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 September 30, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _________
Commission file number 33-90344
Clariti Telecommunications International, Ltd.
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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) 425-8682
---------------------------
(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes (X) No ( )
State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date: As of November 8, 1999, there were
129,848,400 shares outstanding of $.001 par value common stock.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
1
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
September 30, 1999 (unaudited) and
June 30, 1999 (audited) 3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
three months ended September 30, 1999
and 1998 (unaudited) 4
Consolidated Statement of Stockholders'
Equity for the three months ended
September 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended
September 30, 1999 and 1998 (unaudited) 6-7
Notes to Consolidated Financial
Statements (unaudited) 8-13
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 14-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18-19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Events 19
Item 6. Exhibits and Reports on Form 8-K 19-20
SIGNATURES 21
2
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Sept. 30, June 30,
1999 1999
----------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,377 $ 3,284
Trade accounts receivable 324 286
Refundable taxes - 408
Prepaid expenses and other current assets 1,103 112
--------- ---------
8,804 4,090
PROPERTY AND EQUIPMENT, NET 3,392 3,244
INTANGIBLE ASSETS, NET 11,938 12,596
--------- ---------
TOTAL ASSETS $ 24,134 $ 19,930
========= =========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 1,827 $ 4,653
Accrued expenses and other current liabilities 1,737 524
Note payable to related party - 2,000
Excess of net liabilities over assets of
unconsolidated subsidiaries - 32,413
--------- ---------
TOTAL LIABILITIES 3,564 39,590
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 128,708 shares at
September 30, 1999 and 124,235 at June 30, 1999 129 124
WARRANTS OUTSTANDING 6,227 2,322
ADDITIONAL PAID-IN-CAPITAL 238,335 228,611
ACCUMULATED DEFICIT (224,104) (252,065)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ( 17) 1,348
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 20,570 ( 19,660)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,134 $ 19,930
========= =========
See accompanying notes
3
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
--------- ---------
REVENUE $ 318 $ -
COST OF REVENUE 188 -
-------- --------
GROSS PROFIT 130 -
Salaries and benefits 1,005 395
Operating expenses 72 -
Marketing expenses 287 -
Research and development 695 431
General and administrative expenses 1,553 518
Depreciation and amortization 1,037 34
-------- --------
LOSS FROM OPERATIONS ( 4,519) ( 1,378)
-------- --------
OTHER INCOME (EXPENSE)
Interest income 16 12
Interest expense ( 38) -
-------- --------
( 22) 12
-------- --------
Net loss before extraordinary item ( 4,541) ( 1,366)
EXTRAORDINARY ITEM
Gain on discharge of indebtedness 32,502 -
-------- --------
NET INCOME (LOSS) $ 27,961 $( 1,366)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment ( 17) -
-------- --------
COMPREHENSIVE INCOME (LOSS) $ 27,944 $( 1,366)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 125,141 23,734
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss before extraordinary item $( .04) $( .06)
Extraordinary item .26 -
-------- --------
Net income (loss) $ .22 $( .06)
======== ========
See accompanying notes
4
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
------------------- STOCK
NUMBER WARRANTS
OF OUT-
SHARES AMOUNT STANDING
-------- ------ --------
BALANCES, JUNE 30, 1999 124,235 $ 124 $ 2,322
Three months ended
September 30, 1999 (unaudited):
Common stock issued for cash 3,973 4 -
Common stock issued in settlement
of loan payable 500 1
Common stock warrants issued - - 3,905
------- ----- ------
BALANCES, SEPTEMBER 30, 1999 128,708 $ 129 $6,227
======= ===== ======
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
Three months ended
September 30, 1999 (unaudited):
Common stock issued for cash 9,929 - -
Common stock issued in settlement
of loan payable 999 - -
Commission on issuance of
common stock ( 1,083) - -
Common stock warrants issued ( 2,202) - -
Capitalization of note payable
to related party 2,081 - -
Net income - 27,961 (1,348)
Currency translation adjustment - - ( 17)
-------- --------- -------
BALANCES, SEPTEMBER 30, 1999 $238,335 $(224,104) $( 17)
======== ========= =======
See accompanying notes
5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 27,961 $( 1,366)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Extraordinary gain on discharge of
indebtedness (32,502) -
Depreciation and amortization 1,037 34
Issuance of common stock warrants for
expenses and prepaid expenses 1,703 -
Settlement of interest upon capitalization
of loan payable to related party 81 -
Issuance of common stock in settlement of
accounts payable and accrued liabilities - 56
Change in current assets and liabilities
which increase (decrease) cash:
Trade accounts receivable ( 38) -
Prepaid expenses and other current assets ( 991) 94
Accounts payable - trade ( 2,826) 4
Accrued expenses and other current
liabilities 1,213 162
Other 21 -
-------- --------
Net cash used in operating activities ( 4,341) ( 1,016)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ( 416) ( 46)
-------- --------
Net cash used in investing activities ( 416) ( 46)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash 9,933 100
Commission on sale of common stock ( 1,083) ( 10)
-------- --------
Net cash received from financing activities 8,850 90
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS 4,093 ( 972)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,284 1,391
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 7,377 $ 419
======== ========
6
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ -
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
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 1 - BASIS OF INTERIM PRESENTATION
The accompanying interim period financial statements of Clariti
Telecommunications International, Ltd. ("Clariti" or the "Company") are
unaudited, pursuant to certain rules and regulations of the Securities and
Exchange Commission, and include, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair statement
of the results for the periods indicated, which, however, are not necessarily
indicative of results 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.
