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 MARCH 31, 2001
Commission File Number 0-31729
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
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(Exact name of registrant as specified in its charter)
Delaware 23-2498715
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
185 Commerce Drive, Fort Washington, PA 19034
---------------------------------------------
(Address of principal executive offices)
Telephone: (215) 591-3540
1735 Market Street, Mellon Bank Center Suite 1300, Philadelphia, PA 19103
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(Former name or former address, if changed since last report)
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 May 4, 2001, there were 35,624,565 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
March 31, 2001 (unaudited) and
June 30, 2000 (audited) 3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
three months and nine months ended
March 31, 2001 and 2000 (unaudited) 4-5
Consolidated Statement of Stockholders'
Equity for the nine months ended
March 31, 2001 (unaudited) 6
Consolidated Statements of Cash Flows for
the nine months ended March 31, 2001 and
2000 (unaudited) 7-8
Notes to Consolidated Financial
Statements (unaudited) 9-17
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
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 5. Other Information 24
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)
March 31, June 30,
2001 2000
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 715 $ 14,333
Trade accounts receivable, net 861 1,026
Prepaid expenses and other current assets 1,924 1,368
--------- ---------
3,500 16,727
PROPERTY AND EQUIPMENT, NET 3,418 4,072
INTANGIBLE ASSETS, NET 1,530 5,858
--------- ---------
TOTAL ASSETS $ 8,448 $ 26,657
========= =========
CURRENT LIABILITIES
Accounts payable - trade $ 3,915 $ 1,064
Deferred revenue 157 1,069
Accrued expenses and other current liabilities 2,645 2,041
--------- ---------
6,717 4,174
LONG-TERM LIABILITIES 589 624
--------- ---------
TOTAL LIABILITIES 7,306 4,798
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 35,625 shares at March
31, 2001 and 35,973 shares June 30, 2000 36 36
WARRANTS OUTSTANDING 9,747 14,062
ADDITIONAL PAID-IN-CAPITAL 269,269 264,643
ACCUMULATED DEFICIT (277,919) (256,937)
ACCUMULATED OTHER COMPREHENSIVE INCOME 9 55
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,142 21,859
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,448 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE $ 4,008 $ 1,989 $ 11,004 $ 3,206
COST OF REVENUE 3,994 1,510 10,021 2,406
-------- ------- -------- --------
GROSS PROFIT 14 479 983 800
Network operating expenses 104 429 1,283 777
Marketing expenses 721 327 2,169 951
Research and development expenses 927 824 3,632 2,334
Depreciation and amortization 530 1,482 1,622 3,765
General and administrative expenses 3,431 3,698 9,648 11,305
Equity in net loss of
unconsolidated subsidiary - - 880 -
Asset impairments 1,676 - 2,192 -
Loss on sale of UK net assets 844 - 844 -
-------- ------- -------- --------
LOSS FROM OPERATIONS ( 8,219) ( 6,281) (21,287) (18,332)
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 43 194 370 295
Interest expense ( 27) ( 2) ( 65) ( 41)
-------- ------- -------- --------
16 192 305 254
-------- ------- -------- --------
Net loss before extraordinary item ( 8,203) ( 6,089) (20,982) (18,078)
EXTRAORDINARY ITEM
Gain on discharge of indebtedness - - - 32,502
-------- ------- -------- --------
NET INCOME (LOSS) $( 8,203) $(6,089) $(20,982) $ 14,424
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustment ( 52) 39 ( 46) 12
-------- ------- -------- --------
COMPREHENSIVE INCOME (LOSS) $( 8,255) $(6,050) $(21,028) $ 14,436
======== ======= ======== ========
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 35,764 32,746 35,820 32,943
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss before extraordinary
item $( .23) $( .19) $( .59) $( .55)
Extraordinary item - - - .99
-------- ------- -------- --------
Net income (loss) $( .23) $( .19) $( .59) $ .44
======== ======= ======== ========
See accompanying notes
5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2001
(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
Nine months ended March 31,
2001 (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 returned to the Company
as consideration for sale of NKA ( 277) - - ( 1,143)
Common stock returned to the Company
as consideration for sale of UK net
assets ( 71) - - ( 98)
Common stock warrants issued, net of
