issued 206,197 shares of common stock as commission on the
sale of stock to CHH.
NOTE 8 - STOCK OPTIONS
- ----------------------
During the quarter ended December 31, 1998, the Company issued options to
purchase a total of 355,750 shares of the Company's common stock to several new
and existing employees of the Company. These stock options may be exercised
over a period of 10 years at the fair market value on the date of the grant
(weighted average price of $2.39 per share) and generally carry such other
terms as are outlined in the Company's Stock Option Plan.
NOTE 9 - WARRANTS
- -----------------
From time to time, the Company may issue warrants to purchase its common stock
to parties other than employees and directors. Warrants may be issued as an
incentive to help the Company achieve its goals, or in consideration for cash
10
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - WARRANTS (continued)
- -----------------
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%.
In October 1998, the Company issued to both its corporate counsel and its
securities counsel warrants to purchase 100,000 shares of the Company's common
stock at an exercise price of $1.75 per share, the market price on the date of
grant. The warrants were issued for services rendered and expire in October
2001. The Black-Scholes model valued these warrants at a total of $192,000.
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.
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
On February 3, 1999, the Company completed the sale of all of the outstanding
capital stock of Telnet Products & Services, Ltd. ("Telnet") to CHH (the
"Telnet Share Purchase and Sale Agreement"). Prior to its sale, Telnet was one
of several businesses Clariti had acquired as part of its December 8, 1998
acquisition of GlobalFirst from CHH. Telnet owns and operates PCO's located in
the United Kingdom, France, Spain and Germany. Pursuant to the Telnet Share
Purchase and Sale Agreement, Clariti will serve as the exclusive worldwide
provider of telecommunications carrier services to Telnet and each of its
subsidiaries.
In consideration for the capital stock of Telnet, CHH issued to Clariti a
demand note in the amount of $21 million (the "$21 Million Note"), the
estimated value of Telnet at the time it was acquired by Clariti on December 8,
1998. As a result, Clariti does not expect to report a material gain or loss
on the sale of Telnet. The $21 Million Note carries a fixed interest rate of
4.62% and is payable, including accrued interest thereon, within 10 days of
demand by Clariti. Pursuant to the terms of the $21 Million Note, CHH may repay
the $21 Million Note and any accrued interest thereon in the form of Clariti
restricted common stock valued at $1.75 per share. This price per share is the
same as that used in Clariti's acquisition of GlobalFirst (including Telnet)
from CHH in December 1998.
11
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - SUBSEQUENT EVENTS (continued)
- ---------------------------
Also on February 3, 1999, Clariti entered into a Share Exchange Agreement with
CHH pursuant to which Clariti will acquire for $34 million all of the
outstanding capital stock of MediaTel Global Communications, Ltd. ("MediaTel").
MediaTel is a switchless reseller of telecommunications services in the United
Kingdom with annualized revenues of approximately $40 million. The purchase
price was determined on an arms-length basis utilizing a valuation performed by
Clariti's investment banker, ING Barings Furman Selz LLC. The consideration to
be paid by Clariti to CHH will consist of:
(a) cancellation of the $21 Million Note, including accrued interest thereon,
(b) issuance of 3,555,555 shares of Clariti's restricted common stock valued at
$8 million ($2.25 per share), and
(c) issuance of a convertible debenture (the "Convertible Debenture"), the face
value of which will equal $5 million less the interest accrued on the $21
Million Note.
The Convertible Debenture will carry a fixed interest rate of 4.62% and will be
payable, including interest thereon, 90 days from the date of settlement.
Pursuant to the terms of the Convertible Debenture, Clariti has the option to
convert the balance of the note, including accrued interest thereon, into
shares of Clariti's restricted common stock at a fixed price of $2.25 per
share, the approximate market value of Clariti common stock on the date the
MediaTel Share Exchange Agreement was entered. Consummation of Clariti's
acquisition of MediaTel is expected to occur in March 1999 and is subject to
satisfactory completion of Clariti's due diligence and other customary
conditions.
12
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
Company's consolidated financial statements appearing elsewhere in this
report.
General Operations
- ------------------
The operations of Clariti consist of international telecommunications
services and development of its digital voice paging technology.
