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 DECEMBER 31, 2000
Commission File Number 0-31729
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2498715
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1735 Market Street, Mellon Bank Center Suite 1300, Philadelphia, PA 19103
-------------------------------------------------------------------------
(Address of principal executive offices)
Telephone: (215) 979-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the
past 90 days.
Yes (X) No ( )
As of February 2, 2001, there were 35,973,076 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
December 31, 2000 (unaudited) and
June 30, 2000 (audited) 3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
three months and six months ended
December 31, 2000 and 1999 (unaudited) 4-5
Consolidated Statement of Stockholders'
Equity for the six months ended
December 31, 2000 (unaudited) 6
Consolidated Statements of Cash Flows for
the three months and six months ended
December 31, 2000 and 1999 (unaudited) 7-8
Notes to Consolidated Financial
Statements (unaudited) 9-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 18-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24-25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Dec. 31, June 30,
2000 2000
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 3,908 $ 14,333
Trade accounts receivable, net 1,037 1,026
Prepaid expenses and other current assets 1,745 1,368
--------- ---------
6,690 16,727
PROPERTY AND EQUIPMENT, NET 5,223 4,072
INTANGIBLE ASSETS, NET 2,715 5,858
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY 1,781 -
--------- ---------
TOTAL ASSETS $ 16,409 $ 26,657
========= =========
CURRENT LIABILITIES
Accounts payable - trade $ 1,338 $ 1,064
Deferred revenue 961 1,069
Accrued expenses and other current liabilities 3,182 2,041
--------- ---------
5,481 4,174
LONG-TERM LIABILITIES 774 624
--------- ---------
TOTAL LIABILITIES 6,255 4,798
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 35,973 shares at
December 31, 2000 and June 30, 2000 36 36
WARRANTS OUTSTANDING 9,672 14,062
ADDITIONAL PAID-IN-CAPITAL 270,101 264,643
ACCUMULATED DEFICIT (269,716) (256,937)
ACCUMULATED OTHER COMPREHENSIVE INCOME 61 55
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,154 21,859
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,409 $ 26,657
========= =========
See accompanying notes
3
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUE $ 3,815 $ 899 $ 6,996 $ 1,217
COST OF REVENUE 3,202 708 6,027 896
-------- ------- -------- --------
GROSS PROFIT 613 191 969 321
Network operating expenses 591 276 1,179 348
Marketing expenses 742 337 1,448 624
Research and development expenses 1,548 815 2,705 1,510
Depreciation and amortization 579 1,246 1,092 2,283
General and administrative expenses 2,703 5,049 6,217 7,607
Equity in net loss of
unconsolidated subsidiary 330 - 880 -
Write-down of investment in
unconsolidated subsidiary 516 - 516 -
-------- ------- -------- --------
LOSS FROM OPERATIONS ( 6,396) ( 7,532) (13,068) (12,051)
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 65 85 327 101
Interest expense ( 26) ( 1) ( 38) ( 39)
-------- ------- -------- --------
39 84 289 62
-------- ------- -------- --------
Net loss before extraordinary item ( 6,357) ( 7,448) (12,779) (11,989)
EXTRAORDINARY ITEM
Gain on discharge of indebtedness - - - 32,502
-------- ------- -------- --------
NET INCOME (LOSS) $( 6,357) $(7,448) $(12,779) $ 20,513
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustment ( 112) ( 10) 6 ( 27)
-------- ------- -------- --------
COMPREHENSIVE INCOME (LOSS) $( 6,469) $(7,458) $(12,773) $ 20,486
======== ======= ======== ========
4
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 35,859 32,797 35,847 32,041
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss before extraordinary
item $( .18) $( .23) $( .36) $( .37)
Extraordinary item - - - 1.01
-------- ------- -------- --------
Net income (loss) $( .18) $( .23) $( .36) $ .64
======== ======= ======== ========
See accompanying notes
5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2000
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L.
