U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Commission File Number 0-31729
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2498715
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1341 N. Delaware Avenue, Suite 300, Philadelphia, PA 19125
----------------------------------------------------------
(Address of principal executive offices)
Telephone: (215) 291-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of November 7, 2001, there were 38,529,565 shares outstanding of the
Registrant's $.001 par value common stock.
1
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FORM 10-Q
PAGE(S)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at
September 30, 2001 (unaudited) and
June 30, 2001 (audited) 3
Consolidated Statements of Operations
for the three months ended September 30,
2001 and 2000 (unaudited) 4
Consolidated Statement of Stockholders'
Equity (Deficit) for the three months ended
September 30, 2001 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended September 30,
2001 and 2000 (unaudited) 6-7
Notes to Consolidated Financial
Statements (unaudited) 8-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21-22
Item 2. Changes in Securities and Use of Proceeds 22-23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Sept. 30, June 30,
2001 2001
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 1 $ 124
Inventory - 107
Prepaid expenses and other current assets 13 105
--------- ---------
14 336
PROPERTY AND EQUIPMENT, NET 73 814
INTANGIBLE ASSETS, NET 7 148
OTHER NON-CURRENT ASSETS 8 -
--------- ---------
TOTAL ASSETS $ 102 $ 1,298
========= =========
CURRENT LIABILITIES
Accounts payable - trade $ 791 $ 1,828
Accrued expenses and other current liabilities 2,076 637
Short-term borrowings from related party 781 762
Convertible short-term borrowings 314 63
--------- ---------
3,962 3,290
DEFERRED CREDIT 665 -
--------- ---------
TOTAL LIABILITIES 4,627 3,290
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 38,530 shares at
September 30, 2001 and 35,380 shares at
June 30, 2001 38 35
WARRANTS OUTSTANDING 7,154 9,865
ADDITIONAL PAID-IN-CAPITAL 269,639 266,626
ACCUMULATED DEFICIT (281,356) (278,518)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT ( 4,525) ( 1,992)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 102 $ 1,298
========= =========
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,
------------------------
2000
2001 (Note 6)
--------- ---------
REVENUE $ - $ -
COST OF REVENUE - -
-------- --------
GROSS PROFIT - -
Marketing expenses - 270
Research and development expenses - 1,157
Depreciation and amortization expenses 8 85
General and administrative expenses 2,283 2,752
Loss from unconsolidated subsidiary 427 -
-------- --------
LOSS FROM OPERATIONS ( 2,718) ( 4,264)
-------- --------
OTHER INCOME (EXPENSE)
Interest income - 256
Interest expense ( 20) -
-------- --------
( 20) 256
-------- --------
NET LOSS FROM CONTINUING OPERATIONS ( 2,738) ( 4,008)
DISCONTINUED OPERATIONS
Net loss from operations - ( 2,413)
Loss on disposal ( 100) -
-------- --------
NET LOSS $( 2,838) $( 6,421)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 36,955 35,836
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss from continuing operations $( 0.08) $( .11)
Discontinued operations:
Net loss from operations - ( .07)
Loss on disposal - -
-------- --------
Net loss $( 0.08) $( .18)
======== ========
See accompanying notes
4
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED SEPTEMBER 30, 2001
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L.
