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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, 2000
( ) 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.
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(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)
1735 Market Street, Mellon Bank Center Suite 1300, Philadelphia, PA 19103
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(Address of principal executive offices)
(215) 979-3600
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(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 5, 2000, there were
142,834,067 shares outstanding of $.001 par value common stock.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
1
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
March 31, 2000 (unaudited) and
June 30, 1999 (audited) 3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
nine months and three months ended
March 31, 2000 and 1999 (unaudited) 4-5
Consolidated Statement of Stockholders'
Equity for the nine months ended
March 31, 2000 (unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended
March 31, 2000 and 1999 (unaudited) 7-8
Notes to Consolidated Financial
Statements (unaudited) 9-17
Item 2. Management's Discussion and Analysis 18-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 5. Other Events 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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,
2000 1999
----------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,417 $ 3,284
Trade accounts receivable 1,300 286
Refundable taxes 32 408
Prepaid expenses and other current assets 990 112
--------- ---------
13,739 4,090
PROPERTY AND EQUIPMENT, NET 3,961 3,244
INTANGIBLE ASSETS, NET 16,622 12,596
--------- ---------
TOTAL ASSETS $ 34,322 $ 19,930
========= =========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 2,572 $ 4,653
Accrued expenses and other current liabilities 2,138 524
Note payable to related party - 2,000
Excess of net liabilities over assets of
unconsolidated subsidiaries - 32,413
--------- ---------
TOTAL LIABILITIES 4,710 39,590
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 138,984 shares at
March 31, 2000 and 124,235 at June 30, 1999 139 124
WARRANTS OUTSTANDING, NET 11,001 2,322
ADDITIONAL PAID-IN-CAPITAL 256,101 228,611
ACCUMULATED DEFICIT (237,641) (252,065)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 12 1,348
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 29,612 ( 19,660)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,322 $ 19,930
========= =========
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)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
As Restated As Restated
2000 1999 2000 1999
-------- --------- -------- ---------
REVENUE $ 3,206 $ - $ 1,989 $ -
COST OF REVENUE 2,406 - 1,510 -
-------- --------- -------- --------
GROSS PROFIT 800 - 479 -
Salaries and benefits 3,812 1,237 1,528 416
Operating expenses 777 - 429 -
Marketing expenses 951 96 327 96
Research and development 2,334 1,764 824 681
General and administrative
expenses 7,493 2,667 2,170 1,391
Depreciation and amortization 3,765 102 1,482 36
Equity in losses of
unconsolidated subsidiaries - 16,764 - 13,951
-------- --------- -------- --------
LOSS FROM OPERATIONS (18,332) (22,630) ( 6,281) (16,571)
OTHER INCOME (EXPENSE)
Interest income 295 257 194 145
Interest expense ( 41) ( 2) ( 2) ( 2)
-------- -------- -------- --------
Net loss before extraordinary
item (18,078) (22,375) ( 6,089) (16,428)
EXTRAORDINARY ITEM
Gain on discharge of
indebtedness 32,502 - - -
-------- -------- -------- --------
NET INCOME (LOSS) $ 14,424 $(22,375) $( 6,089) $(16,428)
OTHER COMPREHENSIVE
INCOME (LOSS):
Foreign currency
translation adjustment 12 - 39 -
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 14,436 $(22,375) $( 6,050) $(16,428)
======== ======== ======== ========
4
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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)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
As Restated As Restated
2000 1999 2000 1999
-------- --------- -------- ---------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 131,771 59,043 138,984 113,203
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE
Net loss before
extraordinary item $( 0.14) $( 0.38) $( 0.04) $( 0.15)
Extraordinary item 0.25 - - -
-------- -------- -------- --------
Net income (loss) $ 0.11 $( 0.38) $( 0.04) $( 0.15)
======== ======== ======== ========
See accompanying notes
5
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2000
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
------------------- STOCK
NUMBER WARRANTS
OF OUTSTAN-
SHARES AMOUNT DING,NET
-------- ------ --------
BALANCES, JUNE 30, 1999 124,235 $ 124 $ 2,322
Nine months ended
March 31, 2000 (unaudited):
Common stock issued for cash 11,807 12 -
Common stock issued in settlement
of loan payable 500 1 -
Common stock issued as
consideration for acquisitions 2,442 2 -
Common stock warrants issued, net
of unearned consulting fees of
$1,224 - - 8,679
------- ----- -------
BALANCES, MARCH 31, 2000 138,984 $ 139 $11,001
