<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 March 31, 1999
( ) 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 ( )
State the number of shares outstanding of each of the issuer's class of common
Equity, as of the latest practicable date: As of May 7, 1999, there were
124,230,080 shares outstanding of $.001 par value common stock.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
March 31, 1999 (unaudited) and
June 30, 1998 (audited) 3
Consolidated Statements of Operations
for the nine months and three months
ended March 31, 1999 and 1998
(unaudited) 4
Consolidated Statement of Stockholders'
Equity for the nine months ended
March 31, 1999 (unaudited) 5
Consolidated Statements of Cash Flows
for the nine months ended March 31, 1999
and 1998 (unaudited) 6-7
Notes to Consolidated Financial
Statements (unaudited) 8-14
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 15-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Events 22
Item 6. Exhibits and Reports on Form 8-K 23-24
SIGNATURES 25
EXHIBIT INDEX 26
2
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PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
March 31, June 30,
1999 1998
----------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,231 $ 228
Trade accounts receivable 15,072 4,496
Other receivables 1,427 262
Refundable taxes 3,011 2,706
Prepaid expenses and other current assets 613 346
--------- --------
32,354 8,038
--------- --------
PROPERTY AND EQUIPMENT, NET 4,894 2,011
INTANGIBLE ASSETS, NET 127,734 -
--------- --------
TOTAL ASSETS $ 164,982 $ 10,049
========= ========
LIABILITIES AND STOCKHOLDERS'EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 12,114 $ 8,629
Deferred revenue 7,288 2,069
Accrued expenses and other current liabilities 5,847 1,921
Funding from parent - 16,580
Note payable to related party 3,000 -
--------- --------
TOTAL LIABILITIES 28,249 29,199
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 119,450 shares at
March 31, 1999 and 23,697 at June 30, 1998 119 -
WARRANTS OUTSTANDING 2,075 -
ADDITIONAL PAID-IN-CAPITAL 195,947 -
ACCUMULATED DEFICIT ( 61,499) (19,108)
CUMULATIVE TRANSLATION ADJUSTMENTS 90 ( 42)
--------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 136,733 (19,150)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 164,982 $ 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)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUE $ 27,568 $ 10,531 $ 10,698 $ 5,945
COST OF REVENUE 40,892 18,699 17,787 13,594
-------- -------- -------- --------
GROSS LOSS (13,324) ( 8,168) ( 7,089) ( 7,649)
Sales and marketing 1,369 1,569 354 751
General and administrative 16,640 7,080 5,213 5,555
Amortization of intangibles 11,058 - 7,027 -
-------- -------- -------- --------
NET LOSS (42,391) (16,817) (19,683) (13,955)
OTHER COMPREHENSIVE LOSS:
Foreign currency
translation adjustments 132 - ( 103) -
-------- -------- -------- --------
COMPREHENSIVE LOSS $(42,259) $(16,817) $(19,786) $(13,955)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 59,299 19,773 113,372 20,395
NET LOSS PER SHARE - BASIC
AND DILUTED $( 0.71) $( 0.85) $( 0.17) $( 0.68)
======== ======== ======== ========
[FN]
See accompanying notes
4
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
------------------- STOCK
NUMBER WARRANTS
OF OUT-
SHARES AMOUNT STANDING
-------- ------ --------
BALANCES, JUNE 30, 1998 - $ - $ -
Nine months ended
March 31, 1999 (unaudited):
Acquisition of majority
interest in GlobalFirst - - -
Capitalize funding from parent - - -
Reverse acquisition of Clariti
by GlobalFirst 111,950 112 1,881
Settlement of Frontier liability 5,000 5 -
Common stock issued for cash 2,500 2 -
Commission on sale of common stock - - -
Common stock warrants issued - - 195
Sale of Telnet - - -
Net loss - - -
Currency translation adjustment - - -
------- ----- ------
BALANCES, MARCH 31, 1999 119,450 $ 119 $2,076
======= ===== ======
ADD'L. ACCUMU- CURRENCY
PAID-IN LATED TRANSLA-
CAPITAL DEFICIT TION ADJ
--------- --------- --------
BALANCES, JUNE 30, 1998 $ - $(19,108) $( 42)
Nine months ended
March 31, 1999 (unaudited):
Acquisition of majority
interest in GlobalFirst 99,460 - -
Capitalize funding from
GlobalFirst parent 24,770 - -
Reverse acquisition of Clariti
by GlobalFirst 59,565 - -
Settlement of Frontier liability 11,245 - -
Sale of common stock for cash 4,998 - -
Commission on sale of common stock ( 500) - -