OF OUTSTAN- PAID-IN
SHARES AMOUNT DING,NET CAPITAL
------ ------ --------- ---------
BALANCES, JUNE 30, 2000 35,836 $ 36 $14,062 $ 264,643
Six months ended December 31,
2000 (unaudited):
Common stock issued as additional
consideration for acquisition of TWC 222 - - 743
Common stock returned to the Company
pursuant to terms of TWC acquisition
agreement ( 85) - - ( 766)
Common stock warrants issued, net of
unearned consulting fees of $349 - - 608 483
Common stock warrants expired - - ( 4,998) 4,998
------ ---- -------- ---------
BALANCES, DECEMBER 31, 2000 35,973 $ 36 $ 9,672 $ 270,101
====== ==== ======== =========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME
----------- -------------
BALANCES, JUNE 30, 2000 $(256,937) $ 55
Three months ended December 31,
2000 (unaudited):
Net loss ( 12,779) -
Currency translation adjustment - 6
--------- -------
BALANCES, DECEMBER 31, 2000 $(269,716) $ 61
========= =======
See accompanying notes
6
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(12,779) $ 20,513
Adjustments to reconcile net income (loss)
to net cash flows used in operating
activities:
Extraordinary gain on discharge of
indebtedness - (32,502)
Depreciation and amortization 1,092 2,283
Equity in net loss of unconsolidated
subsidiary 880 -
Write-down of net assets of unconsolidated
subsidiary 516 -
Issuance of common stock warrants
for expenses 958 2,625
Settlement of interest upon capitalization
of loan payable to related party - 81
Change in current assets and liabilities
which increase (decrease) cash:
Trade accounts receivable, net ( 283) 14
Prepaid expenses and other current assets ( 387) ( 85)
Accounts payable - trade 481 ( 2,667)
Deferred revenue ( 108) -
Accrued expenses and other current
liabilities 652 ( 108)
Other 43 ( 6)
-------- --------
Net cash used in operating activities ( 8,935) ( 9,852)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ( 1,932) ( 587)
Deconsolidation of unconsolidated subsidiary ( 46) -
Advances to unconsolidated subsidiary ( 225) -
Cash received with companies acquired net
of cash paid for companies acquired - 136
-------- --------
Net cash used in investing activities ( 2,203) ( 451)
-------- --------
7
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash - 25,600
Commission on sale of common stock - ( 2,650)
Proceeds from loan payable 261 -
Repayment of loan payable ( 11) -
Net increase in capital lease obligations 503 -
-------- --------
Net cash received from financing activities 753 22,950
-------- --------
Effect of exchange rate changes on cash ( 40) -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS (10,425) 12,647
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 14,333 3,284
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,908 $ 15,931
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 38 $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock as additional
consideration for acquisition of TWC $ 743 $ -
Common stock returned to the Company
pursuant to terms of acquisition
agreement for TWC $ 766 $ -
Common stock issued as consideration for
acquisitions of NKA and TWC $ - $ 6,462
Capitalization of note payable to related
party, including accrued interest $ - $ 2,000
Issuance of common stock in settlement of
loan payable $ - $ 1,000
Issuance of common stock warrants for
unearned consulting fees $ - $ 1,758
See accompanying notes
8
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - BASIS OF INTERIM PRESENTATION
The accompanying interim period financial statements of Clariti
Telecommunications International, Ltd. ("Clariti" or the "Company") are
unaudited, pursuant to certain rules and regulations of the Securities and
Exchange Commission, and include, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair statement
of the results for the periods indicated, which, however, are not necessarily
indicative of results that may be expected for the full year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial statements and the
notes thereto included in Clariti's June 30, 2000 Form 10-K and other
information included in Clariti's Forms 8-K and amendments thereto as filed
with the Securities and Exchange Commission.
NOTE 2 - DESCRIPTION OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company") is
a diversified international telecommunications company with businesses that
cover voice, data, Internet and wireless communications.
The Company has made several acquisitions in the telecommunications industry.
In April 1995, the Company acquired its wireless messaging technology. In May
1999, the Company acquired MegaHertz-NKO, Inc., an Internet Service Provider
("ISP") and a provider of enhanced telecommunications and Internet Protocol
("IP") telephony services. In October 1999, the Company acquired NKA
Communications Pty, Ltd. ("NKA"), an Australian provider of telephony to
corporate clients. In December 1999, the Company acquired Tekbilt World
Communications, Inc. ("TWC"), a facilities-based provider of IP and
conventional switched telecommunications services with a large distribution
network. During the quarter ended June 30, 2000, the Company terminated most of
MegaHertz-NKO's revenue-generating activities and consolidated those remaining
operations into TWC. In January 2001, the Company sold a majority interest in
its Australian subsidiary, Clariti Telecommunications Pty, Ltd.("Clariti
Australia"), formerly NKA (see Note 15).
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 December 31, 2000 and 1999 are referred to as Fiscal
2Q01 and Fiscal 2Q00, respectively, and the six-month periods ended December
31, 2000 and 1999 are referred to as Fiscal First Half 2001 and Fiscal First
Half 2000, respectively.
9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries where management control is not deemed to be
temporary. All significant intercompany transactions have been eliminated in
consolidation.
For Fiscal 2Q01 and Fiscal First Half 2001, Clariti Australia was accounted for
under the equity method of accounting because the Company sold a majority
interest in such subsidiary in January 2001 (see Note 15). Prior to Fiscal
2001, Clariti Australia was accounted for as a consolidated subsidiary.
Revenue Recognition
-------------------
The majority of the Company's revenue is generated through sales of prepaid
calling cards. The Company sells prepaid calling cards to distributors or
direct to retailers at a fixed price with normal credit terms. When the
customer is invoiced, deferred revenue is recognized. The Company recognizes
revenue and reduces the deferred revenue account as the end users utilize
calling time and upon expiration of cards containing unused calling time. All
prepaid calling cards sold by the Company have expiration dates ranging up to a
maximum of six months after first use.
Income Taxes
------------
There was no income tax benefit for operating losses for Fiscal 2Q01 and Fiscal
First Half 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 receivable, accounts payable, and accrued expenses. These balances
approximate their fair value because of their short maturities. Accounts
receivable are presented net of allowance for uncollectible accounts of
$293,000 as of December 31, 2000 and $289,000 as of June 30, 2000,
respectively.
10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Common Share
-------------------------
Effective as of July 3, 2000, the Company implemented a 1 for 4 reverse split
of its common stock. Prior year amounts presented as net loss per common share
have been retroactively restated to give effect to this reverse split.
NOTE 4 - UNCONSOLIDATED SUBSIDIARY
As further described in Note 15, effective as of January 17, 2001, the Company
sold a 75% interest in its Clariti Australia. As a result of this divestment,
the Company's financial statements for Fiscal 2Q01 and Fiscal First Half 2001
reflect Clariti Australia's results of operations and financial position using
the equity method of accounting. The following table presents summary
financial information for Clariti Australia for Fiscal 2Q01 and Fiscal First
Half 2001.