OF OUTSTAN- PAID-IN ACCUMULATED
SHARES AMOUNT DING,NET CAPITAL DEFICIT
------ ------ --------- --------- -----------
BALANCES, JUNE 30, 2001 35,380 $ 35 $ 9,865 $ 266,626 $( 278,518)
Three months ended
September 30, 2001
(unaudited):
Common stock issued for
cash 3,000 3 - 147 -
Commission on issuance
of common stock - - - ( 15) -
Common stock issued for
expenses 150 - - 10 -
Common stock warrants
issued, net of change
in unearned consulting
fees of $(90) - - 160 - -
Common stock warrants
expired - - ( 2,871) 2,871 -
Net loss - - - - ( 2,838)
------ ---- -------- --------- ----------
BALANCES, SEPTEMBER 30,
2001 (unaudited) 38,530 $ 38 $ 7,154 $ 269,639 $( 281,356)
====== ==== ======== ========= ==========
See accompanying notes
5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000
2001 (Note 6)
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $( 2,838) $( 6,421)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Loss from discontinued operations - 2,413
Loss from unconsolidated subsidiary 427 -
Depreciation and amortization 8 85
Issuance of common stock and common
stock warrants for expenses 170 933
Other ( 198) ( 87)
Change in current assets and liabilities
which increase (decrease) cash:
Inventory - ( 334)
Prepaid expenses and other current assets 67 ( 261)
Accounts payable - trade 66 315
Accrued expenses and other current
liabilities 1,903 275
-------- --------
Net cash used in operating activities ( 395) ( 3,082)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to unconsolidated subsidiary ( 132) -
Proceeds from sale of fixed assets 19 -
Investment in discontinued operations - ( 1,852)
Investment in long-lived assets - ( 220)
-------- --------
Net cash used in investing activities ( 113) ( 2,072)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash 150 -
Commission on sale of common stock ( 15) -
Short-term borrowings 250 -
-------- --------
Net cash received from financing activities 385 -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS ( 123) ( 5,154)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 124 13,752
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 1 $ 8,598
======== ========
6
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000
2001 (Note 6)
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ - $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
None
See accompanying notes
7
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
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 accounting principles generally accepted in the
United States 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, 2001
Form 10-K and other information included in Clariti's Forms 8-K and amendments
thereto as filed with the Securities and Exchange Commission.
NOTE 2 - DESCRIPTION OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company") is
an international wireless communications technology company with proprietary
technology for transmitting digital data utilizing radio frequencies
transmitted by FM radio stations.
During the period from December 1998 to May 2001, the Company was also a
significant provider of wire-line telecommunication services through its
interest in several businesses with operations in the United States, United
Kingdom, Europe and Australia. During the year ended June 30, 2001, the
Company discontinued its wire-line telecommunication operations (see Note 6).
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, 2001 and 2000 are referred to as Fiscal
1Q02 and Fiscal 1Q01, 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.
On October 24, 2001, the Company's wholly-owned subsidiary, Clariti Wireless
Messaging, Inc. ("Clariti Wireless"), filed a voluntary petition for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. Because of the bankruptcy filing,
8
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued
the Company is deemed not to have a controlling interest as defined in
accordance with Statement of Financial Accounting Standards No. 94.
Consequently, the Company has not consolidated the assets and liabilities of
Clariti Wireless as of September 30, 2001. Pending resolution of the
bankruptcy filing, the net liabilities of Clariti Wireless have been classified
as a Deferred Credit in the accompanying consolidated balance sheet as of
September 30, 2001. Results of Clariti Wireless' operations for the three
months ended September 30, 2001 are reflected as Loss from Unconsolidated
Subsidiary in the accompanying consolidated statement of operations for the
three months ended September 30, 2001.
Income Taxes
------------
There is no income tax benefit for operating losses for the three months ended
September 30, 2001 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.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash and equivalents,
accounts payable, accrued expenses, and short-term borrowings. These balances,
as presented in the balance sheet as of September 30, 2001 and June 30, 2001
approximate their fair value because of their short maturities.
Net Loss Per Common Share
-------------------------
Net loss per common share is based upon the weighted average number of common
shares outstanding during the period. The treasury stock method is used to
calculate dilutive shares. Such method reduces the number of dilutive shares
by the number of shares purchasable from the proceeds of the options and
warrants assumed to be exercised. Basic and diluted weighted average shares
outstanding for Fiscal 1Q02 and Fiscal 1Q01 were the same because the effect of
using the treasury stock method would be antidilutive.
Recent Accounting Pronouncements
--------------------------------
In August 2001, FASB Statement 142, "Goodwill and Other Intangible Assets" was
issued, which is effective for fiscal years beginning after December 15, 2001.
9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued
Statement 142 addresses how intangible assets that are acquired individually or
with a group of assets should be accounted for upon their acquisition and also
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. Also,
for previously recognized non-goodwill intangible assets, the useful lives must
be reassessed with remaining amortization periods adjusted accordingly, and
reflected as a change in accounting principle. Based on the Company's policy
for accounting for intangible assets, management does not anticipate the
adoption of this standard will result in any significant impact on earnings or
financial position of the Company.