Common stock warrants issued ( 195) - -
Sale of Telnet ( 3,396) - -
Net loss - (42,391) -
Currency translation adjustment - - 132
-------- -------- -------
BALANCES, MARCH 31, 1999 $195,947 $(61,499) $ 90
======== ======== =======
[FN]
See accompanying notes
5
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(42,391) $(16,817)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 11,661 398
Change in assets and liabilities which
increase (decrease) cash, net of effects
of acquisition:
Trade accounts receivable ( 5,713) ( 6,864)
Other receivables ( 1,009) ( 636)
Refundable taxes 355 ( 1,313)
Prepaid expenses and other current assets ( 775) ( 303)
Accounts payable 4,302 7,969
Accrued expenses and other current
liabilities 1,618 5,987
Deferred revenue 8,885 -
-------- --------
Net cash used in operating activities (23,067) (11,579)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in stock for stock reverse
acquisition 16,063 -
Divestment of Telnet 2,290 -
Acquisition of MediaTel 7,830 -
Purchase of equipment ( 6,235) ( 1,435)
-------- --------
Net cash received from (used in) investing
activities 19,948 ( 1,435)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan from parent 10,490 13,130
Repayment of loan to parent - ( 200)
Sale of common stock for cash 5,000 -
Commission on sale of common stock ( 500) -
-------- --------
Net cash received from (used in) financing
activities 14,990 (12,930)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 132 ( 49)
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS 12,003 ( 133)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 228 133
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 12,231 $ -
======== ========
6
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued in 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 $ -
[FN]
See accompanying notes
7
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
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
- ------------------------------------
Clariti's business consists of the international telecommunications services
division, the Internet services division and the wireless messaging division.
Clariti's international telecommunications services division consists of
GlobalFirst Holdings, Ltd. and its subsidiaries ("GlobalFirst") and MediaTel
Global Communications, Ltd. and its subsidiaries ("MediaTel"). 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 4 - Acquisitions
and Dispositions). MediaTel sells long distance and local telephone services,
including prepaid phone cards, through agent distribution channels in the
United Kingdom. The Company acquired MediaTel in March 1999 (see Note 4 -
Acquisitions and Dispositions) and is currently in the process of integrating
its operations with those of GlobalFirst.
Clariti's Internet services division consists of MegaHertz-NKO, Inc., which was
acquired on May 7, 1999 (see Note 11 - Subsequent Events). MegaHertz-NKO was
formed in January 1999 to succeed to the operations of MegaHertz Communications
Corp., an Internet Service Provider (ISP), and NKO, Inc., a provider of
enhanced telecommunications and Internet Protocol ("IP") telephony services
(voice, data, fax and video). MegaHertz-NKO offers products and services that
meet most aspects of telecommunications including dial up and dedicated access,
customized Web hosting, e-commerce, enhanced telecommunications and IP
Telephony.
8
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 2 - DESCRIPTION OF THE BUSINESS (continued)
- ------------------------------------
Clariti's wireless messaging division is pursuing a business strategy of
bringing innovative, affordable, wireless telecommunications products and
services to markets worldwide. The wireless messaging division is currently
developing the world's first low-cost Digital Voice Messaging 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
- ----------------------------------------
During the nine-month and three-month periods ended March 31, 1999, the
Company's revenue was generated principally through three sources, telephone
services (including prepaid calling cards), PCO's and franchise fees.
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 to 90 days after first use.
Revenues from PCO's were recognized as the services were 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 nine months and
three months ended March 31, 1999 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.