======= ===== =======
ACCUMU-
LATED
OTHER
COMPRE-
ADD'L. ACCUMU- HENSIVE
PAID-IN LATED INCOME
CAPITAL DEFICIT (LOSS)
--------- ---------- --------
BALANCES, JUNE 30, 1999 $228,611 $(252,065) $ 1,348
Nine months ended
March 31, 2000 (unaudited):
Common stock issued for cash 25,588 - -
Common stock issued in settlement
of loan payable 999 - -
Commission on issuance of
common stock ( 2,650) - -
Common stock issued as
consideration for acquisitions 6,460 - -
Common stock warrants issued ( 4,988) - -
Capitalization of note payable
to related party 2,081 - -
Net income - 14,424 (1,348)
Currency translation adjustment - - 12
-------- --------- -------
BALANCES, MARCH 31, 2000 $256,101 $(237,641) $ 12
======== ========= =======
See accompanying notes
6
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------------
As Restated
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 14,424 $(22,375)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Extraordinary gain on discharge of
indebtedness (32,502) -
Equity in losses from unconsolidated
subsidiaries - 16,764
Depreciation and amortization 3,765 102
Issuance of common stock warrants for
general and administrative expenses 3,691 -
Settlement of interest upon capitalization
of loan payable to related party 81 -
Change in current assets and liabilities
which increase (decrease) cash, excluding
effect of companies acquired:
Trade accounts receivable ( 289) -
Refundable taxes ( 32) -
Prepaid expenses and other current assets ( 669) 238
Accounts payable - trade ( 2,294) 112
Accrued expenses and other current
liabilities ( 162) ( 66)
Other 38 56
-------- --------
Net cash used in operating activities (13,949) ( 5,169)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ( 1,004) ( 101)
Cash received with companies acquired net
of cash paid for companies acquired 136 -
Advances to unconsolidated subsidiaries - ( 8,995)
-------- --------
Net cash used in investing activities ( 868) ( 9,096)
-------- --------
7
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------------
As Restated
2000 1999
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash 25,600 25,100
Commission on sale of common stock ( 2,650) ( 968)
-------- --------
Net cash received from financing activities 22,950 24,132
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS 8,133 9,867
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,284 1,391
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 11,417 $ 11,258
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 2 $ 2
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued as consideration for
acquisitions of NKA and TWC $ 6,462 $ -
Capitalization of note payable to related
party $ 2,000 $ -
Issuance of common stock in settlement of
loan payable $ 1,000 $ -
Issuance of common stock warrants for
unearned consulting fees $ 1,758 $ -
Issuance of common stock in settlement of
accounts payable and accrued liabilities $ - $ 56
Common stock issued as security for
unconsolidated subsidiaries' potential
liability to Frontier Corp. $ - $ 11,250
See accompanying notes
8
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, 1999 Form 10-KSB and other
information included in Clariti's Forms 8-K and amendments thereto as filed
with the Securities and Exchange Commission. The balance sheet at June 30,
1999 was derived from audited financial statements.
NOTE 2 - DESCRIPTION OF THE BUSINESS
Clariti is a diversified international telecommunications company with
businesses that cover voice, data, Internet and wireless communications. The
Company's businesses operate on the basis of two industry segments; IP/Internet
Services and Wireless Messaging.
Clariti's IP/Internet Services group ("Clariti IP") consists of the following
wholly owned subsidiaries:
- Clariti IP Services, Inc., formerly MegaHertz-NKO, Inc., acquired May 7,
1999
- Clariti IP Services Asia Pty., Ltd., formerly NKA Communications Pty.,
Ltd. ("NKA"), acquired October 12, 1999 (see Note 6)
- Clariti Telecom, Inc., formerly Tekbilt World Communications, Inc.
("TWC"), acquired December 23, 1999 (see Note 6).
Clariti IP currently offers prepaid phone cards, residential and business long
distance, and fax services through Internet Protocol ("IP") and traditional
circuit switching technologies. Clariti IP is also an Internet Service
Provider ("ISP"), offering dial up and dedicated access, customized Web hosting
and e-commerce.
Clariti Wireless Messaging is pursuing a business strategy of bringing
innovative, affordable, wireless telecommunications products and services to
markets worldwide. Clariti Wireless Messaging 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.
The Company also acquired GlobalFirst Holdings Limited ("GlobalFirst") in
December 1998 and Mediatel Global Communications Limited ("Mediatel") in March
1999. 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
9
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
international calling card business sectors in Europe. As of October 11, 1999,
the International Telecommunications Group filed for voluntary liquidation and
ceased operation of its businesses (see Note 4).