GlobalFirst operates the Company's international telecommunications
services division. GlobalFirst is a licensed telecommunications carrier in the
United Kingdom and sells long distance and local telephone services, including
prepaid phone cards, through franchise and agent distribution channels in the
United Kingdom and France. Prior to February 1999, GlobalFirst also operated
public call offices in Europe, through which it offered other
telecommunications products and services including phone cards. However, the
group of subsidiaries comprising GlobalFirst's PCO business was sold in
February 1999 (see Recent Developments).
Clariti Digital Paging operates the Company's digital voice paging
division and is pursuing a business strategy of bringing innovative,
affordable, wireless telecommunications products and services to markets
worldwide. Clariti Digital Paging is currently developing the world's first
low-cost Digital Voice Paging System for use on FM radio frequencies based on
the Company's ClariCAST(TM) technology.
Recent Developments
- -------------------
During October and November 1998, the Company sold to CHH 5,228,571 shares
of Clariti's restricted common stock for $9,150,000, or $1.75 per share. On
December 8, 1998, pursuant to a Share Exchange Agreement, Clariti acquired 100%
of the outstanding capital stock of GlobalFirst Holdings, Ltd. from CHH. In
exchange, Clariti issued to CHH 76,571,500 shares of Clariti's restricted
common stock. Also pursuant to the Share Exchange Agreement, Clariti sold to
CHH's designee, Corporate and Legal Nominees, Ltd. ("CLN"), a corporation
formed under the laws of the United Kingdom, 6,199,929 shares of its restricted
common stock for $10,850,000, or $1.75 per share. As a result of these
transactions, CHH and CLN together acquired a total of 88,000,000 shares, or
approximately 79% of the Company's outstanding common stock (75% on a fully
diluted basis). Clariti received a fairness opinion from an independent
valuation firm in connection with the transactions that took place pursuant to
the Share Exchange Agreement.
On February 3, 1999, Clariti completed the sale of all of the outstanding
capital stock of Telnet to CHH. Prior to its sale, Telnet and its subsidiaries
comprised the PCO business of GlobalFirst. Pursuant to the Telnet Share
Purchase and Sale Agreement, Clariti will serve as the exclusive worldwide
provider of telecommunications carrier services to Telnet and each of
13
<PAGE>
its subsidiaries. The sale of Telnet will enable GlobalFirst to focus its human
and financial resources on becoming a profitable international
telecommunications carrier and network services provider.
In consideration for the capital stock of Telnet, CHH issued to Clariti
the $21 Million Note, the face value of which is the estimated value of Telnet
at the time it was acquired by Clariti on December 8, 1998. As a result,
Clariti does not expect to report a material gain or loss on the sale of
Telnet. The $21 Million Note carries a fixed interest rate of 4.62% and is
payable, including accrued interest thereon, within 10 days of demand by
Clariti. Pursuant to the terms of the $21 Million Note, CHH may repay the $21
Million Note and any accrued interest thereon in the form of Clariti restricted
common stock valued at $1.75 per share. This price per share is the same as
that used in Clariti's acquisition of GlobalFirst (including Telnet) from CHH
in December 1998.
Also on February 3, 1999, Clariti entered into a Share Exchange Agreement
with CHH pursuant to which Clariti will acquire for $34 million all of the
outstanding capital stock of MediaTel. MediaTel is a switchless reseller of
telecommunications services in the United Kingdom with annualized revenues of
approximately $40 million. MediaTel is focused on providing high quality, low-
cost retail telephone services to residential markets and small-to-medium sized
enterprises located primarily in the United Kingdom.
The $34 million purchase price was determined on an arms-length basis
utilizing a valuation performed by Clariti's investment banker, ING Barings
Furman Selz LLC. Consideration to be paid by Clariti to CHH is expected to
consist of:
(a) cancellation of the $21 Million Note, including accrued interest thereon,
(b) issuance of 3,555,555 shares of Clariti's restricted common stock valued at
$8 million ($2.25 per share), and
(c) issuance of a Convertible Debenture, the face value of which will equal $5
million less the interest accrued on the $21 Million Note.
The Convertible Debenture will carry a fixed interest rate of 4.62% and
will be payable, including interest thereon, 90 days from the date of
settlement. Pursuant to the terms of the Convertible Debenture, Clariti will
have the option to convert the balance of the note, including accrued interest
thereon, into shares of Clariti's restricted common stock at a fixed price of
$2.25 per share, the approximate market value of Clariti common stock on the
date the MediaTel Share Exchange Agreement was entered. Consummation of
Clariti's acquisition of MediaTel is expected to occur in March 1999 and is
subject to satisfactory completion of Clariti's due diligence and other
customary conditions.