9
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------
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:
Current assets and liabilities: The carrying value of cash and cash
equivalents, receivables, payables, deferred revenue, accrued liabilities and
notes payable approximates fair value due to their short maturity.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
- --------------------------------------
Acquisition of GlobalFirst
- --------------------------
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. GlobalFirst will conduct business as a wholly owned subsidiary
of 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-month and nine-
month periods ended March 31, 1999, 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 stockholders' equity which has been
adjusted for the shares of Clariti common stock issued and outstanding as of
March 31, 1999. Because of the accounting treatment described herein, the
financial statements differ from those previously reported by the Company.
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.
10
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 4 - ACQUISITIONS AND DISPOSITIONS (continued)
- --------------------------------------
In the case of both acquisitions, management has not yet made final allocations
to 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 filed with the SEC on February 22, 1999.
Sale of Telnet
- --------------
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 operated by GlobalFirst. 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. The $21 Million 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 Million 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 $3.8 million 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 the
goodwill to reflect the fact that Telnet was purchased from and resold to CHH,
the Company's majority shareholder.
Pro forma financial information for the sale of Telnet has been included in a
Form 8-K/A the Company filed with the SEC on April 19, 1999.
Acquisition of MediaTel
- -----------------------
On March 16, 1999, Clariti acquired all of the outstanding capital stock of
MediaTel from CHH for approximately $24 million. MediaTel is a switchless
reseller of telecommunications services in the United Kingdom. Consideration
paid for MediaTel consisted of cancellation of the $21 Million Note received
upon the sale of Telnet, including accrued interest of approximately $109,000,
and the issuance of a promissory note payable to CHH in the amount of $3
million (the "$3 Million Note"). The $3 Million Note carries a fixed interest
11
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 4 - ACQUISITIONS AND DISPOSITIONS (continued)
- --------------------------------------
rate of 6.5% and is payable, including any accrued interest thereon, on March
16, 2000. As of March 31, 1999, there was $8,000 of accrued interest on the $3
Million Note. On April 7, 1999 Clariti prepaid $1 million against the
principal balance of the $3 Million Note.
On March 26, 1999 the Company filed a Form 8-K with the SEC disclosing the
acquisition of MediaTel. Historical audited financial statements and related
pro forma financial information for the acquisition of MediaTel will be
presented in a Form 8-K/A within the time period prescribed by SEC rules.
A pro forma statement of operations for the nine months ended March 31, 1999 is
attached hereto as Exhibit 99.3, reflecting the reverse acquisition of Clariti
by GlobalFirst and the sale of Telnet as if these transactions had occurred at
the beginning of the period.
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 March 31, 1999,
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 Messaging 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 March 31, 1999 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 March 31, 1999,
the Company had paid $366,000 in progress payments against such contract.
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 ("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.
12
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued)
- --------------------------------------
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) my 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
stock or payment made by any of the parties), Frontier must surrender any
remaining shares of the Clariti stock to Clariti.
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 connection with the Company's acquisition of GlobalFirst, CHH and an
affiliated company 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
addition, the Company issued 206,197 shares of common stock in January 1999 as
commission on the sale of such shares.
In March 1999, the Company issued 5,000,000 shares of its restricted common
stock to Frontier in connection with the Frontier Settlement Agreement (see
Note 6 above). If CHH acquires such 5,000,000 shares from Frontier pursuant to
the Frontier Settlement Agreement, CHH and its affiliates will hold a total of
93,000,000 shares, or 75% of Clariti's currently outstanding common stock.
In March 1999, the Company also sold 2,500,000 shares of its restricted common
stock to a third party investor for proceeds, net of commissions, of
$4,500,000.
NOTE 8 - STOCK OPTIONS
- ----------------------
During the quarter ended March 31, 1999, the Company issued options to
purchase a total of 688,500 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 $2.36 per share) and generally carry such other
terms as are outlined in the Company's Stock Option Plan.
13
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
NOTE 9 - WARRANTS
- -----------------
From time to time, the Company may issue warrants to purchase its common stock
to parties other than employees and directors. Warrants may be issued as an
incentive to help the Company achieve its goals, or in consideration for cash
or services rendered to the Company, or a combination of the above.
