<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File Number 0-31729
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2498715
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1735 Market Street, Mellon Bank Center Suite 1300, Philadelphia, PA 19103
-------------------------------------------------------------------------
(Address of principal executive offices)
Telephone: (215) 979-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the
past 90 days.
Yes (X) No ( )
As of November 3, 2000, there were 35,836,017 shares outstanding of the
Registrant's $.001 par value common stock.
1
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FORM 10-Q
PAGE(S)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at
September 30, 2000 (unaudited) and
June 30, 2000 (audited) 3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
three months ended September 30, 2000
and 1999 (unaudited) 4
Consolidated Statement of Stockholders'
Equity for the three months ended
September 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended September 30,
2000 and 1999 (unaudited) 6-7
Notes to Consolidated Financial
Statements (unaudited) 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18-20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
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PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Sept. 30, June 30,
2000 2000
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 8,722 $ 14,333
Trade accounts receivable, net 1,351 1,026
Prepaid expenses and other current assets 2,380 1,368
--------- ---------
12,453 16,727
PROPERTY AND EQUIPMENT, NET 3,962 4,072
INTANGIBLE ASSETS, NET 5,516 5,858
--------- ---------
TOTAL ASSETS $ 21,931 $ 26,657
========= =========
CURRENT LIABILITIES
Accounts payable - trade $ 1,435 $ 1,064
Deferred revenue 1,165 1,069
Accrued expenses and other current liabilities 2,348 2,041
--------- ---------
4,948 4,174
LONG-TERM LIABILITIES 588 624
--------- ---------
TOTAL LIABILITIES 5,536 4,798
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 35,836 shares at
September 30, 2000 and June 30, 2000 36 36
WARRANTS OUTSTANDING 9,420 14,062
ADDITIONAL PAID-IN-CAPITAL 270,124 264,643
ACCUMULATED DEFICIT (263,358) (256,937)
ACCUMULATED OTHER COMPREHENSIVE INCOME 173 55
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 16,395 21,859
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,931 $ 26,657
========= =========
See accompanying notes
3
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
--------- ---------
REVENUE $ 4,017 $ 318
COST OF REVENUE 3,418 188
-------- --------
GROSS PROFIT 599 130
Network operating expenses 615 72
Marketing expenses 1,006 287
Research and development expenses 1,157 695
Depreciation and amortization expenses 680 1,037
General and administrative expenses 3,812 2,558
-------- --------
LOSS FROM OPERATIONS ( 6,671) ( 4,519)
-------- --------
OTHER INCOME (EXPENSE)
Interest income 262 16
Interest expense ( 12) ( 38)
-------- --------
250 ( 22)
-------- --------
Net loss before extraordinary item ( 6,421) ( 4,541)
EXTRAORDINARY ITEM
Gain on discharge of indebtedness - 32,502
-------- --------
NET INCOME (LOSS) $( 6,421) $ 27,961
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 118 ( 17)
-------- --------
COMPREHENSIVE INCOME (LOSS) $( 6,303) $ 27,944
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 35,836 31,285
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss before extraordinary item $( .18) $( .15)
Extraordinary item - 1.04
-------- --------
Net income (loss) $( .18) $ .89
======== ========
See accompanying notes
4
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L.