As of December 31, 2000
-----------------------
Current assets $ 612
Non-current assets $ 2,553
Current liabilities $ 887
Fiscal
Fiscal First Half
2Q01 2001
--------- ----------
Net sales $ 1,067 $ 1,903
Gross profit $ 280 $ 523
Net loss $( 387) $( 880)
NOTE 5 - WRITE-DOWN OF INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
As further described in Note 15, effective as of January 17, 2001, the Company
sold a 75% interest in Clariti Australia. As a result of this divestment, the
Company's net investment in its 100% interest in Clariti Australia as of
December 31, 2000 ($2,297,000) was written down to a net realizable value of
$1,781,000. The resulting write-down included in the Company's consolidated
results of operations for Fiscal 2Q01 and Fiscal First Half 2001 was $516,000.
11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 6 - EXTRAORDINARY GAIN
As of October 11, 1999, GlobalFirst Holdings Limited ("GlobalFirst") and
Mediatel Global Communications Limited ("Mediatel") and their respective
subsidiaries (the "International Telecommunications Group") filed for voluntary
liquidation and ceased operation of their businesses. At the time the
liquidation proceedings began, GlobalFirst and Mediatel were wholly owned
subsidiaries of the Company. Liquidation proceedings were undertaken because
the International Telecommunications Group could not pay its debts, including
debt the group owed to the Company. The liquidation proceedings have
discharged all liabilities of the International Telecommunications Group. All
losses from operations of the International Telecommunications Group had been
provided for as of June 30, 1999, including losses from operations during
Fiscal First Half 2000. 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 October 11,
1999, the liquidation date.
NOTE 7 - COMPREHENSIVE INCOME
The Company has adopted FASB Statement 130, "Comprehensive Income." The
Company's only item of comprehensive income that is excluded from net
income is the cumulative foreign currency translation adjustment associated
with the Company's ongoing foreign businesses. The Company had foreign
currency translation adjustments of $(112,000) and $(10,000) during Fiscal 2Q01
and Fiscal 2Q00, respectively, and $6,000 and $(27,000) during Fiscal First
Half 2001 and Fiscal First Half 2000, respectively. During Fiscal First Half
2000, the Company also reclassified a cumulative foreign currency translation
adjustment of $1,348,000 to net income as a result of the liquidation of the
International Telecommunications Group. This reclassification amount was
included in the extraordinary gain described in Note 6 above.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
France Telecom SA ("France Telecom") initiated a complaint against the Company
on May 12, 2000 before the Tribunal de Commerce de Paris (Paris Commercial
Court) in Paris, France. France Telecom's claim relates to a debt it claims it
is owed by GlobalFirst Communications SA, a French subsidiary of GlobalFirst
Holdings Ltd., for long-distance telephone services. France Telecom seeks
payment from Clariti of 20,000,000 French Francs (approximately $2,800,000).
France Telecom further claims unspecified damages corresponding to the loss of
revenue resulting from the ceasing of commercial relations with GlobalFirst
Communications SA. The Company intends to vigorously defend the claims
asserted by France Telecom. Clariti believes that it did not verbally or in
writing make a promise to pay any obligations of GlobalFirst Communications SA,
and that it caused no damages to France Telecom because commercial relations
with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. This matter is currently pending in the
French Court.
12
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the Court of
Common Pleas in Philadelphia, Pennsylvania against the Company and Clariti
Carrier Services Limited, a United Kingdom subsidiary of the Company, seeking
payment for long-distance telephone services pursuant to a contract between IDT
and GlobalFirst Communications Limited, a subsidiary of GlobalFirst. The
complaint seeks damages in the amount of $690,163 plus interest, costs and
attorneys fees. On March 20, 2000, the Court of Common Pleas dismissed the
complaint on the basis of jurisdiction, provided that proper jurisdiction lies
in England. On or about April 15, 2000, IDT filed an appeal with the Superior
Court of Pennsylvania appealing the decision of the Court of Common Pleas.
This appeal is currently pending. The Company believes damages IDT may have
suffered, if any, must be recovered through the liquidation proceedings of the
International Telecommunications Group, and that neither the Company nor
Clariti Carrier Services Limited has any liability with respect to IDT's claim.
On or about June 17, 1999 Clariti, together with Mediatel, GlobalFirst, and
Chadwell Hall Holdings Ltd. ("CHH"), formerly the owner of record of a majority
of Clariti stock (collectively the "Claimants"), filed a Demand for Arbitration
with the American Arbitration Association (case no. 50 N 181 0021399) against
Frontier Corporation and Frontel Communications Limited (collectively
"Frontier") concerning obligations arising under that certain March 4, 1999
agreement entered into by and among Frontier and each of the Claimants ("March
4 Agreement"). The parties entered into the March 4 Agreement for the purpose
of resolving certain billing disputes between Frontier on the one part and
GlobalFirst and Mediatel on the other part. Under the March 4 Agreement,
Clariti paid $3,000,000 to Frontier during March 1999 in payment of amounts
allegedly due Frontier by Mediatel and/or GlobalFirst. Additionally, Clariti
issued to Frontier 1,250,000 shares of its common stock (5,000,000 shares
before the 1 for 4 reverse split) as security for the remaining balance, if
any, due Frontier by Mediatel and/or GlobalFirst ("Clariti Stock"). The amount
due Frontier by Mediatel and GlobalFirst as agreed to by the parties or as
determined by arbitration is referred to in the March 4 Agreement as the
"Account Balance". The terms of the March 4 Agreement provide in part as
follows: that CHH is liable for and guarantees payment in full of the Account
Balance and, further, shall be obligated to purchase the Clariti Stock from
Frontier for an amount equal to the Account Balance. In the event of a default
under the March 4 Agreement, Frontier may, at its option, sell a sufficient
amount of shares of Clariti Stock in order to satisfy the Account Balance. If
Frontier sells all 1,250,000 shares of Clariti Stock for less than the Account
Balance, GlobalFirst, Mediatel and CHH are liable to pay Frontier the remaining
Account Balance due to Frontier. Once Frontier collects the Account Balance
(whether by sale of Clariti Stock or payment made by any of the parties),
Frontier must surrender to Clariti any remaining shares of Clariti Stock. A
hearing was held in London before an arbitration panel in early December 2000.