Compensation cost associated with warrants issued to other than employees is
valued based on the fair value of the warrants as estimated using the Black-
Scholes model with the following assumptions: no dividend yield, expected
volatility of 80%, and a risk-free interest rate of 5.5%.
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 $195,000.
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 May 7, 1999 Clariti acquired all of the outstanding common stock of
MegaHertz, NKO, Inc., a provider of IP telephony, Internet and web-based
services for consumers and businesses. Consideration for MegaHertz-NKO
consisted of a total of 5,500,000 shares of Clariti common stock, of which
1,020,000 shares are to be held in escrow until certain revenue and gross
margin targets are achieved over a 24-month period.
14
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PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain information included in this Quarterly 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:
- commercialize its digital voice messaging technology
- integrate the operations of GlobalFirst and MediaTel and realize related
synergies and cost savings
- reverse the negative gross margins being experienced by GlobalFirst and
MediaTel
- realize profit improvements resulting from the sale of Telnet
- expand its telecommunications business using MegaHertz-NKO's managed IP
network infrastructure
- 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
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.
The following discussion should be read in conjunction with the
Company's consolidated financial statements appearing elsewhere in this
report.
General Operations
- ------------------
The businesses of Clariti Telecommunications International, Ltd.
("Clariti") consist of the international telecommunications services division,
the Internet services division and the wireless messaging division.
Clariti's international telecommunications services division consists of
GlobalFirst Holdings, Ltd. and its subsidiaries ("GlobalFirst") and MediaTel
15
<PAGE>
Global Communications, Ltd. and its subsidiaries ("MediaTel"). 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 owned the Telnet group of companies
that operated public call offices ("PCO's") in Europe, through which it which
offered other telecommunications products and services including phone cards.
However, the Telnet group of subsidiaries was sold in February 1999 (see Recent
Developments). The Company acquired MediaTel in March 1999 and is currently in
the process of integrating its operations with those of GlobalFirst (see Recent
Developments). MediaTel sells long distance and local telephone services,
including prepaid phone cards, through agent distribution channels in the
United Kingdom.
Clariti's Internet services division consists of MegaHertz-NKO, Inc.
("MegaHertz-NKO"), which was acquired on May 7, 1999 (see Recent Developments).
MegaHertz-NKO was formed in January 1999 to succeed to the operations of
MegaHertz Communications Corporation, an Internet Service Provider ("ISP"), and
NKO, Inc., a provider of enhanced telecommunications and Internet Protocol
("IP") telephony services (voice, data, fax and video). MegaHertz-NKO offers
products and services that meet most aspects of telecommunications including
dial up and dedicated access, customized Web hosting, e-commerce, enhanced
telecommunications and IP Telephony.
Clariti's wireless messaging division is pursuing a business strategy of
bringing innovative, affordable, wireless telecommunications products and
services to markets worldwide. The wireless messaging division is currently
developing the world's first low-cost Digital Voice Messaging System for use on
FM radio frequencies based on the Company's ClariCAST(TM) technology.
Recent Developments
- -------------------
On February 3, 1999, Clariti completed the sale of all of the outstanding
capital stock of Telnet Products and Services, Ltd. ("Telnet") to Chadwell Hall
Holdings, Ltd. ("CHH"). Prior to its sale, Telnet comprised the PCO business of
GlobalFirst. The sale of Telnet enables GlobalFirst to focus its human and
financial resources on becoming a profitable international
telecommunications carrier and network services provider. Clariti expects the
sale of Telnet to have a positive effect on its future results of operations
and cash flows because Telnet had been operating with significant losses, and
would have required Clariti to make significant investments to eventually
become profitable. Prior to the sale, Clariti provided telecommunication
services, including prepaid phone cards, to Telnet's PCO's. In the event
Clariti elects not to provide such services to Telnet in the future, Clariti's
annual revenues would decline by approximately $10 million to $15 million.
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. Clariti realized a
gain on the sale of Telnet of $3.8 million as a result of Telnet's operating
losses. However, this gain was not included in results of operations, but was
recorded as a reduction of goodwill 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 goodwill to reflect the fact that
Telnet was purchased from and resold to CHH, the Company's majority
shareholder.