Fiscal Year End
- ---------------
The Company's fiscal year ends on June 30. In these financial statements, the
three-month periods ended March 31, 2000 and 1999 are referred to as Fiscal
3Q00 and Fiscal 3Q99, respectively, and the nine-month periods ended March 31,
2000 and 1999 are referred to as Fiscal Nine Months 2000 and Fiscal Nine Months
1999, 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.
As of June 30, 1999 and for Fiscal Nine Months 2000, 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 (see
Note 5). The comparative financial statements included herein for Fiscal Nine
Months 2000 and Fiscal 3Q99 have been restated to account for the International
Telecommunications Group under the equity method (see Note 4).
Revenue Recognition
- -------------------
The Company's revenue is generated principally through telephony services
(including prepaid and postpaid calling cards) and ISP services. The Company
sells prepaid phone cards to distributors at a fixed price with normal credit
terms. When the distributor is invoiced, deferred revenue is recognized. The
Company recognizes revenue and reduces deferred revenue as the end user
utilizes calling time and upon expiration of cards containing unused calling
time. Deferred revenue is included in the consolidated balance sheet under
accrued expenses and other current liabilities. Revenues from ISP services are
recognized as the services are provided.
Income Taxes
- ------------
There is no income tax benefit for operating losses for the three months and
nine months ended March 31, 2000 and 1999 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Current tax provision - utilization of net operating loss carryforward.
10
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
In the Company's March 31, 1999 Form 10-QSB, the acquisition of GlobalFirst
was accounted for using the purchase method of accounting as a reverse
acquisition in which GlobalFirst was considered the accounting acquirer and
Clariti was considered the acquired company. Consistent with such reverse
acquisition accounting treatment, the consolidated financial statements for
Fiscal Nine Months 1999 included in the Company's March 31, 1999 Form 10-QSB
reflected the results of operations and cash flows of GlobalFirst for the full
reporting periods and the results of Clariti from the acquisition date through
the end of the period.
As of June 30, 1999 and for Fiscal Nine Months 1999, the International
Telecommunications Group (including GlobalFirst) 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 (see Note 5). In order to present prior period amounts on a
basis consistent with those of the current period, results of operations and
cash flows for Fiscal Nine Months 1999 have been restated to reflect the
acquisition of GlobalFirst using the equity method of accounting. The
following table presents the impact of this restatement on the consolidated
statements of operations for Fiscal Nine Months 1999 and for Fiscal 3Q99.
Amounts presented in the following table are in thousands of dollars, except
per share amounts.
11
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 4 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS (continued)
Amounts
Previously Restated
Reported Amounts
---------- ---------
Fiscal Nine Months 1999:
Revenues $ 27,568 $ -
Net loss $(42,391) $(22,375)
Net loss per share $ (0.71) $( 0.38)
Fiscal 3Q99:
Revenues $ 10,698 $ -
Net loss $(19,683) $(16,428)
Net loss per share $ (0.17) $( 0.15)
The impact of the restatement also resulted in changes to the consolidated
statement of cash flows for Fiscal Nine Months 1999.
NOTE 5 - 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. Management believes that all losses from operations
of the International Telecommunications Group had been provided for as of June
30, 1999, including estimated 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 6 - ACQUISITIONS
On October 12, 1999, the Company completed the acquisition of all of the
outstanding common stock of NKA, an Australian IP telephony company, for
consideration valued at approximately $3,554,000, substantially all of which
was recognized as goodwill. Consideration paid for NKA consisted of 1,150,000
shares of Clariti common stock. An additional 350,000 shares of Clariti common
stock are being held in escrow until certain performance targets are achieved
by NKA over a two-year period.
On December 23, 1999, the Company completed the acquisition of all of the
outstanding common stock of TWC, a telecommunications company that offers long
distance and toll-free services, prepaid calling cards, postpaid calling cards,
prepaid cellular and e-commerce telecommunications services, through both
retail and wholesale distribution channels, for consideration valued at
12
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 6 - ACQUISITIONS (continued)
approximately $3,206,000, substantially all of which was recognized as
goodwill. Consideration paid for TWC consisted of 1,292,333 shares of Clariti
common stock valued at approximately $2,908,000 and $298,000 in cash. An
additional 2,222,223 shares of Clariti common stock are being held in escrow
until certain performance targets are achieved by TWC over a three-year period.