NOTE 4 - MANAGEMENT'S PLANS
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
The Company has historically relied on equity and debt financing to meet its
cash requirements. However, adverse market conditions for telecommunications
companies during the last 18 months have made it extremely difficult for the
Company to raise additional financing. The Company has substantially exhausted
its cash reserves and has no firm commitments for near-term funding. On
October 24, 2001, the Company's wholly-owned subsidiary, Clariti Wireless
Messaging, Inc., filed a voluntary petition for bankruptcy under Chapter 7 of
the U.S. Bankruptcy Code. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management is considering
methods to restructure and/or reorganize its obligations.
The Company has chosen to focus its future efforts on development and
commercialization of its patented ClariCAST(TM) wireless datacasting
technology. Because the Company's technology is still under development, the
Company expects no revenues or operating cash flows in the near term.
The Company is actively pursuing opportunities to secure additional financing
which, if obtained, is expected to be sufficient to repay short-term borrowings
and meet operating cash requirements through most of the current fiscal year.
There can be no assurances that such funding will be generated or available, or
if available, on terms acceptable to the Company. Failure to secure additional
financing will have a material adverse impact on the Company.
The consolidated financial statements do not include any adjustments relating
to the recoverability of recorded asset amounts or the amounts of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 5 - UNCONSOLIDATED SUBSIDIARY
As further described in Note 3, on October 24, 2001, Clariti Wireless filed a
voluntary petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.
As a result, the Company's financial statements for Fiscal 1Q02 reflect Clariti
Wireless' results of operations using the equity method of accounting. The
following table presents summary financial information for Clariti Wireless
(dollars in thousands):
Fiscal 1Q02:
Net sales $ -
Expenses $ 427
As of September 30, 2001:
Current assets $ 125
Noncurrent assets $ 778
Current liabilities $ 1,568
NOTE 6 - DISCONTINUED OPERATIONS
During the period from December 1998 to May 2001, the Company was a significant
provider of wire-line telecommunication services through its interest in
several businesses with operations in the United States, United Kingdom, Europe
and Australia. The Company previously referred to these operations as the
Telephony/Internet Services business segment. As further described below, the
Company has divested substantially all of its interests in the Telephony/
Internet Services business segment, representing the disposal of a business
segment under Accounting Principals Board Opinion No. 30. Accordingly, the
accompanying statement of operations and statement of cash flows for Fiscal
1Q01 have been restated to conform to discontinued operations treatment. These
divestments consist of the following:
- In October 1999, the Company's wire-line operations in the United
Kingdom and Europe (the "UK Telecommunications Group") filed for
voluntary liquidation and ceased operation of its businesses. Through
such liquidation proceedings, the Company received certain operating
assets of the UK Telecommunications Group consisting principally of
telephone switching equipment in the United Kingdom. In March 2001, the
Company sold such operating assets in the United Kingdom.
- In January and March of 2001, the Company sold a total of 91% of its
interest in NKA Communications Pty Ltd. ("NKA"), an Australian provider
of telephony to corporate clients. The estimated net realizable value
of the remaining 9% of NKA still held by the Company is -0-.
11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 6 - DISCONTINUED OPERATIONS (continued)
- In May 2001, the Company sold all of the common stock of Tekbilt World
Communications, Inc. ("TWC") for an unsecured note for $250,000 (the
"TWC Note") and in a separate transaction, the Company also sold all of
the common stock of MegaHertz-NKO, Inc. ("M-NKO") for an unsecured note
for $250,000 (the "M-NKO Note"). The TWC Note carries a fixed interest
rate of 6% and is payable on May 9, 2003. The M-NKO Note carries a fixed
interest rate of 6% and is payable on May 23, 2003. The estimated net
realizable value of both notes is -0-.
The operating results from these discontinued operations are as follows (in
thousands):
Fiscal Fiscal
1Q02 1Q01
---------- ----------
Revenues $ - $ 4,017
Expenses - ( 6,430)
-------- --------
Net (loss) from
discontinued operations $ - $( 2,413)
======== ========
During Fiscal 1Q02, the Company recognized an additional loss of $100,000 on
the disposal of TWC. There was no gain or loss on disposal of discontinued
operations during Fiscal 1Q01.
NOTE 7 - SHORT-TERM BORROWINGS FROM RELATED PARTY
On May 3, 2001, the Company borrowed $750,000 from Ansteed Investment, Ltd.