16
<PAGE>
On March 16, 1999, Clariti acquired all of the outstanding capital stock
of MediaTel from CHH for approximately $24 million. MediaTel is a switchless
reseller of telecommunications services, 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. Consideration paid
for MediaTel consisted of cancellation of the $21 Million Note and the issuance
of the $3 Million Note. The $3 Million 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 $3 Million Note. Clariti is currently in the process of consolidating the
operations of MediaTel with those 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.
On May 7, 1999 Clariti acquired all of the outstanding common stock of
MegaHertz-NKO, a provider of IP telephony, Internet and web-based services for
consumers and businesses. Consideration for the common stock of MegaHertz-NKO
consisted of a total of 5,500,000 shares of Clariti common stock, of which
1,020,000 shares are to be held in escrow until certain revenue and gross
margin targets are achieved over a 24-month period. Management believes that
MegaHertz-NKO's existing managed IP network infrastructure, "NKOnet", will
enable Clariti to expand its telecommunications business to countries outside
of Europe, including the U.S., Brazil, South Korea, Mexico, Australia, and
Israel. MegaHertz-NKO's managed IP network also provides Clariti with the means
to route voice, fax and data traffic at lower cost than traditional
telecommunications systems. Management also anticipates that MegaHertz-NKO's
infrastructure can also be used to facilitate the establishment of an
international network for the Clariti Digital Voice Messaging System.
Clariti's wireless messaging division is pursuing a business strategy of
bringing innovative, affordable, wireless telecommunications products and
services to markets worldwide. The wireless messaging division is currently
developing the world's first low-cost Digital Voice Messaging System for use on
FM radio frequencies based on the Company's ClariCAST(TM) technology.
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 nine-
month period ended March 31, 1999 reported in this Form 10-QSB include
GlobalFirst's operations for the entire period. However, Clariti's previous
business operations are included only for the period from December 8, 1998
(date of reverse acquisition) to March 31, 1999. Telnet's operations are
included up to February 3, 1999 (date of sale) and MediaTel's operations are
included from March 16, 1999 (date of acquisition) to March 31, 1999.
Three Months Ended March 31, 1999
v. Three Months Ended March 31, 1998
- ------------------------------------
For the three months ended March 31, 1999 ("Fiscal 3Q99"), the Company
incurred a net loss of $19,683,000 ($0.17 per share) on revenue of $10,698,000
compared to a net loss of $13,955,000 ($0.68 per share) on revenue of
17
<PAGE>
$5,945,000 for the three months ended March 31, 1998 ("Fiscal 3Q98"). The
$5,728,000 (41%) increase in net loss is primarily due to amortization of
goodwill ($7,027,000) resulting from the acquisitions.
The $4,753,000 (80%) increase in revenue largely reflects GlobalFirst's
rapid expansion from primarily the PCO business during Fiscal 3Q98 into
marketing of telecommunication services, including prepaid phone cards, during
Fiscal 3Q99. The Company anticipates additional revenue growth in the future
as a result of the acquisition of MediaTel in March 1999 and as it implements
its 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.
GlobalFirst experienced a gross loss (revenue less cost of revenue) in
both Fiscal 3Q98 ($7,649,000) and Fiscal 3Q99 ($7,089,000). 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. In addition, 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.
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
capabilities that would increase profitability. Such improvements have already
begun with the purchase and installation of a new switch in the United Kingdom
during March, and further improvements are planned for 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.
There also can be no assurance that the Company will be able to run its
business profitably; additional capital will be needed to fund its operations.
Sales and marketing expenses decreased from $751,000 in Fiscal 3Q98 to
$354,000 for Fiscal 3Q99, a decline of $397,000 or 53%. This decline is due to
the absence of costs from Telnet, which was sold in February. General and
administrative expenses decreased from $5,555,000 in Fiscal 3Q98 to $5,213,000
in Fiscal 3Q99, a decline of $342,000 or 6%. The impact of the sale of Telnet
in February 1999 and the inclusion of Clariti's voice messaging business in
Fiscal 3Q99 (but not in Fiscal 3Q98 due to the effect of reverse acquisition
accounting) had largely offsetting effects on general and administrative
expenses.