On January 11, 2001, the Arbitration panel determined in pertinent part as
follows:
13
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
(1) The Account Balance for purposes of the March 4 Agreement is 8,737,397.74
British Pounds (approximately US$12.7 million). Including interest through
January 11, 2001, the total amount due to Frontier is 10,164,534.60
(approximately US$14.8 million).
(2) Clariti has complied with its obligations under the March 4 Agreement.
Based on the arbitration panel's ruling, the Company believes it has no further
obligations to Frontier under the March 4 Agreement. Both GlobalFirst and
Mediatel are in liquidation and thus will be unable to pay their portions of
the arbitration award. As of February 7, 2001, CHH had not yet paid its
obligation to Frontier. If CHH fails to pay the arbitration award to Frontier
and Frontier sells a significant amount of the Clariti Stock in the open
market, the market price of Clariti's common stock may decline.
The Company is, from time to time, during the normal course of its business
operations, subject to various other litigation claims and legal disputes. The
Company expects none to have a material adverse impact on its operations;
however, no assurance can be given that an adverse determination of any claim
or dispute would not have an adverse impact on its operations during any given
period.
NOTE 9 - RELATED PARTIES
In connection with the Company's acquisition of Mediatel, the Company issued a
promissory note payable to CHH, the owner of Mediatel and formerly the
Company's majority shareholder of record, in the amount of $3,000,000. Such
note carried a fixed interest rate of 6.5% and was payable, including any
accrued interest thereon, on March 16, 2000. On April 7, 1999 Clariti prepaid
$1 million against the principal balance of the note. During Fiscal First Half
2000 the remaining $2,000,000 balance of the note plus accrued interest of
$81,000 was capitalized as a contribution to capital of the Company by CHH.
The Company issued no common stock to CHH in connection with this contribution
to capital.
14
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 10 - COMMON STOCK
Effective as of July 3, 2000, the Company implemented a 1 for 4 reverse split
of its common stock. All prior year amounts of Clariti common stock presented
in these financial statements and notes have been retroactively restated to
give effect to this reverse split.
During Fiscal First Half 2001, the Company issued approximately 222,000 shares
of Clariti common stock pursuant to its December 1999 agreement to acquire TWC.
In addition, approximately 85,000 shares of Clariti common stock were returned
to the Company pursuant to the terms of such agreement to acquire TWC. The
Company has retired these returned shares.
During Fiscal First Half 2000, the Company sold approximately 2,952,000 shares
of its common stock to several third party investors for proceeds, net of
commissions, of $22,950,000. In addition, the Company issued 500,000 shares to
a third party investor in settlement of a loan for $1,000,000 such investor had
made to the Company.
NOTE 11 - STOCK OPTIONS
During Fiscal First Half 2001, the Company granted options to purchase
approximately 2,897,000 shares of the Company's common stock at prices ranging
from $3.06 per share to $8.38 per share (weighted average price of $4.69 per
share). In addition, approximately 2,267,000 previously outstanding common
stock options expired during Fiscal First Half 2001. The exercise prices of
these expired options ranged from $4.75 per share to $13.50 per share (weighted
average price of $8.92 per share). Company stock options have been issued to
new and existing employees of the Company and members of the Company's board of
directors, may be exercised over a period of 10 years at the fair market value
on the date of grant and generally carry such other terms as if they had been
issued under the Company's Stock Option Plan.
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, as an incentive to help the Company achieve
its goals, or in consideration for cash or services rendered to the Company, or
a combination of the above. Cost associated with warrants issued to other than
employees is valued based on the fair value of the warrants as estimated using
the Black-Scholes model with the following assumptions: no dividend yield,
expected volatility of 80%, and a risk-free interest rate of 6.5%.
15
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 12 - WARRANTS (continued)
During Fiscal First Half 2001 the Company issued to several consultants
warrants to purchase a total of 463,000 shares of the Company's common stock at
the market price on the date of grant, which ranged from $4.31 per share to
$5.06 per share (weighted average price of $4.68 per share). The warrants were
issued for services rendered and expire from 1 to 3 years from the date of
grant. The Black-Scholes model valued these warrants at a total of $658,000.
Also during Fiscal First Half 2001, approximately 3,017,000 warrants with
exercise prices between $8.00 and $20.00 per share expired without being
exercised. The book value of such expired warrants (approximately $4,998,000)
was reclassified from warrants outstanding to additional paid-in capital.