OF OUTSTAN- PAID-IN
SHARES AMOUNT DING,NET CAPITAL
------ ------ --------- ---------
BALANCES, JUNE 30, 2000 35,836 $ 36 $14,062 $ 264,643
Three months ended September 30,
2000 (unaudited):
Common stock warrants issued, net of
unearned consulting fees of $577 - - 356 483
Common stock warrants expired - - ( 4,998) 4,998
------ ---- -------- ---------
BALANCES, SEPTEMBER 30, 2000 35,836 $ 36 $ 9,420 $ 270,124
====== ==== ======== =========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME
----------- -------------
BALANCES, JUNE 30, 2000 $(256,937) $ 55
Three months ended September 30,
2000 (unaudited):
Net loss ( 6,421) -
Currency translation adjustment - 118
--------- --------
BALANCES, SEPTEMBER 30, 2000 $(263,358) $ 173
========= =======
See accompanying notes
5
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $( 6,421) $ 27,961
Adjustments to reconcile net income (loss)
to net cash flows used in operating
activities:
Extraordinary gain on discharge of
indebtedness - (32,502)
Depreciation and amortization 680 1,037
Issuance of common stock warrants for
expenses and prepaid expenses 933 1,703
Settlement of interest upon capitalization
of loan payable to related party - 81
Change in current assets and liabilities
which increase (decrease) cash:
Trade accounts receivable, net ( 325) ( 38)
Prepaid expenses and other current assets ( 1,012) ( 991)
Accounts payable - trade 371 ( 2,826)
Deferred revenue 96 -
Accrued expenses and other current
liabilities 307 1,213
Other ( 74) 21
-------- --------
Net cash used in operating activities ( 5,445) ( 4,341)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ( 220) ( 416)
-------- --------
Net cash used in investing activities ( 220) ( 416)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash - 9,933
Commission on sale of common stock - ( 1,083)
Repayment of loan payable ( 7) -
Decrease in capital lease obligations ( 46) -
-------- --------
Net cash received from financing activities ( 53) 8,850
-------- --------
Effect of exchange rate changes on cash 107 -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS ( 5,611) 4,093
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 14,333 3,284
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 8,722 $ 7,377
======== ========
6
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 12 $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capitalization of note payable to related
party, including accrued interest $ - $ 2,000
Issuance of common stock in settlement of
loan payable $ - $ 1,000
See accompanying notes
7
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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 that 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, 2000 Form 10-K 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 Telecommunications International, Ltd. ("Clariti" or the "Company") is
a diversified international telecommunications company with businesses that
cover voice, data, Internet and wireless communications.
The Company has made several acquisitions in the telecommunications industry.
In April 1995, the Company acquired its wireless messaging technology. In May
1999, the Company acquired MegaHertz-NKO, Inc., an Internet Service Provider
("ISP") and a provider of enhanced telecommunications and Internet Protocol
("IP") telephony services. In October 1999, the Company acquired NKA
Communications Pty, Ltd. ("NKA"), an Australian provider of telephony to
corporate clients. In December 1999, the Company acquired Tekbilt World
Communications, Inc. ("TWC"), a facilities-based provider of IP and
conventional switched telecommunications services with a large distribution
network. During the quarter ended June 30, 2000, the Company terminated most of
MegaHertz-NKO's revenue-generating activities and consolidated those remaining
operations into TWC.
In Fiscal 1999, the Company also acquired GlobalFirst Holdings Limited
("GlobalFirst") and Mediatel Global Communications Limited ("Mediatel"). At
the time of their acquisitions, GlobalFirst, Mediatel and their respective
subsidiaries (the "International Telecommunications Group") were
telecommunications resellers operating in the residential, commercial and
international calling card business sectors in the United Kingdom and Europe.
In February 1999, the Company sold Telnet Products and Services Ltd.
("Telnet"), a wholly owned subsidiary of GlobalFirst, which operated over 100
public call offices throughout Europe. As of October 11, 1999, all of the
remaining companies in the International Telecommunications Group filed for
voluntary liquidation in the United Kingdom and ceased operation of their
businesses as of that date (see Note 4).
8
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
---------------
The Company's fiscal year ends on June 30. In these financial statements, the
three-month periods ended September 30, 2000 and 1999 are referred to as Fiscal
1Q01 and Fiscal 1Q00, respectively.
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries where management control is not deemed to be
temporary. All significant intercompany transactions have been eliminated in
consolidation.
For Fiscal 1Q00, the companies of the International Telecommunications Group
have been accounted for under the equity method of accounting. In the case of
GlobalFirst, Mediatel and their subsidiaries, equity method accounting was
required because the Company's control was deemed to be temporary due to the
liquidation proceedings initiated on October 11, 1999. In the case of Telnet,
equity method accounting was required because the Company's control was
temporary due to the sale of Telnet in February 1999.