unearned consulting fees of $237 - - 1,092 483
Common stock warrants expired - - ( 5,407) 5,407
------ ---- -------- ---------
BALANCES, MARCH 31, 2001 35,625 $ 36 $ 9,747 $ 269,269
====== ==== ======== =========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME
----------- -------------
BALANCES, JUNE 30, 2000 $(256,937) $ 55
Nine months ended March 31,
2001 (unaudited):
Net loss ( 20,982) -
Currency translation adjustment - ( 46)
--------- -------
BALANCES, MARCH 31, 2001 $(277,919) $ 9
========= =======
See accompanying notes
6
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(20,982) $ 14,424
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 1,622 3,765
Equity in net loss of unconsolidated
subsidiary 880 -
Asset impairments 2,192 -
Loss on sale of UK net assets 844 -
Issuance of common stock warrants
for expenses 1,329 3,691
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 ( 107) ( 289)
Prepaid expenses and other current assets ( 451) ( 701)
Accounts payable - trade 3,278 ( 2,294)
Deferred revenue ( 913) -
Accrued expenses and other current
liabilities 198 ( 162)
Other 42 38
-------- --------
Net cash used in operating activities (12,068) (13,949)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment ( 1,992) ( 1,004)
Deconsolidation of unconsolidated subsidiary ( 46) -
Advances to unconsolidated subsidiary ( 256) -
Cash proceeds from sale of UK net assets 227 -
Cash received with companies acquired net
of cash paid for companies acquired - 136
-------- --------
Net cash used in investing activities ( 2,067) ( 868)
-------- --------
7
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
---------- ----------
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 ( 74) -
Net increase in capital lease obligations 387 -
-------- --------
Net cash received from financing activities 574 22,950
-------- --------
Effect of exchange rate changes on cash ( 57) -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS (13,618) 8,133
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 14,333 3,284
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 715 $ 11,417
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ 38 $ 2
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 returned to the Company as
consideration for sales of NKA and UK
net assets $ 1,241 -
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
MARCH 31, 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 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
an international telecommunications company with businesses that include wire-
line and wireless communications.
The Company has made several acquisitions and dispositions of
telecommunications businesses. In April 1995, the Company acquired its
wireless messaging technology. In May 1999, the Company acquired MegaHertz-
NKO, Inc., an Internet Service Provider ("ISP") and a provider of enhanced
telecommunications and Internet Protocol ("IP") telephony services. In October
1999, the Company acquired NKA Communications Pty, Ltd. ("NKA"), an Australian
provider of telephony to corporate clients. In December 1999, the Company
acquired Tekbilt World Communications, Inc. ("TWC"), a facilities-based
provider of IP and conventional switched telecommunications services with a
large distribution network. During the quarter ended June 30, 2000, the Company
terminated most of MegaHertz-NKO's revenue-generating activities and
consolidated those remaining operations into TWC. In Fiscal 3Q01, the Company
sold approximately 91% of its interest in NKA (see Note 5). In May 2001, the
Company sold 100% of its interest in TWC (see Note 16).
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 March 31, 2001 and 2000 are referred to as Fiscal
3Q01 and Fiscal 3Q00, respectively, and the nine-month periods ended March 31,
2001 and 2000 are referred to as Fiscal Nine Months 2001 and Fiscal Nine Months
2000, respectively.
9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
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 3Q01 and Fiscal Nine Months 2001, NKA was accounted for under the
equity method of accounting because the Company sold a majority
interest in such subsidiary in January 2001 (see Note 5). Prior to Fiscal
2001, NKA was accounted for as a consolidated subsidiary.
Revenue Recognition
-------------------
Prior to the sale of TWC, the majority of the Company's revenue was generated
through sales of prepaid calling cards. TWC sold prepaid calling cards to
distributors or direct to retailers at a fixed price with normal credit terms.