NOTE 7 - COMPREHENSIVE INCOME
The Company has adopted FASB Statement 130, "Comprehensive Income." The
Company's only item of comprehensive income that is excluded from net
income for Fiscal 3Q00 and Fiscal Nine Months 2000 is the cumulative foreign
currency translation adjustment associated with the Company's ongoing foreign
businesses. The Company had foreign currency translation adjustments of
$39,000 and $12,000 during Fiscal 3Q00 and Fiscal Nine Months 2000,
respectively. During Fiscal Nine Months 2000, 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 5 above.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
On or about June 17, 1999, Clariti, together with Mediatel, GlobalFirst and
Chadwell Hall Holdings Limited (formerly the owner of record of a majority of
Clariti stock), filed a Demand for Arbitration with the American Arbitration
Association against Frontier concerning obligations arising under a March 4,
1999 agreement entered into by and among Frontier and Mediatel, GlobalFirst,
Chadwell Hall and Clariti (the "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 5,000,000 shares of its
common stock as security for the remaining balance, if any, due Frontier by
Mediatel and/or GlobalFirst. The amount due Frontier by Mediatel and Global
First 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 that Chadwell Hall is liable for and guarantees
payment in full of the Account Balance and, further, shall be obligated to
purchase the 5,000,000 shares of Clariti common stock from Frontier for an
amount equal to the Account Balance. At any time prior to the purchase of the
5,000,000 shares of Clariti common stock by Chadwell Hall, Clariti may purchase
any portion or all of the 5,000,000 shares of its common 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 the
5,000,000 shares of Clariti common stock in order to satisfy the Account
Balance. If Frontier sells all 5,000,000 shares of Clariti common stock for
13
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
less than the Account Balance, GlobalFirst, Mediatel and Chadwell Hall are
liable to pay Frontier the remaining Account Balance due to Frontier. Once
Frontier collects the Account Balance (whether by sale of the 5,000,000 shares
of Clariti common stock or payment made by any of the parties), Frontier must
surrender to Clariti any remaining shares of Clariti common stock. Frontier, in
its recent filing with the American Arbitration Association, has alleged that
(i) the Account Balance is at least $14,000,000; (ii) Clariti fraudulently
failed to disclose material information to Frontier at the time of signing the
March 4 Agreement; (iii) Clariti, together with GlobalFirst, Mediatel and
Chadwell Hall, breached the March 4 Agreement and (iv) Clariti, together with
GlobalFirst, Mediatel and Chadwell Hall, are liable to Frontier for an amount
to be determined by the Arbitrators, but at least $14,000,000. Clariti disputes
these allegations of Frontier. 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 5,000,000 shares of Clariti
common stock to Frontier as collateral (which has already been accomplished)
and that Clariti has no obligation for the account balance, and (iii) the
allegation of Frontier that Clariti fraudulently failed to disclose material
information to Frontier is incorrect. If Frontier is successful in its
position, Clariti would have a significant obligation to Frontier if the value
of the 5,000,000 shares of Clariti common stock is less than the Account
Balance. Further, if neither Clariti nor Chadwell Hall purchases the 5,000,000
shares of Clariti common 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.
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, 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 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. As of October 11, 1999, the International
Telecommunications Group filed for voluntary liquidation and ceased operation
of its businesses (see Note 4). 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.
The Company is, from time to time, during the normal course of its business
operations, subject to various other litigation claims and legal disputes. The
Company expects none to have a material adverse impact on its operations;
however, no assurance can be given that an adverse determination of any claim
or dispute would not have an adverse impact on its operations or cash flows
during any given period.
14
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CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 9 - RELATED PARTIES
In connection with the Company's acquisition of Mediatel, the Company issued a
promissory note payable to CHH, formerly its majority shareholder of record, in
the amount of $3,000,000. On April 7, 1999 Clariti prepaid $1 million against
the principal balance of the note. During Fiscal Nine Months 2000 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 10 - COMMON STOCK
During Fiscal Nine Months 2000 the Company sold approximately 11,807,000 shares
of its common stock to several third party investors for proceeds, net of
commissions, of $22,950,000. In addition, the Company issued 500,000 shares to
a third party investor in settlement of a loan for $1,000,000 such investor had
made to the Company. As further described in Note 6 above, approximately
2,442,000 shares of the Company's common stock was issued in connection with
acquisitions of other companies.
NOTE 11 - COMMON STOCK OPTIONS
During Fiscal Nine Months 2000, the Company issued options to purchase a total
of 2,210,000 shares of the Company's common stock to several new and existing
employees and directors 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 $2.74 per share) and generally carry such other
terms as if they had been issued under the Company's Stock Option Plan. In
addition, a total of 169,082 options to purchase the Company's common stock
expired without being exercised. These expired options carried a weighted
average price of $2.78 per share.