Revenue Recognition
-------------------
The majority of the Company's revenue is generated through sales of prepaid
calling cards. The Company sells prepaid calling cards to distributors or
direct to retailers at a fixed price with normal credit terms. When the
customer 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. All
prepaid phone cards sold by the Company have expiration dates ranging up to a
maximum of six months after first use.
Income Taxes
------------
There is no income tax benefit for operating losses for the three months ended
September 30, 2000 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
SEPTEMBER 30, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash and equivalents,
accounts receivable, accounts payable, and accrued expenses. These balances
approximate their fair value because of their short maturities. Accounts
receivable are presented net of allowance for uncollectible accounts of
$345,000 as of September 30, 2000 and $289,000 as of June 30, 2000,
respectively.
Net Loss Per Common Share
-------------------------
Effective as of July 3, 2000, the Company implemented a 1 for 4 reverse split
of its common stock. Prior year amounts presented as net loss per common share
have been retroactively restated to give effect to this reverse split.
NOTE 4 - EXTRAORDINARY GAIN
As of October 11, 1999, the International Telecommunications Group filed for
voluntary liquidation and ceased operation of its businesses. This voluntary
liquidation was undertaken because the International Telecommunications Group
could not pay its debts, including debt the group owed to Clariti. The
liquidation proceedings have discharged all liabilities of the International
Telecommunications Group. All losses from operations of the International
Telecommunications Group had been provided for as of June 30, 1999, including
losses from operations during the period from July 1, 1999 to October 11, 1999.
Therefore, the Company recognized an extraordinary gain of $32,502,000, which
was largely attributable to the excess of liabilities over assets of the
International Telecommunications Group as of the liquidation date.
NOTE 5 - COMPREHENSIVE INCOME
The Company adopted FASB Statement 130, "Comprehensive Income," in Fiscal 1Q99.
The Company's only item of comprehensive income that is excluded from net
income for Fiscal 1Q01 and Fiscal 1Q00 is the cumulative foreign currency
translation adjustment associated with the Company's ongoing foreign
businesses. The Company had foreign currency translation adjustments of
$118,000 and $(17,000) during Fiscal 1Q01 and Fiscal 1Q00, respectively. During
Fiscal 1Q00, the Company also reclassified a cumulative foreign currency
translation adjustment of $1,348,000 to net income as a result of the
liquidation of the International Telecommunications Group. This
reclassification amount was included in the extraordinary gain described in
Note 4 above.
10
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES
France Telecom SA ("France Telecom") initiated a complaint against the Company
on May 12, 2000 before the Tribunal de Commerce de Paris (Paris Commercial
Court) in Paris, France. France Telecom's claim relates to a debt it claims it
is owed by GlobalFirst Communications SA, a French subsidiary of GlobalFirst
Holdings Ltd., for long-distance telephone services. France Telecom seeks
payment from Clariti of 20,000,000 French Francs (approximately $2,600,000).
France Telecom further claims unspecified damages corresponding to the loss of
revenue resulting from the ceasing of commercial relations with GlobalFirst
Communications SA. The Company intends to vigorously defend the claims
asserted by France Telecom. Clariti believes that it did not verbally or in
writing make a promise to pay any obligations of GlobalFirst Communications SA,
and that it caused no damages to France Telecom because commercial relations
with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. This matter is currently pending in the
French Court.
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the Court of
Common Pleas in Philadelphia, Pennsylvania against the Company and Clariti
Carrier Services Limited, a United Kingdom subsidiary of the Company, seeking
payment for long-distance telephone services pursuant to a contract between IDT
and GlobalFirst Communications Limited, a subsidiary of GlobalFirst. The
complaint seeks damages in the amount of $690,163 plus interest, costs and
attorneys fees. On March 20, 2000, the Court of Common Pleas dismissed the
complaint on the basis of jurisdiction, provided that proper jurisdiction lies
in England. On or about April 15, 2000, IDT filed an appeal with the Superior
Court of Pennsylvania appealing the decision of the Court of Common Pleas.
This appeal is currently pending. The Company believes damages IDT may have
suffered, if any, must be recovered through the liquidation proceedings of the
International Telecommunications Group, and that neither the Company nor
Clariti Carrier Services Limited has any liability with respect to IDT's claim.