When the customer was invoiced, deferred revenue was recognized. TWC recognized
revenue and reduced the deferred revenue account as the end users utilized
calling time and upon expiration of cards containing unused calling time. All
prepaid calling cards sold by TWC had 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 3Q01 and Fiscal
Nine Months 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
$529,000 as of March 31, 2001 and $289,000 as of June 30, 2000, respectively.
10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
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.
Recent Accounting Pronouncements
--------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), which addresses certain criteria for revenue recognition. SAB 101, as
amended by SAB 101A and SAB 101B, outlines the criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. Management believes the Company's revenue recognition
policies comply with the guidance in SAB 101.
NOTE 4 - UNCONSOLIDATED SUBSIDIARY
As further described in Note 5, the Company sold a 75% interest in NKA in
January 2001. As a result of this divestment, the Company's financial
statements for Fiscal 3Q01 and Fiscal Nine Months 2001 reflect NKA's results of
operations through the date of divestment using the equity method of
accounting. The following table presents summary results of operations for NKA
for Fiscal 3Q01 and Fiscal Nine Months 2001.
Fiscal
Fiscal Nine Months
3Q01 2001
--------- -----------
Net sales $ 190 $ 2,093
Gross profit $ 52 $ 575
Net loss $ - $( 880)
In March 2001, the Company sold an additional 16% of NKA, reducing its interest
in NKA to 9%. As a result of this additional divestment, the Company's March
31, 2001 balance sheet reflects its remaining investment in NKA on the cost
basis at no value.
NOTE 5 - ASSET IMPAIRMENTS
During Fiscal 3Q01, the Company sold a total of 91% of its interest in NKA in
exchange for 277,210 shares of Clariti stock valued at approximately
$1,143,000. As a result of this divestment, the Company wrote down its net
investment in NKA by a total of $1,185,000 of which $669,000 was written off in
Fiscal 3Q01 and $516,000 was written off in Fiscal 2Q01.
11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 5 - ASSET IMPAIRMENTS (continued)
As further described in Note 16, in May 2001 the Company also sold 100% of its
interest in TWC in exchange for an unsecured note for $250,000. As a result of
this divestment, the Company wrote down its net investment in TWC by a total of
$1,007,000, all of which was reflected in Fiscal 3Q01 results of operations.
NOTE 6 - LOSS ON SALE OF UK NET ASSETS
During Fiscal 3Q01, the Company sold all of its operating assets in the United
Kingdom consisting principally of telephone switching equipment for total
consideration valued at $623,000. Such consideration consisted of $227,000
cash, 71,301 shares of Clariti common stock valued at $98,000 and the
assumption by the buyer of net liabilities aggregating $298,000. The Company
incurred a loss on the sale of its UK net assets of $844,000.
NOTE 7 - 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 Nine Months 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 8 - 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 $(52,000) and $39,000 during Fiscal 3Q01
and Fiscal 3Q00, respectively, and $(46,000) and $12,000 during Fiscal Nine
Months 2001 and Fiscal Nine Months 2000, respectively. During Fiscal Nine
Months 2000, the Company also reclassified a cumulative foreign currency
translation adjustment of $1,348,000 to net income as a result of the
liquidation of the International Telecommunications Group. This
reclassification amount was included in the extraordinary gain described in
Note 7 above.
12
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 9 - 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.
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.
On April 19, 2001 the Superior Court of Pennsylvania affirmed the decision of
the Court of Common Pleas concerning the court's jurisdiction. IDT may appeal
this decision to the Pennsylvania Supreme Court within 30 days. The Company
believes damages IDT may have suffered, if any, must be recovered through the
liquidation proceedings of the International Telecommunications Group, and that
neither the Company nor Clariti Carrier Services Limited has any liability with
respect to IDT's claim.
The Company is, from time to time, during the normal course of its business
operations, subject to various other litigation claims and legal disputes. The
Company expects none to have a material adverse impact on its operations;
however, no assurance can be given that an adverse determination of any claim
or dispute would not have an adverse impact on its operations during any given
period.