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 division ("Clariti IP") consists of the former
MegaHertz-NKO, Inc., which was acquired on May 7, 1999 and the former NKA
Communications Pty., Ltd. ("NKA"), which was acquired on October 12,
1999 (see Note 13). Clariti IP is a provider of enhanced telecommunications
and Internet Protocol ("IP") telephony services (voice, data, fax and video) in
the United States and Australia. Clariti IP is also an Internet Service
Provider ("ISP") in the United States, offering dial up and dedicated access,
customized Web hosting and e-commerce.
Clariti's Wireless Messaging division ("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
international calling card business sectors. As of October 11, 1999, the
Company filed for voluntary liquidation for the International
Telecommunications Group and ceased operation of such businesses (see Note 4).
8
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
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, 1999 and 1998 are referred to as Fiscal
1Q00 and Fiscal 1Q99, 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 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 (see Note 4).
Revenue Recognition
- -------------------
The Company's revenue is generated principally through telephone services
(including prepaid 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 ended
September 30, 1999 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance required by FASB Statement 109,
"Accounting for Income Taxes." The valuation
allowance is necessary because, according to
criteria established by FASB Statement 109, it is
more likely than not that the deferred tax asset
will not be realized through future taxable income.
9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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 - EXTRAORDINARY GAIN
As of October 11, 1999, the Company filed for voluntary liquidation of the
International Telecommunications Group and ceased operation of such businesses.
This voluntary liquidation was undertaken because the Company concluded that
the International Telecommunications Group could not pay its debts. 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 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 1Q00 is the cumulative foreign currency translation
adjustment associated with the Company's ongoing foreign businesses. The
Company had foreign currency translation adjustments of $(17,000) during Fiscal
1Q00. 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.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In March 1999 Clariti, GlobalFirst, Mediatel and Chadwell Hall Holdings Limited
("CHH"), the Company's majority shareholder of record, entered into an
agreement with Frontier Corporation together with its subsidiary, Frontel
10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued)
Communications, Ltd. (collectively, "Frontier") to resolve a billing dispute
between GlobalFirst and Mediatel on the one part ("Customers") and Frontier on
the other part (the "Frontier Agreement"). One objective of the Frontier
Agreement is to identify the precise amount of the balance due to Frontier, if
any, by the Customers ("Balance Due Frontier"). Pursuant to the Frontier
Agreement, Clariti paid to Frontier $3,000,000 during March 1999 against the
Balance Due Frontier and issued to Frontier 5,000,000 shares of the Company's
restricted common stock valued at $11,250,000 as security for payment of any
remaining Balance Due Frontier. Within 5 business days after any Balance Due
Frontier is determined by agreement among the parties or by arbitration, CHH is
to pay such amount to Frontier, and Frontier must then transfer the 5,000,000
shares of Clariti common stock to CHH. At any time prior to the purchase of
the Clariti stock by CHH, Clariti (or its designee) may purchase any portion or
all of the stock for an amount equal to any Balance Due Frontier. In the event
CHH and/or Customers fail to pay to Frontier any Balance Due Frontier, Frontier
may, at its option, sell a sufficient amount of the Clariti shares in order to
satisfy the Balance Due Frontier. If Frontier sells all 5,000,000 shares of
Clariti common stock for less than the Balance Due Frontier, CHH (but not
Clariti) is contingently liable to pay Frontier the remaining Balance Due
Frontier. Once Frontier collects the Balance Due Frontier (whether by sale of
Clariti stock or payment made by any of the parties), Frontier must surrender
any remaining shares of the Clariti stock to Clariti. On or about June 17,
1999, Clariti, together with GlobalFirst, Mediatel and CHH filed a demand for
arbitration with the American Arbitration Association (case no. 50 N 181
0021399) against Frontier concerning Frontier's obligations arising under the
Frontier Agreement. This arbitration matter is currently pending.