NOTE 13 - EARNINGS PER SHARE
The Company utilizes FASB Statement 128, "Earnings Per Share," which prescribes
standards for computing and presenting earnings per share. Under FASB Statement
128, basic income or loss per common share is based upon the weighted average
number of common shares outstanding during the period. Diluted income or loss
per common share is computed after the assumed conversion of potential common
shares (warrants and stock options). The treasury stock method is used to
calculate dilutive shares. Such method reduces the number of dilutive shares
by the number of shares purchasable from the proceeds of the options and
warrants assumed to be exercised. Basic and diluted weighted average shares
outstanding for Fiscal First Half 2001, Fiscal First Half 2000, Fiscal 2Q01 and
Fiscal 2Q00 were the same because the effect of using the treasury stock method
would be antidilutive.
NOTE 14 - SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The Company has divided its operations
into two reportable segments, Telephony/Internet Services and Wireless
Messaging, based on fundamental differences in their operations as well as
their products and services offered. Amounts presented in the following tables
are in thousands of dollars, except per share amounts.
16
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 14 - SEGMENT INFORMATION (continued)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Revenues
--------
Telephony/Internet Services $ 3,815 $ 899 $ 6,996 $ 1,217
Wireless Messaging - - - -
Corporate - - - -
------- ------- -------- --------
Total revenues $ 3,815 $ 899 $ 6,996 $ 1,217
======= ======= ======== ========
Net Loss Before Extraordinary Item
----------------------------------
Telephony/Internet Services $(1,850) $(2,840) $( 4,185) $( 4,277)
Wireless Messaging (2,580) (1,107) ( 4,438) ( 2,166)
Corporate (1,927) (3,501) ( 4,156) ( 5,546)
------- ------- -------- --------
Total net loss before
extraordinary item $(6,357) $(7,448) $(12,779) $(11,989)
======= ======= ======== ========
Extraordinary Item
------------------
Telephony/Internet Services $ - $ - $ - $ -
Wireless Messaging - - - -
Corporate - - - 32,502
------- ------- ------- --------
Total extraordinary item $ - - $ - $ 32,502
======= ======= ======= ========
Net Income (Loss)
-----------------
Telephony/Internet Services $(1,850) $(2,840) $( 4,185) $( 4,277)
Wireless Messaging (2,580) (1,107) ( 4,438) ( 2,166)
Corporate (1,927) (3,501) ( 4,156) 26,956
------- ------- -------- --------
Total net loss before
extraordinary item $(6,357) $(7,448) $(12,779) $ 20,513
======= ======= ======== ========
17
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 14 - SEGMENT INFORMATION (continued)
As of As of
Dec. 31, June 30,
2000 2000
-------- --------
Assets
------
Telephony/Internet Services $ 10,650 $ 11,095
Wireless Messaging 1,479 839
Corporate 4,280 14,723
-------- --------
Total assets $ 16,409 $ 26,657
======== ========
NOTE 15 - SUBSEQUENT EVENT
Effective as of January 17, 2001, the Company sold a 75% interest in Clariti
Australia in exchange for 314,184 shares of Clariti common stock, which have
since been retired. Based on the closing price of Clariti common stock on
January 17, 2001 of $4.75 per share, the consideration was valued at
$1,492,000. The agreement for the sale of Clariti Australia provides for a
second closing during February 2001 pursuant to which the Company will receive
up to an additional 60,816 shares of Clariti common stock in exchange for up to
an additional 18% of Clariti Australia. The actual percentage interest in
Clariti Australia sold at the second closing will be prorated based on the
actual number of shares of Clariti common stock delivered.
NOTE 16 - MANAGEMENT'S PLANS
Adverse market conditions for telecommunications companies during the second
half of calendar 2000 have made it difficult for the Company to raise
additional financing to meet its future cash requirements. However, the
Company is actively pursuing opportunities to secure additional financing that
is expected to be sufficient to meet its operating cash requirements at least
through the current fiscal year end. 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.
18
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain information included in this Quarterly Report may be deemed to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risk and uncertainty, such as information
relating to sufficiency of cash resources and expected trends in operating
losses and cash flows, as well as the Company's ability to successfully do any
or all of the following:
- commercialize its wireless voice messaging technology
- integrate the business operations of MegaHertz-NKO with those of TWC
- obtain the necessary additional financing to achieve it business plans
In addition, certain statements may involve risk and uncertainty if they
are preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks associated with the
Company's operating losses, risks relating to the Company's development and
expansion and possible inability to manage growth, risks relating to the
Company's significant capital requirements, including its ability to obtain
additional financing in a challenging market for telecommunications companies,
risks relating to competition and regulatory developments, risks relating to
implementing local and enhanced services, risks relating to its long distance
business, risks related to the various technical aspects of developing the
Company's wireless voice messaging technology and the market acceptance of
same, as well as other risks referenced in the Company's annual report on Form
10-K for the year ended June 30, 2000 and from time to time in the Company's
filings with the Securities and Exchange Commission . All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements. The Company does not undertake any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The following discussion should be read in conjunction with the
Company's consolidated financial statements appearing elsewhere in this
report.
General Operations
------------------
The Company's current focus is in two industry segments: wireless
messaging services and telephony/Internet services. Clariti's wireless
technology will support voice messaging (including wireless voicemail and text-
to-speech), data and information services to a high-speed digital wireless
device. Clariti's telephony/Internet business is an international facilities-
based carrier that utilizes both IP and circuit switched technologies over a
unified messaging platform, and includes the following services:
19
- prepaid phone cards;
- residential and business long distance services;
- fax and data services;
- traditional dial-up Internet access, web site design and hosting; and
- Digital Subscriber Line ("DSL") connections for business customers.