("Ansteed"), a greater than 5% shareholder, for a period of 61 days. The note
carries interest at the rate of 10% per annum and is secured by substantially
all of the Company's assets. The amount shown on the Company's consolidated
balance sheet as of June 30, 2001 includes $12,000 of accrued interest. In
connection with this loan, the Company granted to Ansteed warrants to purchase
400,000 shares of the Company's common stock at an exercise price of $0.95 per
share. Such warrants expire on May 3, 2003. The Company was unable to repay
the loan from Ansteed by the July 3, 2001 due date, and is therefore in default
of the loan agreement.
NOTE 8 - CONVERTIBLE SHORT-TERM BORROWINGS
On June 28, 2001, the Company borrowed $62,500 from a third party. The
unsecured note is due on November 1, 2001 and carries interest at the rate of
8% per annum. The note is convertible into shares of the Company's common stock
12
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 8 - CONVERTIBLE SHORT-TERM BORROWINGS (continued)
at the option of the lender at a conversion price of $0.075 per share. In
connection with this loan, the Company granted to the third party warrants to
purchase a total of 125,000 shares of the Company's common stock, 62,500 of
which are exercisable at $0.25 per share and 62,500 of which are exercisable at
$0.50 per share. Such warrants expire on June 28, 2002. The Company was
unable to repay the loan by the November 1, 2001 due date, and is therefore in
default of the loan agreement.
On July 2, 2001, the Company entered into a Funding Agreement with a third
party pursuant to which Clariti borrowed $250,000 (the "Outstanding Balance").
The Outstanding Balance is secured by a second position security interest in
substantially the same assets as those securing the $750,000 loan from Ansteed
(see Note 7). The Outstanding Balance must be repaid on or before July 2,
2002, and no interest accrues on the Outstanding Balance. The third party may
convert the Outstanding Balance into shares of the Company's common stock at a
conversion price of $0.50 per share. In connection with this Funding
Agreement, the Company granted to the third party warrants to purchase a total
of 1,000,000 shares of the Company's common stock exercisable at $0.50 per
share. Such warrants expire on July 2, 2002.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On October 24, 2001, Clariti Wireless, a wholly owned subsidiary of the
Company, filed a voluntary petition for bankruptcy under Chapter 7 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Pennsylvania. The case has been assigned to Judge Diane W. Sigmund and is
designated as case number 01-34959. Clariti Wireless' operations have ceased.
France Telecom SA ("France Telecom") initiated a complaint against the Company
on May 12, 2000 before the Tribunal de Commerce de Paris (Paris Commercial
Court) in Paris, France. France Telecom's claim relates to a debt it claims it
is owed by GlobalFirst Communications SA, a former French subsidiary of the UK
Telecommunications Group, for long-distance telephone services. France Telecom
seeks payment from Clariti of 20,000,000 French Francs (approximately
$2,600,000). France Telecom further claims unspecified damages corresponding
to the loss of revenue resulting from the ceasing of commercial relations with
GlobalFirst Communications SA. The Company intends to vigorously defend the
claims asserted by France Telecom. Clariti believes that it did not verbally or
in writing make a promise to pay any obligations of GlobalFirst Communications
SA, and that it caused no damages to France Telecom because commercial
relations with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. This case is still 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
13
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
Carrier Services Limited, an inactive United Kingdom subsidiary of the Company,
seeking payment for long-distance telephone services pursuant to a contract
between IDT and GlobalFirst Communications Limited, a former subsidiary of the
UK Telecommunications Group. The complaint seeks damages in the amount of
$690,163 plus interest, costs and attorneys fees. On March 20, 2000, the Court
of Common Pleas dismissed the complaint on the basis of jurisdiction, provided
that proper jurisdiction lies in England. On or about April 15, 2000, IDT
filed an appeal with the Superior Court of Pennsylvania appealing the decision
of the Court of Common Pleas. On or about April 19, 2001, the Superior Court
sustained the decision of the Court of Common Pleas regarding jurisdiction. To
date, the Company is not aware of any further action taken by IDT in this
matter. The Company believes that neither the Company nor Clariti Carrier
Services Limited has any liability with respect to IDT's claim.