If Clariti acquires MediaTel pursuant to the Share Exchange Agreement and
if Clariti exercises its option to convert the entire balance of the
Convertible Debenture into Clariti common stock, CHH and CLN together will hold
a total of approximately 93.8 million, or 80% of Clariti's then outstanding
common stock (76% on a fully diluted basis). Upon completing the acquisition
of MediaTel, Clariti plans to consolidate the operations of MediaTel with those
14
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of GlobalFirst in order to minimize overhead costs and take advantage of
potential telecommunications traffic cost reduction opportunities resulting
from the substantial size of the combined companies' traffic.
Results of Operations
- ---------------------
Under generally accepted accounting principles, Clariti's acquisition of
GlobalFirst was accounted for as a reverse acquisition because GlobalFirst's
original shareholder, CHH, owned more than 50% of Clariti immediately following
the acquisition. As a result, Clariti's results of operations for the six-
month and three-month periods ended December 31, 1998 reported in this Form 10-
QSB include GlobalFirst's operations for the entire six-month and three-month
periods. Clariti Digital Paging's operations however are included only for the
period from December 8, 1998 (date of reverse acquisition) to December 31,
1998.
Six Months Ended December 31, 1998
v. Six Months Ended December 31, 1997
- -------------------------------------
For the six months ended December 31, 1998, the Company incurred a net
loss of $19,042,000 on revenues of $20,536,000 compared to a net loss of
$2,862,000 on revenues of $4,586,000 for the six months ended December 31,
1997. Sales and marketing expenses increased from $818,000 in the six months
ended December 31, 1997 to $1,015,000 for the six months ended December 31,
1998. General and administrative expenses increased from $1,525,000 in the six
months ended December 31, 1997 to $11,427,000 for the six months ended December
31, 1998. Net loss per share increased from $0.15 for the six months ended
December 31, 1997 to $0.59 for the six months ended December 31, 1998. All of
these variances reflect GlobalFirst's strategy to change from primarily a sales
and marketing focused operation to develop a network for carrier services in
the United Kingdom and Western Europe. Such development entails a high cost of
overhead in the early stages of operation. Most of these operations first
started in early 1998, while operations prior to that time largely consisted of
the lower volume PCO business.
As further described above, the Company sold the PCO business in February
1999; however, management expects there to be no appreciable decline in
revenues as the PCO sale agreement provides that Clariti will serve as the
exclusive worldwide provider of telecommunications carrier services to Telnet
and each of its subsidiaries. The sale of Telnet will enable GlobalFirst to
focus its human and financial resources on becoming a profitable international
telecommunications carrier and network services provider.
GlobalFirst's strategy of gaining market share prior to building a network
by aggressively pricing its prepaid calling cards and other telecommunications
services has resulted in a rapid increase in its revenues; however, this
strategy has also resulted in negative margins on such sales. GlobalFirst
plans to continue to aggressively market its telecommunications products and
services; however, management plans to improve its margins through a series of
capital improvements that will significantly improve GlobalFirst's switching
operations and provide it with routing capabilitiesthat would increase
profitability. Such improvements have already begun with the purchase and
15
<PAGE>
installation of a new switch in the United Kingdom during February, and further
improvements are planned for the France later in 1999. As further described
below under "Capital Resources and Liquidity," the Company's plans to make
further capital improvements are subject to the its ability to secure
additional financing, of which there can be no assurance.
The Company's net loss in the six months ended December 31, 1998 was also
negatively affected by the amortization of intangible assets resulting from the
acquisitions described in Note 4 to the financial statements. Such
amortization amounted to $4,031,000 for the months of November and December
1998. The Company's preliminary allocation of purchase price in excess of fair
market value of tangible net assets to identifiable intangible assets such as
intellectual property, in-process research and development, or goodwill is not
currently available. Should management identify such assets in the future, the
useful life of any individual asset may differ from the intangible asset
amortization period of 5 years currently reflected in the Consolidated
Statements of Operations. Future charges to amortization expense are likely to
be significant in relation to the Company's results of operations; however,
such charges have no impact on the Company's cash flow.