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.
NOTE 7 - RELATED PARTIES
In connection with the Company's acquisition of Mediatel, the Company issued a
promissory note payable to CHH, 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 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.
11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 8 - COMMON STOCK
During 1Q00 the Company sold 3,973,333 shares of its common stock to several
third party investors for proceeds, net of commissions, of $8,950,000. 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 GlobalFirst.
NOTE 9 - STOCK OPTIONS
During 1Q00, the Company issued options to purchase a total of 160,000 shares
of the Company's common stock to several new and existing employees of the
Company. These stock options may be exercised over a period of 10 years at the
fair market value on the date of the grant (weighted average price of $2.94 per
share) 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 5.5%.
During 1Q00 the Company issued a total of 4,473,333 warrants in connection with
the issuance of a like number shares of common stock. 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 $2,202,000.
During 1Q00 the Company also issued to several consultants warrants to purchase
a total of 900,000 shares of the Company's common stock at the market price on
the date of grant, which ranged from $2.53 per share to $3.00 per share. The
warrants were issued for services rendered and expire 3 years from the date of
grant. The Black-Scholes model valued these warrants at a total of $1,703,000.
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
12
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
NOTE 11 - EARNINGS PER SHARE (continued)
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 1Q00 and Fiscal 1Q99 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." Prior to Fiscal 1Q00, the Company had
determined that presentation of segment information was not required.
Beginning with Fiscal 1Q00, the Company will be presenting segment information
based on the following reportable segments: IP/Internet Services and Wireless
Messaging. Segment information for Fiscal 1Q99 has not been presented because
the IP/Internet Services segment was not in operation until the acquisition of
MegaHertz-NKO in May 1999 (dollars in thousands).
IP/Internet Wireless Corporate
Services Messaging and Other Total
----------- --------- --------- ---------
Revenues $ 318 $ - $ - $ 318
Loss before
extraordinary item $( 1,437) $( 1,059) $( 2,045) $( 4,541)
Extraordinary item - - 32,502 32,502
-------- -------- -------- --------
Net income (loss) $( 1,437) $( 1,059) $ 30,457 $ 27,961
-------- -------- -------- --------
Total assets $ 12,965 $ 703 $ 10,466 $ 24,134
NOTE 13 - SUBSEQUENT EVENT
On October 12, 1999, the Company completed the acquisition of all of the
outstanding common stock of NKA Communications Pty., Ltd. ("NKA"), an
Australian IP telephony company, for consideration valued at approximately
$3,558,000. 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 revenue and gross margin targets are achieved by
NKA over a 24-month period.
13
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 MegaHertz-NKO's managed IP
network infrastructure
- adequacy of existing financing arrangements and ability to obtain the
necessary financing to achieve it business plans
- manage compliance with Year 2000 issues
In addition, certain statements may involve risk and uncertainty if they
are preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks associated with the
Company's operating losses, risks relating to the Company's development and
expansion and possible inability to manage growth, risks relating to the
Company's significant capital requirements, substantial indebtedness and
possible inability to service its debt, risks relating to competition and
regulatory developments, risks relating to implementing local and enhanced
services, risks relating to its long distance business, as well as other risks
referenced 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 businesses consist of the IP/Internet Services division and the
Wireless Messaging division.
Clariti's IP/Internet Services division ("Clariti IP") consists of the
former MegaHertz-NKO, Inc., which was acquired on May 7, 1999 and the former
NKA Communications Pty., Ltd. ("NKA"), which was acquired on October 12, 1999
14
(see Note 13 to the consolidated financial statements). Clariti IP is a
provider of enhanced telecommunications and Internet Protocol ("IP") telephony
services (voice, data, fax and video) in the United States and Australia.
Clariti IP is also an Internet Service Provider ("ISP") in the United States,
offering dial up and dedicated access, customized Web hosting and e-commerce.
Clariti's Wireless Messaging division ("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.
Recent Developments
- -------------------
The Company 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
international calling card business sectors. On October 11, 1999, at the
request of the Company, 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
Company concluded that the International Telecommunications Group could not pay
its debts, including the advances made by Clariti to GlobalFirst and Mediatel.
The liquidation proceedings have discharged all liabilities of the
International Telecommunications Group.