On or about September 28, 2000, Michael P. McAndrews filed a Demand for
Arbitration with the American Arbitration Association against the Company and
Clariti Wireless concerning obligations arising under Mr. McAndrews' Employment
Agreement. Mr. McAndrews has alleged that the Company had guaranteed and
assumed the obligation due Mr. McAndrews pursuant to an Assignment and Guaranty
Agreement. Mr. McAndrews claimed that as a result of a material change in his
duties, he resigned from employment for "good reason" (as defined in the
Employment Agreement), therefore entitling him to a severance package in an
amount in excess of $294,000. Additionally, Mr. McAndrews requested reasonable
attorney fees and other costs and fees, together with interest thereon.
Clariti Wireless and the Company disputed Mr. McAndrews' allegations, asserting
that Mr. McAndrews was not entitled to any payments and/or damages under the
Employment Agreement. The Arbitrators held a hearing on June 14 and 15, 2001
regarding the matter. On October 18, 2001, the Arbitrators ruled that the
Company and Clariti Wireless are jointly and severally liable to pay Mr.
McAndrews $290,500 plus reasonable attorney's fees. The Company continues to
believe that Mr. McAndrews was not entitled to any payments and/or damages
under the Employment Agreement and is considering its options in response to
this ruling.
On June 12, 2001, M&T Bank filed an action against Clariti Telecommunications
International, Ltd. in the Court of Common Pleas of Montgomery County,
Pennsylvania. M&T Bank seeks to hold Clariti responsible under the terms of a
guaranty agreement pursuant to which Clariti allegedly guaranteed certain
obligations of its former subsidiary, Clariti Telecom, Inc. M&T Bank seeks
damages in the amount of $368,000. This case is in the early stages of
discovery with no case management scheduled or trial date set.
As further described in Note 4, the Company has been experiencing a severe cash
shortage. As a result, the Company has been unable to pay its vendors and
lessors on a timely basis. Some vendors and lessors have chosen to use the
legal process to attempt to collect their debts, including obtaining judgments
against the Company. If the Company is able to raise significant additional
funding, the Company expects to attempt to work out settlements with respect to
these judgments.
14
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
The Company is, from time to time, during the normal course of its business
operations, subject to various other litigation claims and legal disputes. The
Company expects none to have a material adverse impact on its operations;
however, no assurance can be given that an adverse determination of any claim
or dispute would not have an adverse impact on its operations during any given
period.
NOTE 10 - COMMON STOCK
During Fiscal 1Q02 the Company sold 3,000,000 shares of its common stock to
a third party investor for proceeds, net of commissions, of $135,000. In
addition, the Company issued 150,000 shares of its common stock to a third
party for consulting services valued at $10,500.
NOTE 11 - STOCK OPTIONS
During Fiscal 1Q02, 147,000 stock options with exercise prices between $4.75
and $12.12 per share (weighted average price of $5.57 per share) expired
without being exercised. There were no new stock options issued during Fiscal
1Q02.
NOTE 12 - 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, in connection with borrowings, 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 5.0%.
During Fiscal 1Q02 the Company issued warrants to purchase a total of 1,062,500
shares of the Company's common stock at prices ranging from $0.25 per share to
$0.50 per share (weighted average price of $0.49 per share). The warrants were
issued for services rendered and expire 1 year from the date of grant. The
Black-Scholes model valued these warrants at a total of $12,000.
During Fiscal 1Q02 the Company also amended the terms of certain outstanding
warrants. The expiration date of 31,250 warrants was extended for one
additional year and the exercise price of such warrants was reduced from $7.00
per share to $3.56 per share. In addition, the exercise price of a total of
347,500 warrants was reduced from between $1.00 per share and $6.00 per share
to $0.07 per share.
15
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
NOTE 12 - WARRANTS (continued)
Also during Fiscal 1Q02, 625,000 warrants with exercise prices between $4.40
and $8.00 per share expired without being exercised. The book value of such
expired warrants (approximately $2,871,000) was reclassified from warrants
outstanding to additional paid-in capital.
NOTE 13 - SEGMENT INFORMATION
The Company has determined that segment information is not required to be
presented because the Company's former segment known as Telephony/Internet
Services was discontinued during Fiscal 2001 (see Note 6).