On or about June 17, 1999 Clariti, together with Mediatel, GlobalFirst, and
CHH, formerly the owner of record of a majority of Clariti stock (collectively
the "Claimants"), filed a Demand for Arbitration with the American Arbitration
Association (case no. 50 N 181 0021399) against Frontier Corporation and
Frontel Communications Limited (collectively "Frontier") concerning obligations
arising under that certain March 4, 1999 agreement entered into by and among
Frontier and each of the Claimants ("March 4 Agreement"). The parties entered
into the March 4 Agreement for the purpose of resolving certain billing
disputes between Frontier on the one part and GlobalFirst and Mediatel on the
other part. Under the March 4 Agreement, Clariti paid $3,000,000 to Frontier
during March 1999 in payment of amounts allegedly due Frontier by Mediatel
and/or GlobalFirst. Additionally, Clariti issued to Frontier 1,250,000 shares
11
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued)
of its common stock (5,000,000 shares before the 1 for 4 reverse split) as
security for the remaining balance, if any, due Frontier by Mediatel and/or
GlobalFirst ("Clariti Stock"). The amount due Frontier by Mediatel and
GlobalFirst as agreed to by the parties or as determined by arbitration is
referred to in the March 4 Agreement as the "Account Balance". The terms of
the March 4 Agreement provide in part as follows: that CHH is liable for and
guarantees payment in full of the Account Balance and, further, shall be
obligated to purchase the Clariti Stock from Frontier for an amount equal to
the Account Balance. At any time prior to the purchase of the Clariti Stock by
CHH, Clariti may purchase any portion or all of the Clariti Stock for an amount
equal to the Account Balance. In the event of a default under the March 4,
1999 Agreement, Frontier may, at its option, sell a sufficient amount of shares
of Clariti Stock in order to satisfy the Account Balance. If Frontier sells
all 1,250,000 shares of Clariti Stock for less than the Account Balance,
GlobalFirst, Mediatel and CHH are liable to pay Frontier the remaining Account
Balance due to Frontier. Once Frontier collects the Account Balance (whether
by sale of Clariti Stock or payment made by any of the parties), Frontier must
surrender to Clariti any remaining shares of Clariti Stock. Frontier, in its
filings with the American Arbitration Association, has alleged that (i) the
Account Balance is at least 9,215,074.40 British Pounds (approximately
$13,500,000); (ii) Clariti had failed to disclose material information to
Frontier at the time of signing the March 4 Agreement; (iii) Clariti and the
other Claimants breached the March 4 Agreement and (iv) Clariti, together with
the other Claimants, are liable to Frontier for an amount to be determined by
the Arbitrators, but at least 9,215,074.40 British Pounds (approximately
$13,500,000). Clariti has filed a pleading with the American Arbitration
Association disputing these allegations. Further, Clariti believes that (i)
the Account Balance determined by Frontier is incorrect, (ii) Clariti's
liability under the March 4 Agreement is limited to the delivery of the Clariti
Stock to Frontier as collateral (which has already been accomplished) and that
Clariti has no obligation for the Account Balance, and (iii) the allegations of
Frontier that Clariti failed to disclose material information to Frontier is
incorrect. A hearing date has been set to commence December 4, 2000. If
Frontier is successful in its position, Clariti would have a significant
obligation to Frontier if the value of the Clariti Stock is less than the
Account Balance. Further, if neither Clariti nor CHH purchases the Clariti
Stock from Frontier and Frontier is then able to sell a significant amount of
such shares in the open market, the market price of Clariti's common stock may
decline.
The Company is, from time to time, during the normal course of its
business operations, subject to various other litigation claims and legal
disputes. The Company expects none to have a material adverse impact on its
operations; however, no assurance can be given that an adverse determination of
any claim or dispute would not have an adverse impact on its operations during
any given period.