NOTE 10 - 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
13
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 10 - RELATED PARTIES (continued)
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.
NOTE 11 - 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 Nine Months 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. Also during Fiscal Nine Months
2001, the Company received and retired a total of 348,000 shares of its common
stock as consideration for the sale of the Company's UK net assets and the sale
of a 91% interest in NKA (see Notes 5 and 6).
During Fiscal Nine Months 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 125,000 shares to
a third party investor in settlement of a loan for $1,000,000 such investor had
made to the Company.
NOTE 12 - STOCK OPTIONS
During Fiscal Nine Months 2001, the Company granted options to purchase
approximately 2,901,000 shares of the Company's common stock at prices ranging
from $2.88 per share to $8.38 per share (weighted average price of $4.68 per
share). In addition, approximately 2,449,000 previously outstanding common
stock options expired during Fiscal Nine Months 2001. The exercise prices of
these expired options ranged from $4.00 per share to $13.50 per share (weighted
average price of $8.58 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.
14
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 13 - 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%.
During Fiscal Nine Months 2001 the Company issued to several consultants
warrants to purchase a total of 758,000 shares of the Company's common stock at
the market price on the date of grant, which ranged from $1.00 per share to
$5.06 per share (weighted average price of $3.59 per share). The warrants were
issued for services rendered and expire from 1 to 4 years from the date of
grant. The Black-Scholes model valued these warrants at a total of $1,329,000.
Also during Fiscal Nine Months 2001, approximately 3,092,000 warrants with
exercise prices between $8.00 and $20.00 per share expired without being
exercised. The book value of such expired warrants (approximately $5,407,000)
was reclassified from warrants outstanding to additional paid-in capital.
NOTE 14 - 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 Nine Months 2001, Fiscal Nine Months 2000, Fiscal 3Q01
and Fiscal 3Q00 were the same because the effect of using the treasury stock
method would be antidilutive.
NOTE 15 - 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.
15
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 15 - SEGMENT INFORMATION (continued)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues
--------
Telephony/Internet Services $ 4,006 $ 1,989 $ 11,002 $ 3,206
Wireless Messaging 2 - 2 -
Corporate - - - -
------- ------- -------- --------
Total revenues $ 4,008 $ 1,989 $ 11,004 $ 3,206
======= ======= ======== ========
Net Loss Before Extraordinary Item
----------------------------------
Telephony/Internet Services $(4,329) $(2,604) $( 8,514) $( 6,881)
Wireless Messaging (1,942) (1,171) ( 6,380) ( 3,337)
Corporate (1,932) (2,314) ( 6,088) ( 7,860)
------- ------- -------- --------
Total net loss before
extraordinary item $(8,203) $(6,089) $(20,982) $(18,078)
======= ======= ======== ========
Extraordinary Item
------------------
Telephony/Internet Services $ - $ - $ - $ -
Wireless Messaging - - - -
Corporate - - - 32,502
------- ------- ------- --------
Total extraordinary item $ - - $ - $ 32,502
======= ======= ======= ========
Net Income (Loss)
-----------------
Telephony/Internet Services $(4,329) $(2,604) $( 8,514) $( 6,881)
Wireless Messaging (1,942) (1,171) ( 6,380) ( 3,337)
Corporate (1,932) (2,314) ( 6,088) 24,642
------- ------- -------- --------
Total net loss before
extraordinary item $(8,203) $(6,089) $(20,982) $ 14,424
======= ======= ======== ========
16
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 and 2000
NOTE 15 - SEGMENT INFORMATION (continued)
As of As of
Mar. 31, June 30,
2001 2000
-------- --------
Assets
------
Telephony/Internet Services $ 5,710 $ 11,095
Wireless Messaging 1,674 839
Corporate 1,064 14,723
-------- --------
Total assets $ 8,448 $ 26,657
======== ========
NOTE 16 - SUBSEQUENT EVENT
On May 9, 2001, the Company sold 100% of the common stock of TWC. Consideration
received by the Company consisted of an unsecured note for $250,000 (the "TWC
Note") payable on May 9, 2003. The TWC Note carries a fixed interest rate of
6%. As a result of the sale of TWC, the Company recognized an impairment loss
in Fiscal 3Q01 of $1,007,000 on the write-down of its net investment in TWC.