Results of Operations
- ---------------------
As of June 30, 1999 and 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, 1999
v. Three Months Ended September 30, 1998
- ----------------------------------------
For the three months ended September 30, 1999 ("Fiscal 1Q00"), the Company
had net income of $27,961,000, or $0.22 per share, on revenue of $318,000
compared to a net loss of $1,366,000, or $0.06 per share, on no revenue for the
three months ended September 30, 1998 ("Fiscal 1Q99"). Excluding a $32,502,000,
or $0.26 per share, extraordinary gain, the Company had a net loss of
$4,541,000, or $0.04 per share, in Fiscal 1Q00. The Fiscal 1Q00 revenues were
generated by the IP/Internet Services division, which was acquired in May 1999.
On October 11, 1999, at the request of the Company, 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.
15
Salaries and benefits in Fiscal 1Q00 increased $610,000, or 154%, to
$1,005,000 as compared to $395,000 in Fiscal 1Q99. Of this increase, $340,000,
or 56%, was attributable to the IP/Internet Services division, which was
acquired in May 1999, and $270,000, or 44%, was attributable to increased
employment in the Wireless Messaging division and Corporate staff. Operating
and marketing expenses in Fiscal 1Q00 were $72,000 and $287,000, respectively,
as compared to no operating or marketing expenses in Fiscal 1Q99. All
operating expenses were attributable to the IP/Internet Services division, and
$174,000, or 61%, of the marketing expenses were attributable to the
IP/Internet Services division. All research and development expenses related
to the development of the Digital Voice Messaging System. Such expenses in
Fiscal 1Q00 increased $264,000, or 61%, to $695,000 as compared to $431,000 in
Fiscal 1Q99 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 1Q00 increased $1,035,000, or 200%, to
$1,553,000 as compared to $518,000 in Fiscal 1Q99. Of this increase, $192,000,
or 19%, of the increase was attributable to the IP/Internet Services division
which was acquired in May 1999, and $671,000 , or 65%, of the increase was due
to the issuance of common stock warrants as compensation to consultants.
Depreciation and amortization in Fiscal 1Q00 increased from $34,000 to
$1,037,000 primarily due to the May 1999 acquisition of the IP/Internet
Services division, of which $635,000 related to the amortization of goodwill
resulting from such acquisition.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had working capital of $5,240,000
(including a cash balance of $7,377,000) 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 $40,740,000 is primarily due to the
following:
- the forgiveness of debt of approximately $32,502,000 related to the
liquidation of the International Telecommunications Group
- the sale of 3,973,333 shares of common stock for proceeds, net of
commissions, of $8,850,000 during Fiscal 1Q00
These working capital improvements were partially offset by use of cash in
operations during Fiscal 1Q00.
Management of the Company continues to make concerted efforts to raise
additional capital through the sale of common stock. In addition to the funds
raised during Fiscal 1Q00, the Company has received firm commitments for an
additional $16,166,000 of equity funding to be received by the end of calendar
year 1999.
Management believes that these funds will enable the Company to complete
the process of developing its Digital Voice Messaging System and continue to
fund expected negative cash flows and capital expenditures related to the
growth of the IP/Internet Services Division for the remainder of the current
fiscal year.
Management is aware however that significant additional funding will be
required beyond its fiscal year-end 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.
16
Year 2000
- ---------
In the past a number of computer software programs were written using two
digits rather than four digits to determine the applicable year. As a result,
date-sensitive computer software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem.
Management believes that all of Clariti's digital messaging systems are Year
2000 compliant. In particular, the software being developed for use in the
Digital Voice Messaging System has been designed specifically to be Year 2000
compliant.
The Company has completed its analysis of the IP/Internet Services
division Year 2000 readiness. Some minor modifications have been substantially
completed at a cost of less than $50,000. It now appears that the IP/Internet
Services division is Year 2000 compliant.
Clariti also plans to assess the readiness of its significant vendors and
financial institutions for the Year 2000 issue. Contingency plans will be
developed in the event that business-critical vendors and financial
institutions do not provide the Company with satisfactory evidence of their
readiness to handle Year 2000 issues.