The Company's net loss in Fiscal 3Q99 was also negatively affected by
$7,027,000 of amortization expense resulting from the acquisitions described in
Note 4 to the financial statements. 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
18
<PAGE>
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.
Nine Months Ended March 31, 1999
v. Nine Months Ended March 31, 1998
- -----------------------------------
For the nine months ended March 31, 1999 ("Nine Months 1999"), the Company
incurred a net loss of $42,391,000 ($0.71 per share) on revenue of $27,568,000
compared to a net loss of $19,683,000 ($0.85 per share) on revenue of
$10,531,000 for the nine months ended March 31, 1998 ("Nine Months 1998"). The
$22,708,000 (135%) increase in net loss is primarily due to amortization of
goodwill resulting from the acquisitions ($11,058,000), a $5,156,000 (63%)
increase in gross loss, and a $9,560,000 (135%) increase in general and
administrative expenses.
The $17,037,000 (162%) increase in revenue largely reflects GlobalFirst's
rapid expansion from primarily the PCO business during Nine Months 1998 to
marketing of telecommunication services, including prepaid phone cards, during
Nine Months 1999. The Company anticipates additional revenue growth in the
future as a result of the acquisition of MediaTel in March 1999 and as it
implements its 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.
Gross loss increased from 8,168,000 for Nine Months 1998 to $13,324,000 in
Nine Months 1999. GlobalFirst's aggressive expansion of its telecommunications
services was primarily responsible this increase. 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. In addition, 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.
General and administrative expenses increased from $7,080,000 in Nine
Months 1998 to $16,640,000 in Nine Months 1999, an increase of $9,560,000 or
135%. This variance reflects GlobalFirst's 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 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.
The Company's net loss in Nine Months 1999 was also negatively affected
by $11,058,000 of amortization expense resulting from the acquisitions
described in Note 4 to the financial statements.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1999, the Company had working capital of $3,996,000
(including a cash balance of $12,231,000) as compared to a working capital
deficit of $21,161,000 (including a cash balance of $228,000) at June 30, 1998.
19
<PAGE>
The working capital increase of $25,157,000 is primarily due to the following:
- the sale of 11,428,500 shares of Clariti common stock to CHH for
$20,000,000 during November and December 1998
- the capitalization of operating funds GlobalFirst borrowed from its
parent company prior to its acquisition by Clariti.
- the sale of 2,500,000 shares of common stock to a third party investor
for $4,500,000, net of commissions, in March 1999
- the issuance of 5,000,000 shares of common stock valued at $11,250,000
in partial settlement of the Balance Due Frontier.
These working capital improvements were partially offset by use of cash in
operations during the nine months ended March 31, 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 negative cash flows and capital expenditures related to the rapid growth
of GlobalFirst, MediaTel and MegaHertz-NKO 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 Messaging
System in specified target markets and to meet expected negative operating cash
flows and capital expenditure plans of GlobalFirst, MediaTel and MegaHertz-NKO.
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 Messaging System will be developed into a commercially successful
business. Also, there can be no assurance that GlobalFirst, MediaTel and
MegaHertz-NKO will be able to continue the rapid pace of their growth while
taking the steps necessary to generate positive cash flow from its future
operations. There can be no assurance that Clariti will be able to successfully
integrate the operations of MediaTel and GlobalFirst. Finally, there can be no
assurance that Clariti will be successful in its efforts to expand its
telecommunications business using MegaHertz-NKO's managed IP network
infrastructure.
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.
Management also believes that all material GlobalFirst and MediaTel
systems will be Year 2000 compliant by the end of 1999. Specifically, all of
the telecommunications equipment and related software purchased by GlobalFirst
and MediaTel within the last 18 months have been acquired with a specific
requirement that they be Year 2000 compliant by the end of 1999. In addition,
GlobalFirst is in the process of changing its accounting system to a new system
that is Year 2000 compliant. MediaTel's accounting system is already Year 2000
compliant.