NOTE 12 - COMMON STOCK 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 5.5%.
During Fiscal Nine Months 2000 the Company issued a total of 12,306,666
warrants in connection with the issuance of a like number shares of common
stock to third party investors. Such warrants were issued with exercise prices
ranging from $3.00 per share to $5.00 per share and expiration dates ranging
from June 15, 2000 to March 31, 2001. The Black-Scholes model valued these
warrants at a total of $4,988,000.
15
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 12 - COMMON STOCK WARRANTS (continued)
During Fiscal Nine Months 2000 the Company also issued to several consultants
warrants to purchase a total of 3,310,000 shares of the Company's common stock
at prices ranging from $2.38 per share to $4.00 per share. The warrants were
issued for services rendered or to be rendered and expire 2 to 3 years from the
date of grant. The Black-Scholes model valued these warrants at a total of
$4,915,000, of which $3,691,000 was recognized as general and administrative
expenses in the Fiscal Nine Months 2000 consolidated statement of operations
and $1,224,000 was reflected as reduction of warrants outstanding at March 31,
2000 because the value of such warrants had not been earned.
NOTE 13 - 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 were the same for Fiscal Nine Months 2000, Fiscal Nine Months 1999,
Fiscal 3Q00 and Fiscal 3Q99 because the effect of using the treasury stock
method would be antidilutive.
NOTE 14 - SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The Company had determined that
presentation of segment information was not required for the year ended June
30, 1999. For the year ended June 30, 2000, the Company will be presenting
segment information based on the following reportable segments: IP/Internet
Services, Wireless Messaging, and Corporate and Other. Amounts presented in
the following tables are in thousands of dollars, except per share amounts.
Fiscal Nine Months 2000
- -----------------------
IP/Internet Wireless Corporate
Services Messaging and Other Total
----------- --------- --------- ---------
Revenues $ 3,206 $ - $ - $ 3,206
-------- -------- -------- --------
Loss before
extraordinary item $( 6,881) $( 3,337) $( 7,860) $(18,078)
Extraordinary item - - 32,502 32,502
-------- -------- -------- --------
Net income (loss) $( 6,881) $( 3,337) $ 24,642 $ 14,424
======== ======== ======== ========
16
<PAGE>
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 14 - SEGMENT INFORMATION (continued)
Fiscal Nine Months 2000
- -----------------------
IP/Internet Wireless Corporate
Services Messaging and Other Total
----------- --------- --------- ---------
Per Share Amounts:
Loss before
extraordinary item $( 0.05) $( 0.03) $( 0.06) $( 0.14)
Extraordinary item - - 0.25 0.25
-------- -------- -------- --------
Net income (loss) $( 0.05) $( 0.03) $ 0.19 $ 0.11
======== ======== ======== ========
Total assets at
March 31, 2000 $ 21,762 $ 741 $ 11,819 $ 34,322
-------- -------- -------- --------
Fiscal 3Q00
- -----------
IP/Internet Wireless Corporate
Services Messaging and Other Total
----------- --------- --------- ---------
Revenues $ 1,989 $ - $ - $ 1,989
-------- -------- -------- --------
Net loss $( 2,604) $( 1,171) $( 2,314) $( 6,089)
-------- -------- -------- --------
Net loss per share $( 0.02) $( 0.01) $( 0.01) $( 0.04)
-------- -------- -------- --------
NOTE 15 - SUBSEQUENT EVENT
- --------------------------
In April 2000, Clariti completed a private placement to several foreign
institutional investors of 3,850,000 shares of its common stock for aggregate
proceeds of $10,588,000 which, after commissions of $1,165,000, resulted in net
proceeds to Clariti of $9,423,000. In connection with this private placement,
Clariti also issued 1,060,000 warrants to purchase Clariti common stock at a
price of $3.025 per share. These warrants expire in April 2003.
17
<PAGE>
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
- expand its telecommunications business using Clariti IP's managed IP
network infrastructure as well as the business operations of NKA and TWC
- integrate the business operations of Clariti IP Services with those of
NKA and TWC
- increase revenue for remainder of Fiscal 2000 as a consequence of
acquisitions of NKA and TWC
- adequacy of existing financing arrangements and ability to obtain the
necessary 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-KSB for the year ended June 30, 1999
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
- ------------------
Clariti's subsidiary businesses consist of the IP/Internet Services group
and Wireless Messaging.