Three Months Ended December 31, 1998
v. Three Months Ended December 31, 1997
- ---------------------------------------
For the three months ended December 31, 1998, the Company incurred a net
loss of $14,491,000 on revenues of $11,797,000 compared to a net loss of
$1,484,000 on revenues of $2,848,000 for the three months ended December 31,
1997. Sales and marketing expenses increased from $573,000 in the three months
ended December 31, 1997 to $601,000 for the three months ended December 31,
1998. General and administrative expenses increased from $911,000 in the three
months ended December 31, 1997 to $7,657,000 for the three months ended
December 31, 1998. The Company's net loss in the three months ended December
31, 1998 was also negatively affected by $4,031,000 in amortization of
intangible assets resulting from the acquisitions described in Note 4 to the
financial statements. Net loss per share increased from $0.07 for the three
months ended December 31, 1997 to $0.36 for the three months ended December 31,
1998.
The discussion of results of operations for the six months ended December
31, 1998 as compared to the six months ended December 31, 1997 is also
applicable to the results of operations for the three months ended December 31,
1998 as compared to the three months ended December 31, 1997.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had working capital of $4,152,000
(including a cash balance of $16,293,000) as compared to a working capital
deficit of $21,161,000 (including a cash balance of $228,000) at June 30, 1998.
The working capital increase of $25,313,000 largely reflects the sale of
11,428,500 shares of Clariti common stock to CHH for $20,000,000 during the
three months ended December 31, 1998, as well as the capitalization of
operating funds GlobalFirst borrowed from its parent company prior to its
acquisition by Clariti. These working capital improvements were partially
offset by use of cash in operations during the six months ended December 31,
1998.
16
<PAGE>
Management believes that these funds will enable the Company to complete
the process of developing its Digital Voice Paging System and continue to fund
negative cash flows and capital expenditures related to the rapid growth of
GlobalFirst for the remainder of the fiscal year. Management is aware however
that significant additional funding will be required beyond its fiscal year-end
to launch the Digital Voice Paging System in specified target markets and to
meet expected negative operating cash flows and capital expenditure plans of
GlobalFirst. 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. Also, there can be no assurance that GlobalFirst will be able to
continue the rapid pace of its growth while taking the steps necessary to
generate positive cash flow from its future operations. Finally, there can be
no assurance that Clariti will complete its acquisition of MediaTel or, if
the acquisition is completed that Clariti will be able to successfully
integrate the operations of MediaTel and GlobalFirst.
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 Clariti Digital Paging systems are Year 2000
compliant. In particular, the software being developed for use in the Digital
Voice Paging System has been designed specifically to be Year 2000 compliant.
Management also believes that all material GlobalFirst systems will be
Year 2000 compliant by the end of 1999. Specifically, all of GlobalFirst's
telecommunications equipment and related software have been purchased within
the last 18 months with a specific requirement that they be Year 2000
compliant. In addition, GlobalFirst is in the process of changing its
accounting system to a new system that is Year 2000 compliant.
Clariti also plans to assess the readiness of its significant vendors
and financial institutions for the Year 2000 issue. GlobalFirst is
particularly focused on ensuring that its long-distance carriers are Year 2000
compliant. 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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
The following information sets forth all shares of the Company's $.001 par
value common stock and warrants to purchase the Company's $.001 par value
common stock issued by the Company since June 30, 1998, none of which were
registered under the Securities Act of 1933, as amended (the "Act") at the time
of issuance.
COMMON STOCK ISSUANCES
----------------------
Number Total
Date Name of Shares Consideration
-------- --------------------------------- ---------- -------------
Jul-98 BNP Jersey Trust 40,000 $ 100,000
Aug-98 Joseph Tarsia 6,600 $ 17,937(a)
Oct-98 Chadwell Hall Holdings, Ltd. 5,228,571 $ 9,150,000
Dec-98 Corporate and Legal Nominees, Ltd. 6,199,929 $ 10,850,000
Dec-98 Chadwell Hall Holdings, Ltd. 76,571,500 $134,000,000(b)
Dec-98 Tajine Investments 206,197 $ 457,500(c)
COMMON STOCK WARRANTS ISSUED
----------------------------
Number Fair
Date Name of Shares Value
-------- ------------------------------- ---------- -------
Oct-98 Silverman Collura & Balzano 100,000(d) $96,521
Oct-98 Eizen Fineburg & McCarthy 100,000(e) $96,521
(a) Common shares valued at $2.72 per share were issued in partial settlement
of a former employee's severance pay.