12
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 7 - RELATED PARTIES
In connection with the Company's acquisition of Mediatel, the Company issued a
promissory note payable to CHH, the owner of Mediatel and formerly the
Company's majority shareholder of record, in the amount of $3,000,000. Such
note carried a fixed interest rate of 6.5% and was payable, including any
accrued interest thereon, on March 16, 2000. On April 7, 1999 Clariti prepaid
$1 million against the principal balance of the note. During Fiscal 1Q00 the
remaining $2,000,000 balance of the note plus accrued interest of $81,000 was
capitalized as a contribution to capital of the Company by CHH. The Company
issued no common stock to CHH in connection with this contribution to capital.
NOTE 8 - COMMON STOCK
Effective as of July 3, 2000, the Company implemented a 1 for 4 reverse split
of its common stock. All prior year amounts of Clariti common stock presented
in these financial statements and notes have been retroactively restated to
give effect to this reverse split.
During Fiscal 1Q00 the Company sold 993,334 shares of its common stock to
several third party investors for proceeds, net of commissions, of $8,850,000.
In addition, the Company issued 125,000 shares to a third party investor in
settlement of a loan for $1,000,000 such investor had made to GlobalFirst.
NOTE 9 - STOCK OPTIONS
During Fiscal 1Q01, the Company issued options to purchase approximately
2,020,000 shares of the Company's common stock at prices ranging from $4.75 per
share to $5.125 per share (weighted average price of $4.83 per share). These
stock options, which were issued to new and existing employees of the Company,
may be exercised over a period of 10 years at the fair market value on the date
of the grant and generally carry such other terms as if they had been issued
under the Company's Stock Option Plan.
NOTE 10 - 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 a
unit with shares of common stock, 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. 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 6.5%.
13
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 10 - WARRANTS (continued)
During Fiscal 1Q01 the Company issued to several consultants warrants to
purchase a total of 450,000 shares of the Company's common stock at the market
price on the date of grant, which ranged from $4.40 per share to $5.0625 per
share (weighted average price of $4.69 per share). The warrants were issued
for services rendered and expire from 1 to 3 years from the date of grant. The
Black-Scholes model valued these warrants at a total of $933,000.
Also during Fiscal 1Q01, approximately 3,017,000 warrants with exercise prices
between $8.00 and $20.00 per share expired without being exercised. The book
value of such expired warrants (approximately $4,998,000) was reclassified from
warrants outstanding to additional paid-in capital.
NOTE 11 - EARNINGS 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 income or loss per common share is based upon the weighted average
number of common shares outstanding during the period. Diluted income or loss
per common share is computed after the assumed conversion of potential common
shares (warrants and stock options). The treasury stock method is used to
calculate dilutive shares. Such method reduces the number of dilutive shares
by the number of shares purchasable from the proceeds of the options and
warrants assumed to be exercised. Basic and diluted weighted average shares
outstanding for Fiscal 1Q01 and Fiscal 1Q00 were the same because the effect of
using the treasury stock method would be antidilutive.
NOTE 12 - SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The Company has divided its operations
into two reportable segments, Telephony/Internet Services and Wireless
Messaging, based on fundamental differences in their operations as well as
their products and services offered. Amounts presented in the following tables
are in thousands of dollars, except per share amounts.