NOTE 17 - MANAGEMENT'S PLANS
Adverse market conditions for telecommunications companies during Fiscal Nine
Months 2001 have made it difficult for the Company to raise additional
financing to meet its future cash requirements. The Company has significantly
reduced its future cash expenditures through the divestments of NKA and TWC,
and has made major reductions in future Wireless Messaging and corporate
overhead expenses. In May 2001, the Company entered into a 60-day bridge loan
with a related party for $650,000, which is expected to be sufficient to meet
its operating cash requirements at least through the current fiscal year end.
The bridge loan is secured by the assets of the Company. The Company is
actively pursuing opportunities to secure additional financing that is expected
to be sufficient to repay the bridge loan and meet its 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 the Company. Failure to secure additional financing will have a
material adverse impact on the Company.
17
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
- obtain the necessary additional financing to achieve it business plans
- realize cost savings in future periods from expense reduction efforts
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 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 has been 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. The Company is currently in the final stages of commercializing its
wireless voice messaging technology and expects to launch a commercial wireless
voice messaging service in the United States and Italy during the second half
of 2001.
18
As a result of the divestments of 91% of NKA and the Company's UK business
operations in Fiscal 3Q01 and the sale of TWC in May 2001, Clariti's
telephony/Internet business consists principally of its remaining 9% interest
in NKA and several international long distance projects.
Recent Developments
-------------------
Since the beginning of 2001, the Company has been facing significant cash
shortages. Adverse market conditions for telecommunications companies during
Fiscal Nine Months 2001 have made it difficult for the Company to raise
additional financing to meet its future cash requirements. In May 2001, the
Company entered into a 60-day bridge loan with a related party for $650,000,
which is expected to be sufficient to meet its operating cash requirements at
least through the current fiscal year end. The bridge loan is secured by the
assets of the Company. The Company is actively pursuing opportunities to secure
additional financing that is expected to be sufficient to repay the bridge loan
and meet its operating cash requirements through most of the next fiscal year.
The Company has also made significant strides toward reducing its future
operating cash requirements by eliminating expenses and selling cash-consuming
businesses. Specifically, during Fiscal 3Q01 the Company sold a 91% interest
in NKA in exchange for 277,210 shares of Clariti stock, and later sold all of
its operating assets in the United Kingdom receiving $227,000 in cash, 71,301
shares of Clariti common stock, and the assumption by the buyer of net
liabilities aggregating $298,000. During Fiscal Nine Months 2001, these
businesses consumed over $3 million of cash. Other actions taken by the
Company have reduced future Wireless Messaging and corporate overhead cash
requirements by more than $2 million per month.
Results of Operations
---------------------
For Fiscal 3Q01 and Fiscal Nine Months 2001, Clariti's investment in NKA
was accounted for under the equity method of accounting because the Company
sold a majority interest in such subsidiary in January 2001. For Fiscal 3Q00
and Fiscal Nine Months 2000, NKA was accounted for as a consolidated
subsidiary. This change to equity method accounting is hereinafter referred to
as the "deconsolidation of NKA."
Three Months Ended March 31, 2001 ("Fiscal 3Q01")
v. Three Months Ended March 31, 2000 ("Fiscal 3Q00")
--------------------------------------------------------
For Fiscal 3Q01, the Company had a net loss of $8,203,000, or $0.23 per
share, on revenue of $4,008,000 as compared to a net loss of $6,089,000, or
$0.19 per share, on revenue of $1,989,000 in Fiscal 3Q00.
The $2,019,000 increase in revenue was primarily due to substantially
higher prepaid calling card revenues from TWC, partially offset by reductions
in revenues resulting from the deconsolidation of NKA in Fiscal 3Q01 and the
termination of most of MegaHertz-NKO's revenue-generating activities in the
quarter ended June 30, 2000. Gross profit decreased $465,000, from $479,000 in
Fiscal 3Q00 to $14,000 in Fiscal 3Q01 due to the accrual of payphone surcharges
related to TWC's prepaid phone card business, the deconsolidation of NKA in
Fiscal 3Q01 and the termination of most of MegaHertz-NKO's revenue-generating
activities in the quarter ended June 30, 2000.