Management does not believe the costs related to Year 2000 compliance,
including the costs relating to assessing the Year 2000 readiness of vendors
and financial institutions, will be material to its financial position or
results of operations. However, such costs are based on management's best
estimates. Unanticipated failures by critical vendors and financial
institutions as well as failure by the Company to satisfactorily execute its
own compliance could have a material adverse effect on Clariti's financial
position and results of operations. As a result, there can be no assurance
that these forward-looking estimates will be achieved and the actual cost and
vendor compliance could differ materially from those plans, resulting in
material financial risk.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1999 Clariti, GlobalFirst, Mediatel and Chadwell Hall Holdings
Limited ("CHH"), the Company's majority shareholder of record, entered into an
agreement with Frontier Corporation together with its subsidiary, Frontel
Communications, Ltd. (collectively, "Frontier") to resolve a billing dispute
between GlobalFirst and Mediatel on the one part ("Customers") and Frontier on
the other part (the "Frontier Agreement"). One objective of the Frontier
Agreement is to identify the precise amount of the balance due to Frontier, if
any, by the Customers ("Balance Due Frontier"). Pursuant to the Frontier
Agreement, Clariti paid to Frontier $3,000,000 during March 1999 against the
Balance Due Frontier and issued to Frontier 5,000,000 shares of the Company's
restricted common stock valued at $11,250,000 as security for payment of any
remaining Balance Due Frontier. Within 5 business days after any Balance Due
Frontier is determined by agreement among the parties or by arbitration, CHH is
to pay such amount to Frontier, and Frontier must then transfer the 5,000,000
shares of Clariti common stock to CHH. At any time prior to the purchase of
the Clariti stock by CHH, Clariti (or its designee) may purchase any portion or
all of the stock for an amount equal to any Balance Due Frontier. In the event
CHH and/or Customers fail to pay to Frontier any Balance Due Frontier, Frontier
may, at its option, sell a sufficient amount of the Clariti shares in order to
satisfy the Balance Due Frontier. If Frontier sells all 5,000,000 shares of
Clariti common stock for less than the Balance Due Frontier, CHH (but not
Clariti) is contingently liable to pay Frontier the remaining Balance Due
Frontier. Once Frontier collects the Balance Due Frontier (whether by sale of
Clariti stock or payment made by any of the parties), Frontier must surrender
any remaining shares of the Clariti stock to Clariti. On or about June 17,
1999, Clariti, together with GlobalFirst, Mediatel and CHH filed a demand for
arbitration with the American Arbitration Association (case no. 50 N 181
0021399) against Frontier concerning Frontier's obligations arising under the
Frontier Agreement. This arbitration matter is currently pending.
Item 2. Changes in Securities and Use of Proceeds
The following information sets forth all shares of the Company's $.001 par
value common stock issued by the Company during the quarter ended September 30,
1999, none of which were registered under the Securities Act of 1933, as
amended (the "Act") at the time of issuance.
Number Total
Date Name of Shares Consideration
-------- --------------------------------- ---------- --------------
Jul-99 Showtime Investment Corp. 40,000 $ 100,000
Aug-99 BSI SA 100,000 $ 250,000
Aug-99 SG Ruegg Bank 200,000 $ 500,000
Aug-99 SCF Societa Di Consulenza Finanziara 100,000 $ 250,000
Sep-99 BSI SA 200,000 $ 500,000
Sep-99 ABC Corporation 3,333,333 $ 8,333,333
Sep-99 Ansteed Investment Corp. 500,000 $ 1,000,000(a)
(a) Consideration consisted of settlement of a loan for $1,000,000 such
investor had made to GlobalFirst.
18
The securities issuances set forth above are exempt from registration with
the Securities and Exchange Commission pursuant to Regulation S as transactions
with non-U.S. persons or Section 4(2) as transactions by an issuer not
involving any public offering in that said transactions involved the issuance
by the Company of shares of its common stock to financially sophisticated
individuals who are fully aware of the Company's activities, as well as its
business and financial condition, and acquired said securities for investment
purposes. The Company plans to use proceeds from the issuance of these
securities for general corporate purposes and working capital needs of its
subsidiaries.
The Company has placed a restrictive legend on all of the stock
certificates representing the shares issued above and will give appropriate
"stop transfer" instructions to its transfer agent, until such time as those
shares are registered pursuant to the Act, or a valid exemption from
registration exists under the Act. The Company intends to register the resale
of the common stock described above by filing a registration statement with the
Securities and Exchange Commission in the near future.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
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/A on July 22, 1999. The
report disclosed in Item 7 that financial statements and
pro forma financial information for the acquisition of
MegaHertz-NKO, Inc. are not required pursuant to Item 310
of Regulation S-B.
The Company filed a Form 8-K on September 13, 1999. The
report disclosed that PricewaterhouseCoopers LLP resigned
as the Company's independent accountants.
The Company filed a Form 8-K on September 14, 1999. The
report disclosed that the Company had engaged Cogen Sklar
LLP as the Company's independent accountants.
19
(b) Reports on Form 8-K (continued):
The Company filed a Form 8-K/A on September 23, 1999. The
report amended the Form 8-K filed on September 13, 1999 to
include as an exhibit a letter from PricewaterhouseCoopers
LLP to the Securities and Exchange Commission dated
September 22, 1999.
20
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 22, 1999
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
21