Fiscal Fiscal
1Q01 1Q00
---------- ----------
Revenues
--------
Telephony/Internet Services $ 4,017 $ 318
Wireless Messaging - -
Corporate - -
-------- --------
Total revenues $ 4,017 $ 318
======== ========
14
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 12 - SEGMENT INFORMATION (continued)
Fiscal Fiscal
1Q01 1Q00
---------- ----------
Net Loss Before Extraordinary Item
----------------------------------
Telephony/Internet Services $( 2,334) $( 1,437)
Wireless Messaging ( 1,858) ( 1,059)
Corporate ( 2,229) ( 2,045)
-------- --------
Total net loss before
extraordinary item $( 6,421) $( 4,541)
======== =========
Extraordinary Item
------------------
Telephony/Internet Services $ - $ -
Wireless Messaging - -
Corporate - 32,502
-------- --------
Total extraordinary item $ - $ 32,502
======== ========
Net Income (Loss)
-----------------
Telephony/Internet Services $( 2,334) $( 1,437)
Wireless Messaging ( 1,858) ( 1,059)
Corporate ( 2,229) 30,457
-------- --------
Total net loss before
extraordinary item $( 6,421) $ 27,961
======== ========
As of As of
Sept. 30, June 30,
2000 2000
--------- --------
Assets
------
Telephony/Internet Services $ 11,249 $ 11,095
Wireless Messaging 1,363 839
Corporate 9,319 14,723
-------- --------
Total assets $ 21,931 $ 26,657
======== ========
15
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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 sufficiency of cash resources 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 wireless voice messaging technology
- expand its telecommunications business using MegaHertz-NKO's managed IP
network infrastructure as well as the business operations of NKA and TWC
- integrate the business operations of MegaHertz-NKO with those of
NKA and TWC
- complete existing financing arrangements and obtain the necessary
additional financing to achieve it business plans
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, risks relating to competition and
regulatory developments, risks relating to implementing local and enhanced
services, risks relating to its long distance business, risks related to the
various technical aspects of developing the Company's wireless voice messaging
technology and the market acceptance of same, as well as other risks referenced
in the Company's annual report on Form 10-K for the year ended June 30, 2000
and 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 Company's current focus is in two industry segments: wireless
messaging services and telephony/Internet services. Our wireless technology
will support voice messaging (including wireless voicemail and text-to-speech),
data and information services to a high-speed digital wireless device. Our
telephony/Internet business is an international facilities-based carrier that
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utilizes both IP and circuit switched technologies over a unified messaging
platform, and includes the following services:
- prepaid phone cards;
- residential and business long distance services;
- fax and data services;
- traditional dial-up Internet access, web site design and hosting; and
- Digital Subscriber Line ("DSL") connections for business customers.
Results of Operations
---------------------
For Fiscal 1Q00, the International Telecommunications Group was accounted
for under the equity method of accounting because the Company's control was
deemed to be temporary due to the fact that the Group filed for voluntary
liquidation on October 11, 1999.
Three Months Ended September 30, 2000 ("Fiscal 1Q01")
v. Three Months Ended September 30, 1999 ("Fiscal 1Q00")
--------------------------------------------------------
For Fiscal 1Q01, the Company had a net loss of $6,421,000, or $0.18 per
share, on revenue of $4,017,000 as compared to net income of $27,961,000, or
$0.89 per share, on revenue of $318,000 in Fiscal 1Q00. Excluding an
extraordinary gain of $32,502,000, or $1.04 per share, the Company had a net
loss of $4,541,000, or $0.15 per share, in Fiscal 1Q00.
As of October 11, 1999, the International Telecommunications Group filed
for voluntary liquidation and ceased operation of its businesses. As of June
30, 1999, the Company had written off all assets related to the International
Telecommunications Group and had accrued for all of the Group's estimated
losses from operations up to the date of liquidation. The liquidation
proceedings have discharged all liabilities of the International
Telecommunications Group, and as a result the Company recognized an
extraordinary gain on the discharge of such indebtedness in Fiscal 1Q00.
Revenues increased from $318,000 in Fiscal 1Q00 to $4,017,000 for Fiscal
1Q01. The $3,699,000 increase was due to inclusion in Fiscal 1Q01 of revenues
from NKA and TWC, which were acquired in October 1999 and December 1999,
respectively.
Network operating expenses increased from $72,000 in Fiscal 1Q00 to
$615,000 for Fiscal 1Q01. Of the $543,000 increase, $304,000 was due to
inclusion in Fiscal 1Q01 of network operating expenses from NKA and TWC, which
were acquired in October 1999 and December 1999, respectively, and $163,000
related to operations in the United Kingdom, where the Company began to utilize
some of the switching equipment previously used in the International
Telecommunications Group. Marketing expenses increased $719,000, from $287,000
in Fiscal 1Q00 to $1,006,000 in Fiscal 1Q01 entirely due to inclusion in Fiscal
1Q01 of marketing expenses from NKA and TWC.