20
<PAGE>
Based on the due diligence work performed in connection with the
acquisition of MegaHertz-NKO, Clariti has no reason to believe that MegaHertz-
NKO's systems are not Year 2000 compliant. However, further analysis must be
performed to thoroughly evaluate their Year 2000 readiness.
Clariti also plans to assess the readiness of its significant vendors and
financial institutions for the Year 2000 issue. GlobalFirst and MediaTel are
particularly focused on ensuring that their 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.
21
<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 issued by the Company during the quarter ended March 31,
1999, none of which were registered under the Securities Act of 1933, as
amended (the "Act") at the time of issuance.
Number Total
Date Name of Shares Consideration
-------- --------------------------------- ---------- -------------
Mar-99 Frontier Corporation 5,000,000 $ 11,250,000(d)
Mar-99 ABC Corporation 2,500,000 $ 5,000,000
(a) Common shares valued at $2.25 per share were issued pursuant to the terms
of the Frontier Settlement Agreement.
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 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. The Company intends to register the resale
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
None
Item 5. Other Events
None
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit - 2.1. Telnet Share Purchase and Sale Agreement
dated February 3, 1999 between Clariti
Telecommunications International, Ltd., and
Chadwell Hall Holdings, Ltd. (incorporated
by reference to Form 8-K filed on February
18, 1999)
Exhibit - 2.2. MediaTel Share Exchange Agreement dated
February 3, 1999 between Clariti
Telecommunications International, Ltd., and
Chadwell Hall Holdings, Ltd. (incorporated
by reference to Form 8-K filed on February
18, 1999)
Exhibit - 27. Financial Data Schedule
Exhibit - 99.1. Press release dated February 10, 1999
announcing the completion of Clariti
Telecommunications International, Ltd.'s
sale of 100% of the outstanding stock of
Telnet Products and Services, Ltd.
(incorporated by reference to Form 8-K
filed on February 18, 1999)
Exhibit - 99.2. Press release dated February 12, 1999
announcing the of signing of a Share
Exchange Agreement pursuant to which
Clariti Telecommunications International,
Ltd. will acquire 100% of the outstanding
stock of MediaTel Global Communications,
Ltd. (incorporated by reference to Form 8-K
filed on February 18, 1999)
Exhibit - 99.3. Pro Forma Financial Information
(b) Reports on Form 8-K:
The Company filed a Form 8-K on February 18, 1999. The
report disclosed in Item 2 that it had sold Telnet on
February 3, 1999 and that it had entered into an agreement
to acquire MediaTel also on February 3, 1999.
The Company filed a Form 8-K/A on February 22, 1999. The
report amended the Form 8-K filed on December 23, 1998 by
including the required financial statements and pro forma
financial information related to the acquisition of
GlobalFirst.
23
<PAGE>
(b) Reports on Form 8-K (continued):
The Company filed a Form 8-K on March 26, 1999. The
report disclosed in Item 2 that it had acquired
MediaTel on March 16, 1999.
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.
24
<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: May 24, 1999
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
25
<PAGE>
EXHIBITS INDEX
Exhibit - 2.1. Telnet Share Purchase and Sale Agreement dated February 3, 1999
between Clariti Telecommunications International, Ltd., and
Chadwell Hall Holdings, Ltd. (incorporated by reference to Form
8-K filed on February 18, 1999)
Exhibit - 2.2. MediaTel Share Exchange Agreement dated February 3, 1999
between Clariti Telecommunications International, Ltd., and
Chadwell Hall Holdings, Ltd. (incorporated by reference to Form
8-K filed on February 18, 1999)
Exhibit - 27. Financial Data Schedule (included herein)
Exhibit - 99.1. Press release dated February 10, 1999 announcing the completion
of Clariti Telecommunications International, Ltd.'s sale of
100% of the outstanding stock of Telnet Products and Services,
Ltd. (incorporated by reference to Form 8-K filed on February
18, 1999)
Exhibit - 99.2. Press release dated February 12, 1999 announcing the of signing
of a Share Exchange Agreement pursuant to which Clariti
Telecommunications International, Ltd. will acquire 100% of the
outstanding stock of MediaTel Global Communications, Ltd.