Recent Developments
-------------------
Effective as of January 17, 2001, the Company sold a 75% interest in
Clariti Australia in exchange for 314,184 shares of Clariti common stock, which
have since been retired. Based on the closing price of Clariti common stock on
January 17, 2001 of $4.75 per share, the consideration was valued at
$1,492,000. The agreement for the sale of Clariti Australia provides for a
second closing during February 2001 pursuant to which the Company will receive
up to an additional 60,816 shares of Clariti common stock in exchange for up to
an additional 18% of Clariti Australia. The actual percentage interest in
Clariti Australia sold at the second closing will be prorated based on the
actual number of shares of Clariti common stock delivered.
Results of Operations
---------------------
For Fiscal 2Q01 and Fiscal First Half 2001, Clariti Australia was
accounted for under the equity method of accounting because the Company sold a
majority interest in such subsidiary in January 2001. For Fiscal 2Q00 and
Fiscal First Half 2000, Clariti Australia was accounted for as a consolidated
subsidiary. This change to equity method accounting is hereinafter referred to
as the "deconsolidation of Clariti Australia."
Three Months Ended December 31, 2000 ("Fiscal 2Q01")
v. Three Months Ended December 31, 1999 ("Fiscal 2Q00")
--------------------------------------------------------
For Fiscal 2Q01, the Company had a net loss of $6,357,000, or $0.18 per
share, on revenue of $3,815,000 as compared to a net loss of $7,448,000, or
$0.23 per share, on revenue of $899,000 in Fiscal 2Q00.
Revenues increased from $899,000 in Fiscal 2Q00 to $3,815,000 for Fiscal
2Q01. The $2,916,000 increase resulted from an increase in revenues from TWC,
which was acquired in December 1999, and operations in the United Kingdom,
where the Company began to utilize some of the switching equipment previously
used in the International Telecommunications Group. Partially offsetting these
increases were reductions in revenues resulting from the deconsolidation of
Clariti Australia in Fiscal 2Q01 and the termination of most of MegaHertz-NKO's
revenue-generating activities in the quarter ended June 30, 2000. Likewise,
gross profit increased $422,000, from $191,000 in Fiscal 2Q00 to $613,000 in
Fiscal 2Q01 due to an increase in gross profit from TWC and operations in the
United Kingdom, partially offset by a reduction in gross profit resulting from
the deconsolidation of Clariti Australia in Fiscal 2Q01 and the termination of
most of MegaHertz-NKO's revenue-generating activities in the quarter ended June
30, 2000.
20
Network operating expenses increased $315,000, from $276,000 in Fiscal
2Q00 to $591,000 for Fiscal 2Q01. This increase resulted from an increase in
network operating expenses from TWC, which was acquired in December 1999, and
operations in the United Kingdom, where the Company began to utilize some of
the switching equipment previously used in the International Telecommunications
Group. Marketing expenses increased $405,000, from $337,000 in Fiscal 2Q00 to
$742,000 in Fiscal 2Q01. This increase was due to an increase in marketing
expenses from TWC as well as higher marketing expenses from the Wireless
Messaging group in anticipation of commercial launch of its wireless messaging
service. Lower marketing expenses resulting from the termination of most of
MegaHertz-NKO's revenue-generating activities in the quarter ended June 30,
2000 partially offset these increases.
All of the Company's research and development expenses relate to the
development of its Wireless Messaging technology. Such expenses in
Fiscal 2Q01 increased $733,000, from $815,000 in Fiscal 2Q00 to $1,548,000 in
Fiscal 2Q01 due to expansion and acceleration of the Company's efforts to
complete development and implement commercial deployment of the Wireless Voice
Messaging System.
Depreciation and amortization decreased from $1,246,000 in Fiscal 2Q00 to
$579,000 in Fiscal 2Q01. The $667,000 decrease resulted from the absence of
amortization of goodwill recognized in the acquisition of MegaHertz-NKO because
such goodwill had been written off in the quarter ended June 30, 2000.
Partially offsetting this decrease was higher depreciation and amortization
expense resulting from TWC, which was acquired in December 1999.
General and administrative expenses decreased $2,346,000, from $5,049,000
in Fiscal 2Q00 to $2,703,000 in Fiscal 2Q01. A substantial reduction in the
number of common stock warrants issued as compensation to consultants reduced
general and administrative expenses by nearly $2 million. No cash was expended
in connection with the issuance of such warrants. Also contributing to the
decrease was the deconsolidation of Clariti Australia. Partially offsetting
these decreases were the addition of general and administrative expenses from
TWC, which was acquired in December 1999, and the expansion of Wireless
Messaging and Corporate Overhead activities in preparation for the anticipated
commercial launch of the Company's Wireless Voice Messaging System.
As further described above under Recent Developments, the Company sold a
75% interest in Clariti Australia in January 2001. As a result, for Fiscal
2Q01 Clariti Australia was accounted for under the equity method of accounting.
Prior to Fiscal 2001, Clariti Australia was accounted for as a consolidated
subsidiary. The equity in net loss of unconsolidated subsidiary reflects the
Company's 100% interest in Clariti Australia's results of operation for Fiscal
First Half 2001. In addition, the Company's net investment in Clariti
Australia as of December 31, 2000 was written down to reflect net realizable
value of such investment based on the terms of the divestment described above
under Recent Developments.