19
Network operating expenses decreased $325,000, from $429,000 in Fiscal
3Q00 to $104,000 for Fiscal 3Q01. This decrease resulted principally from the
deconsolidation of NKA in Fiscal 3Q01 and the termination of most of MegaHertz-
NKO's network operating activities in the quarter ended June 30, 2000.
Marketing expenses increased $394,000, from $327,000 in Fiscal 3Q00 to
$721,000 in Fiscal 3Q01. 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 deconsolidation of NKA in
Fiscal 3Q01 and 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 3Q01 increased $103,000, from $824,000 in Fiscal 3Q00 to $927,000 in
Fiscal 3Q01 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 $1,482,000 in Fiscal 3Q00 to
$530,000 in Fiscal 3Q01. The $952,000 decrease resulted from the absence of
amortization of goodwill recognized in the acquisitions of MegaHertz-NKO and
NKA. MegaHertz-NKO goodwill had previously been written off in the quarter
ended June 30, 2000, and the NKA goodwill was previously written off partially
in 2Q01 and the remainder in 3Q01.
General and administrative expenses decreased $267,000, from $3,698,000
in Fiscal 3Q00 to $3,431,000 in Fiscal 3Q01 partially due to the
deconsolidation of NKA and lower corporate overhead expenses. Partially
offsetting these decreases was the expansion of Wireless Messaging operations
in preparation for the anticipated commercial launch of wireless messaging
service.
As noted above under Recent Developments, the Company sold a total of 91%
of its interest in NKA in exchange for 277,210 shares of Clariti stock and sold
100% of its interest in TWC in exchange for an unsecured note for $250,000. As
a result of these divestments, the Company recorded asset impairment write-
downs in 3Q01 of $669,000 related to NKA and $1,007,000 related to TWC. In
addition, during Fiscal 3Q01 the Company sold all of its operating assets in
the United Kingdom consisting principally of telephone switching equipment,
incurring a loss on the sale of $844,000.
Interest income decreased $151,000, from $194,000 in Fiscal 3Q00 to
$43,000 in Fiscal 3Q01 due to lower cash balances available for investment.
Nine Months Ended March 31, 2001 ("Fiscal Nine Months 2001")
v. Nine Months Ended March 31, 2000 ("Fiscal Nine Months 2000")
----------------------------------------------------------------
For Fiscal Nine Months 2001, the Company had a net loss of $20,982,000, or
$0.59 per share, on revenue of $11,004,000 as compared to net income of
$14,424,000, or $0.44 per share, on revenue of $3,206,000 in Fiscal Nine Months
2000. Excluding an extraordinary gain of $32,502,000, or $0.99 per share, the
Company had a net loss of $18,078,000, or $0.55 per share, in Fiscal First Half
2000.
20
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 Nine Months 2000.
Revenues increased from $3,206,000 in Fiscal Nine Months 2000 to
$11,004,000 for Fiscal Nine Months 2001. The $7,798,000 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 NKA in Fiscal Nine Months 2001 and the
termination of most of MegaHertz-NKO's revenue-generating activities in the
quarter ended June 30, 2000. Gross profit increased $183,000, from
$800,000 in Fiscal Nine Months 2000 to $983,000 in Fiscal Nine Months 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 NKA in Fiscal Nine Months 2001 and the termination of most
of MegaHertz-NKO's revenue-generating activities in the quarter ended June 30,
2000.