All of the Company's research and development expenses relate to the
development of its Wireless Voice Messaging technology. Such expenses in
Fiscal 1Q01 increased $462,000, or 66%, to $1,157,000 as compared to $695,000
in Fiscal 1Q00 due to expansion and acceleration of the Company's efforts to
complete development and implement commercial deployment of the Wireless Voice
Messaging System.
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Depreciation and amortization decreased from $1,037,000 in Fiscal 1Q00 to
$680,000 in Fiscal 1Q01. The Fiscal 1Q01 amount included $323,000 of goodwill
amortization related to the acquisitions of NKA and TWC in October 1999 and
December 1999, respectively. Depreciation and amortization in Fiscal 1Q00
included $635,000 related to the amortization of goodwill resulting from the
acquisition of MegaHertz-NKO in May 1999. The Fiscal 1Q01 amount did not
include any amortization of goodwill resulting from the acquisition of
MegaHertz-NKO because all such unamortized goodwill was written off in the
quarter ended June 30, 2000.
General and administrative expenses in Fiscal 1Q01 increased $1,254,000,
or 49%, to $3,812,000 as compared to $2,558,000 in Fiscal 1Q00. Of this
increase, $734,000 of the increase was attributable to inclusion in Fiscal 1Q01
of general and administrative expenses from NKA and TWC, which were acquired in
October 1999 and December 1999, respectively. An additional $268,000 of the
increase resulted from higher levels of common stock warrants issued as
compensation to consultants. No cash was expended in connection with the
issuance of such warrants. The balance of the increase was primarily due to
the expansion of Wireless Messaging and Corporate Overhead activities in
preparation for the anticipated commercial launch of the Company's Wireless
Voice Messaging System.
Liquidity and Capital Resources
-------------------------------
At September 30, 2000, the Company had working capital of $7,505,000
(including a cash balance of $8,722,000) as compared to working capital
of $12,553,000 (including a cash balance of $14,333,000) at June 30, 2000. The
working capital decrease of $5,048,000 is primarily due to the use of cash in
operations during Fiscal 1Q00.
Management believes that existing cash balances will enable the Company to
continue developing its Wireless Voice Messaging System and continue to fund
expected negative cash flows and capital expenditures related to the growth of
the Telephony/Internet Services Group for the remainder of calendar year 2000.
The Company currently has no bank lines of credit; however, the Company has
received a commitment from a European investment bank to secure additional
financing during the fourth quarter of calendar 2000 that will fund the
Company's operating cash requirements at least through June 2001.
Significant additional funding will be required beyond June 2001 to launch
the Wireless Voice Messaging System in specified target markets and to meet
expected negative operating cash flows and capital expenditure plans. There
can be no assurances that such funding will be generated or available, or if
available, on terms acceptable to the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
France Telecom SA ("France Telecom") initiated a complaint against the
Company on May 12, 2000 before the Tribunal de Commerce de Paris (Paris
Commercial Court) in Paris, France. France Telecom's claim relates to a debt it
claims it is owed by GlobalFirst Communications SA, a French subsidiary of
GlobalFirst Holdings Ltd., for long-distance telephone services. France
Telecom seeks payment from Clariti of 20,000,000 French Francs (approximately
$2,600,000). France Telecom further claims unspecified damages corresponding
to the loss of revenue resulting from the ceasing of commercial relations with
GlobalFirst Communications SA. The Company intends to vigorously defend the
claims asserted by France Telecom. Clariti believes that it did not verbally or
in writing make a promise to pay any obligations of GlobalFirst Communications
SA, and that it caused no damages to France Telecom because commercial
relations with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. This matter is currently pending in the
French Court.
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the
Court of Common Pleas in Philadelphia, Pennsylvania against the Company and
Clariti Carrier Services Limited, a United Kingdom subsidiary of the Company,
seeking payment for long-distance telephone services pursuant to a contract
between IDT and GlobalFirst Communications Limited, a subsidiary of
GlobalFirst. The complaint seeks damages in the amount of $690,163 plus
interest, costs and attorneys fees. On March 20, 2000, the Court of Common
Pleas dismissed the complaint on the basis of jurisdiction, provided that
proper jurisdiction lies in England. On or about April 15, 2000, IDT filed an
appeal with the Superior Court of Pennsylvania appealing the decision of the
Court of Common Pleas. This appeal is currently pending. The Company believes
damages IDT may have suffered, if any, must be recovered through the
liquidation proceedings of the International Telecommunications Group, and that
neither the Company nor Clariti Carrier Services Limited has any liability with
respect to IDT's claim.