18
<PAGE>
Clariti's IP/Internet Services group consists of Clariti IP Services,
formerly MegaHertz-NKO, Inc., which was acquired on May 7, 1999, Clariti IP
Services Asia, formerly NKA Communications Pty., Ltd., which was acquired on
October 12, 1999, and Clariti Telecom, formerly Tekbilt World Industries, Inc.,
which was acquired on December 23, 1999 (see Note 6 to the consolidated
financial statements). Clariti's IP/Internet Services group is a provider of
enhanced telecommunications and Internet Protocol ("IP") telephony services
(voice, data, fax and video) in the United States and Australia. Clariti's
IP/Internet Services group is also an Internet Service Provider ("ISP") in the
United States, offering dial up and dedicated access, customized Web hosting
and e-commerce. The acquisitions of Clariti IP Services Asia in October 1999
and Clariti Telecom in December 1999 will provide the Company's consolidated
revenues during the remainder of Fiscal 2000.
Clariti Wireless Messaging is pursuing a business strategy of bringing
innovative, affordable, wireless telecommunications products and services to
markets worldwide. Clariti Wireless Messaging 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.
Other Developments
- ------------------
The Company acquired GlobalFirst Holdings Limited in December 1998 and
Mediatel Global Communications Limited in March 1999. At the time of their
acquisitions, GlobalFirst, Mediatel and their respective subsidiaries comprised
the Company's International Telecommunications Group and were
telecommunications resellers operating in the residential, commercial and
international calling card business sectors. On October 11, 1999, the
International Telecommunications Group filed for voluntary liquidation under
the laws of the United Kingdom and ceased operations of the Group. 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.
Results of Operations
- ---------------------
As of June 30, 1999 and for the period from July 1, 1999 to October 11,
1999, 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. The comparative prior period financial information included
herein has been restated to account for the International Telecommunications
Group under the equity method (see Note 4 to the consolidated financial
statements).
Three Months Ended March 31, 2000
v. Three Months Ended March 31, 1999
- ------------------------------------
For the three months ended March 31, 2000 ("Fiscal 3Q00"), the Company
had a net loss of $6,089,000, or $0.04 per share, on revenue of $1,989,000
compared to a net loss of $16,428,000, or $0.15 per share, on no revenue for
the three months ended March 31, 1999 ("Fiscal 3Q99"). All of the Fiscal 3Q00
revenues were generated by the IP/Internet Services group, the component parts
of which were acquired in May, October and December 1999.
19
<PAGE>
Salaries and benefits in Fiscal 3Q00 increased $1,112,000, or 267%, to
$1,528,000 as compared to $416,000 in Fiscal 3Q99. Of this increase, $809,000,
or 73%, was attributable to the IP/Internet Services group, the component
parts of which were acquired in May, October and December 1999, and $303,000,
or 27%, was attributable to increased employment in Clariti Wireless Messaging
and Corporate staff. Operating expenses in Fiscal 3Q00 were $429,000 as
compared to no operating expenses in Fiscal 3Q99. All of the Fiscal 3Q00
operating expenses were attributable to the IP/Internet Services group.
Marketing expenses in Fiscal 3Q00 increased $231,000, or 241%, to
$327,000 as compared to $96,000 in Fiscal 3Q99. Substantially all of this
increase was attributable to the IP/Internet Services group. All research and
development expenses related to the development of the Digital Voice Messaging
System. Such R&D expenses in Fiscal 3Q00 increased $143,000, or 21%, to
$824,000 as compared to $681,000 in Fiscal 3Q99 due to expansion and
acceleration of the Company's efforts to complete development of the Digital
Voice Messaging System. General and administrative expenses in Fiscal 3Q00
increased $779,000, or 56%, to $2,170,000 as compared to $1,391,000 in Fiscal
3Q99. Of this increase, $132,000, or 17%, was attributable to the IP/Internet
Services group, and $1,066,000, or 137%, was due to the recognition of common
stock warrants issued as compensation to several consultants. Partially
offsetting these increases was a $395,000 refund of United Kingdom value added
taxes received in Fiscal 3Q00, which reduced the percentage increase in general
and administrative expenses by 28%. Depreciation and amortization expense
increased from $36,000 in Fiscal 3Q99 to $1,482,000 in Fiscal 3Q00.