(b) Common shares valued at $1.75 per share issued in exchange for all of the
outstanding common stock of GlobalFirst. Pursuant to the Share Exchange
Agreement, CHH may not transfer ownership of these shares until June 8,
2000.
(c) Common shares valued at $2.22 per share issued as commission on the sale
of common stock.
(d) Warrants to purchase a total of 100,000 shares of the Company's common
stock were issued for legal services. These warrants may be exercised at
$1.75 per share and expire on October 14, 2001.
(e) Warrants to purchase a total of 100,000 shares of the Company's common
stock were issued for legal services. These warrants may be exercised at
$1.75 per share and expire on October 14, 2001.
18
<PAGE>
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 are fully aware of the Company's activities, as well as its
business and financial condition, and acquired said securities for investment
purposes. The Company plans to use proceeds from the issuance of these
securities for general corporate purposes, including the development of its
Digital Voice Paging technology.
The Company has placed a restrictive legend on all of the stock
certificates representing the shares issued above and will give appropriate
"stop transfer" instructions to its transfer agent, until such time as those
shares are registered pursuant to the Act, or a valid exemption from
registration exists under the Act. The Company intends to register
all of the common stock described above, except for the 76,571,500 shares
issued to CHH pursuant to the acquisition of GlobalFirst, by filing a
registration statement with the Securities and Exchange Commission in the near
future.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Effective on November 25, 1998, shareholders representing
15,409,571 shares (51.9%) of the Company's then
outstanding common stock consented in writing to authorize
the Company's Board of Directors to increase the Company's
authorized shares of common stock to 300,000,000.
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit - 2. Share Exchange Agreement dated November 5,
1998 between Clariti Telecommunications
International, Ltd., GlobalFirst Holdings,
Ltd. and Chadwell Hall Holdings, Ltd.
(incorporated by reference to Form 8-K filed
on December 23, 1998)
Exhibit - 3(i) Amendment to Articles of Incorporation of
Clariti Telecommunications International,
Ltd. (incorporated by reference to Form 8-K
filed on December 23, 1998)
Exhibit - 27. Financial Data Schedule
19
<PAGE>
Exhibit - 99.1. Press release dated December 8, 1998
announcing the completion of Clariti
Telecommunications International, Ltd.'s
acquisition of 100% of the outstanding
stock of GlobalFirst Holdings, Ltd.
(incorporated by reference to Form 8-K
filed on December 23, 1998)
Exhibit - 99.2. Pro Forma Financial Information
(b) Reports on Form 8-K:
The Company filed a Form 8-K on December 22, 1998. The
report disclosed in Item 4 that it had replaced its
Certifying Accountant to PricewaterhouseCoopers LLP.
The Company filed a Form 8-K on December 23, 1998. The
report disclosed in Item 1 that a change in control of the
Company had occurred on December 8, 1998 as a result of the
issuance of 76,571,500 shares of the Company's common stock
in connection with the acquisition of GlobalFirst. The
Company also disclosed in Item 2 that it had acquired
GlobalFirst on December 8, 1998.
20
<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 22, 1999
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
21
<PAGE>
EXHIBITS INDEX
Exhibit - 2. Share Exchange Agreement dated November 5, 1998 between Clariti
Telecommunications International, Ltd., GlobalFirst Holdings,
Ltd. and Chadwell Hall Holdings, Ltd. (incorporated by reference
to Form 8-K filed on December 23, 1998)
Exhibit - 3(i) Amendment to Articles of Incorporation of Clariti
Telecommunications International, Ltd. (incorporated by
reference to Form 8-K filed on December 23, 1998)
Exhibit - 27. Financial Data Schedule (included herein on page 23)
Exhibit - 99.1. Press release dated December 8, 1998 announcing the completion
of Clariti Telecommunications International, Ltd.'s acquisition
of 100% of the outstanding stock of GlobalFirst Holdings, Ltd.