(incorporated by reference to Form 8-K filed on February 18,
1999)
Exhibit - 99.3. Pro Forma Financial Information (included herein)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Mar-31-1999
<CASH> 12,231,000
<SECURITIES> 0
<RECEIVABLES> 15,072,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,354,000
<PP&E> 5,527,000
<DEPRECIATION> 633,000
<TOTAL-ASSETS> 164,982,000
<CURRENT-LIABILITIES> 23,915,000
<BONDS> 0
0
0
<COMMON> 119,000
<OTHER-SE> 136,613,000
<TOTAL-LIABILITY-AND-EQUITY> 164,981,000
<SALES> 27,568,000
<TOTAL-REVENUES> 27,568,000
<CGS> 40,892,000
<TOTAL-COSTS> 29,067,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (42,391,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (42,391,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,391,000)
<EPS-BASIC> (.71)
<EPS-DILUTED> (.71)
</TABLE>
<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. At that time, Telnet Products and Services, Ltd. ("Telnet") was
a wholly owned subsidiary of GlobalFirst. CHH acquired the remaining 75%
majority interest in GlobalFirst in order to facilitate the subsequent sale of
GlobalFirst to Clariti Telecommunications International, Ltd. ("Clariti") in
December 1998. In February 1999, Clariti sold Telnet back to CHH in order to
focus its human and financial resources on becoming a profitable international
telecommunications carrier and network services provider.
The following unaudited pro forma combined financial statement is based on
the historical financial statements of Clariti, GlobalFirst and Telnet adjusted
to give effect to the purchase by CHH of the 75% majority interest in
GlobalFirst, the subsequent acquisition of GlobalFirst by Clariti, and the
subsequent sale of Telnet 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 consolidated financial statements of Clariti 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.
This unaudited pro forma financial statement does not reflect Clariti's March
1999 acquisition of MediaTel Global Communications, Ltd. ("MediaTel") because
MediaTel's historical financial statements are not yet available. Clariti
plans to file a Form 8-K/A in the near future which will include audited
historical financial statements for MediaTel and pro forma financial
information reflecting the MediaTel acquisition.
1
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(Dollars and Shares in Thousands, Except Per Share Amounts)
Historical Deduct Pro Forma
Historical GlobalFirst Historical Adj.'s Pro Forma
Clariti (a) Telnet (b) Combined
---------- ----------- ---------- ----------- ---------
Revenue $ - $ 26,794 $( 6,822) $ - $ 19,972
Cost of revenue - 39,990 ( 7,415) - 32,575
------- -------- -------- -------- --------
Gross profit (loss) - (13,196) 593 - (12,603)
Sales and marketing - 1,265 ( 321) - 944
Research and
development 1,653 - - - 1,653
General and
administrative 3,958 13,600 ( 6,711) - 10,847
Amortization - - - 19,328(c) 19,328
------- -------- -------- -------- --------
Net loss (5,611) (28,061) 7,625 (19,328) (45,375)
Other comprehensive
loss:
Foreign currency
translation
adjustments - 132 - - 132
------- -------- -------- -------- --------
Comprehensive loss $(5,611) $(27,929) 7,625 $(19,328) $(45,243)
======= ======== ======== ======== ========
Weighted average number
of shares outstanding 112,570
Basic and diluted loss
per common share $( 0.40)
========
2
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
- --------------------------------------------------------------
(a) The historical results of operations of GlobalFirst for the nine months
ended March 31, 1999 include Telnet for the period from July 1, 1998 to
February 3, 1999, the date Telnet was sold. Likewise, the historical
results of operations for Telnet include only the period from July 1, 1998
to February 3, 1999.
(b) 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.
The Unaudited Pro Forma Combined Statement of Operations also reflects the
November 1998 acquisition of the 75% majority interest in Global First by
CHH, for consideration which approximated $100 million and the sale of
Telnet for a $21 million note receivable.
(c) 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.
3