Substantially all of this $1,446,000 increase was due to goodwill amortization
resulting from the May, October and December 1999 acquisitions of the component
parts of the IP/Internet Services group and to depreciation expense of the
IP/Internet Services group. Results of operations for Fiscal 3Q99 also include
the recognition of equity in net losses of GlobalFirst and Mediatel of
$13,951,000, which reflects net losses of GlobalFirst and Mediatel from their
respective acquisition dates.
Nine Months Ended March 31, 2000
v. Nine Months Ended March 31, 1999
- -----------------------------------
For the nine months ended March 31, 2000 ("Fiscal Nine Months 2000"), the
Company had net income of $14,424,000, or $0.11 per share, on revenue of
$3,206,000 compared to a net loss of $22,375,000, or $0.38 per share, on no
revenue for the nine months ended March 31, 1998 ("Fiscal Nine Months 1999").
Excluding a $32,502,000, or $0.25 per share, extraordinary gain, the Company
had a net loss of $18,078,000, or $0.14 per share, in Fiscal Nine Months 2000.
The Company's Fiscal Nine Months 2000 revenues were generated by the
IP/Internet Services group, the component parts of which were acquired in May,
October and December 1999.
On 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 of $32,502,000 on the discharge of such indebtedness in
Fiscal Nine Months 2000.
20
<PAGE>
Salaries and benefits in Fiscal Nine Months 2000 increased $2,575,000, or
208%, to $3,812,000 as compared to $1,237,000 in Fiscal Nine Months 1999. Of
this increase, $1,704,000, or 66%, was attributable to the IP/Internet Services
group, the component parts of which were acquired in May, October and December
1999, and $871,000, or 34%, was attributable to increased employment in Clariti
Wireless Messaging and Corporate staff. Operating expenses in Fiscal Nine
Months 2000 were $777,000 as compared to no operating expenses in Fiscal 3Q99.
All of the Fiscal Nine Months 2000 operating expenses were attributable to the
IP/Internet Services group. Marketing expenses in Fiscal Nine Months 2000
increased $855,000, or 891%, to $951,000 as compared to $96,000 in Fiscal Nine
Months 2000. Of this increase, $723,000, or 85%, was attributable to the
IP/Internet Services group, and $154,000, or 18%, was attributable to Clariti
Wireless Messaging as completion of development of the Digital Voice Messaging
System nears. All research and development expenses related to the development
of the Digital Voice Messaging System. Such R&D expenses in Fiscal Nine Months
2000 increased $570,000, or 32%, to $2,334,000 as compared to $1,764,000 in
Fiscal Nine Months 1999 due to expansion and acceleration of the Company's
efforts to complete development of the Digital Voice Messaging System. General
and administrative expenses in Fiscal Nine Months 2000 increased $4,826,000, or
181%, to $7,493,000 as compared to $2,667,000 in Fiscal Nine Months 1999. Of
this increase, $876,000, or 18%, was attributable to the IP/Internet Services
group, and $3,691,000, or 76%, of the increase was due to the issuance of
common stock warrants as compensation to consultants. The remaining $259,000,
or 6%, of the increase was due to an overall expansion of the Company's
business activities, partially offset by a $395,000 refund of United Kingdom
value added taxes received in Fiscal Nine Months 2000. Depreciation and
amortization increased from $102,000 in Fiscal Nine Months 1999 to $3,765,000
in Fiscal Nine Months 2000, of which $2,405,000 was goodwill amortization
resulting from the May, October and December 1999 acquisitions of the component
parts of the IP/Internet Services group and $1,196,000 was depreciation expense
of the IP/Internet Services group. Results of operations for Fiscal Nine
Months 1999 also include the recognition of equity in net losses of GlobalFirst
and Mediatel of $16,764,000, which reflects net losses of GlobalFirst and
Mediatel from their respective acquisition dates.
Liquidity and Capital Resources
- -------------------------------
At March 31, 2000, the Company had working capital of $9,029,000
(including a cash balance of $11,417,000) as compared to a working capital
deficit of $35,500,000 (including a cash balance of $3,284,000) at June 30,
1999. The working capital increase of $44,529,000 is primarily due to the
following:
- the discharge of indebtedness of approximately $32,502,000 related to
the liquidation of the International Telecommunications Group; and
- the sale of 11,807,000 shares of common stock for proceeds, net of
commissions, of $22,950,000 during Fiscal Nine Months 2000.
These working capital improvements were partially offset by use of cash in
operations during Fiscal Nine Months 2000.
After the end of 3Q00, in April 2000, Clariti completed a private
placement to several foreign institutional investors of 3,850,000 shares of its
common stock for aggregate proceeds of $10,588,000 which, after commissions of
$1,165,000, resulted in net proceeds to Clariti of $9,423,000.