(incorporated by reference to Form 8-K filed on December 23,
1998)
Exhibit - 99.2. Pro Forma Financial Information (included herein on pages
24 - 26)
22
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 16,293,000
<SECURITIES> 0
<RECEIVABLES> 8,705,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,067,000
<PP&E> 5,811,000
<DEPRECIATION> 772,000
<TOTAL-ASSETS> 171,746,000
<CURRENT-LIABILITIES> 23,915,000
<BONDS> 0
0
0
<COMMON> 112,000
<OTHER-SE> 147,719,000
<TOTAL-LIABILITY-AND-EQUITY> 171,746,000
<SALES> 20,536,000
<TOTAL-REVENUES> 20,536,000
<CGS> 23,105,000
<TOTAL-COSTS> 16,473,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (19,042,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,042,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,042,000)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
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<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
Prior to November 1998, Chadwell Hall Holdings, Ltd. ("CHH") owned
approximately 25% of GlobalFirst Holdings, Ltd. ("GlobalFirst"). In November
1998, CHH acquired the remaining 75% majority interest in GlobalFirst held by
other parties. CHH entered this transaction in order to facilitate the
subsequent sale of GlobalFirst to Clariti Telecommunications International,
Ltd. ("Clariti") in December 1998.
The following unaudited pro forma combined financial statement is based on
the historical financial statements of Clariti Telecommunications
International, Ltd. ("Clariti") and GlobalFirst Holdings, Ltd. ("GlobalFirst")
adjusted to give effect to the purchase by CHH of the 75% majority interest in
GlobalFirst and the subsequent acquisition of GlobalFirst by Clariti. The
unaudited pro forma combined financial statement gives effect to the
acquisition of GlobalFirst by Clariti in a transaction to be accounted for as a
reverse acquisition under the purchase method of accounting. The pro forma
adjustments are based upon preliminary allocations of purchase price and upon
the assumptions described in the accompanying notes. Actual allocations of
purchase price are likely to be different from that reflected in this pro forma
financial statement. References in this document to data presented on a "pro
forma basis" as of any date or for any period shall have the meaning set forth
above with respect to such date or period.
The unaudited pro forma combined financial statement should be read in
conjunction with the financial statements of GlobalFirst appearing elsewhere in
this document. The unaudited pro forma combined financial statement is
presented for information purposes only and is not necessarily indicative of
the results that would have been reported had such events occurred on the dates
specified, nor is it indicative of Clariti's future results.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Dollars and Shares in Thousands, Except Per Share Amounts)
Pro Forma
Historical Historical Adjustments
Clariti GlobalFirst for the
Telecoms. Holdings Acquisitions Pro Forma
Int'l Ltd. Ltd. (a) Combined
---------- ----------- ----------- ---------
Revenue $ - $ 20,536 $ - $ 20,536
Cost of revenue - 23,105 - 23,105
------- -------- -------- --------
Gross profit (loss) - ( 2,569) - ( 2,569)
Sales and marketing - 1,013 - 1,013
Research and development 867 - - 867
General and administrative 1,861 10,986 - 12,847
Amortization - - 14,244(b) 14,244
------- -------- -------- --------
Net loss (2,728) (14,568) (14,244) (31,540)
Other comprehensive loss:
Foreign currency trans-
lation adjustments - 235 - 235
------- -------- -------- --------
Comprehensive loss $(2,728) $(14,333) $(14,244) $(31,305)
======= ======== ======== ========
Weighted average number
of shares outstanding 111,945
Basic and diluted loss
per common share $( 0.28)
========
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
- --------------------------------------------------------------
(a) The Unaudited Pro Forma Combined Statement of Operations has been
prepared to reflect the December 1998 business combination between
Clariti and GlobalFirst as a reverse acquisition in which GlobalFirst is
considered the acquiror and Clariti is considered the acquired company.
Under the terms of the transaction, Clariti acquired 100% of the capital
stock of GlobalFirst in exchange for 76,571,500 shares of Clariti common
stock. In conjunction with the acquisition, GlobalFirst's parent company,
Chadwell Hall Holdings, Ltd. ("CHH") and an affiliated company, Corporate
and Legal Nominees, Ltd., combined to purchase a total of 11,428,500 shares
of Clariti's restricted common stock for $20,000,000.
Additionally, the Unaudited Pro Forma Combined Statement of Operations
reflects the November 1998 acquisition of the 75% majority interest in
Global First by CHH, for consideration which approximated $100 million.
(b) Pro forma adjustment reflects amortization of intangible assets resulting
from the acquisitions on a straight-line basis over a useful life of five
years. Management has not yet allocated any of the excess purchase price of
either acquisition to identifiable intangible assets such as technology,
in-process research and development, or goodwill, as final valuations of
any potential intangible assets are not currently available. Appropriate
revisions will be made when the final valuations are available. The useful
life of any individual asset so identified may differ from the five-year
amortization period reflected in this Pro Forma Combined Statement of
Operations.
26