Network operating expenses increased $506,000, from $777,000 in Fiscal
Nine Months 2000 to $1,283,000 for Fiscal Nine Months 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
$1,218,000, from $951,000 in Fiscal Nine Months to $2,169,000 in Fiscal Nine
Months 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 wireless messaging service. Lower
marketing expenses resulting from the deconsolidation of NKA and 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 Nine Months 2001 increased $1,298,000, from $2,334,000 in Fiscal Nine
Months 2000 to $3,632,000 in Fiscal Nine Months 2001 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 $3,765,000 in Fiscal Nine
Months 2000 to $1,622,000 in Fiscal Nine Months 2001. The $2,143,000 decrease
resulted from the absence of amortization of goodwill recognized in the
acquisitions of MegaHertz-NKO and NKA. MegaHertz-NKO goodwill had previously
been written off in the quarter ended June 30, 2000, and the NKA goodwill was
previously written off in Fiscal Nine Months 2001. Partially offsetting this
decrease was higher depreciation and amortization expense resulting from TWC,
which was acquired in December 1999.
21
General and administrative expenses decreased $1,657,000, from $11,305,000
in Fiscal Nine Months 2000 to $9,648,000 in Fiscal Nine Months 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 NKA and
the termination of most of MegaHertz-NKO's revenue-generating activities prior
to Fiscal 2001. 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 operations in preparation for the
anticipated commercial launch of wireless messaging service.
As noted above under Recent Developments, the Company sold a total of 91%
of its interest in NKA in exchange for 277,210 shares of Clariti stock and sold
100% of its interest in TWC in exchange for an unsecured note for $250,000. As
a result of these divestments, the Company recorded asset impairment write-
downs in 3Q01 of $669,000 related to NKA and $1,007,000 related to TWC. In
addition, during 3Q01 the Company sold all of its operating assets in the
United Kingdom consisting principally of telephone switching equipment,
incurring a loss on the sale of $844,000.
The Company sold a 91% interest in NKA, 75% of which was sold in January
2001, and an additional 16% was sold in March 2001. As a result of the initial
75% divestment, the Company's investment in NKA was accounted for under the
equity method of accounting for Fiscal Nine Months 2001 up to the date of
divestment. Prior to Fiscal 2001, NKA was accounted for as a consolidated
subsidiary. The $880,000 equity in net loss of unconsolidated subsidiary
reflects the Company's 100% interest in NKA's results of operations for Fiscal
Nine Months 2001 up to the date of divestment.
As a result of the sale of 91% of its interest in NKA and the sale of 100%
of TWC in May 2001, the Company recorded asset impairment write-downs in Fiscal
Nine Months 2001 of $1,185,000 related to NKA and $1,007,000 related to TWC. In
addition, during Fiscal Nine Months 2001 the Company sold all of its operating
assets in the United Kingdom consisting principally of telephone switching
equipment, incurring a loss on the sale of $844,000.
Liquidity and Capital Resources
-------------------------------
At March 31, 2001, the Company had a working capital deficit of $3,217,000
(including a cash balance of $715,000) 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 $15,770,000 is primarily due to the use of cash in
operations and capital expenditures during Fiscal Nine Months 2001.
Adverse market conditions for telecommunications companies during Fiscal
Nine Months 2001 have made it difficult for the Company to raise additional
financing to meet its future cash requirements. The Company has significantly
reduced its future cash expenditures through the divestments of NKA and TWC,
and has made major reductions in future Wireless Messaging and corporate
overhead expenses. In May 2001, the Company entered into a 60-day bridge loan
with a related party for $650,000, which is expected to be sufficient to meet
its operating cash requirements at least through the current fiscal year end.
The bridge loan is secured by the assets of the Company. The Company is
22
actively pursuing opportunities to secure additional financing that is expected
to be sufficient to repay the bridge loan and meet its 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 the Company. Failure to secure additional financing will have a
material adverse impact on 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. On April 19, 2001 the Superior Court of Pennsylvania
affirmed the decision of the Court of Common Pleas concerning the court's
jurisdiction. IDT may appeal this decision to the Pennsylvania Supreme Court
within 30 days. The Company believes damages IDT may have suffered, if any,
must be recovered through the liquidation proceedings of the International
Telecommunications Group, and that neither the Company nor Clariti Carrier
Services Limited has any liability with respect to IDT's claim.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
24
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: May 15, 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