21
<PAGE>
Management believes that existing cash balances will enable the Company to
continue developing its Digital Voice Messaging System and continue to fund
expected negative cash flows and capital expenditures related to the growth of
the IP/Internet Services Group for the remainder of calendar year 2000. The
Company currently has no bank lines of credit.
Management is aware however that significant additional funding will be
required beyond its year-end 2000 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.
On May 12, 2000, the Company filed with the SEC Amendment No. 1 to its
Form S-3 registration statement seeking to register the resale by the holders
thereof of up to 117,378,388 shares of common stock that had previously been
issued in private placements and up to 16,741,666 shares of common stock
issuable upon the exercise of outstanding common stock purchase warrants. As of
May 1, 2000, the Company had 83,974,321 shares (including 81,701,988 shares
covered by Amendment No. 1 to the Form S-3 registration statement) subject to
lock-up agreements. The parties to the lock-up agreements are not permitted to
sell their shares until the expiration of the lock-up period without prior
consent from the Company. Current lock-up agreements have expiration dates
ranging from June 2000 to March 2002. The expiration of a particular lock-up
period could have a depressive effect on the market price of the Company's
common stock, potentially creating greater difficulty for the Company to raise
additional equity capital. Amendment No. 1 to the Form S-3 registration
statement also seeks to register common stock underlying a total of 16,741,666
warrants with strike prices ranging from $3.00 to $5.00 per share. If all of
the warrants are exercised, the Company will receive proceeds of approximately
$52,569,000.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about June 17, 1999, Clariti, together with Mediatel, GlobalFirst
and Chadwell Hall Holdings Limited (formerly the owner of record of a majority
of Clariti stock), filed a Demand for Arbitration with the American Arbitration
Association against Frontier concerning obligations arising under a March 4,
1999 agreement entered into by and among Frontier and Mediatel, GlobalFirst,
Chadwell Hall and Clariti (the "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 5,000,000 shares of its
common stock as security for the remaining balance, if any, due Frontier by
Mediatel and/or GlobalFirst. The amount due Frontier by Mediatel and Global
First 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 that Chadwell Hall is liable for and guarantees
payment in full of the Account Balance and, further, shall be obligated to
purchase the 5,000,000 shares of Clariti common stock from Frontier for an
amount equal to the Account Balance. At any time prior to the purchase of the
5,000,000 shares of Clariti common stock by Chadwell Hall, Clariti may purchase
any portion or all of the 5,000,000 shares of its common 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 the
5,000,000 shares of Clariti common stock in order to satisfy the Account
Balance. If Frontier sells all 5,000,000 shares of Clariti common stock for
less than the Account Balance, GlobalFirst, Mediatel and Chadwell Hall are
liable to pay Frontier the remaining Account Balance due to Frontier. Once
Frontier collects the Account Balance (whether by sale of the 5,000,000 shares
of Clariti common stock or payment made by any of the parties), Frontier must
surrender to Clariti any remaining shares of Clariti common stock. Frontier, in
its recent filing with the American Arbitration Association, has alleged that
(i) the Account Balance is at least $14,000,000; (ii) Clariti fraudulently
failed to disclose material information to Frontier at the time of signing the
March 4 Agreement; (iii) Clariti, together with GlobalFirst, Mediatel and
Chadwell Hall, breached the March 4 Agreement and (iv) Clariti, together with
GlobalFirst, Mediatel and Chadwell Hall, are liable to Frontier for an amount
to be determined by the Arbitrators, but at least $14,000,000. Clariti disputes
these allegations of Frontier. 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 5,000,000 shares of Clariti
common stock to Frontier as collateral (which has already been accomplished)
and that Clariti has no obligation for the account balance, and (iii) the
allegation of Frontier that Clariti fraudulently failed to disclose material
information to Frontier is incorrect. This arbitration matter is currently
pending.
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, seeking payment
for long-distance telephone services pursuant to a contract between IDT and
23
<PAGE>
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 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. As of October 11, 1999, the International
Telecommunications Group filed for voluntary liquidation and ceased operation
of its businesses (see Note 4 to the consolidated financial statements included
herein). 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.
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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit - 27. Financial Data Schedule
(b) Reports on Form 8-K:
None
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 15, 2000
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
25
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<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-01-1999
<PERIOD-END> Mar-31-2000
<CASH> 11,417,000
<SECURITIES> 0
<RECEIVABLES> 1,300,000
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<COMMON> 139,000
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