16
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 our ability
to successfully do any or all of the following:
- Obtain financing for operations and expansion
- Achieve our goal of launching a commercial wireless voicemail system or
other applications in Italy during calendar 2002
- Lease SCA channels from FM radio stations
- Develop commercially viable applications for the ClariCAST(TM)
technology in addition to the Wireless Voicemail System
- Develop partnerships with local companies domestically or in foreign
markets to help market, sell and distribute our wireless products and
services
- Select partners who will be used to help market, sell and distribute our
wireless products and services
- Develop a marketing strategy of our wireless products and services
- Make our wireless products and services affordable and appealing to our
target markets
- Address multiple markets simultaneously to market our wireless
products and services
- Develop manufacturing and distribution channels of our wireless
products and services
- Manage the progress and costs of additional research and development of
our wireless products and services and the ClariCAST(TM) technology
- Manage the risks, restrictions and barriers of conducting business
internationally
- Reduce future operating losses and negative cash flow
- Compete effectively in the markets we choose to enter
- Develop new products and services and enhance current products and
services
- Stimulate demand for our wireless products and services
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 we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our 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 related to our
ability to obtain funding, risks relating to our significant capital
requirements, risks relating to the bankruptcy of our wholly-owned subsidiary,
Clariti Wireless Messaging, Inc., risks associated with our operating losses,
risks relating to our development, risks relating to competition and regulatory
developments, as well as the other risks referenced from time to time in our
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. We do not undertake any obligation to release publicly
17
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 our
consolidated financial statements appearing elsewhere in this report.
General Operations
------------------
The current focus of our business is the development and commercialization
of ClariCAST(TM), our proprietary wireless technology that will support voice
messaging (including wireless voicemail and text-to-speech), data and
information services to a high-speed digital wireless device.
Recent Events
-------------
On October 24, 2001, our wholly-owned subsidiary, Clariti Wireless
Messaging, Inc. ("Clariti Wireless"), filed a voluntary petition for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. Clariti Wireless' operations have
ceased. Under Chapter 7 of the U.S. Bankruptcy Code, the Court will liquidate
Clariti Wireless' assets for the benefit of its creditors. We are a secured
creditor of Clariti Wireless. It is too early in the Court's proceedings to
determine what impact the bankruptcy of Clariti Wireless will have on us.
Results of Operations
Three Months Ended September 30, 2001 ("Fiscal 1Q02")
vs. Three Months Ended September 30, 2000 ("Fiscal 1Q01")
--------------------------------------------------------
For Fiscal 1Q02, we incurred a net loss of $2,838,000, or $0.08 per
share, on no revenue as compared to a net loss of 6,421,000, or $0.18 per
share, on no revenue in Fiscal 1Q01. Excluding discontinued operations, we
incurred a net loss of $2,738,000, or $0.08 per share, on no revenue as
compared to a net loss of 4,008,000, or $0.11 per share, on no revenue in
Fiscal 1Q01.
The $1,270,000 reduction in loss from continuing operations was primarily
due to a $1,428,000 reduction in losses from Clariti Wireless. By July 1,
2001, our severe cash shortage had forced us to lay off most of our wireless
network engineering, marketing and administrative staff and relocate the
wireless group headquarters from Fort Washington, Pennsylvania to Philadelphia.
Fiscal 1Q02 results of operations reflect no marketing expenses or research and
development expenses due to the use of equity method accounting for Clariti
Wireless as a result of its bankruptcy filing described above under Recent
Developments.
Excluding Clariti Wireless, general and administrative expenses decreased
a modest $105,000, from $2,388,000 to $2,283,000. However, Fiscal 1Q02 amounts
include accruals of $1,256,000 for certain leases in default and legal
proceedings. Once again, our severe cash shortage forced us to significantly
reduce our costs.
18
During the period from December 1998 to May 2001, we were also a
significant provider of wire-line telecommunication services through our
interest in several businesses with operations in the United States, United
Kingdom, Europe and Australia. During the year ended June 30, 2001, we
divested these business operations, which formed our former business segment,
Telephony/Internet Services. Our results of operations for Fiscal 1Q01 reflect
$2,413,000 of losses from such discontinued operations. During Fiscal 1Q02 we
recognized an additional $100,000 loss on the disposal of one of those
businesses.