On or about June 17, 1999 Clariti, together with Mediatel, GlobalFirst,
and CHH, formerly the owner of record of a majority of Clariti stock
(collectively the "Claimants"), filed a Demand for Arbitration with the
American Arbitration Association (case no. 50 N 181 0021399) against Frontier
Corporation and Frontel Communications Limited (collectively "Frontier")
concerning obligations arising under that certain March 4, 1999 agreement
entered into by and among Frontier and each of the Claimants ("March 4
Agreement"). The parties entered into the March 4 Agreement for the purpose of
resolving certain billing disputes between Frontier on the one part and
GlobalFirst and Mediatel on the other part. Under the March 4 Agreement,
Clariti paid $3,000,000 to Frontier during March 1999 in payment of amounts
allegedly due Frontier by Mediatel and/or GlobalFirst. Additionally, Clariti
issued to Frontier 1,250,000 shares of its common stock (5,000,000 shares
before the 1 for 4 reverse split) as security for the remaining balance, if
any, due Frontier by Mediatel and/or GlobalFirst ("Clariti Stock"). The amount
due Frontier by Mediatel and GlobalFirst as agreed to by the parties or as
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determined by arbitration is referred to in the March 4 Agreement as the
"Account Balance". The terms of the March 4 Agreement provide in part as
follows: that CHH is liable for and guarantees payment in full of the Account
Balance and, further, shall be obligated to purchase the Clariti Stock from
Frontier for an amount equal to the Account Balance. At any time prior to the
purchase of the Clariti Stock by CHH, Clariti may purchase any portion or all
of the Clariti Stock for an amount equal to the Account Balance. In the event
of a default under the March 4, 1999 Agreement, Frontier may, at its option,
sell a sufficient amount of shares of Clariti Stock in order to satisfy the
Account Balance. If Frontier sells all 1,250,000 shares of Clariti Stock for
less than the Account Balance, GlobalFirst, Mediatel and CHH are liable to pay
Frontier the remaining Account Balance due to Frontier. Once Frontier collects
the Account Balance (whether by sale of Clariti Stock or payment made by any of
the parties), Frontier must surrender to Clariti any remaining shares of
Clariti Stock. Frontier, in its filings with the American Arbitration
Association, has alleged that (i) the Account Balance is at least 9,215,074.40
British Pounds (approximately $13,500,000); (ii) Clariti had failed to disclose
material information to Frontier at the time of signing the March 4 Agreement;
(iii) Clariti and the other Claimants breached the March 4 Agreement and (iv)
Clariti, together with the other Claimants, are liable to Frontier for an
amount to be determined by the Arbitrators, but at least 9,215,074.40 British
Pounds (approximately $13,500,000). Clariti has filed a pleading with the
American Arbitration Association disputing these allegations. Further, Clariti
believes that (i) the Account Balance determined by Frontier is incorrect, (ii)
Clariti's liability under the March 4 Agreement is limited to the delivery of
the Clariti Stock to Frontier as collateral (which has already been
accomplished) and that Clariti has no obligation for the Account Balance, and
(iii) the allegations of Frontier that Clariti failed to disclose material
information to Frontier is incorrect. A hearing date has been set to commence
December 4, 2000. If Frontier is successful in its position, Clariti would
have a significant obligation to Frontier if the value of the Clariti Stock is
less than the Account Balance. Further, if neither Clariti nor CHH purchases
the Clariti Stock from Frontier and Frontier is then able to sell a significant
amount of such shares in the open market, the market price of Clariti's common
stock may decline.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit - 27. Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Form 8-K on July 17, 2000. The
report disclosed in Item 5 that the Company had implemented
a one share for four shares reverse stock split of its
outstanding common stock effective at the close of business
on July 3, 2000.
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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: November 20, 2000
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
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