Six Months Ended December 31, 2000 ("Fiscal First Half 2001")
v. Six Months Ended December 31, 1999 ("Fiscal First Half 2000")
----------------------------------------------------------------
For Fiscal First Half 2001, the Company had a net loss of $12,779,000, or
$0.36 per share, on revenue of $6,996,000 as compared to net income of
$20,513,000, or $0.64 per share, on revenue of $1,217,000 in Fiscal First Half
21
2000. Excluding an extraordinary gain of $32,502,000, or $1.01 per share, the
Company had a net loss of $11,989,000, or $0.37 per share, in Fiscal First Half
2000.
As of October 11, 1999, the International Telecommunications Group filed
for voluntary liquidation and ceased operation of its businesses. As of June
30, 1999, the Company had written off all assets related to the International
Telecommunications Group and had accrued for all of the Group's estimated
losses from operations up to the date of liquidation. The liquidation
proceedings have discharged all liabilities of the International
Telecommunications Group, and as a result the Company recognized an
extraordinary gain of $32,502,000 on the discharge of such indebtedness in
Fiscal First Half 2000.
Revenues increased from $1,217,000 in Fiscal First Half 2000 to $6,996,000
for Fiscal First Half 2001. The $5,779,000 increase resulted from an increase
in revenues from TWC, which was acquired in December 1999, and operations in
the United Kingdom, where the Company began to utilize some of the switching
equipment previously used in the International Telecommunications Group.
Partially offsetting these increases were reductions in revenues resulting from
the deconsolidation of Clariti Australia in Fiscal First Half 2001 and the
termination of most of MegaHertz-NKO's revenue-generating activities in the
quarter ended June 30, 2000. Likewise, gross profit increased $648,000, from
$321,000 in Fiscal First Half 2000 to $969,000 in Fiscal First Half 2001 due to
an increase in gross profit from TWC and operations in the United Kingdom,
partially offset by a reduction in gross profit resulting from the
deconsolidation of Clariti Australia in Fiscal First Half 2001 and the
termination of most of MegaHertz-NKO's revenue-generating activities in the
quarter ended June 30, 2000.
Network operating expenses increased $831,000, from $348,000 in Fiscal
First Half 2000 to $1,179,000 for Fiscal First Half 2001. This increase also
resulted from an increase in network operating expenses from TWC, which was
acquired in December 1999, and operations in the United Kingdom, where the
Company began to utilize some of the switching equipment previously used in the
International Telecommunications Group. Marketing expenses increased $824,000,
from $624,000 in Fiscal First Half 2000 to $1,448,000 in Fiscal First Half
2001. This increase was due to an increase in marketing expenses from TWC as
well as higher marketing expenses from the Wireless Messaging group in
anticipation of commercial launch of its wireless messaging service. Lower
marketing expenses resulting from the termination of most of MegaHertz-NKO's
revenue-generating activities in the quarter ended June 30, 2000 partially
offset these increases.
All of the Company's research and development expenses relate to the
development of its Wireless Messaging technology. Such expenses in
Fiscal First Half 2001 increased $1,195,000, from $1,510,000 in Fiscal First
Half 2000 to $2,705,000 in Fiscal First Half 2001 due to expansion and
acceleration of the Company's efforts to complete development and implement
commercial deployment of the Wireless Voice Messaging System.
22
Depreciation and amortization decreased from $2,283,000 in Fiscal First
Half 2000 to $1,092,000 in Fiscal First Half 2001. The $1,191,000 decrease
resulted from the absence of amortization of goodwill recognized in the
acquisition of MegaHertz-NKO because such goodwill had been written off in the
quarter ended June 30, 2000. Partially offsetting this decrease was higher
depreciation and amortization expense resulting from TWC, which was acquired in
December 1999.
General and administrative expenses decreased $1,390,000, from $7,607,000
in Fiscal First Half 2000 to $6,217,000 in Fiscal First Half 2001. A
substantial reduction in the number of common stock warrants issued as
compensation to consultants reduced general and administrative expenses by more
than $2 million. No cash was expended in connection with the issuance of such
warrants. Also contributing to the decrease was the deconsolidation of Clariti
Australia. Partially offsetting these decreases were the addition of general
and administrative expenses from TWC, which was acquired in December 1999, and
the expansion of Wireless Messaging and Corporate Overhead activities in
preparation for the anticipated commercial launch of the Company's Wireless
Voice Messaging System.
As further described above under Recent Developments, the Company sold a
75% interest in Clariti Australia in January 2001. As a result, for Fiscal
First Half 2001 Clariti Australia was accounted for under the equity method of
accounting. Prior to Fiscal 2001, Clariti Australia was accounted for as a
consolidated subsidiary. The equity in net loss of unconsolidated subsidiary
reflects the Company's 100% interest in Clariti Australia's results of
operation for Fiscal First Half 2001. In addition, the Company's net
investment in Clariti Australia as of December 31, 2000 was written down to
reflect net realizable value of such investment based on the terms of the
divestment described above under Recent Developments.
Liquidity and Capital Resources
-------------------------------
At December 31, 2000, the Company had working capital of $1,209,000
(including a cash balance of $3,908,000) as compared to working capital
of $12,553,000 (including a cash balance of $14,333,000) at June 30, 2000. The
working capital decrease of $11,344,000 is primarily due to the use of cash in
operations and capital expenditures during Fiscal First Half 2001.