Liquidity and Capital Resources
-------------------------------
At September 30, 2001, we had a working capital deficit of $3,948,000
(including a cash balance of $1,000) as compared to a working capital deficit
of $2,954,000 (including a cash balance of $124,000) at June 30, 2000. The
working capital decrease of $994,000 is primarily due to a $1,256,000 increase
in accruals for leases in default and legal proceedings, use of cash in
continuing operations and advances made to Clariti Wireless. These working
capital decreases were partially offset by $250,000 of short-term borrowings
made during Fiscal 1Q02, $135,000 proceeds (net of commissions) from the sale
of common stock during Fiscal 1Q02, and a reduction in working capital deficit
of $1,225,000 as a result of using the equity method of accounting for Clariti
Wireless for Fiscal 1Q02.
We have historically relied principally on equity financing to meet our
cash requirements. Adverse market conditions for telecommunications companies
during the last 18 months have made it extremely difficult for us to raise
additional equity financing. We have substantially exhausted our cash
reserves, we have no credit lines, and we have no firm commitments for near-
term funding. On October 24, 2001, our wholly-owned subsidiary, Clariti
Wireless, filed a voluntary petition for bankruptcy under Chapter 7 of the U.S.
Bankruptcy Code. Substantially all of our assets have been pledged as
collateral for a short-term loan, which is in default because we do not have
the funds to repay it. These matters raise substantial doubt about our ability
to continue as a going concern. We are considering methods to restructure
and/or reorganize our obligations.
In May and June 2001, we obtained limited short-term debt financing in
order to continue operating, including a $750,000 secured loan from a related
party. The $750,000 loan is secured by substantially all of our assets. The
due date for repayment of the loan has already passed and the lender has
notified us that we are in default of the loan agreement. If we were unable to
repay the loan on demand by the lender, the lender could foreclose on the
collateral described above. We are negotiating an extension with the lender.
A major factor in our recent inability to raise equity funding has been
the rapid and precipitous fall in the market price of our common stock, from
$5.25 per share in January 2001 to recent prices of approximately $0.02 per
share, resulting in a reduction of our market capitalization from $187.7
million to less than $1 million. If we are able to obtain additional equity
investments sufficient to continue our operations through the current fiscal
year end (at least $3 million), the low level of our stock price will cause
substantial dilution of the stock held by existing shareholders.
19
We have chosen to focus our future efforts on development and
commercialization of our patented ClariCAST(TM) wireless datacasting
technology. Because our technology is still under development, we expect no
revenues or positive operating cash flow in the near term. Future cash
expenditure requirements have been significantly reduced through the
discontinuance of the Telephony/Internet Services businesses and through major
reductions in wireless technology development and corporate overhead expenses.
We are actively pursuing opportunities to secure additional financing
which, if obtained, is expected to be sufficient to repay short-term borrowings
and meet operating cash requirements through most of the next fiscal year.
There can be no assurances that such funding will be generated or available, or
if available, on terms acceptable to us. Failure to secure additional financing
will have a material adverse impact on our business.
Significant additional funding will be required beyond 2001 to launch
the ClariCAST(TM) System in Italy and other 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 us.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 24, 2001, Clariti Wireless Messaging, Inc., a wholly owned
subsidiary of the Company, filed a voluntary petition for bankruptcy under
Chapter 7 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Eastern District of Pennsylvania. The case has been assigned to Judge Diane W.
Sigmund and is designated as case number 01-34959. Clariti Wireless'
operations have ceased.
France Telecom SA ("France Telecom") initiated a complaint against the
Company on May 12, 2000 before the Tribunal de Commerce de Paris (Paris
Commercial Court) in Paris, France. France Telecom's claim relates to a debt it
claims it is owed by GlobalFirst Communications SA, a former French subsidiary
of the UK Telecommunications Group, for long-distance telephone services.
France Telecom seeks payment from Clariti of 20,000,000 French Francs
(approximately $2,600,000). France Telecom further claims unspecified damages
corresponding to the loss of revenue resulting from the ceasing of commercial
relations with GlobalFirst Communications SA. The Company intends to
vigorously defend the claims asserted by France Telecom. Clariti believes that
it did not verbally or in writing make a promise to pay any obligations of
GlobalFirst Communications SA, and that it caused no damages to France Telecom
because commercial relations with GlobalFirst Communications SA had ceased
before Clariti held any negotiations with France Telecom.