The Company was unable to secure additional financing it had expected to
receive during the fourth quarter of calendar 2000. Adverse market conditions
for telecommunications companies during the second half of calendar 2000 were a
major factor contributing to this situation. However, the Company is actively
pursuing opportunities to secure additional financing that is expected to be
sufficient to meet its operating cash requirements at least through the current
fiscal year end. 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.
Significant additional funding will be required beyond June 2001 to launch
the Wireless Voice Messaging System in specified target markets and to meet
expected negative operating cash flows and capital expenditure plans. However,
there can be no assurances that such funding will be generated or available, or
if available, on terms acceptable to the Company.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
France Telecom SA ("France Telecom") initiated a complaint against the
Company on May 12, 2000 before the Tribunal de Commerce de Paris (Paris
Commercial Court) in Paris, France. France Telecom's claim relates to a debt it
claims it is owed by GlobalFirst Communications SA, a French subsidiary of
GlobalFirst Holdings Ltd., for long-distance telephone services. France
Telecom seeks payment from Clariti of 20,000,000 French Francs (approximately
$2,600,000). France Telecom further claims unspecified damages corresponding
to the loss of revenue resulting from the ceasing of commercial relations with
GlobalFirst Communications SA. The Company intends to vigorously defend the
claims asserted by France Telecom. Clariti believes that it did not verbally or
in writing make a promise to pay any obligations of GlobalFirst Communications
SA, and that it caused no damages to France Telecom because commercial
relations with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. This matter is currently pending in the
French Court.
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the
Court of Common Pleas in Philadelphia, Pennsylvania against the Company and
Clariti Carrier Services Limited, a United Kingdom subsidiary of the Company,
seeking payment for long-distance telephone services pursuant to a contract
between IDT and GlobalFirst Communications Limited, a subsidiary of
GlobalFirst. The complaint seeks damages in the amount of $690,163 plus
interest, costs and attorneys fees. On March 20, 2000, the Court of Common
Pleas dismissed the complaint on the basis of jurisdiction, provided that
proper jurisdiction lies in England. On or about April 15, 2000, IDT filed an
appeal with the Superior Court of Pennsylvania appealing the decision of the
Court of Common Pleas. This appeal is currently pending. The Company believes
damages IDT may have suffered, if any, must be recovered through the
liquidation proceedings of the International Telecommunications Group, and that
neither the Company nor Clariti Carrier Services Limited has any liability with
respect to IDT's claim.
On or about June 17, 1999 Clariti, together with Mediatel, GlobalFirst,
and CHH, formerly the owner of record of a majority of Clariti stock
(collectively the "Claimants"), filed a Demand for Arbitration with the
American Arbitration Association (case no. 50 N 181 0021399) against Frontier
Corporation and Frontel Communications Limited (collectively "Frontier")
concerning obligations arising under that certain March 4, 1999 agreement
entered into by and among Frontier and each of the Claimants ("March 4
Agreement"). The parties entered into the March 4 Agreement for the purpose of
resolving certain billing disputes between Frontier on the one part and
GlobalFirst and Mediatel on the other part. Under the March 4 Agreement,
Clariti paid $3,000,000 to Frontier during March 1999 in payment of amounts
allegedly due Frontier by Mediatel and/or GlobalFirst. Additionally, Clariti
issued to Frontier 1,250,000 shares of its common stock (5,000,000 shares
before the 1 for 4 reverse split) as security for the remaining balance, if
any, due Frontier by Mediatel and/or GlobalFirst ("Clariti Stock"). The amount
due Frontier by Mediatel and GlobalFirst as agreed to by the parties or as
determined by arbitration is referred to in the March 4 Agreement as the
"Account Balance". The terms of the March 4 Agreement provide in part as
24
follows: that CHH is liable for and guarantees payment in full of the Account
Balance and, further, shall be obligated to purchase the Clariti Stock from
Frontier for an amount equal to the Account Balance. In the event of a default
under the March 4 Agreement, Frontier may, at its option, sell a sufficient
amount of shares of Clariti Stock in order to satisfy the Account Balance. If
Frontier sells all 1,250,000 shares of Clariti Stock for less than the Account
Balance, GlobalFirst, Mediatel and CHH are liable to pay Frontier the remaining
Account Balance due to Frontier. Once Frontier collects the Account Balance
(whether by sale of Clariti Stock or payment made by any of the parties),
Frontier must surrender to Clariti any remaining shares of Clariti Stock. A
hearing was held in London before an arbitration panel in early December 2000.
On January 11, 2001, the Arbitration panel determined in pertinent part as
follows:
(1) The Account Balance for purposes of the March 4 Agreement is 8,737,397.74
British Pounds (approximately US$12.7 million). Including interest through
January 11, 2001, the total amount due to Frontier is 10,164,534.60
British Pounds (approximately US$14.8 million).
(2) Clariti has complied with its obligations under the March 4 Agreement.
Based on the arbitration panel's ruling, the Company believes it has no further
obligations to Frontier under the March 4 Agreement. Both GlobalFirst and
Mediatel are in liquidation and thus will be unable to pay their portions of
the arbitration award. As of February 7, 2001, CHH had not yet paid its
obligation to Frontier. If CHH fails to pay the arbitration award to Frontier
and Frontier sells a significant amount of the Clariti Stock in the open
market, the market price of Clariti's common stock may decline.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
25
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: February 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
26