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, an inactive United Kingdom subsidiary of the
Company, seeking payment for long-distance telephone services pursuant to a
contract between IDT and GlobalFirst Communications Limited, a former
subsidiary of the UK Telecommunications Group. The complaint seeks damages in
the amount of $690,163 plus interest, costs and attorneys fees. On March 20,
2000, the Court of Common Pleas dismissed the complaint on the basis of
jurisdiction, provided that proper jurisdiction lies in England. On or about
April 15, 2000, IDT filed an appeal with the Superior Court of Pennsylvania
appealing the decision of the Court of Common Pleas. On or about April 19,
2001, the Superior Court sustained the decision of the Court of Common Pleas
regarding jurisdiction. To date, the Company is not aware of any further
action taken by IDT in this matter. The Company believes that neither the
Company nor Clariti Carrier Services Limited has any liability with respect to
IDT's claim.
On or about September 28, 2000, Michael P. McAndrews filed a Demand for
Arbitration with the American Arbitration Association against the Company and
Clariti Wireless concerning obligations arising under Mr. McAndrews' Employment
Agreement. Mr. McAndrews has alleged that the Company had guaranteed and
assumed the obligation due Mr. McAndrews pursuant to an Assignment and Guaranty
Agreement. Mr. McAndrews claimed that as a result of a material change in his
duties, he resigned from employment for "good reason" (as defined in the
Employment Agreement), therefore entitling him to a severance package in an
amount in excess of $294,000. Additionally, Mr. McAndrews requested reasonable
attorney fees and other costs and fees, together with interest thereon.
Clariti Wireless and the Company disputed Mr. McAndrews' allegations, asserting
that Mr. McAndrews was not entitled to any payments and/or damages under the
21
Employment Agreement. The Arbitrators held a hearing on June 14 and 15, 2001
regarding the matter. On October 18, 2001, the Arbitrators ruled that the
Company and Clariti Wireless are jointly and severally liable to pay Mr.
McAndrews $290,500 plus reasonable attorney's fees. The Company continues to
believe that Mr. McAndrews was not entitled to any payments and/or damages
under the Employment Agreement and is considering its options in response to
this ruling.
On June 12, 2001, M&T Bank filed an action against Clariti
Telecommunications International, Ltd. in the Court of Common Pleas of
Montgomery County, Pennsylvania. M&T Bank seeks to hold Clariti responsible
under the terms of a guaranty agreement pursuant to which Clariti allegedly
guaranteed certain obligations of its former subsidiary, Clariti Telecom, Inc.
M&T Bank seeks damages in the amount of $368,000. This case is in the early
stages of discovery with no case management scheduled or trial date set.
As further described above under Management's Discussion and Analysis, the
Company has been experiencing a severe cash shortage. As a result, the Company
has been unable to pay its vendors and lessors on a timely basis. Some vendors
and lessors have chosen to use the legal process to attempt to collect their
debts, including obtaining judgments against the Company. If the Company is
able to raise significant additional funding, the Company expects to attempt to
work out settlements with respect to these judgments.
The Company is, from time to time, during the normal course of its
business operations, subject to various other litigation claims and legal
disputes. The Company expects none to have a material adverse impact on its
operations; however, no assurance can be given that an adverse determination of
any claim or dispute would not have an adverse impact on its operations during
any given period.
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 period covered by this Form
10-K that were not registered under the Securities Act of 1933, as amended (the
"Act") at the time of issuance and were not previously reported in a Quarterly
Report on Form 10-Q or Annual Report on Form 10-K.
Number of Total
Date Name Shares Consideration
------------- ------------------------------ ------------ -------------
August 2001 MarketWatch Option, Inc. 3,000,000 (a) $150,000
August 2001 Vision Publishing, Inc. 150,000 (b) $ 10,500
(a) The shares listed above were issued in a single private placement.
Commission on the issuance of these shares consisted of $15,000, or 10%, of
total consideration paid in cash.
(b) The shares listed above were issued in a single private placement as
consideration for financial consulting services. There was no commission
paid on the placement of these shares.
22
The securities issuances set forth above were exempt from registration under
the Act pursuant to Regulation S under the Act as transactions with non-U.S.
persons or Section 4(2) of the Act 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 were fully aware of the Company's activities, as well as its business and
financial condition, and acquired said securities for investment purposes.
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.
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:
None
(b) Reports on Form 8-K:
None
23
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 14, 2001
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
24